Analysis of Vistabeans Profitability - Paper Example

Introduction

Vistabeans Coffee Shop was profitable in 2012 and 2013. In 2012, its gross profit margin was 55.3% implying that it made a gross profit of 55.3 cents for each dollar of total revenue generated. The gross margin ratio increased to 57.2% in 2013 indicating an improvement in the profitability of the coffee shop. Its net profit margin was 26% in 2012 showing that it earned a net income of 26 cents per dollar of total revenue generated. The net profit margin increased to 30% indicating that the profitability of Vistabeans Coffee Shop improved in 2013.

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Figure 1: Vistabeans Profit Recap 2012-2013

Analysis of profits by product shows that only one of the 13 products did not make a profit. As shown in Table 2 below, Columbia had the highest profit of $55.804 million while Green Tea made a total loss of $231,000.

Figure 2: Profit by product type-Output from Tableau

Measures to Improve Profitability

Expanding Operations

Vistabeans can improve its profitability by expanding its operations into new markets. Expansion strategies will help the firm diversify its markets thereby spreading risks (Harrisson and John 116-120). This implies that challenges in one market do not significantly affect the overall profitability of the company. For instance, if the Californian market experiences slowdown that causes a fall in sales, the decline will be offset by favorable sales in other states.

Vistabeans Coffee Shop currently operates in 20 states as shown in figure 3 below. It can increase its sales by expanding into the remaining 30 states of the US. This will also expand its supply chain, among other benefits. Expansion strategies the firm can use include opening own stores in those states, acquisitions or mergers with similar firms in those areas, franchising and licensing. Franchising involves granting a local business the right to produce and market the products of Vistabeans (Hill and Jones 163). The franchises will have similar stores and operations as other Vistabeans' stores. This strategy is less costly than other methods since the franchisee incurs most of the costs. However, the franchisee shares the profits of the franchise with Vistabeans hence resulting in lower returns (Hill and Jones 163). Besides, there is a risk that the franchisees will be Vistabeans' competitors if the franchise expires. Opening new stores is a costly activity since Vistabeans will incur all the costs (Harrisson and John 116-120). It is also the riskiest of all the expansion strategies but offers the highest returns of all the other methods. Vistabeans should open stores in other states only after ascertaining the market potential and the risks involved.

Figure 3: Budgeted and Actual Sales by State - Output from Tableau

Reduce Costs of Production

The cost of production is one of the critical variables influencing the profitability of a business. The ability of a company to maximize profits depends on its capability to maximize sales and minimize the cost of production (Drury 182). If a company reduces its production cost without compromising quality, its profitability will improve. As shown in figure 1 above, the company surpassed its sales target in 2012 and 2013. Figure 4 below also indicates that is actual sales exceeded the budgeted sales in each of the 20 states it operates. The actual sales were more than the estimated sales in each of the years. However, the actual net profit was less than the estimated net profit in both 2012 and 2013 as shown in figure 1 above. This is primarily attributed to the high cost of sales and operating expenses. The actual cost of sales and operating expenses were higher than the budgeted values in 2012 and 2013. For instance, the firm's actual cost of goods sold in 2013 was 42.84% of the total revenue while the planned amount was 42.6% of the total revenue.

Reducing cost of sales and operating expenses will improve the firm's profitability if its sales continue to grow. Cost of sales can be reduced by negotiating long-term contracts with suppliers. It will ensure a continuous supply of raw materials at favorable prices. Besides, Vistabeans can cut production costs by sourcing raw materials from several suppliers. Having several suppliers in the supply chain lowers the bargaining power of suppliers thus enabling the firm to purchase raw materials at lower costs.

Operating expenses can be reduced by innovative measures such as the use of modern technology in business operations. This will improve the efficiency of operations thus increasing the profitability of Vistabeans. Internet marketing can help the firm reduce its sales and marketing expenses. Furthermore, it can use new technology such as mobile apps and e-commerce to allowing mobile and online ordering and delivery of products. The firm can also outsource of its functional activities such as IT, employee benefits management, among other functions.

The business can also reduce production and operating costs through effective budgeting and cost control. It is important since some of the increases in operating and production costs are due to wastages in the company's operations. Each activity should be allocated a reasonable budget which should not be exceeded without a reasonable cause. Each activity should be under the responsibility of a manager who ensures that the costs do not exceed the budgeted amounts. Regular monitoring should be conducted through variance analysis to identify and analyze variances then take appropriate corrective actions.

Figure 4: Actual v Budgeted Sales by State-Output from Tableau

Divestment

It is challenging to manage a diversified product portfolio since not all product lines may be profitable. A company should maintain a product mix that maximizes its overall profitability. Products that are making losses reduce the overall profitability of the firm and should be eliminated from the portfolio. However, this should be carefully thought to ensure that abandonment is the last resort. The company should try alternatives to improve the performance of the product and close the line if such strategies fail. The company should consider the contribution margin and the net profit derived from a product both in the short and long-run periods. In the short-run, the company may entertain a product that is making losses so long as its contribution margin is positive. However, if the contribution margin is negative, the product should be abandoned immediately. In the long-run, the commodity must have a positive net profit, that is, the long-run average revenue should exceed the total average cost.

In this case, Vistabeans products are generating net incomes except for the Green Tea. Therefore, the firm should further analyze the Green Tea product line to identify the reasons for the losses and determine appropriate strategies to improve its performance. It will also help the company identify if it is a star, question mark or dog. A dog is a product that uses a lot of cash but generates lower or no returns, and do not have a potential for growth. Star is a product that may be making losses now but has a high potential to increase its market share and profitability to become a cash cow. Vistabeans should close the product line if the evaluation determines that it has no potential for improvement. It will improve the profitability of the overall business since resources will be shifted to profitable product lines.

Controlling Marketing Expenses

Marketing expenditure is essential to the success of a business. Marketing helps a business to create awareness of its products and increase its revenues. However, high expenses can reduce the profitability of a product. Thus, a company must ensure that its marketing activities are economical. Efficiency implies generating a higher return per dollar of marketing expense incurred. Determining and analyzing the correlation between marketing expense and profitability and can help improve the efficiency of marketing expenditure.

As shown in Figure 5 below, Vistabeans should cut its marketing expenses on Mint in New York and Utah. This is because there is a negative correlation between marketing and profitability of the product in the two states. For instance, Vistabeans spent $1,754,000 in marketing Mint in New York, but the outcome was a $4,780 loss. It should increase marketing expenses on Mint in Nevada, Illinois, and California since the two are positively correlated. The net profit generated is more than the cost of marketing Mint in these states. The company should also reduce in marketing expenses on Amaretto in California since a $1 marketing expense results in a more than a proportionate loss. Figure 6 below shows that Vistabeans spent $946,000 in marketing Amaretto in California, but this resulted in a $2,217,000 loss.

Figure 5: correlation of mint profit and marketing - Output from Tableau

Figure 6: correlation of Amaretto profit and marketing - Output from Tableau

References

Drury, Colin. Management Accounting For Business. Andover: Cengage Learning, 2013. Print.

Harrisson, Jeffrey, and Caron H. St John. Foundations In Strategic Management -. Cengage Learning, 2013. Print.

Hill, Charles W. L, and Gareth R Jones. Essentials Of Strategic Management. Mason, Ohio: South-Western/Cengage Learning, 2012. Print.