MysticMonkCoffeeCaseStudy-TravisHuber

Mystic Monk Coffee A case study by Travis Huber 00353504

Introduction The Carmelite Order of monks in Clark, Wyoming consists of a small thirteen-monk cloistered order dedicated to the Catholic Church, and lead a life of solitude and prayer. The

prior and leader of the Carmelite Order is father Daniel Mary, who has a vision of expanding the order form its current four bedroom ranch home and adjoining 42-acres to a beautiful 496-acre ranch that would accommodate 30 monks. The proposed site would allow for a gothic church, a convent for Carmelite nuns, a retreat center for lay visitors, as well as a hermitage. The issue is that the proposed real estate for the „Mount Carmel‟ site carries a sticker price of $8.9 million dollars, which is beyond the monastery's current financial capabilities. The order has two sources of income, one is through donations and the other is from a small coffee brewing company called Mystic Monk Coffee currently based from their Wyoming monastery. The objective of this case study will be to analyze the current financial situation and propose solutions to complete father Daniel Mary‟s vision of purchasing the Mount Carmel ranch. Synopsis Case Facts: The monastery seeks to expand its current space to an $8.9 million dollar ranch. Currently income is accrued primarily by their coffee business, Mystic Monk. Funding has also been received in the form of outside donations, such as a substantial $250,000 donation to be put towards the prior‟s Mount Carmel vision. Daily life of the monks is largely devoted to prayer and worship, leaving approximately six hours daily that can be devoted to work. Currently, they have one head coffee roaster and one monk in charge of maintaining business function of the company. Current operation capacity allows for an average of 540 lbs of coffee to be produced daily. Divided hourly, the per-hour rate becomes 22.5 lbs. With the current HR capabilities of 6hrs daily, production is capped at 135 lbs. This figure could be increased with an investment in a new roaster, which would raise operating capacity to 780 lbs daily at a cost of $32,000. Raw premium fair-trade Arabica coffee beans are currently being purchased at prevailing market price from a single broker based in Seattle, Washington. The market for the company‟s specialty fair trade premium coffee exceeds 30 million consumers according to the text, with a target market of Catholic coffee consumers. The market is also expanding healthily, with a 32% average growth per year for the last 7 years. Through its current endeavors, it is quite obvious that the company has chosen the focused differentiation strategy by focusing on the narrow Catholic buyer segment. Currently, the company is selling its sample bags for $2.99 and its primary 12-ounce bags for $9.95. The company also offers accessories such as mugs and t-shirts in addition to their coffee. Customers also have the option of joining Mystic Monk‟s coffee club which offers pre-

set monthly delivery of preferred flavors. The majority of the company‟s sales are processed on their website, with phone ordering available as well. Mystic Monk‟s offers free shipping for three or more bag purchases, with their primary couriers being UPS and USPS. The majority of brand awareness is currently achieved through word of mouth. Affiliate marketing is also utilized on the website, but carries an 18% commision paid to affiliates. In addition, the company is now also offering wholesale pricing to local shops and churches. At the end of year one, gross revenues average $56,500 per month with a net profit margin of 11%. Expanded to yearly figures, thats $678,000 gross with a net profit of $74,580. Key Problems: ● Less than satisfactory business model ● Current strategy does not fit the company‟s internal situation ● Lack of strategy beyond the obvious focused differentiation strategy ● Lack of strategic vision - the vision is based upon the expansion, not the company itself. Strategic Issues: ● Lack of HR resources - Currently operating with one roaster at 6 hrs daily maximum, and one secretary to oversee operations. ● Limited production - Current daily production capped at 135 lbs. ● High COGS - 52% of margin associated with input costs ● Low profit margin - currently 11% ● Disadvantages based on current output - minimum economies of scale, purchasing leverage, etc. ● Less than favorable marketing mix - High affiliate marketing cost - currently paying out 18% commision to affiliates. Affiliate sales are being sold at a loss when profit margins reside at 11%. Strategic Analysis The business model is a managerial blueprint that lays out how the company will deliver a valuable product to the customer while also yielding an attractive profit. All business models are comprised of two metrics: the customer value proposition and profit formula. The customer value proposition seeks to satisfy customer needs at a favorable price. In my opinion, MMC has done a great job at building its CVP. However, the second part of a business model includes the

profit formula, which determines the cost structure in relation to the CVP. In my opinion, the profit formula is unsubstantiated and below the sustainable level. Recommendation: MMC needs to tweak its profit formula in order to build a sustainable profit model. As the strategic issues above illustrate, the cost structure of MMC‟s current product offerings are skewed. An 11% profit margin is not nearly enough to sustain the type of growth that the prior is seeking. COGS is also quite high at 52%, the company should look into lowering costs rather than raising prices as they are already on the top end of price in the market segment. This strategy would also allow them to maintain their current CVP. Options such as seeking more brokers for their fair trade coffee may be an option. Other contributing factors include high marketing costs, with affiliate sales currently being sold at a loss. The company needs to drastically reduce their affiliate payouts or seek other types of marketing strategies. The next problem is that current strategy does not fit the internal situation of the company. According to our text, the first metric of a winning strategy is that it must fit both the external and internal situation. The external situation seems to be satisfactory, but clearly the key problem of having only one roaster working a maximum of six hours daily is not a good internal situation. The main issue is that the majority of the Monks available time is devoted to worship, causing a lack of available HR resources which leads to a maximum daily output of only 135 lbs. Recommendation: The main issue here is that the lion‟s share of the monk‟s time is devoted to worship, and not to the company or its daily operations. This is a problem with the internal situation of the company. As the case proposes the current available HR allocation to roasting, the production is limited to 6 hrs or 135 lbs daily. Planned upgrades to a higher capacity would increase output to 780 lbs daily, increasing daily output by a factor of 5.78. Assuming all other variable are constant, this type of increase would bring net profits to $431,072 yearly. Even with an output increase of nearly 6 fold, the company will still fall short of it‟s $8.9 million dollar fundraising goal within a reasonable time frame. Even with the first years profits, the $250,000 donation, and the upgrade to the larger roaster, it would still take over 19 years to accrue $8.9 million for the expansion (once again this is assuming all variables remain constant, and demand is unlimited (which is very unlikely)) The main issue here is that there isn't adequate HR to produce the type of output necessary for that type of funding. In my opinion, MMC should bring on more monks that are capable of roasting the coffee to try to maximize

output. Another option would be to outsource all roasting altogether, which may increase output and increase the profit margin if the process was streamlined. Beyond the chosen focused differentiation strategy itself, a clear lack of strategy for the company is another issue I have brought to light. According to the case information, the vision is based solely upon raising the necessary funding for the Irma Lake Ranch real estate. However, no clear strategy is laid out in terms of the actual company and its operations or performance. According to our text, “A company‟s strategy is management‟s game plan to attract and please customers, compete successfully, conduct operations, and achieve targeted levels of performance.” Clearly the vision of raising $8.9 million dollars does little to satisfy the metrics of a successful strategy. In the case of MMC, management has neglected to address most of the basic strategic metrics. Recommendation: The company needs to take a step back and take a long look at its strategy formulation. As I mentioned, they are currently focused on the focused differentiation strategy, but I think this is more by default than by decision. Many customers may purchase solely because they sympathize with the objectives of the monastery. I believe the company could benefit from utilizing all five stages of the strategy formulation process as portrayed in figure 2.1 in our text. According to the text, “A winning strategy must fit the company‟s external and internal situation, build sustainable competitive advantage, and improve company performance.” I believe the company could benefit by first defining all of the above metrics and building upon them. Laying out a clear and definite strategy will also benefit the monastery by ensuring all monks are on the same page in regards to daily business function and operation. The final key problem comes from the lack of a strategic vision. A strategic vision is derived from a clear predetermined path in which the company will take into the future and where focus should be placed in terms of the customer, the products, the market, and the technology. Beyond the obvious goal of raising $8.9 million dollars for the monastery's expansion, the reader is left wondering what path the management plans to follow in order to reach these goals. This metric is also the very first step in the strategy formulation process, as displayed in figure 2.1 in the text. Recommendation: The company needs to develop a strategic vision beyond that of raising the proposed $8.9 million dollar goal. Instead, it needs to focus upon its future performance and market positioning prospects. By focusing on these metrics, the firm will be

able to determine if the changes to their current markets, customer focus, current product offerings, and current technologies are necessary in order to bolster both future performance and market positioning. For example, the case proposes that the current ordering system/website is nearing capacity with current sales. For the type of expansion the company is hoping for, drastic upgrades will be necessary in order to support the increase in sales. Developing a strategic vision early on will ensure that the company is able to sustain expansion in the long run and avoid any “growing pains” that might arise in the process. Conclusion In conclusion, the projected expansion to the $8.9 million dollar ranch cannot be supported solely on the prosperity of the Mystic Monk Coffee Company. As proposed in my analysis, even with rapid expansion and an equally rapid increase in customer demand, the monastery will still be unable to reach their goal within a reasonable time frame. Outside donations would need to account 50% or more of the Irma Lake Lodge purchase price for the cloistered order of the Carmelite Monks of Cody, Wyoming to have a chance at purchasing the parcel in a reasonable amount of time. The company could certainly expand its operations to be a far more profitable operation by upgrading its business model, adjusting their strategy to further adapt to it‟s internal situation, and by forming a strategic vision and overall strategy that align with both the religious obligations of the monastery as well as the business as a whole. Strategic issues such as lack of HR, limited production, high costs of goods sold, low profit margins, and the current marketing mix will all need to be addressed in order for the company to sustain healthy operations going into the future. Side Note Unfortunately for the Carmel monks and MMC, the Irma Lake Lodge was purchased by Bill Gates in 2009.

SWOT Analysis

Strengths:

Weaknesses:

Use of high quality, Fair trade

Limited production

Arabica Beans. Limited HR resources Flavor Variety Variety of accessories offered

Large amount of time spent on daily prayer and worship

Working capital to expand operation

Lack of business knowledge Lack of management depth

Opportunities:

Threats:

Expanding market

Competition from other small brewhouses offering a similar product (some customers may truly just want coffee and are not sentimental to the mission of the order)

Expand product line Large market segment of Catholic consumers

New entrants to the marketplace Economies of scale derived from business expansion

Fluctuations in the market price of raw coffee beans

References Cover Photo: http://en.wikipedia.org/wiki/Monks_of_the_Most_Blessed_Virgin_Mary_of_Mount_Carmel#me diaviewer/File:Symbol_of_Mystic_Monk_Coffee_Image.jpg http://www.examiner.com/article/bill-gates-buys-buffalo-bill-s-ranch-wyoming-monk-s-losedeal-gallery Gamble, John, Peteraf, Margaret, Thompson, Arthur, Essentials of Strategic Management: The Quest for Competitive Advantage. 4th Ed., McGraw Hill Education, 2013