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DESSERT PARADISE Final Report Master of Business Administration SCHOOL OF BUSINESS & MANAGEMENT Consulting Skills for Managers Fall 2009 24 October 2009 By: Suzanne So (0893 3851) Bryan Cheung (0893 3564) Chris Li (0893 4178) Eric So (0893 6229) Vincent Ng (0893 3409) Executive Summary Dessert Paradise (DP) is a new start up dessert shop near Pak Tin Estate at Shek Kip Mei since June 2008. Since its opening DP has been generating a net income (NI) that is just about breakeven. However, DP’s revenue growth stalled. The prospect of growth appears to be overshadowed in the highly competitive industry with around 1,007 dessert stores in Hong Kong. The main challenge is how to achieve a significant increase in NI through solid revenue growth? The main source of growth is customers expansion. Our recommendation is to broaden customer base through an integrated strategy of: 1. Introducing signature desserts in attracting out-district customers (destination customers) 2. Launching lunch set in attracting in-district customers (passers-by customers) 3. Leveraging promotion, publicity and merchandising in Improving brand awareness 1. Attracting destination customers through introducing signature desserts Signature desserts are effective in attracting destination customers from outside districts with high growth potential because: A. Heavy Reliance on passers-by of local residents, students and workers limits DP’s growth opportunities B. The propensity to spend and the purchasing power in the area are rather low in which DP cannot charge a high price C. Hong Kong people like to make deliberate trip for signature dessert Executive Summary (cont.) 2. Recruiting passers-by customers through launching lunch sets Our research found that demand for lunch products existed. DP can meet the existing lunch demand of passers-by customers through lunch set introduction because: A. DP attracts a low percentage of total customer traffic during lunch hour with only around one third of its competitor’s customer flow during lunch hour B. DP has spare resource at lunch hour with current capacity of less than 10% of total staff utilization C. DP has the competence in providing lunch set product not currently available in the market but demanded by the customers 3. Improving brand awareness by leveraging promotion, publicity & merchandising As per our expert’s interviews, customers food critics at popular website such as openrice.com in Hong Kong creates word-of-mouth impact and generates brand awareness for destination customers while appealing in-store merchandising attracts passers-by customers. Many high-traffic flow dessert stores such as Chung Kee Desserts and Yuen Kee Desserts utilise the tactics in expanding customer base as opposed to launching above-the-line campaign. We conclude that it is essential for DP in pursuing the tactics because: A. The brand awareness of DP is significantly lower than other dessert stores B. Interest and trial cannot be induced with low brand awareness C. The channel of promotion is cost effective given DP’s limited resource 1. Signature Dessert A) Heavy reliance on passers-by of local residents, students and workers limits DP’s growth opportunities. Observation: DP heavily relies on in-district customers and hence the business growth is limited. Customer Mix (% ) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dessert Paradise Lok Lam (綠林) Chung Kee (松記) Yuen Kee (源記) Passers-by Customer Destination Customer Source: Shop Interviews 1. Signature Dessert B) The propensity to spend and the purchasing power in the area are rather low in which DP cannot charge a high price. Observation: Destination customers spend more than passers-by customers Spending of a Dessert Trip per PAX (HK$) 50% 45% % of Total Customer 40% 35% 30% 25% 20% 15% 10% 5% 0% Below $10 $11 - $15 $16 - $20 $21 - $25 $26 or Above Spending Passers-by Customer Destination Customer Source: Survey of 100 in-district and out-district people 1. Signature Dessert C) Hong Kong people like to make deliberate trip for signature dessert. Observation: 75% of People Make Deliberate to a Dessert Store for Signature Desserts. People Making Deliberate Trip to a Dessert Store for Signature Stores by % 25% Yes No 75% Source: Survey of 100 in-district and out-district people 1. Signature Dessert C) Hong Kong people like to make deliberate trip for signature dessert. Observation: 61% of people like to make deliberate trip for signature desserts if the store is at Shek Kip Mei. People Making Deliberate Trip to a Dessert Store at Shek Kip Mei for Signature Stores by % 39% Yes No 61% Source: Survey of 50 out-district people 2. Lunch Sets A) DP attracts a low percentage of total customer traffic during lunch hour Observation: If DP reaches Ice Joyce’s customer flow (double existing) during lunch time (11am-2pm), DP NI will be increased by 70% Daily Customer Flow by % 35% 30% 25% 20% 15% 10% 5% 0% 11am-1pm 1-3pm 3-5pm 5-7pm 7-9pm 9-11pm Dessert Paradise Ice Joyce Café BBQ Pork Shop Source: Physical count on site 2. Lunch Sets B) DP has spare resource at lunch hour with current capacity of less than 10% of total staff utilization Observation: DP can handle the surge in customers during lunch. Staff Workload Utilization by % 30% 25% 20% 15% 10% 5% 0% 11am-1pm 1-3pm 3-5pm 5-7pm 7-9pm 9-11pm Source: Owners’ Tallying 2. Lunch Sets C) DP has the competence in providing lunch set product not currently available in the market but demanded by the customers Observation: Over 40% of local customers / residents want a “Sandwiches Set” which can be delivered within the owner’s capability Food style preferred by customers / residents by % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Sandwiches Set Noodles Set Dim Sum Set Others Source: Survey of 50 local customers / residents during lunch time 3. Promotion & Publicity A) The brand awareness of DP is significantly lower than other dessert stores. Survey: Only 2% of Hong Kong people is aware of DP while 40% is aware of Honeymoon Dessert, 10% Lucky Dessert and 13% Chung Kee. Percentage of people who are aware to the particular dessert shop by % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% DP Honeymoon Dessert Lucky Dessert Chung Kee Source: Survey of 50 out-district people 3. Promotion & Publicity B) Interest and trial cannot be induced with low brand awareness Survey: Only 5% of people do not go to DP because they don’t like the food, while 60% is not aware of DP. Percentage of people by % 70% 60% 50% 40% 30% 20% 10% 0% Go to DP Don't like the food Not aware of DP Source: Survey of 100 in-district and out-district people 3. Promotion & Publicity C1) Online food critics provide a cost-effective way in increasing brand awareness of destination customers Observation: Word of mouth is not frequently used to promote DP on the internet while many successful stores utilized the tactic in creating traffic flow Dessert Paradise VS Source: Customer Comments @ Openrice.com 3. Promotion & Publicity C2) To increase brand awareness of passers-by customers, DP can revise its menu Observation: Takeaway leaflet of DP is dull and lack of photos. . VS Dessert Guy Dessert Paradise Honeymoon Dessert Source: Mystery Patrons Chung Kee 3. Promotion & Publicity C3) To increase the brand awareness of passers-by customers, DP can create attractive merchandising Observation: DP does not have enough merchandising to attract customers when comparing against successful competitors Dessert Story Special Display on Signature Dessert Magazine Clippings Source: Mystery Patrons Poster List of Appendices Appendix 1 – Interview Guides a. Schedule Date Interviewee Interviewer (Leading in Bold) Status 25 Sept Owner, Dessert Parade – Mr. David Kuan Suzanne/Vincent Completed 27 Sept Owner, Dessert Parade – Mr. Martin Yu Bryan/Eric Completed 11 Oct Manager, Lok Lam Dessert Store, Chris/Suzanne Completed 11 Oct Manager, Chung Kee Dessert Store Bryan/Eric Completed 13 Oct Consultant, Tsui Wah Restaurant – Mr. Ng Suzanne Completed 14 Oct Owner, Yummy Baking – Ms Nancy Tsui Vincent Completed b. Objectives ● To obtain insights about the dessert / food and beverage industry ● To understand the key success factors about the industry c. Key Questions ● How is the industry situation? How does your shop compete? ● Can you rate the following factors – location, chef, servicing staff, special products, promotion, and menu? Which are the most successful? ● How is your cost structure? Is it typical? ● Do you have signature products? How much percentage of sales do they represent the total? ● Do you use differentiation strategy? Combo products? How are they going? ● What is your shop’s average margin and that of normal against signature products? Appendix 1 – Owner Interview 1 Interviewee: David Kuan (Owner) Interviewers: Vincent and Suzanne Date: 8pm, 22 Sep, 2009 Key Takeaways Background: Current Situation: DP can barely make a profit in its 1st year, however, it faces several key issues, e.g. too few customers, fierce competition and few dessert selections. Future Plan: It targets to increase its profit sharply in its 2nd year and aims to open one more store in the same district. Strength: It adopts a low price strategy to attract customers. Its brand awareness is enhanced by word of mouth and good comments on the Internet He is keen on trying new desserts at idle time and regularly updates the menu to offer more choices to customers. Weakness: As DP does not have any covered areas to serve customers, it has to be close during bad weather. Due to limited space, it cannot order too much ingredient and this limits its customers’ choices. Due to limited manpower, leaflet distribution / free delivery was on hold. Customers in this district is quite price sensitive, DP has difficulty in increasing price. Without much bargaining powers on suppliers, it has no ground to further reduce its cost of goods sold. Appendix 1 – Owner Interview 2 Interviewee: Martin Yu (Owner) Interviewers: Bryan and Eric Date: 8pm, 25 Sep, 2009 Key Takeaways Opportunities for DP Pricing – If the price of all desserts increases by HK$1, its daily turnover will be improved by ~$200 and its annual net income can improve by $63K. Lunch Time – DP only has a few customers at lunch time and this period would be a new revenue source in the future. Partnership – A few competitors near DP has approach them to form partnership to launch lunch combo or discount promotion to boost sales in the district. Manpower – DP plans to recruit a permanent staff to replace one of its owners, so that he can focus on strategic planning or return to his original industry to lower its opportunity cost. Customer Relation – With the high quality of services, DP has successfully developed a customer base from repeated customers in nearby schools and local estates. Threats for DP New competitors – As the start up cost for new cafés is low in this district, a few new snack shops have open recently to compete for customers. High rental – Its landlord is likely to increase its monthly rent in 2010 and this would further affect its profitability. Government Penalty – DP has a risk to be accused of illegally occupying public areas to set up tables to serve customers. Appendix 1 – Expert Interview 1 Interviewee: Nancy Tsui Owner of Yummy Baking (a cake & dessert school in Yuen Long) Interviewer: Vincent Date: 1pm, 14 Oct, 2009 Key Takeaways Key successful factors for signature dessert Understand the ever-changing needs of customers in different seasons in different districts / countries. Compare and analyze the SWOT of the signature product in the district Keep focus on learning one or two signature desserts by attending intensive class or working in famous dessert shop Offer free tasting / discount coupon to passers-by to enhance word of mouth Drive customer flow (instead of revenue) by signature desserts Critical factors to run a dessert store Shop location: It is essential to analyze the customs flow, customer preferences and competitor offerings in the nearby areas Product variety: Focus on a few key high margin items Promotion: Advertise on magazine, discussion board and social network such as facebook/twitter induce trial In-store merchandising attract passers-by customers Partnership: Identify any potential partners in the nearby areas to enhance sales Appendix 1 – Expert Interview 2 Interviewee: Mr. Ng Tak Leung Consultant of Tsui Wah Restaurant (Received “Eating in Hong Kong Image Flagship Store” Award) Interviewer: Suzanne Date: 7pm, 13 Oct, 2009 Key Takeaways Key successful factors for food & beverage industry Visionary – successful restaurants in Hong Kong sets goals beyond making profit. Tsui Wah has the vision to bring Hong Kong style food to the international platform Signature products – salient element to attract customers and build brand Standardization – Tsui Wah has a central kitchen in preparing food items and standardized process in controlling quality and food safety. For example, the restaurant uses of refractometers to measure dissolved sugar level in food. Publicity – position the brand as “Hong Kong Quality Restaurant”. Promotion through editorial in magazines and internets discussion board Threat for start-ups Competitive – the competitive force in food & beverage industry is increasingly intense Rent – most landlords request for 7 months deposit in lieu of rent. New start-up that rent district with high traffic flow requires a minimum of more Hk$1 million on purely on rental payment Salary – salary dominates a large proportion of cost Appendix 1 – Expert Interview 3 Interviewee: Mrs. Chan (Manager of Chung Kee Dessert Shop) Interviewers: Bryan and Eric Date: 4pm, 11 Oct, 2009 Key Takeaways Industry overview Intense competition in dessert industry Under such competition, need to maintain high quality and reasonable prices Key success factors Among different factors food quality is the most important; also need to maintain regular update on the menu so as to suit changing taste due to season and different segments of customers Cost Costs may be high due to the need to ensure quality raw materials Traditional dessert generally has a higher margin than newer ones, especially those with a lot of fruits. Therefore need to keep a healthy ratio to control costs and profits while catering customer tastes Take note of additional costs incurred from launching new desserts but failed. Tips Be a mystery patron in their own shop to objectively listen to customer comments, thus help with future product development with high success rate Be enthusiastic and determined to improve and grow the shop, it generally needs at least a year or two to recoup investment Appendix 1 – Expert Interview 4 Interviewee: Mrs. Lee (Manager of Lok Lam Dessert Shop) Interviewers: Chris, Suzanne & Vincent Date: 4pm, 11 Oct, 2009 Key Takeaways Industry overview There is a keen competition in HK dessert industry Entry barrier for dessert industry is low. There are many new dessert shops opened in HK every year HK people easily accept new things. They are willing to try new dessert products Many HK people like to make deliberate trip for signature desserts with high food quality Key success factors Food quality is the most important factor for attracting customers and building customer loyalty Wide variety of products and seasonal desserts are important to increase purchase frequency Word of mouth is a powerful promotion channel in dessert industry. Costs Generally rental cost is the major expenditure in running a dessert shop in HK Raw material cost for fruit dessert is relatively higher than that of other desserts Appendix 2 – Mystery Patron Checklist Dessert Stores Lok Lam Chung Kee Honeymoon Dessert Yuen Kee Location Shum Shui Po Shum Shui Po Kwun Tong West Point Date 11-Oct 11-Oct 27-Sep 4-Oct Time 3pm 3pm 9pm 10pm Mystery Patron Chris, Suz, Vincent Bryan, Eric Vincent Vincent 1. Product a) Food Quality 4 4 4 5 b) Menu Selection 5 5 5 3 c) Signature Products 3 3 3 4 d) Product Bundling 2 2 3 1 2. Service a) Waiting Time 5 4 4 4 b) Responsiveness 4 5 4 3 c) Politeness of waiters 4 4 4 2 3. Store Environment a) Hygiene 4 4 5 3 b) Merchandising 3 3 4 1 c) Location 3 3 5 1 4. Price 4 5 2 5 5. Promotion a) Coupons 0 0 0 0 b) Partnership 0 0 0 0 Total 41 42 43 32 Remark: 0 = Bad, 5 = Excellent Appendix 3 – Market Survey 1. Are you living in Shek Kip Mei? Yes __ No __ 2. Do you like dessert? Yes __ No __ 3. How frequently would you visit dessert stores? a) everyday b) 2 -3 times a week c) once a week d) once a fortnight e) once a month Lunch Set (for Shek Kip Mei residents ONLY) 4. Which of the following lunch set (main + dessert) would you prefer? a) Sandwiches Set b) Noodles Set c) Dim Sum Set d) Others: ____ 5. Which of the following price range will you pay for the lunch set? a) Below $20 b) $21-$25 c) $26-$30 d) $31 -$35 e) Above $36 Dessert 6. Did you have any past experience of making deliberate trip to a dessert store due to signature dessert? Yes __ No __ 7. Would you make the deliberate trip if the dessert store is located in Shek Kip Mei? Yes __ No __ 8. Currently, what kind of signature dessert would you like? _______ 9. Which of the following price range will you pay for a typical dessert trip per pax? a) Below $10 b) $11-$15 c) $16-$20 d) $21 -$25 e) Above $26 10. Which dessert store in Hong Kong you have visited the most in the past year? a) Honeymoon Dessert (滿記) b) Lucky Dessert (發記) c) Chung Kee (松記) d) Others: _____ 11. Please pick the most important factor in visiting a dessert store? a) Signature dessert (招牌菜) b) Food quality c) Price d) Services e) Store Location __ 12. Have you heard of a dessert store called “Dessert Paradise” in Shek Kip Mei? Yes __ No __ Appendix 4 – Not Feasible List Issue Hypothesis Analysis Data Sources Status Result 1. Cost DP can increase NI of $10K Inventory cost analysis 1. Owner's interview Completed Not feasible. Owners have by reducing 3% COGS compared many price lists from A) Cost of Goods Sold - How through alternative various wholesalers and due to to increase NI through suppliers. relatively small order, DP sourcing cheap raw materials cannot have any bargaining in bulk from suppliers? power on price. 1. Cost DP can increase NI of $12K Rental rate analysis 1. Desktop research: Completed Not feasible as the real estates through a 10% rent Centaline webpage, Agency market is recovering in Q2 B) Fixed Cost - How to deduction. quotes 2009. Owners believed the increase NI by reducing fixed landlord will increase rent in the cost of rent through 2. Owner Interview renewed lease in Dec. negotiating with the landlord? 1. Cost DP can increase NI of $6K Analysis of utilities usage 1. Desktop research: HK Completed Not feasible as (i) no tax by cutting utilities bills and Inland Revenue Dept incentive for new start up in HK, C) Overhead Costs - How to government bills by 5%. and (ii) Already minimize gov't increase NI through reducing 2. Owner's interview fee by all means. (iii) Tables are utilities and government fees all located outdoor without A/C, (license, business thus only limited utilities are registrations, taxes, etc.)? used in the store. 2. Service Change DP can increase NI by 1. Financial model on profit margins of 1. Owner's data Completed Not feasible - The store is only $15K by increasing 20% each additional service 100 square feet with manpower How to increase NI by customers through 2a. Desktop research constraints recruiting new customers provision of services (e.g. 2. Analysis of customer preference on through provision of internet, wi-fi, comics, car service levels 2b. Mystery patron at customized services? parking, special events, DIY nearby restaurants class etc.) 2c. Market survey 3. New Delivery Channel DP can increase NI by 1.Financial model on optimal order 1. Owner Interview/Data Completed Not feasible - The owner ran a HK$80K by providing free amount of delivery service and profit trial of delivery service. Due to How to increase NI by delivery to 1,000 new in- margin analysis 2. Desktop research limited manpower, the service recruiting new in-district district customers for order could not add additional customers through providing >HK$40 2. Analysis of amount of nearby 3. Market survey revenue. delivery to the neighborhood schools and their existing delivery and schools? service 3. Analysis of student preference on their acceptance to school delivery 4. Promotion DP can increase NI to 1. Impact research 1. Desktop research Completed Not feasible - Current price has HK$70K by increasing 30% a slim margin. Further discount How to increase NI by new "residents" through 2. Financial model on profit margins 2. Owner's data will hurt its net income. recruiting in-district customers providing discount to those analysis through providing discount to whose ID # has "8" those whose ID # has "8"? Questions? Comments? Thoughts?
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