CoffeeWorks reusable cups

Possible clarification questions by the interviewee before answering the first question:

1. What products does our client offer?
2. Does our client only operate in the UK?
3. Do we know anything more regarding the reason why our client wants to move away from single-use disposable cups?
4. How will the new cups be offered to customers? How can customers buy coffee with their new cups?

A possible answer to question #1:

We can approach this problem as follows:

Qualitative assessment

1) CoffeeWorks

• Product mix: Can we get more details regarding the coffee selection? Can customers use reusable cups for all types of coffee?
• Value proposition: What is our client’s positioning compared to competitors?
• Reusable cups: How different is the new, reusable cup compared to existing cups? How long can one reusable cup be used? Does our client plan to replace the disposable cups completely?

​2) Market

• Market size: How large is the coffee market in the UK?
• Market trend: How strong is the demand for reusable cups?
• Competitors: Do we know if any of our competitors already offer sustainable packaging? If not, do we expect them to follow a similar strategy?
• Customer’s purchasing criteria: What are customers’ purchasing criteria for buying coffee? How likely does a reusable cup to influence customers’ purchasing?

3) Potential upsides

What can be the financial upsides of offering reusable cups?

• How can this improve our client’s revenue?
  • Incremental coffee sales
    • Increase in the number of coffee units sold (quantity)
  • Reusable cup sales
    • Number of reusable cups sold (quantity)
    • Price per reusable cup (price)
• How can this decrease our client’s cost?
  • Savings from disposable cups (variable cost)

What can be the non-financial upsides of offering reusable cups?

• Improved brand awareness and recognition
• Workflow optimization/simplification

4) Potential downsides

What can be the financial downsides of offering reusable cups?

• How can this decrease our client’s revenue?
  • Discounts provided to encourage reusable cup uptake (price)

What can be the non-financial downsides of offering reusable cups?

• Inferior product and service quality
• Risks
  • We may overestimate the reusable cup uptake
  • The client may not be able to find a suitable supplier who can provide reusable cups at desired quality, and on time

Before deep-diving into the market, let us discuss the potential upsides and downsides of this strategy. First, can you tell me what could be the potential upsides for our client more in detail? (prompt the interviewee to detail his points earlier in the framework)

We understand that our client will be able to strengthen their brand image. However, our team failed to find a significant upside regarding the cleaning time of the seating areas.

From a financial point of view, our team does not expect sustainable solutions to increase our client’s customer base. In addition, the cost of disposable cups is negligible, hence we can disregard the cost savings. However, as you mentioned, our client can generate incremental sales thanks to the reusable cup sales.

A possible answer to question #2:

Some of the potential upsides can be the following:

Financial upsides

• Incremental coffee sales
  • Our client will be able to increase their customer base thanks to the introduction of sustainable initiatives.
• Reusable cup sales
  • Our client will have a new revenue stream, and charge customers for the reusable cups (while disposable cups are provided for free).
• Cost
  • Our client will be able to decrease the procurement cost of the disposable cups due to the replacement with reusable cups.

Non-financial upsides

• Our client will be able to improve their brand image as a sustainable retailer.
• Due to the potential lower number of disposable cups, our client’s personnel may spend less time for cleaning and removing disposable cups from the seating area.

Before we deep dive into the quantification of the potential upsides, let us discuss the potential downsides first. Can you come up with a few ideas? (prompt the interviewee to detail his points earlier in the framework)

Let us assume that our team does not foresee any non-financial downsides.

From a financial point of view, we understand that the major downside stems from the decreased price point per coffee sold to customers who use reusable cups. Our client is planning to offer a 5% discount per coffee purchased.

Possible answers to question #3:

Some of the potential downsides can be the following:

Financial downsides

• Revenue
  • Price: To encourage uptake, our client may offer discounts on the price point of coffee for customers purchasing with their reusable cups.

Non-financial downsides

• Product and service quality:
  • The quality or flavor of coffee may deteriorate if our baristas do not clean the reusable cups brought by customers properly.
  • The hygiene standards may also be put at risk given the dirty (i.e., not properly cleaned) cups may contact the counter equipment.

Our team anticipates that 30% of our client’s customers will begin using the reusable cups immediately.

You can also assume that our client is prepared to offer the reusable cups at $10, and the procurement cost of a reusable cup is $1. As mentioned earlier, let us assume that the procurement cost of disposable cups is negligible.

We also have the following information. How would you like to proceed?

• The population of the UK is 67M, 80% of which consume coffee outside the home regularly.
• Our client has a 30% market share, including in-store purchases and online orders.
• 90% of our client’s purchases are made in-store.

Our client has informed us that an average customer purchases 2 cups of coffee per week. You can also take 50 as the number of weeks in a year.

Our client charges $3 per cup of coffee on average.

Assuming fixed costs remain the same, we can look into the impact of this initiative on the annual gross profits. As discussed earlier, there are two main drivers which will impact the gross profits:

• Incremental sales of the reusable cups
• 5% discount to be provided to customers purchasing coffee with reusable cups

First, I would like to understand the impact of the first driver. Do we have information regarding the expected number of customers purchasing reusable cups, as well as gross margin per reusable cup?

Do we know how many cups of coffee an average customer purchases in a week?

Potential answers to question #5:

Some of the potential risks can be the following:

• How can we ensure a significant reusable cup uptake of 30%? Moreover, how can we convince them to pay a premium for sustainable packaging solutions?
• Can we find a reliable supplier who can provide reusable cups at the desired quality and on time?
• Do we expect our competition to follow a similar sustainable packaging solution strategy, or even undercut our price levels to capture our market share?

We recommend our client to launch the reusable cup initiative thanks to potential financial and non-financial upsides:

• From a financial perspective, we expect our client to increase their annual gross profits by ~$13M
• From a non-financial perspective, our client will be able to strengthen their brand image by following the sustainability trend. This may also allow us to increase our sustainability-driven customer base in the mid to long term.

Based on the risks we identified, as the next steps, the client needs to look into marketing solutions to ensure high customer uptake and engage with suppliers to ensure reliable, reusable cup supply.