Cookie and Privacy Settings

This website uses cookies to enable essential functions like the user login and sessions. We also use cookies and third-party tools to improve your surfing experience on preplounge.com. You can choose to activate only essential cookies or all cookies. You can always change your preference in the cookie and privacy settings. This link can also be found in the footer of the site. If you need more information, please visit our privacy policy.

Data processing in the USA: By clicking on "I accept", you also consent, in accordance with article 49 paragraph 1 sentence 1 lit. GDPR, to your data being processed in the USA (by Google LLC, Facebook Inc., LinkedIn Inc., Stripe, Paypal).

Manage settings individually I accept
expert
Expert with best answer

Christian

100% Recommendation Rate

51 Meetings

29 Q&A Upvotes

USD 169 / Coaching

1

Long Term v. Short Term Investment | Retail and License

Hey there!

I was posed a tough question on a 'go - no go' decision on investments

Scenario:

  • Our client is a large company that operates airport restaurants. It is currently considering an investment for an additional restaurant in Milan airport
  • In this particular restaurant, the BP shows that we can get 10% profit in a year. Our benchmark 'company' profit on our investments is also 10% a year
  • Of course, this investment has some up-front: license, cooking equipment, area setting

Question:

  1. How would you consider this investment if we consider that the license is valid only for 1 year (after that, we are not sure we'll be able to extend it) ?
  2. How would you consider this investment if the license were valid for 5 years (profit stays the same: 10% a year)?

My View (in short)

  • One-Year Investment It doesn't seem to clever to invest to get our average return for one-year only, because the investment may have significant up-front costs (cooking equipment, license, etc.) that harm the financial sustainability/value of it, putting at least under comparable benchmarks --> I would advise against, unless long term strategic pros emerge
  • Five-Year Investment We know that this is a quintessential 'basic' investment for the company. So investing or not investing is the same: barring demand issues or other barriers, there will be other alternative investments with the same rate. --> I would consider the 'strategic value' of this investment (e.g. we want to increase our presence in the Italian market): if this investment is 'above-average strategic', I would say yes; if it's 'below-average strategic', I would say no.

What do you guys think? I am really looking forward to hear your smart point of views :)

Thank you

Anonym0us

Hey there!

I was posed a tough question on a 'go - no go' decision on investments

Scenario:

  • Our client is a large company that operates airport restaurants. It is currently considering an investment for an additional restaurant in Milan airport
  • In this particular restaurant, the BP shows that we can get 10% profit in a year. Our benchmark 'company' profit on our investments is also 10% a year
  • Of course, this investment has some up-front: license, cooking equipment, area setting

Question:

  1. How would you consider this investment if we consider that the license is valid only for 1 year (after that, we are not sure we'll be able to extend it) ?
  2. How would you consider this investment if the license were valid for 5 years (profit stays the same: 10% a year)?

My View (in short)

  • One-Year Investment It doesn't seem to clever to invest to get our average return for one-year only, because the investment may have significant up-front costs (cooking equipment, license, etc.) that harm the financial sustainability/value of it, putting at least under comparable benchmarks --> I would advise against, unless long term strategic pros emerge
  • Five-Year Investment We know that this is a quintessential 'basic' investment for the company. So investing or not investing is the same: barring demand issues or other barriers, there will be other alternative investments with the same rate. --> I would consider the 'strategic value' of this investment (e.g. we want to increase our presence in the Italian market): if this investment is 'above-average strategic', I would say yes; if it's 'below-average strategic', I would say no.

What do you guys think? I am really looking forward to hear your smart point of views :)

Thank you

Anonym0us

1 answer

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Book a coaching with Christian

100% Recommendation Rate

51 Meetings

29 Q&A Upvotes

USD 169 / Coaching

Hi Anonymous,

thanks for your thoughts and the interesting, since very hypothetical and detailed question.

I think the key concepts you are working towards here is a) opportunity cost of choosing this investment and b) return on investment.

In the context here, I would ask the interviewer for three key aspects to determine that:

  • Total size of the investment: 10% profit is great, but what is the size of the investment? Is there also a benchmark for the size of the usual investments that this company makes and where does the Milan airport restaurant stand on this list? This would give us an idea as to how much sunk cost we would create
  • Portion of upfront investments: In relation to the total investment, what portion of that does a) the license and b) other upfront sunk cost such as the real estate agent take?
  • Amount of other available investments: are investment opportunities limited or not? This would help us to put the value of the opportunity in Milan into context.

Answering these three we would get closer to make a quantified comment on the opportunity cost of foregoing this investment and on how long we would need to have the license to be valid for

Do you have any info on the above?

Best, Christian

Hi Anonymous,

thanks for your thoughts and the interesting, since very hypothetical and detailed question.

I think the key concepts you are working towards here is a) opportunity cost of choosing this investment and b) return on investment.

In the context here, I would ask the interviewer for three key aspects to determine that:

  • Total size of the investment: 10% profit is great, but what is the size of the investment? Is there also a benchmark for the size of the usual investments that this company makes and where does the Milan airport restaurant stand on this list? This would give us an idea as to how much sunk cost we would create
  • Portion of upfront investments: In relation to the total investment, what portion of that does a) the license and b) other upfront sunk cost such as the real estate agent take?
  • Amount of other available investments: are investment opportunities limited or not? This would help us to put the value of the opportunity in Milan into context.

Answering these three we would get closer to make a quantified comment on the opportunity cost of foregoing this investment and on how long we would need to have the license to be valid for

Do you have any info on the above?

Best, Christian

Hi Christian, thank you for the comment. These are 3 very interesting drivers I should consider. Can you elaborate on how (in general) they impact our decision? Thank you so much! — Anonymous A on Apr 16, 2020

In any case, we don't have precise data, but we can guess some more info: 1) Total size of the investment additional revenues would be 0.5% on the company total, the company already has 200 similar airport/station restaurants; 2) Around 15%, equally split between the license and the cooking equipment; 3) Not limited, we are active in all the EMEA market and these opportunities arise quite often, let's say 10-15 times a year (also: no-Covid19 scenario) — Anonymous A on Apr 16, 2020

Hi Anonymous, since this gives us relevant info on the return on investment (15% for the license and cooking one time vs. 10% profit per year), i would go ahead and make a quick ROI calculation for both scenarios, 1 and 5 year investment. The results would support the points you put across as well (1-year rather no, 5-years possibly yes). Maybe to top off the argumentation, make an assumption on how long licenses usually last in other opportunities - that would seem more quantitative than using only the strategic value of the investment (which is also valid considering b2c brand awareness in the market, but difficult to quantify) — Christian on Apr 17, 2020 (edited)

Related case(s)

zeb case: Quo vadis, customer?

Solved 59.8k times
zeb case: Quo vadis, customer? The bank "His Earlship Charles", a domestic retail and private bank is in a difficult situation. Profits have been declining over the past years due to the ongoing low interest rates set by the central bank. Additionally, the bank is suffering from a decreasing number of customers. The board of directors is worried about digitalization and wondering, whether the bank is adequately prepared for it. Please analyze the situation of the client and develop means to sustainably increase profits. Consider the worries expressed by the board of directors.
4.6 5 4526
| Rating: (4.6 / 5.0)

The bank "His Earlship Charles", a domestic retail and private bank is in a difficult situation. Profits have been declining over the past years due to the ongoing low interest rates set by the central bank. Additionally, the bank is suffering from a decreasing number of customers. The board of dire ... Open whole case

Premium Brand Apparel Retailer

Solved 8.1k times
Premium Brand Apparel Retailer We are a premium brand apparel retailer facing a consistent decrease in market share. We would like you to figure out why this is happening and provide recommendations to reverse this trend.
4.5 5 404
| Rating: (4.5 / 5.0)

We are a premium brand apparel retailer facing a consistent decrease in market share. We would like you to figure out why this is happening and provide recommendations to reverse this trend. Open whole case

Caribbean Island – MBB Final Round

Solved 6.2k times
Caribbean Island – MBB Final Round A wealthy client has recently bought an island in the Caribbean. She has engaged us to identify possible uses for her new island.
4.6 5 327
| Rating: (4.6 / 5.0)

A wealthy client has recently bought an island in the Caribbean. She has engaged us to identify possible uses for her new island. Open whole case

Fast Food Pricing

Solved 1.7k times
Fast Food Pricing Our client is a global fast food restaurant that offers a wide range of breakfast and rest of day products including burgers, salads, fries, and beverages, and offers combo bundles. Over the last ~5 years in the US, our client has seen relatively flat guest count, but a decline in profitability. They have launched several large national advertising campaigns focused on highlighting their "value" products which have not turned around profits the way they had hoped. The head of the US business has asked us to help him understand why gross margin is decreasing, and specifically to take a look at his menu's pricing. Is there an issue with the menu pricing structure? If so, what would you recommend to restructure the pricing? What is the overall implications to volume and gross margin with a revised pricing structure?
4.4 5 67
| Rating: (4.4 / 5.0)

Our client is a global fast food restaurant that offers a wide range of breakfast and rest of day products including burgers, salads, fries, and beverages, and offers combo bundles. Over the last ~5 years in the US, our client has seen relatively flat guest count, but a decline in profitability. The ... Open whole case

CoffeeWorks reusable cups

Solved 1.2k times
CoffeeWorks reusable cups CoffeeWorks is one of the leading coffee retail chains in the UK. The client is planning to introduce reusable cups with an aim to decrease the consumption of single-use disposable cups. The main goal of the client is to enhance their brand image as a sustainable retailer without harming current profitability levels. Thus, they approached us to check whether they should go ahead with their plan.
4.2 5 52
| Rating: (4.2 / 5.0)

CoffeeWorks is one of the leading coffee retail chains in the UK. The client is planning to introduce reusable cups with an aim to decrease the consumption of single-use disposable cups. The main goal of the client is to enhance their brand image as a sustainable retailer without harming current pro ... Open whole case