Nepal Coffee Shop: The Business Plan

by

Binup Shrestha

AN APPLIED RESEARCH PROJECT

Submitted in partial fulfillment of the requirements

for the degree of Masters in Business Administration

in the Harrison College of Business

in the School of Graduate Studies and Research of

Southeast Missouri State University

CAPE GIRARDEAU, MISSOURI

2012

2

APPLIED RESEARCH ACCEPTANCE SHEET

Nepal Coffee Shop: A Business Plan

Submitted by Binup Shrestha in partial fulfillment of the requirements for the degree ofMasters in Business Administration.

Accepted on behalf of the Faculty of the School of Graduate Studies and Research by the

Applied Research Project Committee.

Dr. Joel Bolton Advisor/Chair

Dr. Kenneth Heischmidt MBA Coordinator

Abstract

“Coffee isn't my cup of tea.” (Goldwyn).

The above line is the perfect statement that illustrates that Southeast Asians are natural tea drinkers and lean toward tea drinking versus coffee drinking. However, coffee consumption has been the statement of young and upwardly mobile Nepalese people. Just recently, Asia is actually catching on to all of the trends of coffee drinking. The reason behind such movement is that most individuals are looking to spend time drinking coffee in a so-called “Coffee - Shop” which provides an ambience for social interactions with their groups of friends, business associates and people from all walks of life (McCoffee,2009).

Nepal Coffee Shop (NCS) is going to enter a market segment where there is a need for different style and flavored coffee at an affordable price. It has been seen that Himalayan Java, which is a market leader, offers high quality coffee but at a very high price, which deprives coffee lovers. Other coffee vendors charge less for the coffee but do not offer quality coffee making the market unorganized. A majority of customers,especially the youth, is loyal to Himalayan Java so NCS will attempt to attract most of its customers from the market leader.

NCS is going to enter the market with a long-term strategy of offering different coffee style and flavors at an affordable price based on customer feedbacks. It has been observed in Southeast Asian markets that an average consumer becomes loyal to a product or service if it is the best quality product or services at the best price (Wong, n.d.).The market size of NCS is approximately 47,500 customers who are divided into four major sections: youth (students), business, tourist and others.

The per capita income of Nepalese people has been increasing in the last three years ($ 461.95 in 2009, $ 561.87 in 2010, $ 640.15 in 2011) which provides a positive indicator of an increase in customers from the youth and business segments. (“Nepal GDP Per Capita Current Prices, US Dollars Statistics”). NCS’s main focus is to attract the majority of customers from these two segments.

With a strategy of “variety of coffee style and flavor at an affordable price”, NCSwill hope to capture 10% market share after one year of operations.

The typical consumer in Nepal is influenced by “word of mouth” and NCS is going to use this strategy in Kathmandu since this strategy will make the cost of advertisement almost negligible. Other than that, local advertizing in newspapers and magazines will be done to create awareness. NCS is going to project itself in between the market leader (Himalayan Java) and the lowest player.

4

NCS’s co-founders have experience in customer service and recruiting. Their experience will help to serve the customers in the current business and will be helpful in attracting more customers.

The business is going to have a high variable cost compared to fixed cost leading to “high operating leverage.” Fixed cost will be high for the first year due to the start-up costs but succeeding years will shift to high variable cost. NCS is going to maintain a moderately high profit margin but not as high as Himalayan Java. Due to the current market scenarios and marketing strategies NCS is going to capture 10% of the market share after one year and intends to increase the sales volume by at least 10% onwards. The expected amount of revenue generated in the first year will be around Nepalese Rupees (NRs) 2.4 million. After 11 months of sale, NCS should break even following the projections and marketing strategies. Break even revenue will be a little over NRs 1.5 million and break even units will be around 30,711.(1 U.S. Dollar is equivalent to NRs82.62 )

With NCS being a partnership business, the startup capital is generated from the partners as equity and bank loans. The ratio of debt to equity is 70% to 30% (NRs700,000 as loan and NRs 300,000 as partners’ equity). Bank loan terms will be for 10 years paid monthly.

.

Table of ContentsIntroduction of Coffee Industry ................................................................................................... 1

The Industry ............................................................................................................................. 1

Industry at Present.................................................................................................................... 1

The Company, Concept and Services .......................................................................................... 2

The Company........................................................................................................................... 2

The Product and Service .......................................................................................................... 3

Unique Features ....................................................................................................................... 3

Entry and Growth Strategy ...................................................................................................... 4

Market Research and Analysis..................................................................................................... 5

Definition of Relevant Market and Customer Overview ......................................................... 5

Buyer Behavior ........................................................................................................................ 5

Customer Buying Process ........................................................................................................ 6

The Economics of the Business ................................................................................................... 7

Revenue Drivers and Profit Margins ....................................................................................... 7

Fixed and Variable Costs ......................................................................................................... 8

Operating Leverage and its Implications ................................................................................. 9

Start up Costs ......................................................................................................................... 10

Overall Economic Model ....................................................................................................... 11

Break Even Chart and Calculation......................................................................................... 11

Profit Potential and Durability ............................................................................................... 12

The Marketing Plan.................................................................................................................... 12

Overall Marketing Strategy.................................................................................................... 12

Pricing .................................................................................................................................... 13

The Selling Cycle................................................................................................................... 14

Sales Tactics........................................................................................................................... 14

Advertising and Sales Promotion........................................................................................... 15

Publicity ................................................................................................................................. 15

Customer Service ................................................................................................................... 16

Warranty or Guarantee Policies ............................................................................................. 16

Distribution ............................................................................................................................ 16

Design and Development Plan................................................................................................... 17

6

Development Status and Tasks .............................................................................................. 17

Difficulties and Risks............................................................................................................. 17

Product Improvement and New Products .............................................................................. 18

Proprietary Issues................................................................................................................... 18

Operating Plan ........................................................................................................................... 18

Operating Model and Cycle ................................................................................................... 18

Operating Strategy and Plans ................................................................................................. 20

Geographic Location.............................................................................................................. 20

Facilities, Equipment and Improvements............................................................................... 21

Legal Issues affecting Operations .......................................................................................... 21

The Management Team ............................................................................................................. 22

Management Team................................................................................................................. 22

References...................................................................................................................................... 23

List of Tables

Table 1: Breakdown of Revenue......................................................................................... 3Table 2: Potential Customers and Market Consumption .................................................... 5Table 3: Percentage of Potential Customers ....................................................................... 6Table 4: Sources of Revenue and Gross Profit Margin ...................................................... 7Table 5: Projected Revenue for First Year of Operation .................................................... 8Table 6: Fixed and Variable Costs of NCS......................................................................... 9Table 7: Total Start up Cost of NCS ................................................................................. 10Table 8: Break Even Revenue and Units .......................................................................... 12Table 9: Total Cost for Paper Advertisement ................................................................... 15Table 10: Procurement of Coffee Beans ........................................................................... 19Table 11: Registration Process for Private Limited Liability Company in Nepal ............ 21Table 12: Assignment of Roles and Responsibilities ....................................................... 22

viii

List of Figures

Figure 1: The Economic Model of NCS ........................................................................... 11Figure 2: Market Positioning of Major Coffee Vendors in Nepal .................................... 13Figure 3: Operation Process of NCS................................................................................. 19Figure 4: Proposed Location of NCS................................................................................ 20

Introduction of Coffee Industry

The IndustryNepal produces 150,000 kg of coffee as of 2009 and exports 75 % of the total

produce to the USA and European countries. Being a traditional tea consuming country, the domestic tea consumption survey has indicated the consumption of 2.42 cups of tea in a day per person. The annual per capita consumption is 350 grams of tea (“Tea Consumption Facts”).

The consumption of coffee has been increasing since the last decade. This is mainly due to the growing consumption by the young and upwardly mobile Nepalese and the tourists (arrival of tourist in 2008 and 2009 was 500,000 and 600,000 in 2010). (“International Tourism; Number of Arrivals in Nepal”).This is the reason why the demand for Nepalese coffee is growing in the domestic market. Thus, many new vendors have entered the market which is dominated by five vendors.

The coffee business in Nepal is operated under the Food and Beverage industry (F&B). Although the coffee shop business falls under the Food and Beverage industry, it has its own association: Nepal Coffee Producer's Association (NCPA).The market leader in coffee business in Nepal is Himalayan Java which was established in 1999, and the new entrants with high potential in the market is “illy,” an international coffee chain. Besides these two vendors, there are three other vendors that dominate the coffee business.

The Coffee Shop industry in Nepal can be classified under the latter part of the Introduction Stage. The oldest coffee shop in Nepal is Himalayan Java which was opened in the year 1999 followed by the rest of the vendors since 2005. The industry is highly dominated by Himalayan Java.

Industry at PresentIt is a concentrated industry where the market is dominated by five major vendors.

However, since 2005, there have been around 15-20 new entrants that are relatively of a smaller scale and do not provide any competition to the coffee business. The five major vendors are Himalayan Java, illy, Higher Ground, The Coffee Shop and Tushita.

Most of the vendors are predominantly located in the areas of Thamel, Kathmandu. Thamel is the tourist hub in Kathmandu. Himalayan Java is the market leader and the dominant vendor in the coffee business, having been in operation for more than 17 years, and has set the benchmark for the quality of its coffee products in Nepal. They also offer a wide variety of coffee, helping to attract a large number of customers. The other four vendors offer a limited variety of coffee and in a moderate price range. The price range for the coffee differs among the vendors. Himalayan Java charges very high price for their products, which ranges from NRs 100 to NRs 300, whereas the other

2

four vendors’ prices range from NRs 60 to NRs 150. The small coffee shops have a price range from NRs 35 to NRs 90.

In the last decade, Nepal is catching up to the trends of coffee drinking, especially with the younger people and business associates. A new culture has developed where individuals look to spend time drinking coffee in coffee shops which provides an ambience for social interactions and business purposes. The rise of tourism in Nepal has also helped the coffee shops to flourish. From this analysis, we assume that there is a rise in the trend of coffee consumption at coffee places in Nepal.

The Company, Concept and Services

The CompanyThe NCS will be a partnership business in which both the partners will have an

equal share. The partners will be Mr. Binup Shrestha and Mr. Anit Arora. Thispartnership will help to generate more sources of capital as well as new ideas for businessand it is more favorable in terms of tax liability.

We have decided to start our operations at Thamel, one of the most popular tourist attractions in Kathmandu, Nepal. Thamel is the most happening area in Nepal and has been the centre of the tourist industry in Kathmandu for the last two decades. NCS is a new venture which will start its operation from January 2013. Our Unique Value Proposition will be a variety of coffee styles and flavors at an affordable price.

The founders of the NCS are Binup Shrestha and Anit Arora. Binup Shrestha is from Biratnagar, Nepal. He is currently pursuing his graduate degree in General Management. During his studies for BBA in General Management at Ace Institute of Management in Kathmandu, he worked for a year as Project Coordinator at Jobs Dynamics Pvt. Ltd. He is currently the treasurer of Nepalese Students Association at SEMO, involved in maintaining the books of account for the association. Upon completion of the graduate degree, he intends to work with Anit to start their NCS venture in Kathmandu from January 2013. Anit Arora is from New Delhi, India. He iscurrently working on his MBA. Upon completion of his bachelor’s degree in Information Systems at GGS IP University in New Delhi, he worked for three years in Business Development, Sales and Marketing of temporary Staffing Solutions. Anit Arora is the President of ISA (International Student Association) at SEMO and serves theinternational community by building better ties within the student body, creating a better awareness of the diverse cultures and people at SEMO. He and Binup have joined hands to start their NCS venture in Kathmandu from January 2013.

The Product and ServiceThese are the products and services offered by NCS at the store.

• Western Style Coffee• Tea/ Chai• Bakery Products• Cold Beverages• Ice Cream• Snacks• Wi-Fi, books to read at the shop• CDs• Souvenirs• Gift Cards, Discount Coupons

The primary use of NCS will be offering different flavors of coffee and various other products at an affordable price. Since coffee and various other products offered are going to be the end product, then there is no secondary application of the product, and the coffee drinkers and the customers of the NCS are going to be the end users.

The breakdown of revenue is based on the assumption that the trend for coffee consumption is on a rise and more and more people are visiting coffee shops. A detailedbreakdown of Revenue is mentioned in the Economic Model of the plan.

Source of Revenue Revenue (NRs) % of RevenueCoffeeTeaIce CreamCold BeveragesPastriesSnacks

864,000105,000360,000720,000180,000180,000

364153077

Total 2,409,000 100

Unique Features

Table 1: Breakdown of Revenue

• NCS will have a wide variety of coffee styles and flavors. This will help us to compete with the existing market vendors by offering different coffee styles like Cappuccino, Americano, Frappuccino, Mocha, Latte, Macchiato, Espresso and Freshly Brew. Different flavors like Caramel, Chocolate, Vanilla, Pumpkin, Cinnamon, Peppermint, Chocolate Chips, and Strawberries.

4

• The customer is our God. So to keep the customers happy and to retain them, NCS will focus on new marketing strategies which have never been followed by any coffee player in Nepal such as Membership Cards/Discounts/Happy Hour and tear-off coupons from magazines and newspapers.

• NCS will serve the customers in our own customized coffee mugs and cups and give away free souvenirs like t-shirts, caps, mugs, etc.

• NCS’s long term plan is to expand its product line to tea/coffee sachets and commercial sale in local retailers and department stores. It will help NCS to penetrate the local market.

NCS revenue also depends on foreign tourists as many tourists are frequent visitors of coffee shops in Nepal (500,000 in 2008, 510,000 in 2009 and 600,000 in 2010) (“International Tourism; Number of Arrivals in Nepal”). The tourism industry is very volatile and there might be a chance that political instability might affect the coffee industry in the future. NCS will strategize to develop a local market of coffee drinkers especially youths and business associates. There are also possibilities that the competitors will follow a pricing strategy and compete on prices. It is important to have knowledge of all the western style coffees offered in the market and understand the pricing strategy of the competitors. The key factors for the NCS are going to be the value it creates by offering a variety of coffee styles and flavors at an affordable price. Products such as souvenirs, mugs, and gift cards will help in connecting with the customers.

The marketing strategy of NCS will be one-time media advertisement in the form of discount coupons in magazines and newspapers and word of mouth through our customers. Free sampling will be provided to customers before introducing any new product, which will help to meet the customers need.

Entry and Growth StrategyNCS is a new venture that will start its operation from January 2013 in

Kathmandu by offering a variety of coffee flavors and styles at an affordable price to compete with the existing competition in the market.

A business analysis will be conducted to review the operation after three years in2016.An interval of three year is appropriate because it is estimated that the breakeven point will occur after one year and the second and third year of operation will be analyzed to see whether the business can be sustained and compete with the market before expansion of the business will take place. The analysis will help determine crucial facts and numbers about the financial condition of the business. To ensure, the expansion of business is warranted, it is important to consider and make decisions based on financial statement and projection, factors such as return on investment, forecasted sales and revenue, balance sheet will play a vital role in deciding on expansion of the business.

Other factors that will be considered are the lifestyle, per capital income, purchasing power of the people outside Kathmandu valley.

Market Research and Analysis

Definition of Relevant Market and Customer OverviewNCS is going to target Kathmandu valley since it is the most popular tourist as

well as business center in Nepal. The majority of the NCS customers are going to be the youth, the business associates, and foreign tourists. The market is price- driven and dominated by five major vendors in Nepal.

Kathmandu is the largest city in Nepal with a population close to 1.74 million (“Census 2011: Country’s Population 26.6 m”). The total potential populations who consume coffee are 47,500 and are assumed to consume 12 cups of coffee a year, which totals to 570,000 cups of coffee. The average price for coffee in the market is NRs 50 and the total yearly spending of the people is NRs 39,900,000.

Customer Potential Population Potential Customers Potential Customer (%) Market Consumption Spending YearlyBusiness People 20,000 4,000 20 240,000 16,800,000Students 7,500 1,875 25 90,000 6,300,000Tourists 15,000 2,250 15 180,000 12,600,000Others 5,000 500 10 60,000 4,200,000Total 47,500 8,625 70 570,000 39,900,000

Table 2: Potential Customers and Market Consumption

The NCS business plan falls under selective demand since there are already coffee vendors in the market. The essence of NCS is to provide different styles and flavors at affordable price.

Buyer BehaviorThe coffee drinkers are business associates, students, tourists, and others. The

coffee consumption trend has been growing steadily and NCS offering a variety of coffee styles and flavors at an affordable price will help to attract customers to the market. Besides coffee, other products that include cold beverage, pastries, ice cream, tea and snacks will be offered.

NCS will be located in Thamel, Kathmandu with its working hours from 8 a.m. –8 p.m. Customers can only purchase the products offered at NCS by visiting the store as drive-through is not a feasible option in Nepal.

The actual purchase decision maker is solely going to be the ultimate consumer, as it is the consumer who is going to taste/consume the product. However, there are possibilities that the customer may provide feedback or comment about the product. In a nutshell, there is a low cost and medium purchase involvement by the customers.

6

The buying process can start in two different scenarios. First, NCS is going to provide various promotional offers in magazines and newspapers to promote the product to drive customers to visit the store and make a purchase. Second, the customer steps into the store to drink coffee or purchase other products. Upon the arrival of the customer, the waiter takes care of them and gets the order. If the customer wants a takeaway, the waiter provides the invoice along with the order. The customer can enjoy the coffee in the shop and make payment when ready to go. All valid promotional coupons and offers are honored by the store and must be presented at the time of payment.

Customer Buying ProcessThe promotional offer will attract new and existing customers to the store. The

customer buying process is a crucial stage for the business as it provides an opportunity to meet and exceed customers’ need. When the customer enters the store, the service provided by the waiter also plays a vital role. The waiter’s confidence and friendlynature, sense of responsibility, dress and knowledge of all the products will demonstrate a quality service.

Coffee consumption has been popular among the young and upwardly mobile Nepalese people. Customer purchase decisions are affected by various factors such as price, quality, location, service and the ambience of the store. Considering all these factors, NCS will be located in Thamel, Kathmandu as it is one of the busiest places for both locals and tourists. In Nepal, one of the most important factors that drive people to any food and beverage store is the price and the level of quality of service that is provided. The people of Kathmandu are more outgoing than other parts of the country, in terms of socialization, and the growing trend of spending time socializing in “Coffee Shops” will help NCS to attract customers as they can be easily reached and receptive tothe availability of new styles and flavors at an affordable price.

Customers Potential Customer (%)Students 40Business People 25Tourists 25Others 10

Table 3: Percentage of Potential Customers

The coffee vendors around Kathmandu valley offer similar flavors and styles of coffee. It has been observed that current coffee drinkers prefer variety and are willing to try new products due to the fact that people in Nepal and other South Asian countries are not natural coffee drinkers.

The Economics of the Business

Revenue Drivers and Profit MarginsCoffee will generate the highest revenue. It will account for 36 % of the total

revenue. Cold beverages will contribute 30 %, ice-cream will contribute 15 %, pastries and snacks 7 % and tea the least with 4 % of the total revenue. In regards to the gross profit margin, coffee has the highest margin with 88.05 %, whereas ice cream, cold beverages, pastries and snacks with 85.61%, and 71.27 % respectively. Although tea has a lower profit margin than others, tea is still going to be served in the near future because in Nepal, the majority of the decision are based on a group’s taste and we believe that it serves as an option to customers who prefer tea over coffee.

The Table below illustrates the breakdown of the revenue, the percentage of the revenue earned and the gross profit earned.

Source of Revenue Revenue(NRs) % of Revenue Gross Profit MarginCoffeeTeaIce CreamCold BeveragePastriesSnacks

864,000105,000360,000720,000180,000180,000

364153077

88.0571.2785.6185.5185.6185.61

Total 2,409,000 100Table 4: Sources of Revenue and Gross Profit Margin

The revenue generation has been broken down into two seasons: (a) summer, which starts from March to October and (b) winter, which starts from November to February. Comparing the two seasons, it is clear that in summer, there will be more servings of cold beverage as compared to winter season. By contrast, during winter, the servings of hot coffee and tea will be greater compared to cold beverage. The other items will remain constant throughout the year.

During the first year of operation, coffee will generate the highest revenue withNRs 864,000 followed by cold beverages with NRs 720,000, ice cream with NRs360,000, pastries and snacks with NRs 180,000 and tea with NRs 105,000.

Coffee will generate the highest revenue as coffee consumption in Nepal is on a rise and people drinking coffee in the so called Coffee-Shop has become a trend and lifestyle for upwardly mobile Nepalese people, this will help the store to establish coffee as the core product and generate revenue.

There is also a probability of the estimate not being accurate which may result in losses for the business. The contingency plan would be to adopt aggressive marketing by

8

providing discounts and happy hours more than the estimates to draw people to the store and also focus on expanding variety of cold beverages and tea quarterly to provide customers with various options to choose as well as meet the demands of the customer on a seasonal basis.

The following table illustrates the breakdown of revenue on a daily, weekly, monthly, seasonal, and yearly basis.

Projected for Summer Coffee Tea Ice Cream Cold Beverages Pastries SnacksAverage Selling Price 60 25 50 60 50 50Average Servings Per Day 30 10 20 40 10 10Projected Daily Revenue 1800 250 1000 2400 500 500Projected Weekly Revenue 12600 1750 7000 16800 3500 3500Projected Monthly Revenue 54000 7500 30000 72000 15000 15000Projected Summer Operating Revenue 432000 60000 240000 576000 120000 120000

Total Projected Revenue for Summer Season 1548000

Projected for Winter Coffee Tea Ice Cream Cold Beverages Pastries SnacksAverage Selling Price 60 25 50 60 50 50Average Servings Per Day 60 15 20 20 10 10Projected Daily Revenue 3600 375 1000 1200 500 500Projected Weekly Revenue 25200 2625 7000 8400 3500 3500Projected Monthly Revenue 108000 11250 30000 36000 15000 15000Projected Winter Operating Revenue 432000 45000 120000 144000 60000 60000

Total Revenue per Item (First Year Operations) 864000 105000 360000 720000 180000 180000

Total Projected Revenue for Winter Season 861000

Total Projected Revenue from (First Year Operations) 2409000

Table 5: Projected Revenue for First Year of Operation

Fixed and Variable CostsThe fixed cost for NCS includes labor cost and rent of the store with the total cost

of NRs 1,292,000 (79.1% of the total projected cost for the first year of operation) and a variable cost includes coffee beans, tea, milk, ice cream, pastries, creamer, fruits and electricity with the total cost of NRs 341,400 (20.9% of the total projected cost for the first year of operation). The total projected cost for the first year of operation will be NRs1,633,400.

The projected cost has been based on the sales of six different products at thestore. Coffee with the highest sales of 12,100 cups followed by cold beverages with 8,575 cups; snacks, ice cream and snacks with 3,650 each, and tea with 2,425 cups. Altogether there will be total sales of 34,050 units in the first year of operation.

Since the coffee industry in Nepal is still establishing itself and has yet to mature, the relevant industry benchmarks for costs are not available. NCS will furnish the industry benchmarks as they become available from a legitimate source.

Fixed Cost and Variable Cost

Fixed Cost Months Cost (NRs) Percentage %Labor Cost (12 months)Rent (11 months)

1211

192,0001,100,000

11.7567.34

Total Fixed Cost 1,292,000 79.10

Variable Cost Per Month(NRS) Months Cost (NRs) Percentage %Coffee Beans (*)Creamer Electricity Fruits Pastries TeaIce CreamMilk

7,0003,5001,5002,8001,0001,00016,0006,750

12121212124412

84,00042,00018,00036,40012,0004,00064,00081,000

5.142.571.102.230.730.243.924.96

Total Variable Cost 341,400 20.90

Total Projected Cost for(First Year Operations) 1,633,400 100.00

Table 6: Fixed and Variable Costs of NCS

(*) The coffee beans will be ordered every 15 days; therefore, the cost is calculated on the basis of two orders per month for a year and the cost per order is NRs3500.

Operating Leverage and its ImplicationsFor the first year of the business, NCS needs to purchase machinery that includes

espresso machine, coffee maker, coffee press and equipment that includes refrigerator, air conditioner, utensils, sofas, tables, microwaves, ice makers, juice extractors, book racks and backup battery that would incur one-time high investment for the business. Thus, NCS will be a high-leverage business as 79.10 % of the total cost is going to be fixedcost.

There will be less financial burden for the business from the second year as the equipment and machinery costs are not required due to the fact that the life-period of the machinery and equipment will be covered under manufacturers’ warranties for 5 years from the date of purchase. This will help NCS become a low- leverage venture as the majority of costs will be variable costs. NCS will also be a moderate-volume and a high- margin business.

A market survey will be conducted on the third year of operation before adecision is made to expand the additional capital will be required to open up a new store, if the survey provides a positive result.

10

Start up CostsStart-Up Costs (Materials and Overhead)

Coffee Supplies QuantityPer Item(NRs)

Cost(NRs) Percentage %

Solis Master 5000 Auto. Espresso &Coffee Makers10 kg Bag of Coffee Beans

CreamersCoffee Presses

21

103

60,0003,500

3502,000

120,0003,500

3,5006,000

21.500.63

0.631.08

Total Coffee Supplies Costs 133,000 23.83

Total Building & Equipment Costs Quantity Per Item Cost Percentage%Refrigerator Utensils/Cutlery FreezerAir Conditioner Backup Battery SofasTables Microwave ChairsIce MakerJuice ExtractorInterior Design/ Leasehold ImprovementBook RacksRent

1N/A1112612411111

15,0005,000Free32,00060,00012,0005,00012,0001,50015,0004,00030,0005,000100,000

15,0005,000-32,00060,00024,00030,00012,00036,00015,0004,00030,0005,000100,000

2.690.90-5.7310.753.765.382.156.452.350.725.380.9017.92

Total Building & Equipment Costs 368,000 65.94

Other Costs Cost Percentage%Registration of BusinessAdvertisementMagazines 4 (1000+800+400+800) Newspapers 3 (1500+900+900) Books

16,00029,8003,0003,3005,000

2.875.340.540.520.90

Total Other Costs 571,00 10.23

Total Start Up Cost 558,100 100.00Table 7: Total Start up Cost of NCS

The one-time start-up cost of the business includes expenses such as registrationof business; the initial purchase of machinery, equipment, and utensils for coffee making; the interior design cost/leasehold improvement cost; rent (security deposit); subscription to magazines and newspapers; and media advertisement. The freezer will be providedfree by the ice cream company, which will help to reduce the overall startup cost by a slight margin.

Overall Economic ModelNCS has a high operative leverage with the heavy fixed investment in equipment

and machinery which is 79.10 % of the total investment needed for operation of the store. From the second year and onwards, the variable cost will be a dominant part of the expenses. The overall gross profit margins of the products are comparatively high. Coffee has a gross profit margin of 88.05% followed by ice cream, cold beverages, pastries, and snacks. Coffee and cold beverages will provide the largest source of revenue with 36% and 30% respectively, indicating the diversity of revenue to be moderate. NCS in its first year of operation will have sales volume on a moderate scale.

Figure 1: The Economic Model of NCS

Break Even Chart and CalculationThe breakeven revenue is NRs 1,509,981 for the Nepal Coffee Shop. For the

break even revenue, the total fixed costs, the selling price per unit and the variable costper unit have been used. The total fixed asset also includes the start up costs. The variable cost per unit has been derived by dividing the total variable cost by the annual number of units served. For the selling price per unit, the average selling price for each item hasbeen added and multiplied by six (the number of the items)

The Breakeven Units is 30,711 units. It has been calculated by using Total Fixed Costs and the unit contribution margin. The unit contribution margin is calculated by subtracting variable cost per unit from selling price per unit.

12

Particulars Amount (NRs)Variable CostAnnual Number of Units Variable Cost/Per Unit Selling Price/Per UnitUnits Contribution Margin

341,400481,007.1049.1742.07

Total Fixed Costs NRs 1,292,000

Break Even Revenue NRs 1,509,981

Break Even Units 30711Table 8: Break Even Revenue and Units

Profit Potential and DurabilityFor NCS to breakeven it will take almost a year and the business will make a

profit from the second year of operation. The expected profit stream NCS generates is durable as the coffee business has been growing in Nepal, and the availability of various style and flavors of coffee at affordable prices will increase profit for the business. When the business matures, NCS will diversify its product line without significantly reducing the sale of the core product (coffee).A product line of bakery items, gifts, CDs, souvenirs will be added to the store to provide an option for the customers and meet customers’ need. Tea is still considered the main drink of Nepalese people, so varieties of tea flavors will be offered on an experimental basis to attract new customers. With the business analysis done at the end of the third year, if the result is favorable, NCS will have in- house coffee which will be sold at the store and retail stores in Nepal.

The Marketing Plan

Overall Marketing StrategyNCS needs to focus on two important factors to meet the customers’ demands and

draw new customers to the store. First, the major vendors in the market provide a standardized size of coffee drink at a higher price. It provides an opportunity for NCS to offer various sizes of coffee drinks at different prices that would help to target new customers. Second, NCS will also allow its customers to try and experience new styles and flavors of coffee an option which has been lacking in Nepalese market.

Nepal Coffee Shop will be established in the year 2013 and located in Thamel, Kathmandu, Nepal. The products at the store will be offered locally, catering to the needs of Kathmandu people.

The overall marketing plan will be carried out with media advertisement and “word of mouth” by the customers. The major focus will be placed on good products and customer service; this will help to provide free publicity through “word of mouth.” Discount coupons will be published in leading national newspaper and food and beverage magazines to attract new customers and also retain the existing customers.

A market survey will be carried out to review the operation after three years in2016 to determine the feasibility of continuation and expansion of business outsideKathmandu valley.

Large Variety

(Himalayan Java)

(NCS)

(Illy)

(Coffee Shop)

High Price Low Price

(Higher Ground) (Tushita)

Small Variety

Pricing

Figure 2: Market Positioning of Major Coffee Vendors in Nepal

The pricing of the products is market driven. In general, the price will be slightly higher than the average market price but below the market leader price. The price has been set with a view that availability of a variety of coffee flavors at different sizes and at an affordable price will add value to the product.

The market leader offers a wide variety of products which has helped to attract a large number of customers. The other four vendors offer limited variety of products and in a moderate price range. The price range for the coffee differs among the vendors. Himalayan Java has a very high price for their product, which ranges from NRs 100 to NRs 300, whereas the other four vendor’s prices range from NRs 60 to NRs 150. The small coffee shops have a price range from NRs 35 to NRs 90.

The new trend and culture along with the higher income and a more western lifestyle of the people of Kathmandu will complement the availability of new productsand be highly appreciated by the people. The addition of new flavors will add value to the

14

product. Promotion will help to attract new and existing customers to the store; promotions such as discount offers, free giveaways, happy hour, and membership rewards will add incentives for the customers to visit the store. This will meet the needs of the customers and attract customers from other vendors in the near future.

Tea shops, pubs and shisha bars provide competition to the NCS either in a direct or indirect way. Although there are tea shops, they are not organized, and people still prefer to drink tea at home. The pubs in Nepal are opened only after 5 pm, which would mean the customers have to wait till evening to socialize.

The buzzing of new culture and different flavors and styles of coffee at an affordable price will help to meet the customer’s need and increase the number of coffee drinkers.

The Selling CycleCoffee consumption has been popular among the young and upwardly mobile

Nepalese people. Just recently, Nepal is actually catching up with the trends of coffee drinking. The reason behind such movement is that most individuals (youths, business associates) are looking to socialize outside their home with their groups of friends and people from all walks of life.

Promotional offers will be published in food and beverage magazines and national newspapers to bring in customers to the shop. Feedback from customers about theproduct will be highly valued and decisions will made on such a basis. The future plan ofoffering new flavors and products at the store and services such as discount coupons, happy hour, gift cards, membership rewards, and free giveaways which no other vendors offer at the moment in the market store will help to retain the existing group ofcustomers.

Sales TacticsRetail businesses such as coffee stores can be categorized as seasonal in Nepal.

The youth, mainly comprised of college students, often visit coffee stores when the universities are open, as many of the students from all over Nepal come over to Kathmandu for their education and return home on holidays. As coffee stores are also dependent on tourist inflows, the majority of the inflows are between the months of September and March.

NCS will offer discount coupons during the lean period to attract customers. One of the major attractions during the lean period, the summer season, will be the addition of new flavors of cold coffee and cold beverages.

Advertising and Sales PromotionMedia personals will be invited for the opening of the Nepal coffee shop. At the

initial phase, various promotional coupons and discounts will be offered in paper advertisements in the national newspapers and food and beverage magazines. Sampling will be used at the initial stage of the business and also before introduction of any new flavors and styles of coffee and new products. Feedback from customers regarding the product will be highly valued and decisions will be made on its basis. Occasionally, free t-shirts, mugs, gift cards, vouchers, and drinks will be offered to our valued customers, and happy hours will help attract more customers.

A major focus will be placed on good customer service which will result in an effective advertisement and free publicity through word of mouth about the store and theproduct.

Media Vehicle Ad Placement Frequency(12 month)

Rate*SizeCC Total Cost

(NRs)

New BusinessAge Classified 2 4,000 8,000

The Boss Classified 2 5,000 10,000The KathmanduPost Classified 8 350 2,800

Kantipur Classified 8 500 4,000The HimalayanTimes Coupons 8 350 2,800

Nepal Travelers Quarter Page-FirstPage/Coupons 2 7,500 15,000

Wave Magazine Quarter Page-FirstPage/Coupons 2 7,500 15,000

Food and Wine Coupons 2 1,000 2,000Total Cost for Paper Advertisement 59,600

Publicity

Table 9: Total Cost for Paper Advertisement

Generating capital and budgeting are the biggest concerns for any new venture; therefore, the best way to address such concerns would be to get free publicity through word of mouth from our own valued customers. Word of mouth is the best way to create news among the masses. In order for the customers to provide positive publicity about the store, NCS needs to focus on providing the best customer service and products to the customers; the customers will also be invited to various events which would mostly free samples of coffee or new products before introduction of the product in the store.

NCS promoters can also influence their friends, peers, and contacts to visit the store. Finally, as NCS will be providing free t-shirts, mugs, gift cards, vouchers, and

16

membership rewards to the valued customers, which no other vendors offer in the market, it will definitely create a buzz among the general public.

Customer ServiceOne of the reasons for business failure is poor customer service. NCS will make

an effort to put a smile on the customer’s face when they leave the store by working on the basic features of customer service. It would start with a kind gesture, followed by a timely order process and waiters’ the in depth knowledge about the products being served. Most importantly, NCS will provide a good product to the customer.

NCS will be a small entity making it easy to manage customers with conventional methods such as keeping a record of each customer in a local system. Hence there will be no need for any software or tool such as customer relationship management.

Warranty or Guarantee PoliciesAlthough warranties generally do not apply to the retail coffee business, it is

important for NCS to create an atmosphere of quality and customer satisfaction that will seem like a warranty. First, NCS is going to provide the finest coffee desired by the customer group at an affordable price. Second, as NCS is trying to offer customers with a wide variety of styles and flavors of coffee, there is a possibility that sometimes there will be a mismatch between a new flavor and a valued customer. So, to provide guaranteed satisfaction to the customers, we will carry out sampling program for customers so they may taste new styles and flavors; this will help to mitigate the losses of an entire cup of coffee and avoid valued customers’ dissatisfaction. If customers are ever dissatisfied with the products and services provided by NCS, every measure will be taken to overcomesuch situations. For example: A replacement or a different product will be offered free of charge or a gift card provided.

DistributionThe best way to be different from other players is to offer a unique

product/service. NCS intends to offer several high quality levels of styles and flavors toits customers. In order to achieve high quality, there will be a need to get coffee and othermaterials from the best distributors in the market. Royal Everest Mill Pvt. Ltd (RCM) has been selected as the sole provider of coffee to the business.RCM is located in Bhaktapur, Nepal, which is 15 miles from our store. The reasons behind choosing RCM over other suppliers is they have high export quality coffee beans and have been in the business for a decade. They have been exporting green beans and roasted coffee since1995 to Japan, USA and Europe. RCM have exported 50 tons of green beans coffee in2007 to Japan and annual production of company is 100 tons of green beans coffee. “Our farmers taught by coffee experts from El-Salvador, USA, Hawaii said that taste of Nepali coffee was similar with Mexican coffee.” (“Strategy of the Company”)

Design and Development Plan

Development Status and TasksThe coffee styles and flavors offered in the store must meet customers’ needs as

well as demands to make the products fully useable. As NCS intends to be different from other major vendors in the market by providing a variety of styles and flavors and by different marketing tactics; in-depth research needs to be conducted to understand the current market scenario, customers’ specific needs and demands and their knowledge and expertise about different flavors and styles. This will help to introduce new styles and flavors of coffee and other products to induce customers to visit the store.

A regular survey on a monthly basis will be conducted which will help to provide accurate feedback and comments about the products and services offered by the store. Before the introduction of new coffee and other products, a sample will be provided to random customers and feedback taken to focus on meeting customer needs and provide maximum customer satisfaction.

A business analysis will be conducted three years after establishment in 2016 to determine the feasibility of continuation and expansion of business outside Kathmandu valley. If it is feasible and profitable, then a new branch will be opened in Patan, Kathmandu, Nepal.

Difficulties and RisksBefore the introduction of new coffee and other products, a sample will be

provided to random customers and feedback taken in order to focus on meeting customer needs and providing maximum customer satisfaction. The sampling process will be carried out for two weeks before a decision on the product will be made. There will be changes made to the samples in response to customer feedback.

As the business will start to mature, NCS will diversify the product line without significantly reducing sales of our base product line. A new product line of bakery items, gifts, CDs, and coffee beans will be added to the store to meet customers’ needs and diversify source of revenue.

One of the major risks associated with business in Nepal is the political instability of curfew, strike and lock out that prevents businesses from operating their daily activities. The instability also affects the supply of coffee beans to the store as the roads are blocked, resulting in the beans’ being in transit for longer period. This results in great losses for the business.

18

Product Improvement and New ProductsThe feedback received from the customers will determine the addition of new

styles and flavors of coffee as well as new products in the store.

Additional cold beverages will be offered as an experiment to include a variety of cold coffee and fruit smoothies like banana, mango, strawberry, and blackberry. Along with the drinks, new combinations of new items will be tested. A product line of gift sets, coffee beans, bakery items, CDs and souvenirs will be added to the store front.

Nepal is predominant a tea consumption nation, new flavors of tea will be offered incrementally on an experimental basis.

Proprietary IssuesNCS will not have patent, trademark or copyright of its products and services as

the law is very weak. One of the ways to protect the products offered in the store will be not disclosing the ingredients or recipes to anyone. It will be important to discuss the terms and rules enforced with the coffee bean supplier, to avoid displaying their brand or trademark at the store. Coffee beans will be purchased in a loose bag without RCM trademark to avoid giving away recipes to the customers and competitors. As such, it may lead customers to directly purchase RCM coffee beans as they are available in the retail stores in Kathmandu. This will result in losing our valued customers. (The long term plan is to have in-house coffee plantation to avoid such issues and also extend our product line to selling whole coffee beans to the customers directly at the store and retail shops).

Property insurance will be needed to cover against any loss or damages to the physical inventory as well as the store. NCS will provide health insurance to its employees, although it is not mandatory in Nepal; this will help to ensure employee satisfaction as well as avoid liability for any damages that employees face, as they will be totally insured.

Operating Plan

Operating Model and CycleThe operation process for NCS will comprise of three sections: input, operation

and output. The input stage is comprised of procurement of coffee beans and beverages; snacks like cakes and pastries; electronic equipment like microwave and refrigerator; and utensils like mugs, glasses and plates. The operations stage is comprised of purchasingthe coffee machinery, roasting of coffee beans, blending of coffee beans, displaying the snacks on the counter, deep freezing ice cream and providing training to the employees. The output stage is comprised of customers’ orders and good customer service.

INPUTProcurement of coffee beans, beverages, snacks,

electronic equipment and utensils

OPERATIONS Purchase of coffee machinery, Processing

of coffee beans Snacks preparation - Display

Day to day chores - Facility Maintenance, Inventory

OUTPUT Customer Order

Customer Service Environment

Figure 3: Operation Process of NCS

The front stage operations include direct contact with customers and fulfilling customers’ orders. The back stage operations include procurement of coffee beans and snacks, managing the inventory, setting up ties with the suppliers, maintaining the inventory of products, and facility maintenance.

With the focus on quality, the coffee beans will be ordered every 15 days.

Particular No. of daysPlacing an order 1Dispatch from Royal Everest Coffee Mill Pvt. Ltd 2Receive coffee beans 1Roast coffee beans 1* Purchase Coffee Beans after every 15 days

Table 10: Procurement of Coffee Beans

It is very difficult to maintain a certain consistent level of quality for the coffee products. However, the coffee that will be served to the customers will be fresh and the roasting machine will be of high quality.

The ever growing political instability across the nation has impacted several businesses in Nepal. The supplier office (Royal Everest) is located at Bhaktapur, 10 miles from the shop but has its coffee plantation in the eastern part of Nepal in Illam. There is a possibility of the unavailability of fresh coffee beans at supplier’s office when there are strikes in Illam. There is an option to have NCS’s own coffee plantation but it would prove very difficult for NCS due to capital constraints and location, as coffee cultivation

20

areas are found outside Kathmandu valley. NCS with its first year of operation will require coffee beans in moderate volume, making it convenient, inexpensive and hassle- free to purchase from a supplier, rather than produce them in-house.

Operating Strategy and PlansThe coffee beans will be procured directly from the grower/ supplier and there

won’t be any involvement of sub contractors or third parties, which would help to eliminate additional surcharges.

During the winter season, when there is high demand of coffee orders, additional coffee beans will be purchased in advance to avoid product shortage and customer dissatisfaction. Every time the coffee beans are supplied by the grower, the beans will be roasted and sampled by the owners or the staff in the store before using them for daily operations. This process will help to assure a fresh and quality supply of coffee to our valued customers. In regards to the coffee machinery, the inspection will take place on a monthly basis and follow guidelines to keep the machines clean.

Geographic Location

Figure 4: Proposed Location of NCS

The balloon (A) in the map shows the location of Himalayan Java, the leading player in the market. The location of the NCS will be nearby Himalayan Java and close to Kathmandu Guest House which is in Thamel, Kathmandu. The traffic flow of youths, students, business associates and tourists throughout the year in Thamel will make iteasier to target the customer and bring the business close to the customer mainly due to

location. The availability of labor supplies is also one of the advantages of starting in the city. By contrast, leasing of business space will be very expensive as compared to other areas in Kathmandu.

Facilities, Equipment and ImprovementsThe items that are to be purchased for the store are oven, microwave, refrigerator,

cooler, display counter, roaster, espresso machine, furniture, table, chair, internet connection, utensils, and cutlery.

The lease period will start a month before the store opens. The store space will be leased on a yearly contract basis. All the equipment and machinery will be acquired ten days prior to the opening, as a three-day period will be used to test all the equipment and machinery. Coffee beans will only be purchased two days before the commencement of business. The cost will be provided in the financial statement.

A three-year period will be used to analyze the business operation. A market survey will be carried out in 2016 to review the operation after three years to determine the feasibility of continuation and expansion of business outside Kathmandu valley.

Legal Issues affecting OperationsThe registration requirement for a Private Limited Liability Company in

Kathmandu, Nepal takes up to 30 business days with the total cost of NRS 16,000. The table below illustrates the details:

ProcedureTime toComplete(Days)

Cost toComplete(NRs)

Verify the uniqueness of the proposed company name 1 5

Obtain verification and certification of the memorandum and articlesof association

5 10,000

Buy a stamp to be attached to registration form 1 5File documents with the Company Registrar’s Office, Department ofIndustry

15 4,500

Make a company seal/rubber stamp 3 1,000Register with the Inland Revenue Office, the Ministry of Finance 5 No chargeEnroll the employees in the Provident Fund 1 No charge

Table 11: Registration Process for Private Limited Liability Company in Nepal

NCS’s location will have a good access to the fire and police station which will help to minimize legal risks for the business. Although, insurance is not mandatory for Nepalese retail business, NCS will have Fire & Allied Perils Insurance to insure against loss or damage caused by accidental fire and lightening; Burglary & Housebreaking

22

Insurance to insure items being stolen which is important as such incidents do occur when there are strikes and close out of business; Life & Medical Insurance for the employees, and Public Liability Insurance to cover for legal and medical costs that arises from any incident on the store premises to avoid legal issues.

The Management Team

Management TeamNepal Coffee Shop is going to be a partnership business venture. The partners,

Binup Shrestha and Anit Arora, will have equal share in the partnership. However, Binup Shrestha will have the legal obligations of the business venture. Both the partners have prior experience in customer service and working under high pressure demand and willuse their prior experience to leverage their new business venture.

Role Responsibilities Assigned To

CustomerService

Customer service and feedback Primary: BinupShrestha Secondary: Anit Arora

Marketing &Sales

Advertisement decisions, sales promotion,product campaigns, road shows, etc.

Binup Shrestha andAnit Arora

Research Customer surveys, feedback, CompetitiveAnalysis

Binup Shrestha andAnit Arora

Legal Contract with suppliers, disclaimers Binup Shrestha

Operations Procurement, day to day activities, selling,managing the shop

Binup Shrestha andAnit Arora

Table 12: Assignment of Roles and Responsibilities

Nepal Coffee Shop will not have any investors besides Binup Shrestha and Anit Arora. The partners will invest their capital as well as obtain a loan from the bank; there will be no stock options for either of the partners. The net profit earned by Nepal Coffee Shop will be re-invested in the venture to expand its operations.

Finally, NCS is going to be affiliated with National Tea and Coffee Development Board, Nepal, and will take full part in the development of the coffee industry in the country.

References

1. Census 2011: Country’s population 26.6 m. (2011, Sep 27). The Kathmandu Post.Retrieved from http://www.ekantipur.com/thekathmandupost/2011/09/27/topstory/census2011cou ntryspopulation26.6m/226749.html

2. Chang, F., (2010, Feb 19). Beans to brew. Nepali Times, 490.Retrieved from http://www.nepalitimes.com/issue/2010/02/19/LifeTimes/16817

3. Coffee Plantation and Production. (n.d.) Tea & Coffee Business Board, Nepal.Retrieved from http://www.teacoffee.gov.np/indexaboutcoffee.php

4. Energy and Resources- Resource Consumption: Coffee consumption per capita Units: Kilograms per person per year. Earth trends. Retrieved from http://earthtrends.wri.org/text/energy-resources/variable-294.html

5. Himalayan Java. Retrieved from http://www.himalayanjava.com/6. In one’s (coffee) cups. (2007, April 6- April12). Nepali Times, 343. Retrieved

from http://www.nepalitimes.com/issue/343/Leisure/134097. International Tourism; Number of Arrivals in Nepal. Trading Economics.

Retrieved from http://www.tradingeconomics.com/nepal/international-tourism- number-of-arrivals-wb-data.html

8. McCoffee, C., (2009, May 6). Coffee Drinking is in Rise in Asia. Retrieved fromhttp://chuggingmccoffee.hubpages.com/hub/CoffeeDrinkingisOnetheRiseinAsia

9. Nepal GDP Per Capita (Current Prices, US Dollars) Statistics. Economy Watch.Retrieved from http://www.economywatch.com/economic- statistics/Nepal/GDP_Per_Capita_Current_Prices_US_Dollars/

10. PAN. (2011, Dec 26). Inland Revenue Department .Retrieved from http://www.ird.gov.np/ird/

11. Paying Taxes in Nepal. Doing Business. Retrieved from http://www.doingbusiness.org/data/exploreeconomies/nepal/paying-taxes/

12. Royal Everest Coffee Mill Pvt. Ltd. Retrieved from http://www.everestcoffee.com.np

13. Starting a Business in Nepal. Doing Business. Retrieved from http://www.doingbusiness.org/data/exploreeconomies/nepal/starting-a-business

14. Tea Consumption Fact. (n.d.) Tea & Coffee Business Board, Nepal. Retrievedfrom http:// www.teacoffee.gov.np/indexfacts&forecasts.php

15. Wong, M., (n.d.). Marketing with Leadership. Retrieved from http://michaelwong.hubpages.com/hub/marketingwithleadership