Mystic monk coffee case

MYSTIC MONK COFFEE

CASE ANALYSIS

CURRENT SITUATION

Father Daniel Mary has a clear vision for the monastery but not one for Mystic Monk Coffee (MMC).

His vision is to build a newer and more grand monastery for $8.9 million in Wyoming. Currently the Carmelite Monks have $250,000 in donations and through MMC earn about $75,000 per year in profit.

For Father Daniel Mary to realize his vision it would take almost 119 years to obtain the cash through profits of MMC.

Current monthly sales of $56,500 suggest that MMC sells about 5,678 bags of coffee each month at a retail price of $9.95 per 12-ounce bag or about 4250 lbs a month. The coffee is made by Brother Elias (Brother Java) who is able to work for 6 hours per day, which limits production of coffee to about 130-135 pounds per day. At a rate of 135 pounds per day, it appears that Brother Java is working 7 days per week to meet MMC’s current monthly sales!

MMC’s net profit margin is healthy within the industry at 11% however, affiliates earn 18% profit margin to sell MMC’s coffee through their distribution network.

CURRENT SITUATION (cont.)

The company’s cost of sales of 30 percent, broker fees of 3 percent, and inbound shipping costs of 19 percent contributed to a cost of goods sold of 52 percent. Indirect operating expenses (37 percent of revenues) are largely fixed and might go down as volume increases, most of these expenses are somewhat variable and will increase with volume.

Their current strategy does suggest that MMC has a sustainable competitive advantage,, the company’s $56,500 average monthly sales suggest MMC has a growing and loyal following among Catholic consumers and the coffee is made by Catholic Monks for Catholic customers (69 million member of the catholic church within the United States)

Analysis

Marketing (Distribution, Demand, Product)

Operations/Supply Chain/Production

Finance (Cash Flow, Land Investment, Profit)

Human Resources (Manpower, Culture)

Management/Business Model/Strategy

SWOT

STRENGTHS

Exclusive use of high quality fair trade Arabica and fair trade organic Arabic beans

Variety of blends, roasts, and flavors to appeal to a broad range of coffee preferences

Focus on U.S. Catholic consumers and those wishing to support the mission of the Carmelite Monks of Wyoming.

Word of mouth advertising among loyal customers in Catholic parishes across the U.S.

Majority of sales made through MMC’s Web site and telephone orders accepted

Product line extension that included sales of T-shirts, mugs, gift cards, and CDs featuring the monastery’s Gregorian chants

WEAKNESSES

Current profits insufficient to generate funds to purchase the Irma Lake Ranch

Only one person making the coffee

Monk culture does not have business acumen.

Limited marketing

Affiliate program that provided 18 percent commissions to secular Web site operators allowing MMC

ShareASale participation program that allowed affiliates to refer new affiliates and earn 56 percent of the new affiliate’s commission

SWOT

OPPORTUNITIES

MMC’s focus on the 69 million members of the Catholic Church in the United States makes the target market sufficiently large to earn attractive profits.

Market for specialty coffees had grown at an annual rate of 32 percent between 2000 and 2007 to reach $13.5 billion.

Retail sales of organic specialty coffee had grown to $1 billion by 2007.

THREATS

Irma Lake Ranch bought by another party within the timeframe

Multitude of coffee making competitors

Increases in costs from coffee suppliers and shipping organizations

Analysis Marketing - Distribution Network

The strategy fits the external situation nicely since the market for specialty coffees had grown at an annual rate of 32 percent between 2000 and 2007 to reach $13.5 billion.

The retail sales of organic specialty coffee had grown to $1 billion by 2007. MMC’s focus on Catholic consumers in the United States represents a large market for MMC—and one that would arguably become very loyal customers.

MMC generates losses on all sales coming from affiliate Web sites since the company pays an 18 percent commission on these sales, but has a net profit margin of only 11 percent.

If they buy the new roaster Brother Java could make 780 pounds of coffee each day (130 pounds/hr x 6 hours). This level of production would allow MMC to sell up to 1,040 12-ounce bags of coffee each day ((780 pounds x 16 ounces)/12 ounces = 1,040 12-ounce bags) or 31,200 bags of coffee per month. MMC is currently selling about 5,678 bags per month. MMC would need to sell 25,522 more bags per month (31,200-5,678=25,522) or about 4 times what they are selling now.

ANALYSIS Production/Operations

MMC’s current roaster is not at full capacity. It can produce 540 lbs of coffee per day assuming it operates at 22.5 lbs per hour running 24 hours per day. Brother Java can produce 135 lbs per day. If there was one more 6 hour shift added to production, another 135 lbs could be produced for a total of 270 lbs per day. They could double monthly production from 5,678 bags to 11,356 bags per month.

If they add the other shift and sell more bags it will also double their packaging, shipping, and overhead expenses.

Analysis Finance

MMC enjoys no cost advantage and many of its non-differentiating activities involve higher than normal costs because of its low production volume. The company’s cost of sales of 30 percent, broker fees of 3 percent, and inbound shipping costs of 19 percent contributed to a cost of goods sold of 52 percent. Even though students might argue that some indirect operating expenses (37 percent of revenues) are largely fixed and might go down as volume increases, most of these expenses are somewhat variable and will increase with volume.

If they decide to purchase the larger 130-pound per hour roaster it will not allow MMC’s annual profits to increase to beyond what Brother Java’s 6-hour shift will currently allow which is only 780 pounds of coffee to be roasted each day (130 pounds/hr x 6 hours). This level of production would allow MMC to sell up to 1,040 12-ounce bags of coffee each ((780 pounds x 16 ounces)/12 ounces = 1,040 12-ounce bags). This level of production at $9.95/bag allows for daily revenues of $10,348 and a daily profit of $1,138 given the current profit margin of 11 percent. So, MMC’s annual profits could arguably increase to about $415,000 if demand could be increased to match the 6-hour capacity of the larger roaster.

ISSUES

MMC’s current sales, 11 percent net profit margin, and charitable donations are insufficient to generate $8.9 million in cumulative earnings within a reasonable amount of time.

MMC’s current business model severely limits its ability to make a meaningful contribution to the purchase of Lake Irma Ranch.

MMC generates losses on all sales coming from affiliate Web sites since the company pays an 18 percent commission on these sales, but has a net profit margin of only 11 percent.

The monastery does not have the human resources necessary to roast, package, and ship the volume of coffee necessary to accrue $8.9 million. Additionally, Father Daniel Mary nor the other Carmelite brothers have the necessary business experience to manage a large coffee operation capable of generating annual earnings in the millions of dollars.

RECOMMENDATIONS

MMC needs to immediately reduce commissions paid to affiliate Web sites, since the current 18 percent commission cannot be supported.

Increase marketing efforts:

Send e-mails to Catholic churches in the U.S. asking that MMC coffee be used for church events and that parish members be told of MMC’s Internet coffee sales.

Provide churches purchasing MMC coffee with a sign promoting MMC that could be placed near a coffee urn.

Target coffee shops located in communities with large Catholic populations for wholesale purchases.

Promote the Wyoming Carmelite’s vision of a new Mount Carmel and MMC coffee at Catholic religious conferences. MMC might consider providing conferences with free MMC coffee and promotional materials.

MMC obtain permission to place banner ads or links to MMC on church and parish websites.

A larger roaster could be purchased that would push production to 130 pounds per hour, which would increase daily production by a factor of 6. Increased volume will allow MMC’s net profit margin to improve from 11 percent to 15 percent - 19 percent, for a daily net profit increase to $1,552 - $1,996 based on daily sales of $10,348. The improvement in margins would result in an annual net income for MMC of $566,000 - $717,500.

Father Daniel Mary will be required to schedule additional 6-hour shifts for MMC to reach $1 million in annual profits.

RECOMMENDATIONS

Father Daniel Mary could choose to use the monastery’s recent $250,000 donation to expand the current rectory to provide additional living space for existing monks and any new monks joining the monastery. The Carmelites’ current 42-acre parcel of land could be used to construct a larger rectory if the current ranch-style four-bedroom home could not be expanded.

Father Daniel Mary could utilize the resources of the Catholic Church to find major donors willing to contribute to the creation of a new Mount Carmel. However, Father Daniel Mary’s efforts might be limited by the Catholic Church’s charitable giving requests for competing projects and needs.

Father Daniel Mary could request that the Catholic Church send priests or others not constrained by a cloistered life to develop a strategy with Cody, Wyoming business people to maximize the potential of the foundation established for the benefit of the monastery. It’s likely that the Cody, Wyoming business people don’t have the know-how or time to generate substantial contributions to the foundation.

Half of Father Daniel Mary’s efforts could be dedicated to charitable giving to grow donations to $4.5 million (half of the requirements to purchase the $8.9 million Irma Lake Ranch).

Recommendations

Scale down the size of the monastery, purchase a smaller parcel of land with a smaller down payment and/or lease a portion of the land and purchase a portion of the land.