Case Report on “chez Paul”
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Case Report on “Chez Paul”
Executive Summary
A gourmet restaurant, Chez Paul, in downtown Montreal had turned from being very successful to being barely profitable. As a result, the management of Chez Paul was considering different alternatives to make the business more profitable. Either the price of food could be increased by 15 percent, or by 10 percent with a BYO wine option. After weighing the different options, the 15% price increase option is recommended to Chez Paul. Furthermore, Chez Paul is advised against launching a fleet of food trucks in the city.
Case Introduction
Paul Senderens is a graduate of the Montreal culinary who owns his own 70-seat restaurant in downtown Montreal. Chez Paul, the gourmet restaurant had grown after the first few years of operations. However, lately, it had been experiencing very low profit margins. After conducting market research, the report indicated Chez Paul had relatively higher costs compared to similar restaurants and that competition was intense in the industry in its particular location. In the current situation, the primary stakeholder was of course Paul, the owner. Along with him, the staff of the restaurant, especially Christopher – the manager, was also directly affected. The consumer and suppliers were other stakeholders in the case.
Based on the financial statements from the previous year and the marketing report, the management of Chez Paul considered different options for the business. Chez Paul could, obviously, continue its operations as it had been. But there were two other options, namely increasing the price of food by 15 percent, or converting into a BYO (bring your own) wine restaurant while increasing the price of food by 10 percent. All the options needed to be qualitatively and quantitatively analyzed before making a decision. Aside from these options to increase profitability, Chez Paul was also considering extending its business to include food trucks. That option must also be weighed to determine whether it was viable.
Analysis of Options
If there is a 15 percent increase in food prices, a 15 percent decrease in sales volume is expected. As a result, the unit contribution margin of food would increase from $27.30 to $32.45, even though the revenue decreases. The unit contribution margin for wine and food would increase from $16.60 to $19.17. The total contribution margin would be $23,240, which is higher than in the BYO wine option. The net income before tax would increase from $1459 to $1731 (See Appendix 1).
The option of increasing price is financially better than the original situation. However, Christopher was not too enthusiastic about that idea. A price increase is discouraging to customers, which could be damaging to the business in the long run. Furthermore, the decrease in sales volume would require laying off an employee in the dining room, which can result in low employee morale. This can lead to clients being frustrated with the service.
The BYO wine option with the 10 percent markup in food prices is financially a viable option. It has a weighted average unit contribution margin of $30.73. The net income before tax is $1851. In this option, the debt is reduced, with the interest being $300 per week as opposed to $381, since the wine that was kept in stock for six months could be sold. The total contribution margin is $21,511 (See Appendix 2).
Chez Paul is known for its wine collection. Removing the cellar completely would be like removing an arm off a body and would change the image of the restaurant. Customers who used to come to the restaurant only because of the wine would not continue to come. Some might even find it inconvenient to bring their own wine. Moreover, Christopher was a sommelier who would be disappointed if the wine cellar was removed. This option would also result in the loss of all three bar staff, which would create insecurities among the remaining staff members.
Recommendation
Based on these analyses, the 15 percent price increase option is recommended to Chez Paul. This is because this does not change the image of the business and is the least abrupt in internal changes made to the restaurant. Furthermore, this option has a better contribution margin than the BYO wine option and a significantly better profit than the original scenario.
Food Truck Option
As for the option of launching three new food trucks that would operate for 20 weeks in a year, in the aggressive forecast, the business is profitable, with a weekly net income of $130 per truck. In the conservative forecast, the business runs a loss. The breakeven weekly revenue for one truck is $2740, which is close to the conservative forecast. Even if all three food trucks result in a loss in a week, the net income from the restaurant can cover that amount (See Appendix 3).
However, it is still not a viable option. One might argue that the food trucks are like marketing, but the customer segment targeted with the dine-in restaurant is not the same as the food truck. The restaurant image will change, which can confuse the customers. Even if the trucks bring more customers to the restaurant, the volume is not expected to be too high. It also means starting a new business with part-time employees that might be hard to find. So, this option is not advisable at the moment.
Appendix 1
ORIGINAL SCENARIO
Contribution Income Statement
Revenue
31500
Variable Costs
-7630
Variable Rent
Manager Bonus
Total Variable Cost
-8260
Contribution Margin
23240
Fixed Costs
Wages
-12240
Fixed Rent
-2160
Interest
-381.9
Manager Salary
-2400
Other
-4600
Total Fixed Costs
-21781.9
Net Income
1458.1
Unit Contribution
16.6
15 PERCENT PRICE