Dog and Duck
THE DOG AND DUCK PUB
Income Statement
2009 2015
($'000) % ($'000) %
Sales $ 830 100.0% $ 705 100.0%
Cost of Goods Sold 332 40.0% 315 44.7%
Gross Profit 498 60.0% 390 55.3%
Expenses:
Management Salaries 40 4.8% 57 8.1%
Labour: Wages 205 24.7% 133 18.9%
XXXXXXXXXXPayroll Taxes 17 2.0% 13 1.8%
Rent 66 8.0% 74 10.5%
Common Area 5 0.6% 7 1.0%
Promotion 42 5.1% 13 1.8%
Insurance 7 0.8% 12 1.7%
Hydro 12 1.4% 25 3.5%
Natural Gas 13 1.6% 13 1.8%
Telephone 2 0.2% 2 0.3%
Depreciation 10 1.2% 6 0.9%
Miscellaneous 2 0.2% 2 0.3%
Total Expenses 421 50.7% 357 50.6%
Operating Profit 77 9.3% 33 4.7%
Other Income 0 0.0% 12 1.7%
Other Expenses 0 0.0% 3 0.4%
Earnings before Tax 77 9.3% 42 0
Income Tax 23 2.8% 11 0
Net Income $ 54 6.5% $ 32 4.5%
Notes:
1. Other Income of $12,000 in 2015 is the rent on the apartment. Expenses related to this
Income are in the Miscellaneous Expenses line.
2. Management Salaries. In 2009, Montague paid himself a salary of $40,000 as owne
manager. In 2015, a salary of $50,000 was paid to the hired manager (plus 1% of gross sales)
3. Rent. 2,000 square feet at $33 pre square foot in 2009 and $37 in 2015.
4. Common area costs. Refers to upkeep, snow removal, etc.
Retired early from position as manager in a large company
1
The Dog and Duck
Dave Cowan had retired early from his position as office manager in a large company. At
age 57; he had a reasonable pension and some capital that he had saved. Dave had lived
in Rockwood for 30 years and was reasonably well known in the community. He was
active in a service club, on the executive of a soccer league and a hockey league, and
worked with some local charities and fund-raising activities. He was a physically fit and
active man who enjoyed challenges and was growing restless in his retirement.
Dave wanted to invest in a small business, not only to add to his income, but also as an
entrepreneurial venture that would be challenging and interesting for him. He was
considering buying The Dog and Duck, a British pub located in Rockwood. The pub was
located on the edge of town, on the main road running through Rockwood. It was a five-
minute walk from the GO train station.
Rockwood is an Ontario town of 21,000 people about 70km from Toronto. In recent
years, its population has grown quite rapidly as people have moved from the Greater
Toronto Area (GTA) into less crowded communities with lower real estate prices and a
community lifestyle that suits them. Most of these recent a
ivals are reasonably
prosperous family people who commute daily to professional jobs in the GTA.
The Dog and Duck is presently owned by Jeff Be
y, who lives in Georgeburgh, which is
30 km from Rockwood. Be
y was a corporate lawyer in Toronto. He bought the pub as
an investment in 2010 after his investment portfolio of stocks lost 50% of its value, as a
esult of the 2009 financial crisis.
The previous owner had been Henry Montagu, who had managed it himself and had
actually lived on the premises, in a modest apartment over the pub. Henry sold The Dog
and Duck Pub to Be
y before retiring and moving back to Manchester, England. In the
five years before the sale, the pub’s sales had been rising and profits had been good. In
fact, as a percentage of sales, profits had been better than the industry average over the
last two years that Montagu owned it.
Be
y’s impression was that while the business was profitable, profits could be increased,
mainly through better control of expenses. Montagu had spent a considerable amount on
things that Be
y found questionable. In particular, labour costs seemed high. Wage
expenses (mostly for the servers) were 25% of sales, as compared to only 20% for chains
like Boston Pizza and Milestones; the difference in 2009 being nearly $40,000 per year.
Also, sponsorship of local sports teams alone cost $20,000 per year, and the pub’s
participation in a wide variety of community events such as baseball and golf
tournaments was costing another $10,000 to $15,000 per year. Be
y was not interested in
unning the pub himself, so he hired a manager from out of town for $50,000 per year
plus one percent of the gross sales. Be
y regarded Montagu as an old, out-of-date
2
amateur who had been careless with expenses and fortunate to be as successful as he was
with The Dog and Duck. He believed that with modern, professional management, the
pub might even become profitable enough to allow him to buy a 42-foot yacht like the
one a lawyer friend of his owned.
To help pay for the manager’s salary, Be
y rented out the apartment over the pub for
$1,000 per month and reduced spending on “incidentals” such as team sponsorships,
community events and so on. In addition, he directed the manager to reduce wage
expenses from 25 % of sales to 20%, and reduced expenditures on entertainment by 15%.
However, Be
y found himself disappointed with his investment. In 2013, three years
after he bought the pum, sales were actually slightly lower than in 2009, and profits had
decreased. From 2013 to 2015, Be
y decided to further cut expenses. He reduced staffing
in order to cut labour costs, and postponed planned renovations involving replacement of
worn upholstery on furniture and new paint and wallpaper. He directed the manager to
concentrate more on providing high-volume, lower-cost beer and reduced offerings of
more expensive imported
ews. However, both sales and profits continued on their
gradual downward trend, and Be
y eventually concluded that this business was at the
end of its product life cycle. Be
y decided to put Dog and Duck up for sale.
Dave Cowan read up on the market for pubs, and learned that it is a market that has
changed considerably in recent years. From the 1990’s through the 2000’s, the market
was dominated by “roadhouse” bars and restaurants such as Kelsey’s or Boston Pizza.
These were big bars, 500 square meters (5,000 square feet) or larger with no intimacy,
high noise levels and food menus that offered standard items with no product
differentiation – a sort of “mass-production” approach to the business.
A few years after the recession of XXXXXXXXXXhad damaged sales and profits of almost all
estaurants and bars, customers began to venture out again. Now, the trend was away
from hard liquor and big, noisy bars and toward smaller, more intimate neighbourhood
pubs and premium craft and imported beers. As the baby boomers aged, people were
spending more time at home, and near home, in their neighbourhood. The over-40 age
group, with its high spending power, spends considerable time with its elaborate home
entertainment systems, and does almost all of its basic shopping within a 10 km radius of
home. These people wanted to socialize close to home in a comfortable, cozy and
friendly atmosphere. To these people, service, quality and a welcoming atmosphere were
more important than price. A neighbourhood pub, close to home, and with the “flavour of
England” -- a place “where everybody knows your name”—could provide just this,
according to the literature Dave had read.
The price of the pub would be about $250,0001. Since Dave Cowan had about $100,000
of his own money, he would have to bo
ow about $150,000, which would add interest
expenses of approximately $9,000 per year to the pub’s income statement.
1 Businesses such as these tend to sell for 30-40% of gross sales.
3
Dave discussed the matter with a friend, who told Dave that he wished that he had seen
that The Dog and Duck was for sale first. He thought that the pub had real potential,
especially if it were managed by its owner and managed well. He noted that this would
involve a lot of work, but could be quite rewarding financially.
Dave then consulted with his bank manager, who was noticeably less enthusiastic about
the pub as an investment. He confirmed that the bank would loan Dave the funds needed
to buy the pub; however, the bank manager pointed out that this was a very competitive
and high-risk industry. He suggested that Dave consider carefully whether a man his age
should go that far into debt. The bank manager also pointed out that Dave could invest
his savings with the bank at a guaranteed annual interest rates of approximately 3.0%,
and thus earn another $3,000 per year rather than pay about $9,000 annually in interest on
a loan. He observed that, together with Dave’s pension, this would provide him with a
secure income for his retirement years.
Finally, Dave comes to you for advice. What would you suggest?
On the following page are the income statements for:
• 2009, the last full year the pub was owned by Henry Montagu
• 2015, the most recent year of operation under the ownership of Jeff Be
y.
• This data is also included in an Excel file (Case 6 – Dog and Duck excel sheet) posted
on SLATE.
4
Alternatives & Decision Criteria
7 |
Minimum of three alternativs és 0 - sentence to describe each if necessary. Make
sure that your alternatives addres 0 problem. If not, you may need to restate the
problem or eliminate the etd Separate this section from your analysis (see below)
List the four — six main criteria that the decision maker will use to analyse the
alternatives. Two criteria risk and tum (profit) will be included in almost all the case
studies — therefore no marks for these
|
Recommendation
=| You must have a sentence that says, I/We recommend Alternative
Do not combine alternatives (if you wish to do so. do it at the alternative stage) | |||
+ || [Present your rationale for selecting the Alternative: how does it best solve the Problem
Statement and Objectives, Why is your recommendation better than the othe
alternatives?