CARIBBEAN INTERNET CAF I.

Executive Summary David Grant, an MBA student from a London business school, wanted to establish a cyberspace caf in his hometown in Kingston, Jamaica. Jamaica Telecommunications Limited saw its business potential and proposed to invest $500,000 in the venture as well as provide for further loan. David Grant, faced with the decision on whether to proceed with the Caribbean Internet Caf venture with JTL, considered many factors before actually making a choice. The cybercaf industry was taken into account as well as other political, social, economic and technological factors which could greatly affect David Grants business in Jamaica. Based on a study of these aspects, it was evident that there was an unmet need for Internet access on the island. To further evaluate the feasibility and profitability of the alternatives available to David Grant, cash flows were projected across three different scenarios - optimistic, realistic and pessimistic. The resulting estimates and constructed pro forma financial statements indicated a profitable outcome for CIC. Thus, Davids decision should be to pursue the CIC venture with JTL. II. Case Background In 1996, while on vacation from business school, David Grant was contemplating on opening an internet cafe in his hometown - Kingston, Jamaica. Jamaica Telecommunications Limited (JTL), a local telephone company offering Internet services on the island, expressed some interest in the business plan by proposing to invest an approximately equal amount as Davids and provide an additional loan as well. Considering the feasibility and profitability of such a business for him and JTL, David is evaluating his decision to proceed with his Caribbean Internet Caf venture. III. Problem Considering the current market situation of Jamaica, the cybercaf industry, and Davids plans for CIC, should he and JTL pursue the business? IV. Decision After evaluating the industry and other factors surrounding the cybercaf industry, as well as forecasting the profitability of the business model, it is believed that David should partner with JTL and pursue Caribbean Internet Cafe. V. Industry Analysis The Internet was still starting to gain some serious momentum in 1996. It was during this year when Internet Service Providers, such as Jamaica Telecommunications Limited, began emerging in the industry. However, Internet accessibility was still a problem for some people due to high costs associated with private usage. Such was the case in Jamaica, where the Internet had low penetration rates due to high costs of computers, the lack of telephone lines, and the high rates charged by Internet Service Providers. Using Porters Five Forces framework, we have identified five key points to use in analyzing David Grants busine ss strategy development as well as the cybercaf industry in the context of Jamaicas economic conditions in 1996: (1) threat of new entrants, (2) threat of substitutes, (3) bargaining power of customers, (4) bargaining power of suppliers, and (5) intensity of competitive rivalry. Starting an internet cafe business from scratch would require a large amount of capital and that already creates a barrier to new entrants. However, despite that, it is important to note that there is a large number of restaurants and cafs present in Kingston, albeit, without Internet services being offered. Social outlets such as these are already quite popular in Kingston, Jamaica. Caribbean Internet Cafe will have the first mover advantage

of opening a cyberspace caf in Kingston. The threat of substitutes is still low considering that Internet services provided by Internet Service Providers are quite expensive. However in the long run, the threat of substitutes will become high because of the constantly evolving nature of technology and current trends. Customers have low bargaining power due to their perceived need of such services and the limitedness of cybercafs in the area. Telephone companies are the primary providers of Internet services and they have low bargaining power due to the abundance of telecommunications companies in the Jamaican island. Lastly, the internet cafe business is yet to be characterized by intense competition which will largely depend on the growth rate of Internet use. VI. Company Analysis A. The Internet in 1996 Back in 1996, the Internet did not have the power it has now. Google was inexistent and Yahoo only came to life a year before. However, the Internet was starting to gain momentum. More and more people began to recognize the potential of the Internet the possibility of acquiring information and even conducting economic transactions online. Unfortunately, it was very expensive to buy and install a personal computer and other equipment necessary to connect to the Internet. To understand the contrast between the Internet in 1996 and today, here are a few data about Internet usage in the United States1: 1996 20,000,000 hour per month 30 seconds AOL.com 2011 245,000,000 27 hours per month 6 seconds Google Sites

American Internet Users Average Web Usage Average Page Load Time Most Popular Website

Though there are no specific numbers available for Jamaica in 1996, it is possible to assume that, in contrast to the US numbers, the average users and usage were even lower for Jamaica. In 2000, only 60,000 people used the Internet in Jamaica 2.3% of their population. This rose to 55.5% (1,581,100) in 20102. B. Environmental Analysis If Mr. David Grant decides to push through with it, The Caribbean Internet Caf environment will be full of potential but also full of risk. The following analysis will help us further understand CICs environment in Jamaica. FACTORS Political CONDITION Jamaica attained full independence in 1962. Politics was relatively calm during the 90s. Negative economic growth in 1996 until 1999. Double digit inflation (25% in 1995) High mark-up in stores in Jamaica. High awareness of the Internet but low private usage IMPACT

Economic

Social
1 2

These factors make it even more difficult to purchase the necessary equipment to access the Internet (private usage). There is unmet demand for internet access.

http://mashable.com/2011/09/09/internet-yesterday-today/ http://www.internetworldstats.com/car/jm.htm

Large number of restaurants and caf (no Internet) in Kingston

Cafes did not serve coffee

Competition for CIC in terms of food and hospitality for those who will not use their Internet service. Because of the climate, coffee may not suit the tastes of CICs target market. This may, however, be an opportunity to package coffee as a desirable drink. There is unmet demand for internet access.

Technological

Low accessibility to the Internet because of cost and availability Lack of telephone lines in some areas of Kingston

The following may be inferred from the table above: 1. There is available demand for access to Internet. 2. There are virtually no competitors renting out Internet hours in a caf setting. 3. The foreign menu of the caf may be risky given the tastes of CICs target market. These factors, in addition to the results of the market study provided in the case, tell us that CIC has a good chance of thriving. C. SWOT Analysis To better analyze if David should execute his business concept, a summary of the business ventures qualitative aspects is presented below in a SWOT framework. STRENGTHS The caf will be located in an urban area where companies and other businesses are situated CIC will uniquely offer Internet services at an hourly rate for students and workers alike Employees will be highly skilled in computer technology OPPORTUNITIES Partnership with and investment proposition of $500,000 from Jamaica Telecommunications Limited (JTL), one of the seven Internet service providers in Kingston Long-term loan from JTL of $1,250,000 WEAKNESSES Relatively high start-up costs Brewed coffee, which will be served in the caf, is not very popular in Jamaica

THREATS Interest rates for the loan might be high Outsourcing baked products means they will have no control over the quality of food

VII. Quantitative Analysis A. Profitability and Return on Investment To assess the profitability of Caribbean Internet Cafe, we compute for its projected cash flows for the first year across three scenarios: optimistic, realistic, and pessimistic. Each scenario varies in the annual

number of customers and number of visits, as assessed by the independent market research firm. To aid in our computations, we have established the following set of assumptions: 1. Time value of money is negligible. The value of assets at the end of the year will still be the same as the value at the inception of the business. 2. All expenditures and revenues will be for cash. 3. Caribbean Internet Cafe will operate at 12-month or 52-week year. This was used to compute the annual value of expenses. 4. The pricing estimates established by David are on a per customer, per computer basis. 5. Tax rate is 30%. 6. Assets have a useful life of 5 years and are depreciated using the straight-line method. 7. Revenues and costs will remain the same for future years. Relevant financial data can be found in Appendix I. These were used to construct a simple income statement and statement of cash flows for CIC across the different scenarios (Appendix II). Taking into account David estimates, as well as market research by an independent firm, all scenarios indicate profitable results for CIC. Under an optimistic situation, wherein 10,000 people under the target market will visit the caf five times annually, the net income will be $3.2 million. Adding non-cash charges to this amount will yield net cash flows will be $3.5 million. The profitability index (PI), which measures the payoff of the investment of David and JTL, of CIC under this situation is 3.52, indicating that CIC is a financially attractive investment. Alternatively, we computed the return on investment to both David and JTL on their initial investments of $500,000 each. Each party will have an ROI of 604%, meaning that they will be able to recoup their cash out more a little more than six times in the first year alone. Under a realistic situation, wherein only 8,000 people will visit the caf thrice annually, the net income will be $2 million and net cash flows will be $2.2 million. Its PI will still indicate financial attractiveness, with a value of 2.24. However, the ROI is cut in half compared to the previous situation; David and JTL will give returns equal to 349%. Nonetheless, Caribbean Internet Caf is still a very attractive investment. For a pessimistic situation of 6,000 customers returning only twice, net income will be $914 thousand and net cash flow will be $1.2 million. The PI under this situation will still be attractive despite the lower figures, yielding a value of 1.20. ROI will be at 141%. B. Sensitivity Analysis Taking into account adverse business conditions and uncontrollable factors, we created a sensitivity analysis table (Appendix 3). Under this, we have identified the percentage of the segment or the number of customers as the most volatile variable. We projected ten different situations under which the number of customers decreases in increments of 5%. Under the optimistic situation, CIC will remain profitable even if customers decrease to 5,000 people (a 50% decrease on the number of people targeted in the segment). However, it will operate almost on the breakeven point in terms of cash flows. Under the realistic situation and at a 50% decrease level, the PI of the business will decrease to 0.36 and ROI will be at -27%. However, net income and cash flows will still be positive; the low PI and ROI just indicate that the investments of the partners will not be recouped. Considering our assumption that the pattern of cash flow will not change in future years or will be very

minimal, values under a 50% decrease level are dismal. Under the pessimistic situation, CIC starts being unprofitable at around 5,400 customers, which is at a 10% decrease level. PI and ROI will be 0.93 and 86%, respectively. Note that the unprofitability mentioned above relates to the recoupment of the initial investments of David and JTL, and not to the net income and net cash flows of CIC. While those may be positive, it might not be enough to cover the initial investments of both owners. VIII. Operationalization/Recommendations To ensure that Caribbean Internet Caf will be profitable in the actual operations of the business, David should focus on his customers, as they are the most volatile variable in the above computations. He should ensure that a healthy relationship is built between the caf and his customers by focusing on the needs and preferences of the latter. It would also help to have intensive marketing and advertising efforts, especially at the business first year. This would ensure that CIC is a top-of-mind choice for internet usage and simple get-togethers. Moreover, David should address the current weaknesses and threats of the business such as building a good relationship with his supplier of food and drinks to lower variable costs and avoid stock-outs. In the long-run, he should invest in CICs own kitchen for better management of his supplies, as the restaurant aspect provides a great amount of revenues. In addition, he must maintain a good working relationship with JTL. As his partner in the business and co-investor, JTL must constantly be satisfied with the cafs performance as it also affects JTLs brand equity. All in all, David must continually set the proper strategies and measures to address adverse conditions in the market and capitalize on various opportunities. With this, CIC will develop into a very profitable internet caf in the long-run.

IX. Appendices Appendix I: Relevant Financial Data Initial Outlay General Equipment Telephone System Counter Fixtures Espresso Machines Cash Register Photocopier Total Hardware Computers Ink-jet Printer Laser Printer Total Software Windows 95 Microsoft Office Total Furniture Tables or booths Chairs or stools Sofas Total Others (PPE) Artwork/sculptures China, cutlery, glassware Flowers/plants Total Others (Misc) Legal fees, etc. Marketing and advertising Utilities Initial Deposit Total GRAND TOTAL 120,000 20,000 7,000 147,000 1,573,000 10,000 100,000 5,000 115,000 105,000 175,000 50,000 330,000 3,500 12,250 15,750 350,000 14,000 28,000 392,000 $ 5,250 350,000 140,000 50,000 28,000 573,250 Cost

Appendix II: Income Statements and Statements of Cash Flows

Optimistic Percentage of Segment No. of visits per customer No. of customers who will use a computer

50% of segment, 5 times per year 10,000 5 20,000

Simplified Income Statement/SCF Revenues Internet Usage $ 2,400,000 Food Sales 3,000,000 Drinks Sales 7,000,000 Total Revenues 12,400,000 Expenses - variable Food Drinks Internet Service Cost Total Variable Expenses Net Contribution Expenses - fixed Student-employee Wages Manager Salary Lease on Premises Utilities Internet Link Insurance Premium Advertising, Marketing, and Promotion Interest Expense Miscellaneous Depreciation Total Fixed Expenses Earnings Before Tax Tax Net Income

1,500,000 2,500,000 1,200,000 5,200,000 7,200,000

187,200 480,000 360,000 180,000 120,000 120,000 120,000 125,000 600,000 285,200 2,577,400 4,622,600 1,386,780 3,235,820

Add: Depreciation Net Cash Flow Profitability Index Return on Investment David JTL Other Information Breakeven Point No. of Customers Revenues Contribution Realistic Percentage of Segment No. of visits per customer No. of customers who will use a computer

285,200 3,521,020 3.52 604% 604%

$ $

3,014 4,438,856 3,737,173

40% of segment, 3 times per year 8,000 3 9,600

Simplified Income Statement/SCF Revenues Internet Usage $ 1,152,000 Food Sales 2,400,000 Drinks Sales 5,600,000 Total Revenues 9,152,000 Expenses - variable Food Drinks Internet Service Cost Total Variable Expenses Net Contribution Expenses - fixed Student-employee Wages Manager Salary Lease on Premises Utilities Internet Link Insurance Premium

1,200,000 2,000,000 576,000 3,776,000 5,376,000

187,200 480,000 360,000 180,000 120,000 120,000

Advertising, Marketing, and Promotion Interest Expense Miscellaneous Depreciation Total Fixed Expenses Earnings Before Tax Tax Net Income Add: Depreciation Net Cash Flow Profitability Index Return on Investment David JTL Other Information Breakeven Point No. of Customers Revenues Contribution Pessimistic Percentage of Segment No. of visits per customer No. of customers who will use a computer

120,000 125,000 600,000 285,200 2,577,400 2,798,600 839,580 1,959,020 285,200 2,244,220 2.24 349% 349%

$ $

3,299 3,694,118 2,169,971 30% of segment, 2 times per year 6,000 2 4,800

Simplified Income Statement/SCF Revenues Internet Usage $ 576,000 Food Sales 1,800,000 Drinks Sales 4,200,000 Total Revenues 6,576,000 Expenses - variable

Food Drinks Internet Service Cost Total Variable Expenses Net Contribution Expenses - fixed Student-employee Wages Manager Salary Lease on Premises Utilities Internet Link Insurance Premium Advertising, Marketing, and Promotion Interest Expense Miscellaneous Depreciation Total Fixed Expenses Earnings Before Tax Tax Net Income Add: Depreciation Net Cash Flow Profitability Index Return on Investment David JTL Other Information Breakeven Point No. of Customers Revenues Contribution

900,000 1,500,000 288,000 2,688,000 3,888,000

187,200 480,000 360,000 180,000 120,000 120,000 120,000 125,000 600,000 285,200 2,577,400 1,310,600 393,180 917,420 285,200 1,202,620 1.20 141% 141%

$ $

3,349 3,670,199 2,169,971

Appendix III: Sensitivity Analysis