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Financial Prediction

Current market size

 

In order to find the financial projections for this investment we had to make a few assumptions. Due to the lack of financial records from our company it was not possible to retrieve a more precise predictions.

Our first assumption was the number of initial customers. Our first store will be a chocolate bar with 50 seats which will be opened from 10 am to 10 pm. From this we assumed that in our first year with one chocolate bar and our advertising efforts, we will gain 1.5% of the predicted market size, representing 67,632 customers (average of 188 customers per day or 16 customers per hour).

 

These assumptions are very conservative, because we are based in a major area of Shanghai where there are thousands of people flowing every day.

 

The model below is a diffusion model, which shows the percentage of estimated number customers gained every year. It  presents a retention rate of 60% for the first year that increases by 10% the following years. In order to offset miscalculations and assumptions, we have set up a low initial retention rate. This figure though pessimistic, may help achieve a more valid forecast. The model below is a diffusion model, which shows the percentage of estimated number customers gained every year.

 

In the second year we believe an additional 3.5% will be attracted, 1.5% due to our advertising, promotion and word of mouth and 2% due to the establishment of the new restaurant in Xintiandi with 100 seats.

 

Our 3rd year will attract 2% of the market, due to our marketing efforts. The climax of year 3 will see a decrease down to 1.5%, since we are going to spend less on advertising.

 

Overall at the end of year 5 we will have around 4.8% of the market share with one bar and one restaurant.

 

5 Years Projections

 

Net Present Value

NPV 10 Years

 

Discount rate: 6%

NPV = ¥323,600

 

 

Our financial prediction is slightly pessimistic, and by opening 1 chocolate bar and 1 restaurant in Shanghai we will be able to break even at year 2, making this a very good investment. We applied the net present value (NPV) on a 10 year cash flow to see if it would be worth the investment and we used a discount rate of 6 percent taking into account the risk we feel is appropriate. The result is that it is a good investment opportunity.

 

 

Assumptions:

NPV & Discount rate

  • In China the current risk free interest rate is at 3.25%. Given the risk we have set it up at 6%.

  • After year 5 we predict an increase of 5% in cash flows every year for the next 5 years.

 

Sales revenue

  • We calculated that on average a person would pay 60 RMB at the bar and 120 RMB at the restaurant.

  • For the 1st year ‘total sales revenue’ is equal to 60 RMB multiplied by ‘total customers’.

  • From year 2, there are 50 seats in the bar and 100 seats in the restaurant, we will give 1/3 of weighted average payment of a person to the Bar and 2/3 to the restaurant. This gives an average payment of: 60x(1/3)+120x(2/3)=~100 RMB.

 

Rent

  • 57 RMB per sq m per day, for the major commercial areas in Shanghai, from 2013.

  • 200 sq m for chocolate bar = 4.104 million RMB per year

  • 400 sq m for restaurant = 8.208 million RMB per year

 

Staff

  • In the bar we assume we need 5 staff in the peak hours, but less in the beginning and the end of the day. We therefore need a total of 7 staff to cover a full day.

  • In the restaurant we need 10 staff in the peak hours, and 14 in total to cover a full day.

  • We increase the number of staff according to the demand, which is why it increases over time.

 

Salaries

  • Average salary 5000 RMB per month. According to the China Labor Bulletin 2013.

 

Equipment & renovation costs

  • Current franchisee fee to establish a Max Brenner chocolate bar is 800,000-900,000$.

  • We assume that 40% will go on the equipment & renovation costs and the rest to the location itself.

  • 2.1 million RMB for chocolate bar and 3.5 million RMB for the restaurant, since it is much larger.

 

Variable costs

  • Researching on the Internet about other dessert businesses’ variable costs, we estimated 27% of sales revenue is an appropriate figure.

 

Marketing expenses

  • Since we are unknown in the new market, we are not going to focus our marketing expenses on a percentage of predicted sales, but on market potential.

  • These include: advertising, events, interactive marketing and word of mouth.

  • Our calculation for the first year will be 672,000 RMB.

  • In the second year this will increase by 30%, due to the new restaurant marketing efforts.

  • The third year will stay the same, in order to further maximize awareness.

  • The fourth and fifth year will decrease by 30%, since advertising through word of mouth or social media will be well established.

 

Limitation

  • Did not take into account increasing population.

  • Did not take into account tourist.

  • Fluctuations in rent prices.

  • Assumptions can be inaccurate.

 

Max Brenner 5 Year Plan

Looking at our profits projections we came with the following updated 5 year plan:

  • Year 1: Enter with chocolate bar concept, plus high investment in marketing.

  • Year 2: Enter with restaurant concept, increase marketing investment by 30%.

  • Year 3: Keep marketing efforts as from previous years, in order to maximize brand awareness.

  • Year 4: Decrease marketing by 30%

  • Year 5: No changes from year 4.

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