Establishing a Western Coffee Shop Chain in China
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ESTABLISHING A WESTERN COFFEE SHOP CHAIN IN CHINA Hong (Helen) Li BA, Simon Fraser University, 1995 PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION In the Faculty of Business Administration O Hong (Helen) Li 2007 SIMON FRASER UNIVERSITY Summer 2007 All rights reserved. Thls work may not be reproduced in whole or in part, by photocopy or other means, without permission of the author. APPROVAL Name: Helen (Hong) Li Degree: Master of Business Administration Title of Project: Establishing a Western Coffee Shop Chain in China Supervisory Committee: Neil Abramson Ph.D. Associate Professor, Policy Area Group Mark Wexler Ph.D. Professor Date Approved: SIMON FRASER UNIVERSITY LIBRARY Declaration of Partial Copyright Licence The author, whose copyright is declared on the title page of this work, has granted to Simon Fraser University the right to lend this thesis, project or extended essay to users of the Simon Fraser University Library, and to make partial or single copies only for such users or in response to a request from the library of any other university, or other educational institution, on its own behalf or for one of its users. 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Simon Fraser University Library Burnaby, BC, Canada Revised: Summer 2007 SIMON FliASER UNiVERSITY THINKING OF THE WQRLD STATEMENT OF ETHICS APPROVAL The author, whose name appears on the title page of this work, has obtained, for the research described in this work, either: (a)Human research ethics approval from the Simon Fraser University Office of Research Ethics, (b) Advance approval of the animal care protocol from the University Animal Care Committee of Simon Fraser University; or has conducted the research (c) as a co-investigator, in a research project approved in advance, (d) as a member of a course approved in advance for minimal risk human research, by the Office of Research Ethics. A copy of the approval letter has been filed at the Theses Office of the University Library at the time of submission of this thesis or project. The original application for approval and letter of approval are filed with the relevant offices. Inquiries may be directed to those authorities. Bennett Library Simon Fraser University Burnaby, BC, Canada Larl rev8ston Summer 2007 ABSTRACT The project presents a business plan for starting up a coffee shop in Nanjing, China. An overview of the competitive environment and the growing market demand for coffee in China is assessed, and the author describes the criteria by which a new entry to the market can compete successfully. The venture is intended to be a flagship operation for what is intended to be the development of a successful chain of coffee shops in China over a five-year period. The author concludes that a new entrant can penetrate the market based upon a focus on the affluent business and student segments of the population in Nanjing. Three segments have a growing interest in westernized products. The concept will differentiate from competitive brands on the basis of foodheverage pairings, ambience, and service quality. Funding for the venture will be contributed through equity provided by three partners, who also provide operational expertise and experience in China. Keywords: coffee, China, start-up, Nanjing Subject Terms: coffee shop, business plan, investing in China EXECUTIVE SUMMARY Market The coffee industry in China is at its growth stage, with huge market potential. With more Chinese accepting coffee drinking as part of their life style, the coffee industry is entering into an accelerated period of growth in China. Local coffee consumption has increased by 20 percent since 2003 and the Chinese coffee market is expected to grow by approximately 70 percent from 2003 to 2008. While instant coffee dominated the market in early 1990, freshly brewed coffee has gained more and more popularity. Coffee drinking is a passion that many young urban professionals and students wish to cultivate in China because of its close association with sophisticated Western life styles. Coffee drinking is perceived mostly as a sit-in visit to a coffee shop where the drinks, snacks, shop decor and services are provided as a unique coffee experience. Business Description With such a market opportunity and large population base, a group of Canadian investors are interested in establishing a new company to open an overseas coffee shop in China, which will hopefully grow into multiple outlets in various cities in China. The company's flagship shop will be located in downtown Nanjing in Jiangsu Province. It will be a sit-in coffee shop providing on-site fresh roasted coffee products, fresh juices, and other healthy drinks and snacks. The snacks will be baked at the store with recipes from the Canadian partner's stores. The flagship shop will provide both in-house and takeout service and will be complemented by catering once the shop and clientele are established. The flagship shop is scheduled to open in spring 2008. Business Strategy The two customer segments of business professional and students will be the targeted market for the flagship store in China. A focus strategy in terms of the customer retention and a differentiation strategy in terms of the coffee shop offering will be the business guideline for this flagship shop's set-up and operation. Investors and Management The investors will directly incorporate the company in Nanjing, China. The shareholding structure is a three-partner structure with each of the Canadian partners having a 24 percent share in the business while the Chinese partner will have 52 percent. The majority of the management team will be recruited at the local labor market in Nanjing except the positions of general manager and marketing manager. One of the investors will be stationed in Nanjing to undertake both the aforementioned management roles. Short-term Business Objectives The short-term business objective in the first year will focus on penetrating the market in Nanjing and achieving brand awareness. The ROI is targeted at a minimum of 20 per cent after the first year in operation (actual pro forma projects 34% ROI after year one). Financing The company's first coffee shop will be completely financed through the investors' private funding. At the start-up stage, two investors will provide 75,000 Canadian dollars each; the third one will provide 175,000 Canadian dollars. Cost overruns or additional funding will also be provided by the investors based proportionately on their ownership share. In conclusion, the first year funding is in the range of approximately 325,000 Canadian dollars to 433,000 Canadian dollars. DEDICATION To Wen Wen, my daughter, my angel, my life .. vii ACKNOWLEDGEMENTS It has been an exciting and challenging journey over the last two years. I have learned more about myself through some wonderful people - my teachers and EMBA classmates. Thanks to Professor Neil Abramson whose expertise and knowledge enlightened me and guided me through this project. Thanks to Steve, my mentor and friend, who inspired and encouraged me to make my way through this seemingly "mission impossible" program when my work and travelling create a world of chaos. Thanks to Tom, my classmate and friend, whose kind and generous support and his humorous personality highlighted my days at SFU. TABLE OF CONTENTS .. Approval ............................................................................................................................11 ... Abstract ..........................................................................................................................111 Executive Summary ......................................................................................................... iv .. Dedication ........................................................................................................................ vn ... Acknowledgements ........................................................................................................VIII