Author: Jialu Huang, Melonie Jackson, Jared Thomas, Harsh Shah

2023-02-22

Advisor:
Jeyaraj (Jay) Vadiveloo, PhD, FSA, MAAA, CFA
Professor & Director
Janet & Mark L. Goldenson Center for Actuarial Research
University of Connecticut

Contents

• 1 Introduction
• 2 Background
• 3 Clientele and Finances
• 4 Goals
• 5 Recognition of Risks
• 6 Recommendations
• 7 Conclusion

2. Background of [Restaurant]

• [Restaurant] is a milk tea store that opened in 2021. The [restaurant] franchise was first established some years ago, and now has ~20 chain stores across the United States. The head office of [restaurant] is located in New York, and all initial furnishing and equipment are provided by the head office. Perishable items are replenished through weekly journeys to the grocery store.The [restaurant] branch the SWM team has partnered with opens Monday – Sunday and staffs 4-5 full-time and 4-5 part-time employees. They also maintain positive relationships with other local businesses through group delivery services. The main variations of tea products they offer are: fresh milk tea, drinks with coconut milk, crème brûlée flavored drinks, fresh fruit milk tea, fresh fruit tea, milk foam tea, smoothies and oolong tea. These types derive into many drink options including the [restaurant]’s most popular drinks: Oreo milk tea, black sugar pearl milk tea, and Thai milk tea. They also offer auxiliary/additional goods. As stated by the chain’s manager, more than 50% of their business is generated by repeat customers, and they use no loans or financing, while maintaining a self-perceived “good-sized” general cash reserve.The impact of the COVID-19 pandemic on the [restaurant]’s ability to conduct business is detailed in the “Recognition of Risks” section of this report.

3. Clientele and Finances

[Restaurant] sees a diverse mix in clientele with strong leanings towards a wholly youthful student consumer base. The chain manager describes clientele as following:

• 90% young, 8% middle-aged (with family) and 2% elderly
• 30% – 40% Chinese and 60% – 70% Other
• 300 – 600 customers per day (including online orders)

Common metrics of measuring customer satisfaction show the [restaurant] as having a pleased consumer base:

• Facebook (5/5)
• Google Reviews (4.7/5)
• Yelp (5/5)
• Instagram – 400+ followers

The [restaurant] reports monthly revenue of $20,000 – $30,000 US dollars with relatively large fluctuations in profit due to seasonality. In the first year they’ve been open (2021 – 2022), total revenue reached $172,000 with a profitability of ~20%. The business reports having a “good-sized” cash reserve, but no specific risks that they reserve cash for. The manager perceives the seasonal differences in monthly income to result from differences in the weather and upcoming holidays. Demand for iced drinks and milk tea is highest in fall (September – October), with sales decreasing by 10-20% in April – May, and by about 30% in the winter. June – August is the lowest sales period of the year. The manager also notes that busy period sales are twice as high as slack period sales.

4. Goals of [Restaurant]

Our chain of [restaurant] hopes to decrease turnover and enrich the variety of products, but prioritizes remaining profitable. The [restaurant] aims to maintain the quality of materials and drinks while gradually introducing more diversified flavors and new products. Unlike other stores that use storebought powder with taro flavoring, [restaurant] boils their own fresh taro for their taro drinks. Currently, they are the only store in their area that specializes almost exclusively in milk tea — competitors nearby are mainly in the restaurant business with milk tea in the drink menu — more businesses may expand drink menus and new milk tea stores may open close by in the future. Therefore, [restaurant] feels the need to develop special products and ensure the freshness of their products to both enhance their corporate reputation and retain/attract more customers.

Furthermore, to tap into potential customers that have yet to know about the [restaurant], the management is considering acquiring the rights to another franchise expansion in the future

5. Recognition of Risks

1. Systemic Risk – The COVID-19 pandemic saw sharp increases in input material costs such as jams, toppings, plastic cups and especially dairy products. Milk prices increased by almost 40-50%. Additionally, shipping was a big problem during Covid. Many raw materials come from mainland China and Taiwan, and the logistics speed and shipment arrival timelines were greatly worsened due to the epidemic.
2. Mechanical Failure – The blender provided by the headquarters is a household type machine rather than a commercial type machine, which has lower power and a higher damage rate, and often needs repair.
3. Environmental Risk ­– [Restaurant] is located underneath an apartment building. When residential water leaks occur, the ceiling corrodes, and the sanitation of the store is greatly impacted. Typically, this issue costs the store $100 – $1,000 in maintenance fees at a time.
4. Business Interruption Risk – Dissatisfactory retention rates and the chance of a resurgence in COVID infection rates leaves fewer than ideal numbers of employees to be responsible for upholding the entire chain in a worst-case scenario.
5. Chance of missing out on potential customers – While this is not necessarily a traditional risk, it is an opportunity to reduce all other risks by adding a cushion of additional income that can be put towards addressing any concerns. 

6. Recommendations

Operational Risk

[Restaurant] can increase operational efficiency and lessen the amount of money that goes towards blender repairs by requesting permission from the main branch to invest in an industrial blender.

Environmental Risk

            While [restaurant] isn’t allowed to seek compensation for damages to their workplace due to the actions of apartment residents, as this is a common risk and one they are aware of, sectioning out reserves for property damage makes sure the funds are available when needed.

Business Interruption Risk

The business has only been running for one year, so the development of a five-year plan is instrumental in determining where the business is heading, and if they foresee having the ability/resources to continue. If requested, the SWM team will lead the manager through a plan to address both the big picture and possible setbacks like low retention and widespread illness.

Systemic Risk

There are many opportunities for locally sourcing drink inputs in case of worldwide shipping delays. Additionally, it may be of interest to consider partnering with an agricultural outlet to begin local cultivation of the taro plant.

Revenue Generation

Ideas for increasing revenue though more mindful marketing are as follows:

1. [Restaurant] can take advantage of thirsty movers in August by launching a family/group bundle.
2. Introduce a loyalty reward program (i.e., new customers receive a blank card that gets a custom stamp after each purchase with X number of stamps resulting in Y perk, etc.)
3. Create eye-catching sidewalk decorations – decorate to improve the image of the storefront and attract the gaze of protentional consumers from competitors.
4. Post adverts and promotions around the area and be more active on social media.

7. Conclusion

The primary recommendations in this document serve to address recurring risks and ensure continued operation. As a franchise with fewer staff in a more competitive environment, it’s important for [restaurant] to minimize the frequency and severity of losses where they can and set aside reserves for unforeseen circumstances before considering an expansion. By taking detailed steps to address operational, environmental, and business interruption risks as well as considering our suggestions for revenue generation, we hope [restaurant] will continue to pave a distinct place for itself amidst competition.