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Cristian

Hara Coffee Co's innovative coffee subscription model

Case information

Difficulty: Intermediate

Interviewer-led

< 100 Ratings

Times solved: 1.6k

Competitive response Growth strategy Market entry New product Profitability analysis Sustainability

Case Prompt:

Our client, Hara Coffee Company, is a large coffee chain with over 200 locations in the United Kingdom. They import beans from numerous regions and batch-roast them in the UK, offering customers a vast selection of premium blends. In addition to serving delicious coffee, our client offers freshly made sandwiches, pastries, and salads of the highest quality. Hara Coffee Co. is also one of the most socially and environmentally responsible coffee brands in the United Kingdom, and their value proposition heavily relies on customers paying a premium for delicious products that do not compromise on sustainability metrics.

The rising cost of living has significantly reduced the revenue of coffee chains throughout the United Kingdom over the past year. People are increasingly choosing to brew their own coffee at home, with beans delivered by subscription. The CEO of Hara Coffee Company is intrigued by the expansion of coffee subscription models in the UK. They requested that our team investigate whether their chain could also introduce a coffee subscription model, in which customers pay a fixed monthly fee and receive a certain number of coffees throughout the month.

Overview of All Exhibits

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Question 1:

What factors would you evaluate to determine whether it is a good idea for our client to implement a coffee subscription model?

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1. Market assessment

1.1. Demand / Customer trends. What are the main trends in the market? What is the typical customer profile? How many such customers are out there? What is it that they value? What sort of products are they looking for? How price driven are they? Would customers switch coffee brands? How many coffees do they get per month? How do they brew their own coffee (relevant for product definition)?

1.2 Competitors. Who are our main competitors? How has their size, growth, and profitability changed over the past 5 years? How do their stores (number of locations, placement, space, etc.) differ from ours? How their product differentiates from what we would be able to offer? Where are the competitors already present (location of competitors)?

2. Client assessment

2.1. Capabilities. Are our product categories attractive enough to ensure cross-selling to coffee subscribers? Can we deal with a potential demand increase from the subscription? Do we have the workforce to introduce this digital offering, or do we need to hire them (e.g., developers)? Do we have the technical capabilities to sustainably provide this new product?

2.2. Financials.

2.2.1 Budget. What is the budget planned and secured for this project and the timeline?

2.2.2 Profitability analysis. How will this impact our revenues (new customers, more products sold per customer through repeated visits, possibility of selling new products such as reusable cups, halo effect created by increased brand awareness)? How will this impact our costs (initial investment costs in digital architecture, increased raw material costs from selling more coffees, costs of maintaining the digital subscription, etc.)? Cannibalization – customers switching from buying in store to ordering home

2.3. Risks

2.3.1. Financial. Will this investment yield a better payoff than other alternative investments (e.g., new range of products in-story)? Can we afford to pay more due to unforeseen delays/challenges? Would we risk cannibalizing too much of our coffee sales?

2.3.2 Operational. Can we prevent customers from exceeding their daily limit? Can we prevent account sharing? Can we protect online customer data? How will the products be delivered?

2.3.3 Branding. Can we maintain our ESG goals? Will we lose our perceived brand value?

Question 2:

The client would now like your help in deciding how to price the subscription. They have done some market research and have identified two possible options, as illustrated in Exhibit 1. How would you decide between these two options, and which one would you choose?

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Step 1: Calculate the monthly revenue generated by each option

Option 1 – £25 + £30/week x 4 weeks = £145
Option 2 – £15 + £22/week x 4 weeks = £103

Step 2: Calculate the monthly costs associated with each option

Option 1 – £1 cost/drink x 2 drinks/day x 30 days + £30/week x 4 weeks x 50% = £120
Option 2 – £1 cost/drink x 1 drink/day x 30 days + £22/week x 4 weeks x 50% = £74

Step 3: Calculate the profitability per subscriber / month

Option 1 – £145 - £120 = £25
Option 2 – £103 – £74 = £29

Step 4: Calculate the total monthly profitability of each option

Option 1 – £25 x 30k people = £750,000
Option 2 – £29 x 50k people = £1,450,000

Upon performing calculations, candidates should identify that:

Option 2 is more profitable for the business and also generates better footfall, which might come in handy if we add new revenue streams
The main driver of profitability here is the cross-selling opportunity. The actual subscription is generating negative profitability.
We assumed the highest possible cost in our model (subscribers getting the maximum amount of coffee per day every single day). It would be interesting to see what the utilisation rate is, as that might influence how often customers will re-order our product.

Our decision should not be based solely on financial variables, but also on non-financial ones. A cheaper, more accessible price, for instance, could increase the product's popularity and increase demand by triggering a halo effect.

Question 3:

The client appreciated your analysis and is considering implementing the £15/month subscription option. What additional revenue streams could they implement to maximise cross-selling revenue? Second, what are some additional ideas for revenue growth that do not necessarily involve cross-selling?

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Question 4:

The client likes your ideas and they are considering adding smoothies to their product mix and even offering them as part of the subscription that we were discussing. Your colleagues came up with the following estimates to help you make sense of this opportunity:

Smoothies are a higher margin item for us, but they are also more expensive, at a cost of £2 per drink vs £1 for coffees
The number of subscribers is expected to increase by 30% from the 50k we previously estimated
Cross-selling profits will increase from £44 per month (£22/week x 4 weeks x 50%) to £50 per month

If we introduce smoothies, we anticipate that our customer base will order a smoothie 1/3 of the times on average. Assuming we continue to charge £15 per month for the subscription, does it still make sense to include smoothies?

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The purpose of this analysis is to determine whether the increase in profits generated by the additional subscribers and increase in cross-selling profits is greater than the costs incurred by offering smoothies 1/3 of the time.

Step 1: Calculate the additional revenues generated from offering smoothies

Additional subscription fees = (50k subscribers x 30% increase x £15/sub) = £225k
Increased cross-selling profits from current subs = (£50 cross-sell profits/month - £44 cross-sell profits /month) x £50k = £300k
Cross-selling profits from new subs = 50k x 30% increase x £50 cross-sell profits /month = £750k
Increase in revenues from adding smoothies = £225k + £300k + £750k = £1,275,000

Step 2: Calculate the additional costs incurred from offering smoothies

Number of smoothies consumed / month / customer = 30 drinks x 1/3 chance = 10
New cost incurred per customer = (£2 - £1) x 10 drinks = £10
Additional costs incurred from our current customer base = 50k subscribers x £10 additional cost = £500,000
Additional cost incurred from our new customer base = (2/3 chance x £1 cost/coffee x 30 days + 1/3 chance x £2 cost/smoothie x 30 days) x (50k subscribers x 30% increase in subscribers) = £600k
Costs incurred from offering smoothies = £500k + £600k = £1.1m

Step 3: Calculate profitability of offering smoothies

Increase in revenues – incurred costs = £1,275,000 - £1.1m = £175k

Upon performing calculations, candidates should identify that:

Introducing smoothies brings an additional £175k in profits for the business.
Cross-selling revenues are the primary driver of increased profitability, so perhaps by implementing some of the previously suggested strategies to increase revenues, we can increase profits even further.

Our calculations assume that people get a smoothie 1/3 of the time, however, if people were to choose a smoothie more often, this will further decrease our profits.

Question 5:

What would you recommend to the client in light of everything we have analysed?

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Hara Coffee Co's innovative coffee subscription model i

Case Prompt:

Question 1:

Question 2:

Question 3:

Question 4:

Question 5:

Hara Coffee Co's innovative coffee subscription model