Spuyten Duyvil: Turning Entrepreneurial Momentum into Future Growth
Spuyten Duyvil is a beer specialty beer bar that focuses on a special type of customers, the ones with a flair and taste for rare European breeds. In late 2002, two business partners opened this bar with a specific vision and strategy. It was opened in ‘Williamsburg’, and it had a well defined market and business plan. The major revenue generation and the leading marketing strategy focused on the bear and the minor, sideways or the part time focus was on the antique business. Now is the time for both partners to decide about the growth prospects of the business because it is running successfully and it demands extension both in terms of revenue and business diversification. The partners have five available options and they should select the appropriate one that suits them both financially and non- financially. Let’s examine all the options one by one and present appropriate recommendations as to what growth strategy or a combination is best for them.
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1: Retail Location
If you consider this growth option, the best thing that arises pertains to the fact that initial investment is real meagre. On the other hand, the sales volume will be tripled as per assumptions, but the gross margin would be decreased by half of the current percentage. Also, let’s take 2004 as the base year and calculate the gross margin to total cash flow ratio. The analyses of the first year operations indicate that the return on initial investment will stand at 3.3X. However, the business risk will not be diversified, and legal issues can also play their part.
2: Another Duyvil
This option pertains to the mere extension of business in another suitable location. A new location should be chosen to accommodate the whole customer base. The projections of this growth options are not very explicit except for the fact that if Manhattan is chosen as the potential location, the revenues will be doubled. However, there are legal issues pertaining to this option. The partners cannot sublease their current property. Additionally, there will be a significant operational risk accompanied with the high rent in the downtown area.
This option will provide the right to sell the relevant products and services of Spuyten Duyvil to another party that will in turn grant a royalty to the partners. If one assumes that the revenue growth rate and total revenue to total cash flow ratio of 2003-2004 will remain the same for next five years, then the projected cash flows are attractive and lucrative. But this is a risky option in the sense that the service quality and franchise success are not guaranteed.
4: Beer Book
This option looks to be a very lucrative option because of zero real cash outflow. The payment schedule is also acceptable in the sense that, in fact, no money leaves the pocket. Let’s consider the original business investments the time zero cash outflow. In this case, the IRR of this option comes out as 13.3%.
This option carries a significant cash outflow, and as per the past ratios projected for future, the return on investment for next 4 years is 29X the investment.
For the partners, a combination of book publishing and franchising are two most viable growth options. Book publishing requires no real cash outflow and, on the other hand, if the franchisee is successful; the partners can earn a handsome perpetual cash outflow for a time being. Barbecue option was also lucrative, but it bears a huge starting capital. The options of another Duyvil and retail locations possess complex legal issues that might hamper the business performance in the future.
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