Exclusive Summary
Goals and Objectives of the New Business Unit
The first objective is to diversify the portfolio of SOJuba. Diversification is an essential strategy in a competitive market because it allows businesses to widen their revenue streams (Guyader & Piscicelli, 2019). The more we make, the better we can manage costs and keep prices affordable for our customers and remain competitive. Sales from drinks will be a crucial revenue stream as they generally cost more than food and allow us to make more profit on each sale.
The second objective is to offer a new dining experience. Customers might be unhappy if they have to wait too long for their food, so we must provide them with a system to order drinks and food from the same source. Fundamentally, that will reduce the number of people queuing for food and beer, providing a better experience. The total capital investment will be substantial but necessary if we want to expand our customer base in this way. We are also taking advantage of the fact that there are few other similar businesses in the city, so SoJuba stands out in this respect.
We use the Business Simulation to simulate our BrewPub business. We run 7 cycles with different business parameters in different cycles. After 7 cycles, the total revenue was $1,954,316 and the total profit before taxes was $196,191. The BEP point of our project was 18 months. In marketing management, we use SWOT Analysis, Porter Competitive Forces, PESTEL, and Sensitivity Analysis as the business decision tools. We also use Break-even analysis to calculate the margin of safety based on the revenues and associated costs. We make use of 36-Mo-Fin-Pr Analysis and Risk Analysis to find the best cycle. All tools show cycle 7 has the best outcomes.
Introduction
The location of the restaurant
Our team has shifted SoJuba’s location to South End: 782 Tremont St, Boston, MA 02118. The restaurant itself is not too far from the NEU campus, making it easy for students to come out to eat and have drinks conveniently. The location is also perfect for those who wish to dine before or after a Red Sox Game as Fenway Park, where the team plays, is a few blocks from SoJuba. Tourists also frequent the restaurant’s location.
The Customers
The customers of SoJuba are mostly NEU students and other Boston residents. The restaurant is full of color and has an energetic vibe that provides a perfect setting for young people and college-aged people to go out, eat, drink, and have a good time. The target market is people aged 18-45 years old and those living in and around Boston. The average customer usually spends $20 to $30 at the restaurant. It is not too pricey so our customers can afford it and it is also not too cheap to ensure that we still profit from every customer. Customers often order appetizers such as fried chicken or shrimp and alcoholic beverages such as mojitos, martinis, and margaritas.
Competitors
Primarily, SoJuba’s main competitors are other culture-oriented restaurants in the area. Many places within Boston, such as Silk Road Uyghur Cuisine and Coreanos Allston, offer a similar menu (Yelp, 2021). Our advantage over these other restaurants is that we have spicy food and fried chicken. The environment is also very vibrant, so customers can come here to have fun with their friends.
Why Is Change Needed?
Change is needed to make SoJuba more competitive in the restaurant industry. We can do this through various means, such as adding new dishes or items to our menu, changing our food style, and developing an online ordering system on our website. Essentially, these changes will allow us to gain more customers from other restaurants while keeping the ones we currently have happy.
The Size of the Restaurant
SoJuba has a capacity of over 175 people given that it has 35 tables, and one table can hold on average five individuals. The size of the restaurant is essential to consider because, generally speaking, the larger the dining space is, the higher the number of customers. It also means that there is more room for people to move about. If an establishment is too small, it can get very crowded with little elbow room, making customers uncomfortable and driving them away.
Owner’s Objectives
The objective is to invest in a New Brew Pub. The owner of this company wants a new Brew Pub where customers can order their drinks, beers, and food at the same place. Essentially, this will allow the business to tap into new revenue streams as people can now buy food and beer from the same site.
Business Strategy for the Next Three Years of Operation
It is essential to have a business strategy to give the organization a sense of direction. The business strategy for the next three years will incorporate the new Brew Pub. In essence, we expect to spend substantially on initial investment and then see it gradually pay off as we grow our customer base. The number of staff members will go up from 2 employees currently to 10, spread across the whole team. Essentially, this means we will need to think about employee training and safety and have clear lines of communication between the restaurant and pub sides of our business.
We want to make sure that customers enjoy themselves when they go to one of our pubs or bars so we must make their experience enjoyable. That includes providing them with a wide variety of drinks, good quality food at reasonable prices, and quick care of complaints. Fundamentally, it also means having a proactive approach to marketing so that customers are aware of all the great things our company offers. Sales for this year are expected to remain steady at just over $5 million, but next year the pub side of the business will slowly start to encourage customers to eat there instead of at home or somewhere else. In essence, we will provide food that is just as good if not better than what they might get in a restaurant but at a much lower price. We are also planning to implement a rewards program to encourage customers to keep coming back by offering discounts and other incentives. In essence, this could be especially effective if combined with an online presence where customers can sign up for updates on our latest promotional offers. Another fundamental business goal is to offer more flexibility regarding seating arrangements. As a result, people can book booths or areas for large parties.
The Managerial Decision-Making Process for Selected Functional Areas
Functional Area #1: Marketing Management & Decision-Making
The marketing strategy is to be more active on social media, primarily Facebook and Twitter. We will post pictures of the food we serve at our pubs and bars, along with helpful information like where to find us or opening hours. We will also encourage customers to provide feedback by sending photos of their experience when visiting one of our establishments. In essence, the purpose is to gain insight into how we are doing and improve upon anything that might be subpar. We will also use the business’s website by making blog posts about upcoming events or special offers, encouraging customers to sign up for our newsletter to not miss out on any news.
Market Review
The target market is mostly young professionals and university students, but we also attract some older customers on the weekends. We appeal to this demographic because of our low prices and casual atmosphere; people can come in groups or by themselves to enjoy a couple of drinks after work or school. Essential consumer actions include visiting our pubs directly and planning to schedule their next visit with friends.
SWOT Analysis
Strengths
1. We already have a strong customer base.
2. We are already active on social media.
3. We have an established reputation in the Boston area.
Weaknesses
1. We have not been following up on customer input.
2. We do not have a lot of initiative for new ideas.
3. At the moment, our menu is limited.
Opportunities
1. An opportunity is to actively seek customer input by asking them to provide feedback via our website after visiting our establishments.
Threats
1. Economic crisis
2. Competitors within the Boston area.
3. The pandemic
One of the decision support tools we use in Marketing Management is the SWOT Analysis. The SWOT Analysis allows us to clearly analyze four critical elements of our new business, those elements are strengths, weaknesses, opportunities, and threats. The table above shows the brief analysis for each element. Our greatest strength is that we already have a strong customer base and already have a good reputation in the Boston area. Compared to a newly established restaurant, we do not need to worry about customer resources if we establish a new brewpub business. Customers will naturally notice our new beers and will be willing to try it. But we also have some weaknesses. Our menu is limited, and we are lacking initiative for new ideas now. Frequent customers might feel our food is too monotonous or can’t find suitable dishes to enjoy with beers. The opportunities we have is that we can invite customers to give us feedback about how they rate our service performance and how we can improve our products such as beers or dishes. The aspect of threats involves the economic crisis, the competition, and the pandemic. Take the pandemic as an example, we don’t know when the COVID-19 ends. If the condition becomes more serious in the future, there would be a negative impact on our brewpub business.
Porter Competitive Forces
We also use Porter Competitive Forces as a decision support tool in the Marketing Management functional area. Compared to SWOT Analysis, the Porter Competitive Forces analyze our external environments. Since there are five aspects in this analysis tool, we also call it Porter’s Five Forces Analysis.
The supplier bargaining power for our beer business is not strong since the ingredients for our beers are not rare. In addition, since our volume is not enormous, there are many suppliers that can afford our ingredients demand. Thus, we can easily shift to other suppliers if the current supplier does not meet our requirements.
The customer bargaining power, however, is strong. There are many other beer brands and other restaurants that provide beers. Customers could go to another restaurant or buy another company’s beer if they think our beers are expensive or not delicious.
The competition in this industry is very fierce since many restaurants exist in the Boston area. In order to attract more customers, every restaurant needs to have special and unique foods and beers so they can get competitive advantages.
The threat of substitutes is also high for our BrewPub business. Customers can easily find substitutes for beers, and they may choose to drink cola or juice, even water is the substitute of our beers.
The last force is the high threat of new entrants. Crafting beer is not a high technology work, and it does not need heavy capital investment. Thus, the industry barriers are not high, and it is not hard for new companies to enter this industry.
Sensitivity Analysis
We plan to have 8 different types of products and one special offer. Among those 8 types of beer, Pilsner and Bavarian Lager are designed as more expensive beer with premium taste, and the price for those two is $5.5/pint. But they can also be sold through licensed beer wholesalers for $2. Special offer is all the leftover beers that could not be sold within 30 days, so special offers would be sold for only $4 for promotion. Other beers would be sold with the price of $4.5. As the sensitivity analysis shown as Appendix 2 (Sensitivity Analysis) shows, two types of beer that are sold through wholesalers are more price sensitive compared to other beers. Thus, we need to pay more attention to those two types of beers.
PESTEL Analysis
Political Factors
Massachusetts alcohol laws permit adults to serve or bartend in venues selling alcohol for on-premises drinking. They also permit adults to sell alcohol in stores for drinking elsewhere. Restaurants and bars can serve from 8 a.m. to 2 a.m. Monday through Saturday. No alcohol sales begin before noon on Sunday. Besides, the political stability, tax policy and labour law are all good for a bar. In general, political conditions are very good. Our investment won’t be affected.
Economic Factors
The economic growth of Boston is good. The GDP of the Greater Boston metro area grew nearly by 50% from 2001 to 2019. In 2019, its GDP amounted to 423.73 billion U.S. dollars. According to the U.S. Bureau of Labor Statistics prices in Boston experienced an average inflation rate of 3.15% per year between 1914 and 2021. Besides, its interest rates, disposable income of consumers and unemployment rates are all at a good level.
Social Factors
Boston residents have the habit of drinking. The majority are young and middle-aged. Our customers of SoJuba are mostly NEU students and other Boston residents. They are willing to go out, eat, drink, and have a good time.
Technological Factors
The technology of brewing the bar’s own beer is mature. The investment does not require a high level of innovation or automation. It is entirely feasible that the equipment procured provides a steady supply of beer flavor on a continuous basis
Environmental Factors
The ingredients needed to make wine are very simple. The yield of wheat has been quite stable in recent years. Raw material is enough. Boston’s climate is also relatively stable, which basically does not affect the number of tourists.
Legal Factors
Alcohol is permitted in Boston. And Massachusetts alcohol laws permit adults to serve or bartend in venues selling alcohol for on-premises drinking. We make sure that our Brew Pub has an alcohol-serving license, which would allow us to offer beers, wines, and other spirits at the same place. We also need to think about the most important is compliance with health inspection standards by ensuring that all dishes are prepared hygienically and safely. The other legal rule that must be considered is the employment laws. Essentially, this refers to the labor laws that regulate the relationship between employers and employees. These rules can be broad, such as minimum wage or around specific tasks like health and safety training. Laws that the business must keep an eye on are equal pay act, the Civil Rights Act, Americans with disabilities act, the Fair Labor Standards Act and also Age Discrimination in Employment Act. We will offer our employees incentives for their loyalty and another form of remuneration beyond what is mandated by law.
Functional area #2: Financial Management
The next section of financial management is the budgeting process. Essentially, this means planning for future costs and income and any special events that might affect the business. Next is the capital investment analysis, where we need to look at what this will accomplish for our company. There are three main reasons we are making a substantial initial investment in the Brew Pub. Firstly, to create a sense of community by providing a space for customers to meet each other and catch up with friends over drinks or food. Secondly, it will allow us to increase our profits by serving more drinks and food. Finally, it will be a great addition to the neighborhood. It will attract more people and encourage them to spend time there, rather than go elsewhere for dinner or drinks.
The goal of setting up a Brew Pub in SoJuba is to make as much profit as possible. In order to achieve this goal, our suggestion of this part is to add marketing tools, like social media and decrease the number of employees to reduce the cost. We will explain the financial rationale of the project and product plan, including the beer price, the costs of marketing and management, the number of employees recruited, etc. Our recommendation is based on the data of cycle 7 of our simulation analysis. We will also introduce the possible financial results of cycle 7. The reason we choose cycle 7 as our project plan is that it has the lowest break-even point, which is 4.49 months, and it has the highest revenue. In the cycles, we try to change different variables to analyze the critical factors that influence the profit results. For example, we increased the cost of trade shows and social media marketing costs, decreased the number of employees and the costs of administrative management, decreased the cost of beer production, and increased the price of beer.
Besides, the profit growth also matters in the business. In our cycle 7, the profit after tax for the first year to the third year are $253,902, $290,792, $362,344. The growth rate of profit is about 14% from FY1 to FY2, 24% from FY2 to FY3.
Overall, we suggest the investor follow the implementation plan of our simulation cycle 7, which will create the highest revenue and the shortest break-even point. Our other cycles, like one, two, four, five produce lower profit growth and longer break-even points. From a financial point, we advise that investors operate brewery business by using the financial strategies we have recommended in cycle 7.
BEP Analysis
According to Investopedia(2021), Break-even analysis entails calculating and examining the margin of safety for an entity based on the revenues collected and associated costs. In other words, the analysis shows how many sales it takes to pay for the cost of doing business. The most important thing for an investor who invests money in a new business is the payback period. In our cycle 3, the break-even point is around four and a half months, which is the lowest among the six cycles we have experimented with. And it means after nearly four months, the profit will cover the fixed cost of the brew business. During this cycle, we assumed the investment was $20,000 and the results showed that the expected return on investment is about 5%. According to the data, we can expect the brew business to create a revenue of $878,400 in the first year, $976,583 for the second year and $1,132,247 for the third year. The growth of the revenue is around 12%.
36-Mo-Fin-Pr Analysis
We run seven cycles in the simulation, and we decide to choose cycle 7 as our final cycle. Appendix 3 (Sim-Report) shows the different business parameters for different cycles. According to the Sim-Report, compared to previous cycles, cycle 7 have the highest after-tax profit of $907038 and the lowest break-even point in revenue of $328466. In cycle 7, we only choose local advertising and advertisement in trade shows. We tried to make advertisements on social media in previous cycles, but it only brings lower net profits. Another decision we made in cycle 7 is to lower the salaries of employees except salesmen and beer masters, since salesmen and beer masters are more important than other employees. In addition, we also lowered some utilities that would not affect the revenue of the BrewPub business, such as leasing of cars and computers. Thus, cycle 7 has higher net profit and shorter payback period.
RISK Analysis
Monte Carlo Algorithms rely on repeated random sampling to obtain results. They model possible results by altering random variables according to set probability
distributions in other words, they try to account for real-world randomness. MCS uses a massive number of simulations to give an accurate picture of all possible outcomes. When investing in a business, although profit and payback period are very important, we can’t ignore the risk behind them. The Sharpe ratio is a metric used to compare investment risk and return. The higher the ratio, the better an investment. When we use Monte Carlo Algorithms, we can know the Sharpe Ratio(Applying Risk-Free Interest Rate) is 5.9 and Sharpe Ratio(Applying Expected Return on Investment) is 6.04, which means cycle 7 is good.
Functional area #3: Human Resource Management
The business will have an average of 10 employees. The number of employees may be increased in the future on a need-basis. Thus, we must start thinking about longer-term HR development. In essence, we need to retain good employees and encourage them to stay with the business for a long time. We could do this by providing various benefits that might make their job more enjoyable or interesting. It also makes sense to provide training opportunities to learn new skills that might help them advance in their career. We will also determine any gaps that could prove problematic. For example, training can entail several aspects such as reading and understanding policies and procedures, customer relation skills, communication skills, etc.
Functional Area #4: Innovation
Beer improvement
As we all know, the main rule governing the preparation of beer dates from 1516 and it is still applied in various parts of the world. Innovations have been important in this industry because of fierce competition, unchanging production processes and limited flavor. Additional, as shown in the figure below, SOJuba has mature management system, loyal customers and steady sales. It is in the Phase 3 when should focus on innovation.
So we decide to make use of digital transformation to realize innovation. Like Sandra Defelipe(2021)said, ‘Today, machines allow to automate processes, sensors measure various values and analysis allows to act and create new products, modify strategies. Technology and research are also allowing the industry to diversify and new manufacturers to enter. ’ We can use sensors of our New Brewpub to measure values. And find the good flavor through machine learning and artificial Intelligence.
For example, by providing various kinds of beers for customers who are volunteer to test, we can collect a large amount of information: customers’ reaction to the beer’s appearance, aroma, flavor, mouthfeel, size of the bubbles, gas released, height and foam stability, as well as alcohol content, bitterness, and color. These are generally referred to as quantitative parameters of beer character. As shown in the figure below.
simple
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malt
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hops
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look
color
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taste
bitterness
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<2.5
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carbonation
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fullness
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aftertaste
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aroma
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size of the bubbles
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parameters of beer character
Color of beer
By machine learning and artificial Intelligence, we can using these information to forecast the customers’ preference to a beer and finally find the most popular beer. Besides, we can make adjusts and modify our recipes according to customer’s suggests, which help speed up the process.
Material improvement
Improving the quality and stability of material is also important. Cooperating with excellent farms around Boston is a good way. Like Sandra Defelipe(2021) said ‘The proper and responsible use of natural resources, cultivation processes with fertilizers based on organic nutrients and the reduction of insecticides and herbicides have also become popular in the brewing industry.’ So, a good partner who provide superior material and responsible is necessary. Besides, stable provider is advantageous to price of material, which is cost saving.
Functional Area #5: Operations Management
Operations Management and Decision Making
Operations management is also an important aspect when considering the investment to a new brewpub in our restaurant. It is critical to have a precise product schedule to determine when we should start to produce beer and how much beer should be produced. If we produce more than demand, beers will be wasted since the storage life of the craft beer is 30 days. However, if we produce less than demand, we also loss money which we could earn if we have enough inventory.
In order to have a better operations management, we decide to set a cut-off point for the production of every type of beer. If the demand of a certain type of beer is higher than the cut-off point of this beer, this beer will be continuously produced. However, if the customer demand is lower than the cut-off point, the brewpub will stop producing this beer.
At the beginning, the cut-off point for all eight types of beer are all 0.8. That means if the demand is less than 80% of a tank, then we will not make the beer type for this tank. Because the brewpub project requires a lot of investment, we believe that we need to minimize unnecessary waste to avoid more losses. This is the reason why we set the cut-off point to 0.8. However, we set the cut-off point for special offer to 1 because there will always be some leftovers for other beers.
Selected decision support tools for Operations Management
Decision support tools could help use to do analysis to make decisions. For operations management, we decide to use Break-even Analysis and Sim Report.
Sim Report:
Sim Report provides many business parameters that are critical to the brewpub. We can use the Sim Report to compare the results between different cycles. Before we change the cut-off point, the total revenue is $2987230, and the ROI is 6.05% in cycle 8. Then, in cycle 9, we changed the cut-off point for different beer type and tried to increase our revenue. We decreased the cut-off point for Pilsner and Varian Lager from 0.8 to 0.6. In addition, we decreased the cut-off point for Light Wheat, Red Wheat, Pale Ale, and Bock Dark from 0.8 to 0.7. By doing this, the total revenue increased to $3117507 and the ROI increased to 6.57%. That means decrease cut-off points could help the brewpub have more total revenue and higher ROI.
Break-even Analysis:
Break-even Analysis is also a useful decision tool. In operations management, it provides us a clear view about how changing cut-off point affects the break-even time and break-even sales. Figure 1 is the Break-even Analysis in cycle 8. The Break-even Time in cycle 8 is 4.49 months, the break-even sales is $328,466. However, after we decreased the cut-off point for Pilsner and Varian Lager from 0.8 to 0.6 and for Light Wheat, Red Wheat, Pale Ale, and Bock Dark from 0.8 to 0.7, the Break-even time declined to 4.24 months with sales of $324,749 (Shown in Figure 2). In addition, the contribution margin increased from 62.92% in cycle 8 to 63.64 in cycle 9. By using Break-even Analysis, we could determine what is the appropriate cut-off point for different beer types to shorten break-even period and to maximize our revenue and profits.
Figure 1
Figure 2
Result of Operations Management
For Operations Management, we changed cut-off points for different beer types to see how those changes affect simulation results. In cycle 8, we set the cut-off point to be 0.8 for eight beer types and 1 for the special order. However, in cycle 9, we adjust the cut-off point for Pilsner and Varian Lager from 0.8 to 0.6, and we decrease cut-off point for Light Wheat, Red Wheat, Pale Ale, and Bock Dark from 0.8 to 0.7. As a result, the after-tax net profits increased from $907,038 to $985,231. In addition, the break-even period was decreased. In cycle 8, the break-even period is 4.49 months, the the break-even sales is $328,466. In cycle 9, however, the break-even period change to 4.25 months with $324,749 break-even sales. As a result, the shorter break-even period means that the owner could recover his investment faster, and the higher net profit and ROI allows the owner to make more money with same amount of investment.
Conclusion
The proposed Brew Pub will be a good addition to SoJuba’s portfolio. The pub will offer a wide array of food and drinks to increase profit and encourage customers to return. It is also a great way to draw in more people and make them stay at the restaurant longer, which can be highly beneficial for both us and those nearby. Good strategic planning and effective marketing strategies will be key to ensuring we meet our goals and continue to offer customers a good experience.
Reference
Guyader, H., and Piscicelli, L. (2019). Business model diversification in the sharing economy: The case of GoMore. Journal of Cleaner Production, 215(1) 1059-1069. https://doi.org/10.1016/j.jclepro.2019.01.114
Yelp. (2021). Top 10 Best Spicy Food in Boston, MA. Retrieved from https://www.yelp.com/search?find_desc=spicy+food&find_loc=Boston+MA
Hayes, A. (2021, October 25). Break-even analysis. Investopedia. Retrieved November 3, 2021, from https://www.investopedia.com/terms/b/breakevenanalysis.asp.
Sandra Defelipe. (2021, September 24). These are the main innovations in beer production. Impacto TIC. Retrieved December 6, 2021, from https://impactotic.co/en/transformation-and-innovation-in-the-beer-industry/
Brian. (2016, July 4). Beer characteristics. Craft Beer Academy. Retrieved December 6, 2021, from https://craftbeeracademy.com/beer-characteristics/.
The oxford companion to beer definition of mouthfeel. Craft Beer & Brewing. (n.d.). Retrieved December 6, 2021, from https://beerandbrewing.com/dictionary/zAMke7KfZy/.
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