Route 88: Bike Café: From Planning, to Operations, and ...
Route 88: Bike Café: From Planning, to Operations, and Entrepreneurial FinanceJackson J. Tan, PhDEntrepreneurship DepartmentCollege of Commerce and Business AdministrationResearch Center for Social Sciences and EducationUniversity of Santo TomasJanuary 25, 2019AbstractWith new micro and small-scale ventures, a founder may know of the risks associated with bank financing. Furthermore, the fact that these small-scale ventures were not eligible for such facilities, as they lacked proof of business concept, dictated that a founder seek alternatives to finance an enterprise. As a result, founders forego bank financing, and instead choose to finance the going concern with funds generated internally. This particular case study examined the beginning six months of a restaurant venture founded by a female Alumnus of the Entrepreneurship Department at the University of Santo Tomas. More specifically, this case investigated how a female entrepreneur assessed market tastes while controlling for costs and monitoring the company cash position. Discourse in this case study revolved about: (1) factors regarding pricing product offerings for a specific market, (2) assessing items that breakeven versus loss leaders, and (3) financing periodic operations with internally generated cash flows, more specifically, anticipating the cash position based on the cash burn rate per period. Analyses placed an emphasis on the cash position of a new venture, as an income statement may only partially explain operations. Hence, the cash position was used to assess the progress of the new venture, rather than solely through the income statement. This case study was developed to communicate the financing needs of newly conceived ventures that an entrepreneur faces upon implementation. As of 2018, the company this case study considered continued to operate.Learning OutcomesBy the end of the case readers should be able to:Assess factors regarding pricing product offerings for a specific marketAssess items that breakeven versus those that are loss leadersGrasp aspects of financing operations with internally generated cash flowsBackgroundIn her one of her first forays into the world of Entrepreneurship, Czarina Clemente poured over her financial statements, while eating preferences of her local market were tracked. She was aware that costs must be closely monitored as rent ranged from 14% to 24% of total revenue. Yet, Czarina also needed find the menu combinations that appealed to her local market. In the past few months, she added and subtracted dishes from the menu based on the number of units sold. She found that despite her efforts, losses along all her product categories occurred. These losses ultimately affected her cash position.Route 88 was a bike themed café that served food and beverages in East Kamias, Quezon City. The venture began operations in June 2015, and was solely operated by Czarina Clemente, then a fourth year Entrepreneurship student in the College of Commerce and Business Administration at the University of Santo Tomas. She initiated implementation of her venture while still in the planning stages. Her café was situated beside a bicycle shop that specialized in high-end bicycles and equipment targeted at a specific niche of cyclists that were able to afford “top-of-the-range” equipment. As the bicycle shop was owned by one of her relatives, Czarina took the opportunity to locate next to the shop.Apart from the bicycle theme of the café, Route 88 offered the value proposition of providing healthy and fresh eating at a “friendly cost” (Clemente, 2016). During the planning stage of the venture, Czarina saw that the café could be one of the first conceived with a bicycle theme in Quezon City. Initially, the café was conceived to provide board games, and offer a multipurpose room for rent. As she began implementation, the focus of the café turned to offering meals, drinks, a la carte items, and deserts.PlaceThe initial plan was to locate near a main road close to jeepney, tricycles, and the Manila Light Rail Transit System (LRT). Czarina choose to situate the café on Anonas Street, in the East Kamias Barangay of Quezon City. Anonas Street was populated by banks, many other carinderias, and small restaurants. The café itself sat between V. Luna Avenue (about 300 meters Northwest) and the Anonas Station of the LRT (about 1 kilometer Southeast). The café was less than a kilometer (about 750 meters) from the Armed Forces of the Philippines (AFP) Medical Center, on V. Luna Avenue. Within 300 meters of Route 88, Quirino Elementary School, the Don Quintin Paredes High School, and the Project 2 wet market were all within walking distance (Google, 2019b). Within 60 meters of the café, the area surrounding Route 88 was composed of residences, banks, auto parts and accessories dealers, a police station, a gasoline station, a publishing house, and various sari-sari stores that served the general needs of the residents (Google, 2019a).The owner of Route 88 entered a two-year contract with the landlord of the premises, and it was not likely that rental costs would be reduced. At the time of observation, Route 88 had three service employees, and three members of a kitchen crew. Salaries in the venture were treated as a fixed cost. Czarina questioned the necessity to carry the three members of the kitchen crew, given the proportion of sales consumed by operating expenditures.Revenue Streams: Products and PricesDuring the planning stages of the venture, Czarina sought a very pure concept: just offer Coffee, Frappuccino, and Smoothies. As she implemented her business plan, she found the local market demanded rice meals, and other complimentary products to the beverages she offered. Thus, she expanded her product offerings to suite market demand. From market feedback, the café menu expanded from three types of beverages, to offerings of entrées, value meals, all day breakfasts, sandwiches, pasta dishes, appetizers, salads, and sides. Thusly, all dishes were prepared in-house. Effectively, the purist concept of her initial plan evolved as a result of market pressures.The identification of revenue and loss leaders was the result of an examination of various categories of menu items. In 2015, the menu served from June to November consisted of 106 items. From the beginning of operations, the owner augmented the menu selection, by either adding or removing items. The revenue streams of the company were composed of interdependent categories of food. Meals substantiated 58.74 percent of the total sales of the venture, with entrees being the menu items that covered their allocated total costs. Several categories of loss leaders as drinks and deserts were added to stimulate revenues in other categories, namely Value Meals, and All-Day Breakfasts. Drinks comprised 15.19 percent of total sales; the entire category was a loss leader, as it merely complemented the rest of the menu items. A la carte items were 12.54 percent of total sales and was a composition of pasta items and sandwiches. Of the two categories of a la carte items, pastas were a breakeven sub-category. Sandwiches appeared to be a loss leader of the stream. Side dishes accounted for 9.87 percent of total sales, salads were the category leader, while appetizers and extras were loss leaders. Desserts were 3.56 percent of total sales and were offered as a compliment to the meals and a la carte categories. In the first six months of operations, sales of five separate months were not enough to breakeven. Figure 3, described the distribution of sales for each category of menu item.Breakeven levels for the venture were higher than actual sales for five of the first six months of operations. In June, café sales were six percent from a breakeven level of Php94,880, while in the following month sales were 22 percent below a breakeven level of Php140,441. With sales of Php131,350 the café was able to breakeven for the month of October. With the sixth month, sales were shy nine percent from a breakeven level of Php131,000. For the first six months as a total, sales were short seven percent from a breakeven level of Php773,130. Table 2, described the breakeven sales levels and margins of loss for the first six months of operations. A possible reason for the disparity in sales from breaking even could be found in the margins for each menu item, and the frequency of purchase for each dish. With contribution margin increased to 70 percent, the venture would have broken even in five of the past six months. An 80 percent contribution margin would have allowed the café a 22.21 percent average margin of safety. Tables 3 and 4, described breakeven sales levels and margins of safety under conditions of 70 percent and 80 percent contribution margins, respectively.Margins on each menu item varied within the categories. Entrées carried an average margin of 55.23 percent, with margins that ranged from 45.41 percent for Grilled Salmon with Butter Lemon Sauce, to 70.55 percent for Pork Sisig. Value Meals carried a 53.26 percent mean margin, with margins that ranged between Satay Barbeque at a 52.58 percent and Lechon Kawali at 54.64 percent. All-Day Breakfasts had an average margin of 58.31 percent, margins ranged from 44.32 percent for Adobo Flakes to 71.13 percent for a Plain Omelette. Appetizers were priced with an average margin of 57.74 percent, where margins for French Fries were at 47.27 percent and those for Fish and Fries were 76.24 percent. Salads carried an average margin at 71.30 percent, with the Chicken Caesar priced at a 66.26 percent margin and a Garden Salad at 80.77 percent. Sandwiches averaged margins at 58.80 percent, with a Tuna Sandwich priced with a 47.42 percent margin and a Grilled Cheese Sandwich at 67.15 percent. Pastas were priced with average margins at 69.39 percent, with a Creamy Carbonara at 59.09 percent and an Al Pesto at 76.07 percent. Desserts had the highest margins on the menu priced at an average margin of 73.04 percent. Deep Fried Oreos had a margin of 61.11 percent, while a Crépe carried a margin of 85.53 percent. Cold Drinks were priced with a 62.41 percent margin, which ranged from 30.30 percent for a Mountain Dew to 81.82 percent for an Iced Tea. Sides carried margins that averaged 71.43 percent. An Egg carried the least margin at 45.45 percent and an order of Garlic Fried Rice had a margin of 81.82 percent.Since the beginning of operations in 2015, despite being volatile, revenue amounts exhibited a general growth trend. Figure 4, described the upward trend in total sales and costs for the first six months in Philippine Pesos. Yet, as sales began to grow, monthly levels were such that expected gross annual sales would not have exceed the minimum Php1.5 million necessary to be taxable by the 12 percent Value-Added Tax under Title IV of the National Internal Revenue Code (BIR, 2019). In the opening month of the venture, the store experienced sales of Php88,870, which increased 23.32 percent in July. Sales grew 19.11 percent in August, but in September revenue growth slowed 6.11 percent. In October sales increased 19.27 percent. In the sixth month of operations, sales declined 18.37 percent, just below their level in September. From an examination of revenue growth rates, a concern was that the slowing rate of sales indicated public interest in store market offerings were waning or may even have begun to decline. Figure 5, described the slowing growth in sales as well as total costs.Cost DriversFrom the vertical analysis of the income statement, most of the venture’s costs were concentrated in operating expenses. Apart from rental, a significant proportion of operating expenses stemmed from salaries, and allowances, as well as the consumption of electricity. Total operating expenses in the opening month were Php58,160. In the following month, the venture experienced a 47.80 percent increase in these fixed costs. By August, Czarina was able to control operating expenses, which resulted in a 1.43 percent decrease. For the next two months, operating expenses were further lowered at 1.97 percent, and 4.64 percent in September and October, respectively. The sixth month of operations saw a nearly negligible 0.30 percent increase in operating expenses.The more challenging costs to control were the variable costs, as these costs were directly related to the level of production. Variable costs for the venture were the major cost center. These costs in the organization accounted for just the ingredients, and fuel necessary to deliver the dishes. As a proportion of total sales, raw materials and the cost of fuel used by the operations arguably increased the costs of sales for the venture to about 50.76 percent. The growth rate in the variable costs very closely followed revenues. In June, direct costs began at Php34,390, and increased 23.58 percent in the following month. Cost of Sales in the third month of operations grew as a result of the growth in revenues by 19.25 percent. The 6.11 percent decline in September revenues reflected in a 5.19 percent decline in variable costs for the same month. In October, the 19.27 percent increase in Sales saw a 20.75 percent increase in resultant variable costs. The 18.37 percent decline in November sales exhibited a 19.07 percent decline in associated ingredient and fuel costs.With regard to the amount of total costs, Route 88 experienced an upward increase in the level of these expenses during the first six months of operations. This increase was attributable to the volatility in the variable costs, ingredients and fuel. Control in total costs was through the curtailment of substantial cost increases, such that the growth rates of fixed and variable costs were slowed or even lowered. This was evident in the expense for water. In an examination of expenditures in Advertising and Promotions, despite spending Php1,500 per month, as a proportion of total sales, costs associated with marketing efforts decreased from 1.69 percent in June to 1.03 percent in October. As evident in the declining proportion of Advertising and Promotions expenditures to Sales from June to August, the trade-off in lowering the growth in costs was seen in the slower sales growth rate of subsequent months. Arguably, the venture might have been suffering from under capitalization due to the anemic funding for Advertising and Promotions at such a crucial time in its life.PromotionAs she implemented her business plan, Czarina found that she needed to increase the sales volume of the café. Initially, she planned to promote Route 88 by offering promotional cards that incentivized purchases. She also planned to offer group deals that involved a free beverage after purchases of ten units of beverages. To further promote the café, discount promotions were planned where customers that furnished print ads could earn a 20 percent discount. Furthermore, a Happy Hour was planned where customers could enjoy a 30 percent discount on beverages. Promotions that involved free products and services were also intended, where free tastes would be given in store as well as to other institutions in the immediate vicinity. Additionally, the café promotions planned to provide free delivery for orders. A social media campaign on Facebook was purposed to serve as an online presence for the venture. Lastly, Czarina hoped to depend on advertising by word-of-mouth. She further added a promotional discount for bicycle riders.Cash PositionAs evident in the Pro Forma Cash Position Statement, Route 88 was able to increase its cash position through operations in June, July, and October. The organization was estimated to have begun with Php110,500 in cash, which served as a buffer for the monthly operating expenses that averaged Php78,400 a month. Figure 6, described the monthly cash positions of the café. Given the cash buffer afforded by operations at the beginning, it was conceivable that in the worst-case scenario - a condition of no sales - Route 88 could remain open for as much as one and half months, optimistically. Hence, the under capitalization of the venture heightened its risk of not meeting contractual obligations.A projection of the cash burn rate for the store into subsequent periods indicated the venture was expected to consume an average of 10.08 percent of its existing cash holdings every month into December 2016. It was anticipated that the venture would become insolvent by June 2016 if operations were not significantly augmented to increase capital efficiency. It was expected that in May or June cash would be need as an infusion to keep operations going. Of note, this cash shortfall was well before the maturity of the rental agreement with the landlord. Figure 7, described the projected monthly cash positions of the venture should the founder continue to operate without augmenting operations.The FutureAs Czarina Clemente examined the financial statements for Route 88, she quietly thought about the possibility of franchising the operations to other locations. Well aware that her venture was at its very infancy, her examination of revenues at the current location showed her promise. Yet, in the back of her mind the simple café she planned evolved to a more complex operation with a myriad of demands, and areas to monitor. An issue she faced was the fact that five of the past six months of operations did not breakeven. The question of appropriate margins, as well as which items to serve to the primary and secondary markets, grew more distinct. Decisions with regard to margins involved market acceptance of higher prices for menu offerings, and the perceived value members of the target market had with regard to the dish. Another set of decisions that Czarina faced was the selection of menu items. With the plethora of dishes offered, some items saw infrequent or no sales at all. The founder also knew that the market would soon become familiar with her menu, which presented a risk that customers would become bored with the menu offerings and cease returning.Figure 1. Route 88 Café, Location Map at 200-meter scale (Google, 2019a).Figure 2. Route 88 Café, Location Map at 20-meter scale (Google, 2019b).Table 1. Route 88 Revenue Stream Classifications Percentage of Sales.Percentage of SalesMeals58.74Drinks15.19A la carte12.64Sides9.87Dessert3.56Total100.00Figure 3. Diagram of the Revenue Streams for Route 88.Table 2. Route 88 Breakeven Sales Levels from June to November 2015.JuneJulyAugustSeptemberOctoberNovemberTotalBreakeven Sales(Php ‘000s) 94.88 140.41 138.52 136.64 131.35 131.00 773.13 Margin or Safety (Loss)-6.34%-21.95%-5.77%-10.31%11.29%-8.91%-7.26%Contribution Margin61.30%61.22%61.17%60.79%60.31%60.65%60.87%Table 3. Route 88 Breakeven Sales Levels at 70 percent Contribution Margin from June to November 2015.JuneJulyAugustSeptemberOctoberNovemberTotalBreakeven Sales(Php ‘000s) 83.08 122.80 121.05 118.67 113.16 113.50 672.26 Margin or Safety (Loss)6.96%-10.76%7.83%3.27%29.18%5.13%6.66%Contribution Margin70.00%70.00%70.00%70.00%70.00%70.00%70.00%Table 4. Route 88 Breakeven Sales Levels at 80 percent Contribution Margin from June to November 2015.JuneJulyAugustSeptemberOctoberNovemberTotalBreakeven Sales(Php ‘000s) 72.70 107.45 105.92 103.83 99.01 99.31 588.22 Margin or Safety (Loss)22.24%1.99%23.24%18.03%47.63%20.15%21.90%Contribution Margin80.00%80.00%80.00%80.00%80.00%80.00%80.00%Table 5. Route 88 Margins Per Menu Category. (All figures in percentages.)CategoryAverageMinimumMaximumEntrée55.2345.4170.55Value Meals53.2652.5854.64All-Day Breakfast58.3144.3371.13Appetizers57.7447.2775.85Salads71.3066.2680.77Sandwiches58.8047.4266.39Pasta69.3959.0976.07Dessert73.0461.1185.53Cold Drinks62.4130.3081.82Sides71.4345.4581.82Table 6. Route 88 Price Ranges Per Menu Category. (In Philippine Pesos.)CategoryMinimumMaximumEntrée163977Value Meals9797All-Day Breakfast97130Appetizers55207Salads130163Sandwiches97163Pasta132163Dessert75152Cold Drinks2866Sides1139Table 7. Route 88, Select Entrée Prices and Margins.(Prices in Philippine Pesos, and Margins in percentage.)ItemsPriceMarginPork Sisig16370.55Fish Fillet w/ Cheese Sauce16353.99Grilled Salmon w/ Butter Lemon Sauce21845.41Grand Tour Ribs27357.88Platter97754.96Fish Thai Style16353.99Bagnet Kare-Kare27356.04Buffalo Wings With Rice16360.12Table 8. Route 88, Select Value Meals and All-Day Breakfast Prices and Margins. (Prices in Philippine Pesos, and Margins in percentage.)CategoryItemsPriceMarginValue MealsSatay BBQ9752.58Lechon Kawali9754.64All-Day BreakfastLongganisa9755.67Adobo Flakes9744.33Plain Omelette9771.13Ham & Cheese Omelette11963.03Spanish Omelette13066.92Table 9. Route 88, Select A La Carte Orders Prices and Margins.(Prices in Philippine Pesos, and Margins in percentage.)CategoryItemsPriceMarginSandwichesClubhouse Sandwich16353.37Egg Sandwich9758.76Grilled Cheese Sandwich11966.39Tuna Sandwich9747.42Grilled Chicken Sandwich14160.99BLT Sandwich16365.64PastaCreamy Carbonara13259.09Spaghetti Bolognese16373.01Al Pesto16376.07Table 10. Route 88, Select Side Orders Prices and Margins.(Prices in Philippine Pesos, and Margins in percentage.)CategoryItemsPriceMarginAppetizersBuffalo Wings12150.41Chicken Fingers9755.67Fish n Fries20775.85French Fries5547.27Calamari13057.69Spicy Chicken Tenders14159.57SaladsGarden Salad13080.77Chicken Caesar16366.26Tuna Salad16366.87SidesPlain Rice1776.47Garlic Rice3381.82Java Rice3976.92Egg1145.45Atsara1776.47Table 11. Route 88, Select Desserts Prices and Margins.(Prices in Philippine Pesos, and Margins in percentage.)ItemsPriceMarginGlazed Banana7576.00Deep Fried Oreos10861.11Tempura Ice Cream14169.50Crepe15285.53Table 12. Route 88, Select Drink Prices and Margins.(Prices in Philippine Pesos, and Margins in percentage.)ItemsPriceMarginCoke Regular5054.00Mountain Dew3330.30Pineapple Juice5556.36Bottled Water2860.71Iced Tea3381.82Lemonade3369.70Bottomless6678.79Pitcher6678.79Brewed Coffee (8oz)5570.91Brewed Coffee (12oz)6669.70Fruit Shake5569.09Figure 4. Route 88 Sales and Costs from June to November 2015.(Figures in Thousands of Philippine Pesos)Figure 5. Route 88 Sales and Costs Growth Rates from July to November 2015.Table 13. Route 88 Pro Forma Income Statement from June to November 2015. (Figures in thousands of Philippine Pesos.)?AccountJuneJulyAugustSeptemberOctoberNovemberTotalSales88.87109.59130.53122.55146.17119.32717.04Cost of Sales34.3942.5050.6848.0558.0246.96280.60Gross Profit54.4767.0979.8574.5088.1572.37436.44Operating Expenses:Organizational Cost1.491.491.491.491.491.498.96Salaries and Allowances15.0030.0030.0030.0030.0030.00165.00SSS, PHIC, HDMF and Other Contributions3.423.423.423.423.423.4220.52Rental21.6021.6021.6021.6021.6021.60129.60Electricity5.1815.2115.5914.5915.7417.0483.34Water1.574.353.743.081.072.7616.57Communication1.501.501.501.501.501.509.00Advertising and Promotions1.501.501.501.501.501.509.00Depreciation1.491.491.491.491.491.498.95Taxes and Licenses1.401.401.401.401.401.408.40Professional Fee4.004.003.003.00--14.00Total Operating Expenses58.1685.9684.7383.0779.2179.45470.58EBT-3.68-18.87-4.89-8.568.94-7.08-34.14Taxes (30%)----2.68-2.68Net Income (Loss)-3.68-18.87-4.89-8.566.26-7.08-36.82Table 14. Route 88 Pro Forma Income Statement Vertical Analysisfrom June to November 2015.?AccountsJuneJulyAugustSeptemberOctoberNovemberTotalSales100.00100.00100.00100.00100.00100.00100.00Cost of Sales38.7038.7838.8339.2139.6939.3539.13Gross Profit61.3061.2261.1760.7960.3160.6560.87Operating Expenses:Organizational Cost1.681.361.141.221.021.251.25Salaries and Allowances16.8827.3722.9824.4820.5225.1423.01SSS, PHIC, HDMF and Other Contributions3.853.122.622.792.342.872.86Rental24.3119.7116.5517.6214.7818.1018.07Electricity5.8313.8811.9411.9010.7714.2811.62Water1.773.972.872.510.732.322.31Communication1.691.371.151.221.031.261.26Advertising and Promotions1.691.371.151.221.031.261.26Depreciation1.681.361.141.221.021.251.25Taxes and Licenses1.581.281.071.140.961.171.17Professional Fee4.503.652.302.45--1.95Total Operating Expenses65.4578.4464.9167.7854.1966.5865.63EBT-4.15-17.22-3.74-6.996.12-5.93-4.76Taxes (30%)----1.84-0.37Net Income (Loss)-4.15-17.22-3.74-6.994.28-5.93-5.14Table 15. Route 88 Pro Forma Cash Position Statement from June to November 2015. (Indirect Method, figures in thousands of Philippine Pesos.)Assumption of analysis: Beginning Capital net of Fixed Assets.?JuneJulyAugustSeptemberOctoberNovemberTotalNet Income-3.68-18.87-4.89-8.566.26-7.08-36.82Depreciation1.49-----1.49Current Assets:Inventory16.99-0.752.435.50-3.87-2.4017.89Total Cash Outflow16.99-0.752.435.50-3.87-2.4017.89Current Liabilities:Salaries and Allowances15.0015.00----30.00SSS, PHIC, HDMF and Other Contributions3.42-----3.42Rental21.60-----21.60Electricity5.1810.030.38-1.001.151.3117.04Water1.572.77-0.60-0.66-2.01-1.07-Communication1.50-----1.50Advertising and Promotions1.50-----1.50Taxes and Licenses1.40-----1.40Professional Fee4.00--1.00--3.00--Total Cash Inflow55.1727.80-1.23-1.67-3.860.2476.46Cash Provided by Operations35.999.69-8.54-15.736.27-4.4423.24Beginning Cash110.50146.49156.18147.64131.91138.18110.50Ending Cash Position146.49156.18147.64131.91138.18133.74133.74Figure 6. Route 88 Cash Positions from June to November 2015.Figure 7. Route 88 Projected Ending Cash Positionsfrom June 2015 to December 2018.ReferencesBIR. 2019. “Title Iv, Value-Added Tax. National Internal Revenue Code Outline.” Republic of the Philippines Bureau of Internal Revenue. , Czarina. 2016. “Route 88 Bike Café.” January 16, 2016. . 2019a. “Route 88 Bike Café, 20 Meter Scale.” January 6, 2019. .———. 2019b. “Route 88 Bike Café, 200 Meter Scale.” January 6, 2019. . ................
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