INTRODUCTION:
This is a study of a business idea for our uncle, who is intending to setup a business in Malaysia. Based on the industry of Food & Beverages, we suggested a coffee shop business. Last statistics show that each day nearly 2.5 billion cups of coffee are consumed. It is the 5th most widely traded commodity in the world and millions of people depend directly or indirectly on the production and sale of coffee for their livelihoods. Coffee consumption has been growing at a steady rate of between 1.5 and 2% per year.1 The stimulant effect of coffee is one of the reasons that hard working people make stopping into a coffee house part of their day. The local coffee house also provides a warm, calm environment in which people come to socialize, relax or even catch up on work. This sustained growth in the industry points toward a solid opportunity within the coffee industry. Though the coffee industry is highly developed and competitive; the demand for specialty coffee is growing every day. Italy, with a population of 60 million, has over 200,000 coffee shops. In comparison, the U.S. has approximately 21,400 coffee shops with a population of 290 million. Singapore with a population of over 4 million has approximately 1800 coffee shops. This is to show that there are a lot of opportunities for new outlets in the industry. This map shows Coffee consumption per capita is the
average
coffee,
in
weight
of
kilograms,
consumed annually by each person in a given country or region.2 To justify our suggestion to uncle, we are going to explain to him first about the different type of businesses available in Malaysia, secondly we will talk about the factors of production that are considered to be the pillars of any business, thirdly explanation on the external environments factors that may have an effect on the business, finally a detailed study of the suggested market, followed by SWOT analysis. 1 2
Markets in Action: The Market for Coffee, Kingsley College, UK. Current Worldwide Annual Coffee Consumption per capita, 2011, ChartsBin.com
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PART (a): Sole Trader: A sole trade/ proprietorship also called independent or freelancers is the simplest form of business organization, it usually have just
one business owner. (Advantages) All profits kept by the owner
Lack of continuity
If the owner had reason that may stop him from performing his roll, the
all financial information is kept private.
business could be off for a period of time, or may seize and perish.
Limited fund raising capability
The owner has full control over the business, and how far
Soul trader can be difficult to improve the business because it’s usually a small
it grows.
business; which make it hard to obtain long term finance support.
Easy to form
Success of the business and owner talent
It is quite easy to be sole trader; because it does not
The business will grow if it is operated by a talented and hardworking person.
require much of documentation and procedures during
On the other hand, if the owner has no talent in running the business, he may
the setup.
not succeed and probably go bankrupt.
Own decisions
He is the sole owner, takes all the profits of business and
Freedom
(Disadvantages)
Unlimited liability
Decision making is fast because he is the sole owner no
The is a main point, the owner as a sole trader is fully responsible for any
other parties involved to share the decision making.
consequences, in case of failure or a liability that the business incurs, and besides the business assets, his personal assets are not excluded.
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Partnership: In essence, this is like a sole trader but with the ownership shared between partners. One or more partners will have unlimited
liability for the business. At least two shareholders should be in this partnership. (Advantages)
Simple to form
Disagreement among the partners
Partnership is relatively simple to form and setup, and don’t have to pay
A partner needs to discuss with all partners as he cannot take
big amount of fee. Less in tax, and government support.
decision by himself.
Division of work
All owners responsible for business liabilities
Since there is more than a partner, the Partnership has better
If the business fails and still has some remaining debts, all of
management and better financial systems.
the partners are hold responsible or as stated in partnership
Shared liability
agreement.
In partnership, the liability is shared, so all partners are responsible to
(Disadvantages)
Lack of continuity
settle all the debts.
If one of the owners retires or dies, the business will seize. So
More talent and money
they need to approach it in the partnership agreement.
Partnership has more than one owner; they can have more capital
Disputes over profits
resources and talent wise. Partners may be able to provide more funds
Most partnership issues are about sharing profits, even with a
because two or more people borrowing capacity may be bigger than one
written partnership agreement, there are things that cannot be
person, and the benefit from the complimentary skill and knowledge of
stated in the agreement such as person creative idea and the
the partners.
participation in developing the business.
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Partnership: In essence, this is like a sole trader but with the ownership shared between partners. One or more partners will have unlimited
liability for the business. At least two shareholders should be in this partnership. (Advantages)
(Disadvantages)
Simple to form
Partnership is relatively simple to form and setup, and don’t have to pay
A partner needs to discuss with all partners as he cannot take
big amount of fee. Less in tax, and government support.
decision by himself.
Division of work
All owners responsible for business liabilities
Since there is more than a partner, the Partnership has better
If the business fails and still has some remaining debts, all of
management and better financial systems.
the partners are hold responsible or as stated in partnership
Shared liability
agreement.
In partnership, the liability is shared, so all partners are responsible to
Disagreement among the partners
Lack of continuity
settle all the debts.
If one of the owners retires or dies, the business will seize. So
More talent and money
they need to approach it in the partnership agreement.
Partnership has more than one owner; they can have more capital
Disputes over profits
resources and talent wise. Partners may be able to provide more funds
Most partnership issues are about sharing profits, even with a
because two or more people borrowing capacity may be bigger than one
written partnership agreement, there are things that cannot be
person, and the benefit from the complimentary skill and knowledge of
stated in the agreement such as person creative idea and the
the partners.
participation in developing the business.
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Corporation: Corporation (from Latin “corpus”, literally “ body”) is considered to be an individual who is completely part from its owners.
Corporation Owners are known as shareholders because they own only a s hare or part of the corporation. (Advantages)
Continuity
(Disadvantages)
Double taxation of dividends
A corporation continues to operate even if one of the
Corporation has double taxes consequences. First when the corporation
shareholders retires or dies. It will stop if all the shareholders
makes the benefit and second when the dividends are paid for the
decide to dissolve or merge with other corporation.
shareholders.
Corporate tax treatment
Complicated and expensive to form
Because corporation is a separate legal entity, it pays taxes
It costs a lot of money to form a corporation. The shareholders need to
separate from the owners, while the owners still pay their own
fill many forms and there are many proper corporate formalities of
tax.
organizing and running a corporation to be followed.
Stronger fundraising capability
Disclosure of officers and directors name
Because a corporation is owned by several shareholders, they
Many countries require the corporation to mention all the names and
can have more money and capital to invest and improve.
addresses of company officers and directors to be listed with the
Limited liability
Government.
An important advantage is the limited liability for the
Dissolution
shareholders. Because corporation is a separate legal entity,
Because corporation has a long continuity, Countries provides
the shareholders have limited liability for debts. If the
mechanism for dissolving corporation and liquidating the assets.
corporation is going to bankrupt, owner’s personal assets
Corporation’s officers and director have full responsibility for gather the
won’t be affected .
assets and pay all the corporation debts.
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Corporation: Corporation (from Latin “corpus”, literally “ body”) is considered to be an individual who is completely part from its owners.
Corporation Owners are known as shareholders because they own only a s hare or part of the corporation. (Advantages)
(Disadvantages)
Continuity
Double taxation of dividends
A corporation continues to operate even if one of the
Corporation has double taxes consequences. First when the corporation
shareholders retires or dies. It will stop if all the shareholders
makes the benefit and second when the dividends are paid for the
decide to dissolve or merge with other corporation.
shareholders.
Corporate tax treatment
Complicated and expensive to form
Because corporation is a separate legal entity, it pays taxes
It costs a lot of money to form a corporation. The shareholders need to
separate from the owners, while the owners still pay their own
fill many forms and there are many proper corporate formalities of
tax.
organizing and running a corporation to be followed.
Stronger fundraising capability
Disclosure of officers and directors name
Because a corporation is owned by several shareholders, they
Many countries require the corporation to mention all the names and
can have more money and capital to invest and improve.
addresses of company officers and directors to be listed with the
Limited liability
Government.
An important advantage is the limited liability for the
Dissolution
shareholders. Because corporation is a separate legal entity,
Because corporation has a long continuity, Countries provides
the shareholders have limited liability for debts. If the
mechanism for dissolving corporation and liquidating the assets.
corporation is going to bankrupt, owner’s personal assets
Corporation’s officers and director have full responsibility for gather the
won’t be affected .
assets and pay all the corporation debts.
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PART (b):
The term “factors of production ” has its own definition. Well, factors of production can be defined as the inputs used in the production of goods and services in an attempt to make the maximum profit. There are 5 different factors of production. These five include: 1. Labor 2. Capital 3. Entrepreneur 4. Physical resources 5. Information 1.
LABOR
The term “labor” can be explained as the mental and physical human
efforts/capabilities used in production process of goods and services. The physical efforts of humans can be further described as energy put in to work like factory workers using factory machines to develop goods. On the other hand, mental efforts can come in the form of company executives, managers and project supervisors who make decisions and put in their knowledge into the company’s production process.
PART (b):
The term “factors of production ” has its own definition. Well, factors of production can be defined as the inputs used in the production of goods and services in an attempt to make the maximum profit. There are 5 different factors of production. These five include: 1. Labor 2. Capital 3. Entrepreneur 4. Physical resources 5. Information 1.
LABOR
The term “labor” can be explained as the mental and physical human
efforts/capabilities used in production process of goods and services. The physical efforts of humans can be further described as energy put in to work like factory workers using factory machines to develop goods. On the other hand, mental efforts can come in the form of company executives, managers and project supervisors who make decisions and put in their knowledge into the company’s production process. 2.
CAPITAL
Generally, capital always treated as a financial case. But, actually it is a connection within the financial and the equipment. When capital is not available, labor would do all production by hand. The key role of capital in the production process is to make labor more productive. While a covey of construction workers might be able to fabricate a four-bedroom house with nothing but bare hands, an assortment of hammers, saws, and other tools is bound to make their work easier and more productive. In a business production process, when capital is used more than Labor it is called Capital-intensive production and Vice Versa. Capital takes different 3
forms. 3.
ENTREPENEUR
An Entrepreneur is seen as a person who organizes other productive resources to make goods and services. The Entrepreneur accepts risks and opportunities involved in creating and operating a new business venture. 3
International business: theory and practice, By Mohammad R., Steven K. Paulson, William H. T omlinson.
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The new opportunities that an entrepreneur may detect can involve the introduction of new goods or service recently invented or upgraded. It might also involve introducing some existing goods or services into a new market area where it is presently unavailable or deepening the original market by finding and publicizing new ways for new groups of customers to use it. One other opportunity it might involve is recognizing the potential of some new production technology for dramatically lowering the costs of production of an existing good or service.
4.
PHYSICAL RESOURCES
Physical resources are viewed as the tangible materials that can be used by a business venture to either produce or be used in production process. These physical resources can come in the form of Assets and Raw materials. When we talk about the Assets part, we are talking about machineries, factory equipment, work sites, Warehouse and more. Example, Equipment is used to generate these goods such as Laptops, TV screens. While on the other hand, services make include transport systems such cab business.
5.
INFORMATION/KNOWLEDGE
This can also be known as the intangible resources used in production process. Most of production factors if not all depend on information found either from other competitors, economy or any other source. Some of the information unique characteristics: a. Expandable; as information is being used; more information is generated in the process. b. Easily to transport; With IT one of the broadest industries at the moment, information can be transported as fast as the speed of light. Thus, the response is fast as well. c. Information can be substituted; Situations may arise when you have to substitute one factor for valuable information that may benefit the business. d. Gives more options to support the production process. It can come in the form of economical information of a society, information about the external environment of a business and more.4
4
Strategic Planning: How to Develop a Strategic Plan, Bizmove.com - S mall Business Management.
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PART (c)
If uncle where to decided on establishing a coffee bean shop though he can have his choices on how he runs his business but there are some issues which he can’t control and that
is the business external environment. These are everything outside his business boundaries that might affect his business:
1.
Domestic Business Environment
If uncle decide to establish this business, there will be customers. He will try to get close with the customers hoping that his personal touch will ensure that the customers come back to his coffee shop. The only fact that he can’t control is the customers choices, no matter how much he tries to get close with the customer, it is the customer’s choice to come
back to the shop or not. For example, uncle might offer them special promotion but the customer still has the choice to choose to come back or not.
The same issue with the business supplier; he may try building close relationship with the supplier of his stocks but he cannot control the fact regarding the supplier’s issue. For
example, the supplier delivering his coffee on that day ran into an accident; this will delay the delivery to the shop, which could affect business productivity.
2.
Global Business Environment
Our business will also be affected if the price of coffee were to rise globally. The supply of coffee that uncle orders comes from Brazil; so if Brazil were to raise their price of coffee, it will affect the business expenditure, and this raise in price will be indirectly charged to the price of coffee. Then the coffee shop has to pay higher for the coffee.
Another factor is the currency values. Uncle cannot control the currency value, so if Malaysia’s currency was to drop or Brazil’s currency was to rise then the value of our money
will decrease. Then uncle will also have to pay higher for the coffee important from Brazil.
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3.
Political-Legal Environment
We do know that Malaysia is a Halal country. So the coffee shop that we open has to meet this law. Our business has to operate in a free-pork environment. For example, the product that we sell cannot contain pork.
Another point is we have to obtain the license to operate our business. We have to get permission from the government to allow us to operate a coffee shop. We cannot sell other products other than the one we mentioned when applying for the license. If caught, then the coffee shop will face a fine and force to stop selling those products.
4.
Sociocultural Environment
As we know that Malaysia is one of the countries that have the most number of public holidays. So uncle has to follow the customs of our country. Uncle staff’s will feel unrest if we don’t give them their public holidays. Thus, our business will not operate during public
holidays, which will eventually affect company profit earning.
5.
Economic Environment
When the economy of the country is fine and prosper, people tend to seek for jobs which offer high salary and good benefits. Our business has to offer an acceptable salary in order to hire qualified workers. For instant, if uncle don’t comply with this demand then his business will have difficulty in hiring workers. Thus, reducing productivity and increasing workload to the current workers.5
5
Griffin, R.W. & Ebert, R.J., Business, 6th ed., Prentice-Hall, 2002
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PART (d) Type of Recommended Business
We have suggested a Limited Liability Corporation (LLC) , the reasons to recommend this type of business to uncle, because it combines some aspects of a corporation with those of a sole proprietorship or partnership, besides he can join partners, and increase the business resources and capital. LLCs are more popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of reduced taxation, besides handling its taxes are substantially easier to deal with than those of a corporation. LLCs help small businesses gain many of the benefits enjoyed by corporations, while allowing them to retain their small business model of ownership. A limited liability company does not have shareholders and does not require meetings.6
6
Management Information Systems, Managing the Digital Firm. Kenneth C. Laudon, Jane P. Laudon. Pearson, 2010.
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SWOT ANALYSIS FOR UNCLE COFFEE SHOP
The SWOT analysis provides us with an opportunity to examine the internal strengths and weaknesses uncle Café must address. It also allows us to examine the opportunities presented to uncle business as well as potential threats. 7,8
Strengths:
1. Demand and customer base: The demand for coffee shops and quality products at competitive prices is enormous among the business, and crowd areas. Not to forget the increase in the tourists who visit KL city. The primary target market for uncle Café will be the local business people. These business people will visit frequently uncle Café before work for a cup of coffee, at lunch for a tasty sandwich, and after work for a treat and to check their email and surf the web. Secondary target markets for the uncle Café are College students in the area, and the tenants of the surrounding buildings. The colleges have over 2,000 students. The residential buildings, will average 3000 employees and residents. It is well known that people with higher expendable income frequent coffee shops. The predicted household income for Malaysia will grow by 7.20%. (Source: International Monetary Fund - World Economic Outlook 2011). Although if the growth rate wasn’t as we expected, still most of the employees that work
around the Café are well above this level.
2. Location: The location factor is a critical element for strategic positioning of an organization in the target market. The fact that the KL is of importance and a shop located there can attract customers from both the local and passing by customers.
3. Clear vision of the market need: Uncle as a businessman knows what it takes to build an upscale cafe shop. He and his partners know the customers, and how to build the service that will bring them.
4. Health Benefits: One of the factors that have deterred people from drinking coffee in the past was the belief that it was in some way harmful. This is no longer the case. In recent years, some 19,000 studies have been done in an attempt to understand the risks or 7 8
SWOT Analysis, Quality Copyright 1998 MSH and UNICEF SWOT Analysis, NetMBA.com. Internet Center for Management and Business Administration 2011.
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benefits of consuming coffee. While many studies have explored the connection between coffee and certain illnesses such as cancer and high blood pressure, no evidence has been found to link coffee to these health risks. What might be more surprising is that recent studies have shown that coffee can actually be good for you. A study done by Harvard School of Public Health; and Brigham and Women’s Hospital
showed coffee consumption can reduce the risks of type 2 Diabetes. Drinking 6+ cups of coffee a day may reduce the risk of type 2 diabetes by 54% in men and 30% in women.
Weaknesses:
1. Volatile customer base: The major weakness is the volatile nature of the customer base in the area. The fact that even though the customer potential in the area is vast, but ever changing due to the nature of the business makes the customer potential as a critical weakness as much as it is argued as a strength. Since this is an apparent factor for any shop in the area, the weakness is oblivious in nature.
2. As with growing any crop there are unpredictable elements that will affect the production of the crop and therefore the cost of coffee for the coffee franchisee. The coffee plant is selective about growing conditions. Coffee trees can't tolerate weather that is too hot or cold, or too wet or dry. Climate change can play a huge role in the amount of coffee that is produced and how much it costs the retailer. For example, in 2005 coffee prices rose. This rise was most likely because of a harvest that was 10% to 20% lower than that in the record years before. An increase in consumption of coffee in Russia and China also played a part.
Because of the recent economic downturn, consumers are less likely to spend $5 for a cup of coffee than a year ago. Consumers are more conscious of spending and are more willing to shop around for the best deal.
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Opportunities:
1. Differentiation by Pricing: the demand for quality products at competitive pricing is an increasing demand at the business areas. This demand can be harnessed by the coffee shop through providing value-added services and quality products at competitive prices. 2. Diverse Target market: The diversity in the market which is merely due to the diversity in the customers to the area provides an effective method of attracting a niche market or more than one segment of the market with customized products whilst providing a base line of product range to meet the overall demand of the customers.
3. Promotion through embracing culture: The fact that the area service customers from difference culture makes it clear that the coffee shop can attract customers through embracing its promotions reflecting upon specific culture. This even though might appear niche marketing, is actually a successful method of reaching the wider market where the customers would appreciate the innovation in the promotion.
4. The stimulant effect of coffee is one of the reasons that hard working people make stopping into a coffee house part of their day. The local coffee house also provides a warm, calm environment in which people come to socialize, relax or even catch up on work. This sustained growth in the industry points toward a solid opportunity within the coffee franchise industry.
Threats:
1. Terrorism: The major threat is the element of disaster that can be caused by terrorist attacks. The fact that KL is a very crowded metropolitan, and is a pivotal location for terrorist attack.
2. New entrants and costs: The threat of new entrants in the market is a critical element. This is also an increasingly concerning factor with the rapid development in the area, which not only increases the opportunities, but also the threat of new entrants and stiff competition in the target market.
3. Who knows if the market for coffee will grow and stay in favour with customers, or whether another type of beverage or leisure activity will replace coffee in the future? Page | 12
4. Emerging local competitors. Many competitors exist, and we need to be prepared for their competition. The following cafes will be direct competitors to uncle business: -
San Francisco Coffee Express
The San Francisco Coffee Express in Central KL is located at Jalan Tun Razak 182 LG-022, Lower Ground Floor, City Square Mall. Their hours of operation are from Mo to Fr from 08:00 AM to 05:30 PM, Sat from 08:00 AM to 02:00 PM. Originally from San Francisco, the outlet has many gourmet offerings for your caffeine fix. It offer drinks such as Mocha, Chocolate, Latte, Vanilla or Fruit, and cakes, such as Espresso Cheesecake, tiramisu and Lemon Grass Cake.
-
Gloria Bean's Coffees
The Gloria Bean's Coffees is located at KL City Centre. Persiaran Petronas. Their hours of operation are from 9 a.m. to 10 p.m. Monday through Friday, Saturday from 10 a.m. to 10 p.m. It has a wide selection of gourmet coffee beverages (such as cappuccinos, espressos, lattes or iced coffees), also you can choose to dine inside or outdoors. A delicious range of cakes and sandwiches is also available.
All competitors offer coffee, sandwiches and treats, however, none of them offer free Wi-Fi. Uncle Café can offer all of the above with pleasant service!
CONCLUSION:
From this study and SWOT analysis, it is clear that even though there are potential threats and certain weaknesses in starting a coffee shop at KL business area, the strengths and opportunities are outperforming the weaknesses and threats thus justifying the investment for a new coffee shop.
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REFERENCES: BOOKS, JOURNALS, REPORTS, AND FOOTNOTES
1) Markets
in
Action:
The
Market
for
Coffee,
Kingsley
College,
UK.
“http://www.kingsley.worcs.sch.uk/main/subjects/business_studies/Business%20Studi
es/Econ%20Unit%201/Markets%20Coffee.htm” 2) The Big Question: Is the global domination of Starbucks finally on the wane?. independent.co.uk 3) The real price of coffee. independent.co.uk 4) Current Worldwide Annual Coffee Consumption per capita, 2011, ChartsBin.com 5) International business: theory and practice, By Mohammad R., Steven K. Paulson, William H. Tomlinson. 6) Strategic Planning: How To Develop A Strategic Plan, Bizmove.com - Small Business Management. 7) Griffin, R.W. & Ebert, R.J., Business, 6th ed., Prentice-Hall, 2002 8) Management Information Systems, Managing The Digital Firm. Kenneth C. Laudon, Jane P. Laudon. Pearson, 2010. 9) Tax News Headlines. Tax Attorney Michael J. Fiscus, 2011. 10) SWOT Analysis Quality Copyright 1998 MSH and UNICEF. ,
11) SWOT Analysis, NetMBA.com. Internet Center for Management and Business Administration 2011. 12) YouTube video, SWOT Analysis: How to perform one for your organization, Jul 28, 2008. 13) What is SWOT Analysis? Getting Things Done, Francis Lobo.
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