Drill: Interactive Cases: Case 1

Our client is a regional fast food restaurant. Theyre thinking about opening up a restaurant in Metropolis Airport. Metropolis is a hub airport like Pittsburgh, Charlotte or Cincinnati. They want to know if they should open up a restaurant in the airport, and if so, where in the airport. Their choices are Concourses A, B, C, D or the Core. Theyre not interested in Concourse E. They also want to know which site would be more profitable.

Their objectives are profits first and then exposure, because they are thinking about expanding nationally. Q1: What are the 4 main things you need to know when deciding to open this restaurant? Suggested Answer

Some possible answers are given below. Information on our client company Clients products The strength of clients brand recognition Number of current restaurants in the chain Clients financial stability Traffic flow within the airport Number of flights per concourse Number of pedestrians per concourse and in the Core Seasonality of scheduled flights Existing market Competition current and future competition How many restaurants, fast food and others are on each concourse and in the Core? Are any other competitors planning to come in and, if so, where? Types of food currently available and how it compares to what were going to serve Demographics of people coming through the airport and how many of them typically purchase food Costs and Revenues Rent, labor, COGS, building costs, special airport fees Expected guest check size Below is a chart that gives you the number of daily flights on a typical day in October, which airlines serve which concourses, how many arriving, departing and in-transit passengers eat food and, in particular, fast food. It also describes what your costs would be in each concourse and the Core, and general information on our client.

Concourse and flight information Concourses No. of Daily Flights in October Airlines A 45 B 30 C 15 D 35 E 25 Core 8 million passengers a year

US Airways

US Airways

Air Tran

Delta

Puddle Hopper Airlines

Southwest

USA 300 United Air Canada

Northwest Continental American 1 FF, 2 rest. 1FF, 1 rest 5 FF, 3 rest.

Competition

2 FF, 6 rest.

5 FF, 5 rest.

1 rest.

Monthly Rents Assumptions

65K

40K

30K

50K

20K

72K

60% of passengers passing through are business people Planes hold 300 passengers and the average occupancy rate is 65% 40% of the passengers are arriving passengers 20% of these passengers buy food 40% of the passengers are departing passengers 60% of these passengers buy food 20% of passengers are waiting between flights 80% of these passengers buy food 2/3 of the eaters eat in fast food restaurants Our restaurant Regional player 39 restaurants in Metropolis area Average $ spent on meals is $5 pp 18 hours of operation Labor costs are 15% of rev / raw materials are 25% of rev. Q2: What is the average number of passengers per plane? Q3: What is the total percentage of eaters for all three categories? Suggested Answer

The answer is 195 (300*.65). We can round it up to 200 passengers per flight. The answer is 48%. Big points if you did a weighted average. 40% of the passengers are arriving passengers 20% of these passengers buy food 40% of the passengers are departing passengers 60% of these passengers buy food 20% of passengers are waiting between flights 80% of these passengers buy food .40*.20 = .08 .40*.60 = .24 .20*.80 = .16 .48, or round it up to 50% So, now we know that 50% of the people that pass through Metropolis Airport eat food. Based on the information below, Id like you to eliminate 3 of the 6 concourses (this includes the Core.) Additional information: if you open a restaurant in concourses A, B, C, D or E you will be adding a restaurant to the totals, thus the number of fast food restaurants in Concourse A will go from 2 to 3. However, if we place one in the Core, the number will remain the same as if we are replacing one, not building a new one.

Q4: What three concourses would you eliminate? Concourses No. of Daily Flights in October Airlines A 45 B 30 C 15 D 35 E 25 Core 8 million passengers a year

US Airways

US Airways

Air Tran

Delta

Puddle Hopper Airlines

Southwest

USA 300 United Air Canada

Northwest Continental American 1 FF, 2 rest. 50K 1FF, 1 rest 20K 5 FF, 3 rest. 72K

Competition

2 FF, 6 rest. 65K

5 FF, 5 rest. 40K

1 rest.

Monthly Rents

30K

Suggested Answer Eliminate concourse A, because there are already 2 fast food restaurants, and the rent is higher than any other concourse. Concourse B is also out because there are already 5 fast food restaurants. Eliminate concourse E because I told you that we werent interested in E. That leaves concourses C, D and the Core for further analysis Q5: What would be the profit for Concourse C? Q6: What would be the profit for Concourse D? Q7: What would be the profit for the Core? Remember (i) there are an average of 200 passengers per plane, (ii) 50% of all travelers are eaters, (iii) we would be adding a restaurant in Concourses C and D (the Core would remain at 5 fast food restaurants), (iv) 2/3 of all eaters eat fast food, (v) labor costs are 15% of revenue and raw materials are 25% of revenues, (vi) the average person will spend $5 and (vii) you can assume that sales are evenly divided between the fast food restaurants. Suggested Answer Concourses Passengers Eaters Monthly Competition Monthly Rents A 9000 4500 135,000 2 FF, 6 rest. 65K B 6000 3000 90,000 5 FF, 5 rest. 40K C 3000 1500 45,000 1 rest. 30K D 7000 3500 105,000 1 FF, 2 rest. 50K E 5000 2500 75,000 1FF, 1 rest 20K Core 8MM/yr 4MM/yr 333,333 5 FF, 3 rest. 72K

A5: Concourse C - 3,000 passengers, 50% of which are eaters which equals 1500 eaters. Multiply that by 30 days in a month comes to 45,000 eaters in Concourse C. We know that 2/3 eat fast food and we get 30,000. And we are the only fast food restaurant in C. So 30,000 customers spending $5 a head gives us revenues of $150,000. We know that rent is $30,000 and that labor and COGS are a combined 40 percent of revenues. Revenues $ 150,000 - Rent - Labor and COGS Total Costs Total Profit $ 60,000

$ 30,000 $ 60,000 $ 90,000

A6: Concourse D - 7,000 passengers, 50% of which are eaters which equals 3500 eaters. Multiply that by 30 days in a month equals 105,000 eaters in Concourse D. We know that 2/3 eat fast food and we get 70,000. There would be 2 fast food restaurants in D, 70,000/2 equals 35,000 customers spending $5 a head gives us revenues of $175,000. We know that rent is $50,000 and that labor and COGS are a combined 40 percent of revenues. Revenues $ 175,000 - Rent $ 50,000 - Labor and COGS $ 70,000 Total Costs $ 120,000 Total Profit $ 55,000

A7: The Core - 8 million passengers, 4 million eaters. I want to put this on a monthly basis so I'll divide 4 million by 12 and get 333,333 eaters. Two-thirds of them eat fast food, which means that around 220,000 people eat fast food. Divide that by 5 fast food restaurants and you get approximately 44,000 customers spending $5 on a meal, which equals $220,000 in revenues. Revenues $ 220,000 - Rent $ 72,000 - Labor and COGS $ 88,000 Total Costs $ 160,000 Total Profit $ 60,000 Q8: The profits for C and the Core come out exactly the same. So where would you put your restaurant? What other factors might lead to your decision? Make a list of pros for each. Suggested Answer The Core: We would be replacing an existing restaurant, so we wouldnt be facing any new competition in the near future. If people are snowed in or flights are delayed, they are more likely to hang out in the Core than in a Concourse. If the number of flights increases on any concourse, the Core will benefit. If an airline goes under in C, concourse traffic will suffer and it wont affect the Core as much as in C. It will give us greater exposure and if one of our objectives is to build our brand then the Core makes the most sense. Concourse C The core numbers are yearly numbers and include a spike in holiday travel, but the numbers from concourse C didnt. Those numbers were taken from a typical travel day in October. I would estimate that the October travel numbers are near the low end of the scale, thus not really representative of the customer stream. I would argue that the Concourse C numbers, and thus the profits, would be higher in C than in the Core.