Expert case by Deniz

CoffeeWorks reusable cups

CoffeeWorks reusable cups CoffeeWorks reusable cups
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Problem Definition

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.

Solution

Paragraphs highlighted in blue shall be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Question #1

How would you approach this engagement, and what elements would you like to consider?

Possible clarification questions by the interviewee before answering the first question:

  1. What products does our client offer?
  2. Does our client only operate in the UK?
  3. Do we know anything more regarding the reason why our client wants to move away from single-use disposable cups?
  4. How will the new cups be offered to customers? How can customers buy coffee with their new cups?

Answers in case interviewee asks about the above questions:

  1. Similar to any other coffee chain, CoffeeWorks has a wide range of coffee selection, provided in single-use disposable cups.
  2. Yes, our client only serves within the territories of the UK.
  3. Sustainability is an emerging trend amongst consumers, and reusable packaging has been increasingly demanded by consumers. As a result, our client aims to address their needs and improve their brand image.
  4. Customers will be able to buy the reusable cups in the store which they can use for multiple purchases.

Possible answer to question #1:

We can approach this problem as follows:

Qualitative assessment

1) CoffeeWorks

  • Product mix: Can we get more details regarding the coffee selection? Can customers use the reusable cup for all types of coffee?

In case asked by the interviewee, the interviewer may give the following information:

Product mix: CoffeeWorks offers a wide range of coffee selection. Currently, the disposable cup is used to contain all types of coffee. The reusable cup has the same size as the disposable one and can be used to contain all types of coffee as well (both hot and cold).

  • Value proposition: What is our client’s positioning compared to competitors?

In case asked by the interviewee, the interviewer may give the following information:

Value proposition: Our client highly differentiates in terms of the quality (i.e., taste) of their coffee thanks to world-class training of barista and strict quality control processes.

  • Reusable cup: How different is the new, reusable cup compared to existing cups? How long can one reusable cup be used? Does our client plan to replace the disposable cups completely?

In case asked by the interviewee, the interviewer may give the following information:

Reusable cup: The design of the reusable cup is simple, showing our client’s logo as well as messages to convey their efforts in sustainability. Reusable cups can be used up to 6 months for in-store purchases. Our client does not plan to phase out the disposable cups, but rather provide both packaging options to their customers.

​2) Market

  • Market size: How large is the coffee market in the UK?
  • Market trend: How strong is the demand for reusable cups?
  • Competitors: Do we know if any of our competitors already offer sustainable packaging? If not, do we expect them to follow a similar strategy?
  • Customer’s purchasing criteria: What are customer’s purchasing criteria for buying coffee? How likely does a reusable cup influence customer’s purchasing?

3) Potential upsides

What can be the financial upsides of offering the reusable cups?

  • How can this improve our client’s revenue?
    • Incremental coffee sales
      • Increase in the number of coffee units sold (quantity)
    • Reusable cup sales
      • Number of reusable cups sold (quantity)
      • Price per reusable cup (price)
  • How can this decrease our client’s cost?
    • Savings from disposable cups (variable cost)

What can be the non-financial upsides of offering the reusable cups?

  • Improved brand awareness and recognition
  • Workflow optimization/simplification

4) Potential downsides

What can be the financial downsides of offering the reusable cups?

  • How can this decrease our client’s revenue?
    • Discounts provided to encourage reusable cup uptake (price)

What can be the non-financial downsides of offering the reusable cups?

  • Inferior product and service quality
  • Risks
    • We may overestimate the reusable cup uptake
    • The client may not be able to find a suitable supplier who can provide reusable cups at desired quality, and on time

Question #2

Before deep-diving into the market, let us discuss the potential upsides and downsides of this strategy. First, can you tell me what could be the potential upsides for our client more in detail? (prompt the interviewee to detail his points earlier in the framework)

Possible answer to question #2:

Some of the potential upsides can be the following:

Financial upsides

  • Incremental coffee sales
    • Our client will be able to increase their customer base thanks to the introduction of sustainable initiatives.
  • Reusable cup sales
    • Our client will have a new revenue stream, and charge customers for the reusable cups (while disposable cups are provided for free).
  • Cost
    • Our client will be able to decrease the procurement cost of the disposable cups due to the replacement with reusable cups.

Non-financial upsides

  • Our client will be able to improve their brand image as a sustainable retailer.
  • Due to potential lower number of disposable cups, our client’s personnel may spend less time for cleaning and removing disposable cups from the seating area.

We understand that our client will be able to strengthen their brand image. However, our team failed to find a significant upside regarding the cleaning time of the seating areas.

From a financial point of view, our team does not expect sustainable solutions to increase our client’s customer base. In addition, the cost of disposable cups is negligible, hence we can disregard the cost savings. However, as you mentioned, our client can generate incremental sales thanks to the reusable cup sales.

Interviewer should lead the interviewee to brainstorm the potential downsides qualitatively and leave the calculation of financial upsides later (question #4).

Question #3

Before we deep dive into the quantification of the potential upsides, let us discuss the potential downsides first. Can you come up with a few ideas? (prompt the interviewee to detail his points earlier in the framework)

Possible answers to question #3:

Some of the potential downsides can be the following:

Financial downsides

  • Revenue
    • Price: To encourage the uptake, our client may offer discounts on the price point of coffee for customers purchasing with their reusable cups.

Non-financial downsides

  • Product and service quality:
    • The quality or flavor of coffee may deteriorate if our baristas do not clean the reusable cups brought by customers properly.
    • The hygiene standards may also be put at risk given the dirty (i.e., not properly cleaned) cups may contact the counter equipment.

Let us assume that our team does not foresee any non-financial downsides.

From a financial point of view, we understand that the major downside stems from the decreased price point per coffee sold to customers who use reusable cups. Our client is planning to offer a 5% discount per coffee purchased.

Question #4

Our client wants to know how much their annual profits will be changed with this initiative. What data points do we need to determine this?

Assuming fixed costs remain the same, we can look into the impact of this initiative on the annual gross profits. As discussed earlier, there are two main drivers which will impact the gross profits:

  • Incremental sales of the reusable cups
  • 5% discount to be provided to customers purchasing coffee with reusable cups

First, I would like to understand the impact of the first driver. Do we have information regarding the expected number of customers purchasing reusable cups, as well as gross margin per reusable cup?

Our team anticipates that 30% of our client’s customers will begin using the reusable cups immediately.

You can also assume that our client is prepared to offer the reusable cups at $10, and the procurement cost of a reusable cup is $1. As mentioned earlier, let us assume that the procurement cost of disposable cups is negligible.

We also have the following information. How would you like to proceed?

  • The population of the UK is 67M, 80% of which consume coffee outside the home regularly.
  • Our client has a 30% market share, including in-store purchases and online orders.
  • 90% of our client’s purchases are made in-store.

Based on this information, we can calculate the annual upside potential as follows:

= Total # of our client’s customers * % of customers switching to purchasing reusable cups * # of reusable cup purchases per customer in a year * gross profit per reusable cup ($)

In order to find the number of our client’s customers, we first need to understand the total market size:

= Total # of people in the UK * % of those consume coffee outside the home

= 67M * 80%

= 53.6M

Given the 30% market share of our client, the total number of our customers equals to:

= Total # of people consuming coffee outside the home * % our client’s market share

= 53.6M * 30%

= 16M

Since our client’s existing number of customers equals to 16M, 90% of which purchase in-store and we expect 30% customer uptake, the total number of customers purchasing reusable cups will be as follows:

= Total # of our client’s customers * % in-store purchase coffee * % reusable cup uptake

= 16M * 90% * 30%

= 4.3M

From our earlier discussion, we also know that the lifecycle of a reusable cup is six months. Thereby, customers are expected to purchase 2 reusable cups in a year. We can find the total number of reusable cups sold in a year as follows:

= Total # of customers purchasing reusable cups * # of reusable cup purchases per customer in a year

= 4.3M * 2

= 8.6M

As the last step, we can calculate the annual upside potential as follows:

= Total # of reusable cups sold in a year * gross profit per reusable cup ($)

= 8.6M * $9

= $77.4M

In order to understand the net benefits, we need to look into the second driver, the 5% discount, to be provided to customers purchasing coffee with reusable cups. We can calculate the annual downside potential as:

= Total # of coffee purchases with reusable cups * average retail price per coffee ($) * % discount per coffee

We can calculate the total # of coffee purchases with reusable cups as follows:

= Total # of customers purchasing reusable cups * total # of cups of coffee purchased per customer per week * # of weeks in a year

Do we know how many cups of coffee an average customer purchases in a week?

Our client has informed us that an average customer purchases 2 cups of coffee per week. You can also take 50 as the number of weeks in a year.

Great. We can calculate the total number of coffee purchases with reusable cups as follows:

= 4.32M * 2 * 50

= 432M

Can we also understand what the average retail price per coffee is?

Our client charges $3 per cup of coffee on average.

Based on this, we have all the information we need to calculate the annual downside potential. To recap, our equation was:

= Total # of coffee purchases with reusable cups * average retail price per coffee ($) * % discount per coffee

Thus, the total downside potential equals to:

= 432M * $3 * %5

= $64.8M

Comparing the annual upside with the downside potential, the net benefit seems to be highly promising:

= $77.4M - $64.8M

= $12.6M

Question #5

What potential risks do you see based on the analysis we have conducted today?

Potential answers to question #6:

Some of the potential risks can be the following:

  • How can we ensure a significant reusable cup uptake of 30%? Moreover, how can we convince them to pay a premium for sustainable packaging solutions?
  • Can we find a reliable supplier who can provide reusable cups at the desired quality and on time?
  • Do we expect our competition to follow a similar sustainable packaging solution strategy, or even undercut our price levels to capture our market share?

Conclusion

We recommend our client to launch the reusable cup initiative thanks to potential financial and non-financial upsides:

  • From a financial perspective, we expect our client to increase their annual gross profits by ~$13M
  • From a non-financial perspective, our client will be able to strengthen their brand image by following the sustainability trend. This may also allow us to increase our sustainability-driven customer base in the mid to long term.

Based on the risks we identified, as the next steps, the client needs to look into marketing solutions to ensure high customer uptake and engage with suppliers to ensure reliable, reusable cup supply.

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