Groundwork To Understanding Key Characteristics

Published Date: 02 Nov 2017

This report provides the groundwork to understanding key characteristics of the industry, such as the relevant environments and the nature of competitors’ goals and intents. In addition, Ya Kun’s potential positioning and strategy plans were also discussed, taking into account forecasting activities and examining the previous year’s income statement.

This is done through four consulting projects with each of them targeting a different area of analysis of the market that is material to Ya Kun.

In a nutshell, consulting assignments 1 focuses on industry analysis, defining what is the industry about, the impacting macro-environmental factors and the vital concerns that may potentially affect the marketing strategy and how this impact is likely to be.

Consulting assignment 2 focuses on competitors’ analysis, defining who are the competitors, the evaluation of their goals and the implications that arise as such.

On the other hand, consulting assignments 3 and 4 focuses on statistics that are of both past and future nature and its implications.

An in-depth analysis is made for each consulting assignment, which we would discuss the aforementioned points in the conversation and in relation to the approaches of advanced marketing concepts and applications.

Key characteristics of the industry

The industry in perspective is the Asian breakfast offerings, consisting of Kaya toast, traditional coffee/tea and soft boiled eggs. The main contenders in the industry consist of Toast-Box, Ya Kun and Killiney Kopitiam, with Ya Kun leading the market with the highest market share, followed by Toast-Box and subsequently Killiney Kopitiam.

Size of the market

The population size of Singapore was 5.31 million as at end-June 2012(SingStat 2012). This pool of population sets the potential market that Ya Kun could tap on. Ya Kun has gained much popularity among the locals for its toast and coffee prepared to perfection. Most Singaporeans would have known Ya Kun and patronize its stores at least once, especially when they grow up eating kaya toast as a breakfast staple.(Travelife 2013) Moreover, the market for Ya Kun is predicted to grow ,with the expansion of market for cafes by 2.8%, reaching a value of S$140.7 million in 2012. This trend is expected to continue with a growth rate of approximate 12.6% till 2016 (Euromonitor International 2012).

Growth potential

Ya Kun competes in a highly saturated F&B market with many food choices for consumers to choose from. In order to sustain growth, it is essential For Ya Kun to continue expanding its local outlets. (Yahya 2013) Establishing more outlets in the main shopping districts will help in increasing consumer awareness of Ya Kun (IE Singapore 2013). However, given Singapore’s small domestic market, any significant growth prospects would have to come from ventures abroad (AsiaOne 2010). Although Ya Kun has existing operations overseas, there is still much growth potential in untapped markets such as Malaysia, Thailand and Hong Kong. With growing appreciation for Asian flavours, the locals will be more receptive to try out Ya Kun’s menu offerings in their respective countries. (TradeArabia 2013). Moreover, with rising inflation and labour cost in emerging markets such as Thailand, Ya Kun is able to provide more competitively priced menu offerings as compared to previously since the gap for cost of production is now narrowed. (Lim 2013).Such competitive pricing will allow Ya Kun to penetrate overseas markets better.

Market segments and buying motives

Ya Kun’s key target market includes families and friends who generally prefer to bond or socialize over a cup of coffee/ tea or toast. This is evident from Ya Kun’s tagline: ‘’The toast the binds… Kinship, Friendship, Partnership." (Ya Kun 2013) One reason for frequenting Ya Kun is to relieve the nostalgic memories of the past and soak in its ambience with its traditional coffee and toast (Tan, et al., 2012).

Ya Kun has made efforts brandishing itself as a contemporary café with a touch of Chinese heritage to appeal to the younger consumers, especially young working adults (Yeo 2009). They seek to attract the younger generation by coming up with new offerings that are able to suit their tastes and preferences. This includes an assortment of palatable dips for toast and ice-blended drinks to cater to a larger group of consumers. (Infopedia 2010)

One reason for the patronization of working adults will be convenience since there are outlets island wide and are in close proximity between malls and offices. Ya Kun offers takeaway services which are essential since they generally have fast-paced and hectic schedules. (Tan, et al., 2012) Another reason may include Ya Kun offering an alternative to the expensive gourmet coffee such as Starbucks or a cup of coffee sold at a hawker centre to satisfy their cravings for a dosage of caffeine (Huang 2010).

Factors affecting growth of market

The penetration of coffee drinking culture in Singapore has consumers continually seek for authentic high-quality brewed coffee. Such high demand have attracted many manufacturers and specialty coffee shops to introduce new versions of quality coffee that would inevitably compete for the same consumer base that Ya Kun seeks to attract. However, Ya Kun takes a step further and been working closely with organizations such as Singapore Tourism Board (STB) to attract a larger consumer base that includes tourists to Singapore. Such collaboration with reputable organizations, either local or overseas, helps Ya Kun to extend its market reach through enhancement of brand image and positioning (IE Singapore 2013)

The wide availability of other coffee substitutes, such as instant coffee, posed a huge threat to Ya Kun. Although the market for coffee in Singapore is promising, instant coffee has a significant market size in Singapore and the trend is set to grow. (Euromonitor International 2012) With consumers seeking for convenience, instant brew coffee products may instead be preferred as they can have it any time and any place. (Euromonitor International 2012) Even though Ya Kun also has its own instant coffee condiments, consumers may instead go for Nestlé or Super quality coffee products that are retailed in island wide supermarkets for convenience. (Euromonitor International 2012) The younger age group consumers may not associate with Ya Kun well and may instead also opt for national brands that are mentioned above since they are familiar with them. (Euromonitor International 2012) As such, Ya Kun needs to do more to extend its appeal to the younger age group consumers while still maintaining its existing customer base.

The trends of consumer spending in its existing overseas operations and potential investment destinations are important in fuelling the growth for Ya Kun. This is especially so when overseas operations account for one third of Ya Kun’s revenue. (Toh 2012) Rising disposable income and consumption trends in ASEAN counties have transformed consumers’ purchase with increased receptiveness to try out new food choices. (OCBC 2011) Such trends have aided in the popularity of Ya Kun’s products In fact, Ya Kun’s very own kaya jam condiments will soon line supermarket shelves in South Korea. (Lim 2013) It is also necessary to predict the future consumer spending especially in economic downturns. Sales in Singapore for Ya Kun will not be significantly affected even during recession period since coffee or toasts are considered a dietary staple by locals. (Huang 2010) This may not be the case in other countries, such as Thailand as they would have different food culture altogether. As such, there is a need for Ya Kun to monitor the trends continually and strategize accordingly.

Key environmental factors and trends

Political-legal

Ya Kun is currently looking into extending its presence into overseas markets such as Asean countries, India, Australia and South Korea (AsiaOne 2012) However, venturing into overseas markets have its own risks and challenges. Take China for example, it is one of the most attractive investment destinations in the world due to its strong economic prospects and large population size. However, Ya Kun faces some potential risk should it establish operations in China. China’s complex food regulations and lack of enforcement by relevant departments have been a growing concern with rising cases of food scandals ranging from tainted milk to toxic take-away box. (Wikipedia 2013) Should these tainted supplies reach Ya Kun’s supply chain and threaten its customers’ welfare, Ya Kun faces the vulnerability of having its brand tarnished that it has painstakingly built over the decades.

Ya Kun also face difficulties in importing its coffee and Kaya condiments due to strict import regulations on food in certain countries (TheBusinessTimes 2007). But with increasing free trade agreements and support from government agency, the situation is set to improve as increasing exports can now pass through with no questions asked. (Kumar 2011)

Economic

The strong fundamentals of Singapore economy have allowed a 5% gross domestic product (GDP) growth in 2011. (Euromonitor International 2012) Such healthy economic growth helps to boost consumer confidence, increasing the likelihood of increased consumption expenditures (AmosWEB 2013) With Ya Kun commanding a price premium over its product offerings compared to the typical coffee shops, consumers are more willingly to spend more in enjoying the dining experience rather than trying to limit their expenditure. (Yeo 2009; Euromonitor International 2012).

Although Ya Kun has been faithfully sticking to just serving traditional coffee and toast, it eventually gave in to market pressures. Ya Kun started a pilot programme and expanded its menu offerings in one of its flagship outlets to include local delights such as Nasi Lemak and Mee Siam in order to cope with the labour crunch and expensive rental. (Toh 2012; Ya Kun 2013) The results turned out to be promising and the new menu would eventually be rolled out to the other outlets. Having a wider variety would now enable Ya Kun to widen its appeal and to attract consumers during lunch and dinner times where a full meal is preferred. (Toh 2012)

Social

Ya Kun should tap on the trend that Singaporeans are making conscious efforts to reduce the intake of unhealthy food (Euromonitor International 2012). This could include creating healthier options to cater to the changing taste and preferences. For example, local kaya manufacturer’s Fong Yit Kaya collaborated with Singapore Polytechnics to come up with a healthier version of Kaya, which was reportedly to be popular with consumers. (Singapore Polytechnic 2013) Ya Kun could emulate this approach and collaborate with the local institutions to come up with healthier version of their menu offerings to garner a greater appeal.

Singapore notably known as a food paradise has a wide assortment of cuisines and food outlets that caters to varying groups of consumers with different food preferences and budgets (Euromonitor International 2012). Dining out at hawkers is the most prominent trend due to its affordability and accessibility, with outlets all over Singapore. (Ang & Foo 2002) Although modern cafes are preferred by the younger generation and white-collar professionals, a large number of consumers still prefer to get their coffee beverages at hawker centres (Euromonitor International 2012). Therefore, a possible scenario for Ya Kun is to expand its outlets into hawker centres so as to provide for the more economical consumers and yet pay lower rentals.

Five forces impacting Ya Kun’s industry

Rivalry in the Industry

There is an existence of high rivalry among existing competitors with Ya Kun facing competition from well-established competitors such as Toast Box and Killiney Koptiam, which also offer similar menu items. Rivalry takes in many familiar forms such as price discounts with the use of certain cards by participating merchants, new product introductions or free drinks with purchase of a specific item.

Ya Kun differentiate itself from its counterparts by paralleling the brand with their signature kaya toast and coffee. However, Ya Kun faces challenges of attracting a steady stream of customers into its outlets other than the usual breakfast and midafternoon hours. Other competitors such as Wang Café and Killiney Koptiam have in fact widened their product offerings to include local delights that are distinctly part of Singapore culture such as Mee Rebus and Laksa. Such a strategy allows its competitors to reach out to a wider consumer base and higher spending per customer as more consumers patronize throughout the day, which will in turn competes for Ya Kun’s chain profitability (Poh 2008).

New entrants

The threat of entry of new entrants is high given the relatively low barriers to entry into the F&B industry. This is due to the relatively lower initial capital outlay or other necessary expertise or resources needed prior to startup as compared to other industries (Davis et al.2012). Barriers to entry include trademarks, trade secrets and copyright issues. Ya Kun practices sound intellectual property management to achieve what it has today. (WIPO 2012) This includes trade secrets such as its secret formula in Kaya spread and its traditional coffee. (Ya Kun, 2013) Though such product differentiation is present, it hardly posed a deterrent for new entrants as coming up with similar toast or coffee can be easily acquired or imitated. This is similar to the copyright issues that Ya Kun owns for its posters, which purposes are to portray and promote the nostalgia element of Ya Kun. Such ambience of bygone days is also easily parodied.

Buyer power

Consumers have low level of buyer power even though they may face little or no cost in switching places to eat due to a wide range of other alternatives to choose from. This includes Western style breakfast such as MacDonald’s and Chinese breakfast such as dim sum. Despite that, Ya Kun has managed to stay differentiated due to its strong heritage and branding. With its emphasis on quality consistency across all outlets, it continues to win the patronization of consumers (Kumar 2011) No individual consumers also purchase Ya Kun in huge volume or comprise high portion of Ya Kun’s sales.

Supplier Power

In Ya Kun’s context, suppliers may refer to those of eggs, ingredients for its Kaya, bread et cetera. These suppliers have low bargaining power as the number of sellers for such products is numerous. In addition, Ya Kun purchases its supplies in bulk quantities given its large scale of operations and are assumed to represent a large portion of the supplier’s sales. On the other hand, coffee suppliers may possess a considerable amount of power as they harvest high quality coffee beans which can only grow in certain areas in the world. (Spring 2007)

Substitutes

There is the threat of substitution to the traditional coffee and toast business of Ya Kun to other alternatives such as fast food and other types of food establishment as mentioned previously.

Although threats from fast food may exist, they do not pose a significant threat to the profitability for Ya Kun. Singaporeans are increasingly becoming more heath conscious and making conscious efforts to reduce the intake of unhealthy food such as fast food. Moreover, people would prefer and are used to the traditional Asian breakfast than a heavy western styled breakfast such as McDonald’s. Even though the demand for specialty coffee such as Starbucks or Coffee Beans has been increasingly popular, research has shown that majority of consumers prefer to patronize the affordable and familiar traditional cafes such as Ya Kun (Euromonitor International 2010).

Assessment of the strongest force

The threat of entry in F&B industry is believed to be the strongest force among the rest. Rather than the actual occurrence of new entrants, it is actually the threat of entry that will threaten to hurt Ya Kun’s profitability. New entrants put pressure on resources to compete as they seek to compete for their slice of the market. This is particularly so when new entrants, such as Toast Box leverage on existing resources from its parent company, BreadTalk Group Limited, to shake up competition in 2005.

With the threat of new entrants on top of existing competitors continuing to reinvent their menus and expand their outlets, it makes it increasingly difficult for Ya Kun to capture choice locations and market share.

Key issues arising from macroenvironment and industry analysis

Key macroenvironment/ industry issues facing Ya Kun

Likely trends or changes(future)

Possible marketing mix implications

Dilution of brand or watered down market positioning with a greater variety of menu offerings

The association of Ya Kun to its famous toast and coffee is weakened.

Place: Emphasis on the nostalgic concept of Ya Kun through new store furnishing

(the use of furniture & decorations previously used in the 1930s)

Product: Continue to innovate and come up with variations of toast and coffee to cater to changing taste & preferences and to include products that bring a nostalgic feeling

Increasing health consciousness of locals

Changing taste and preference for healthier food choices; locals may choose to drop Ya Kun if there are healthier alternatives available

Product: Ya Kun to take the lead in the reinvention of their menu to include healthier versions of their menu offerings ( e.g. Low fat Kaya or more fiber in their toast)

High rivalry with existing competitors

Consumers may switch to competitors if they perceive there is no difference between Ya Kun and theirs

Product: The use of social platforms to highlight the difference between Ya Kun’s menu offerings and its counterparts (for e.g., how the bread is toasted to bring out the taste; nutritional benefits, fun facts of its products )

Promotion: Introduce a system of reward points where one could redeem something upon accumulation of certain points(reward consumers for their patronization)

Competitors Analysis

This section identifies and analyses domestic brands that compete against Ya Kun Kaya Toast in the traditional local toast breakfast sector; serving Kaya toast accompanied by soft-boiled eggs and traditional tea or coffee.

Identifying Competitors

According to Euromonitior International statistics, Toast Box captures 7.5% of the brand shares of chained cafes in 2011 while Killiney Kopitiam holds on to 2.1%. This evidently shows that Toast Box and Killiney Kopitiam along with Ya Kun Kaya Toast are amongst the chained local cafes that play a significant presence in serving the traditional Chinese breakfast market (Euromonitor 2012). Our competitors are listed and categorized on two dimensions which are range of product offering and scale of operation.

Stand Alone Restaurant Chain Integrated Food Service Operator

Scale of Operation

Product Offering

Narrow Broad

Old Town White Coffee

Toast Box

Ya

Kun

Wang Cafe

Killiney Kopitiam

Scale of operation:

According to AsiaNews, Asia’s Coffee Culture, Killiney Kopitiam has 23 outlets in August 2010. With just 3 more outlets, Toast Box has a slightly larger scale of operation than the former. On the other hand, Ya Kun Kaya Toast has 35 outlets island wide and is to be considered as an integrated food service operator (Asianewsnet 2010).

Product Offering:

Killiney Kopitiam incorporated variety in their menu with local delights such as Mee Siam, Mee Rubus, Curry Chicken and Laksa while Toast Box expanded their menu beyond the former two by introducing zesty drinks such as bubble tea and western pastries such as cakes and muffins (Toast Box 2012). On the other hand, Ya Kun Kaya Toast only ventured about its regular toasts menu.

Competitors’ Objectives

Relevant importance placed by competitors (as indicated by the number of ( ) :

Objectives

Killiney Kopitiam

Toast Box

Brand Share Growth

(as seen in Fig 2.1)

Shrank from 2.3% in 2008 to 2.1% in 2011

Grew from 5.2% in 2008 to 7.2% in 2011

Technological Leadership

Introduced new collection method

Offers free Wi-Fi for customers (EUROMONITOR2010)

Service Leadership

Feedback and enquiries can only be done either by phone or email. There is an obvious absence of social media presence.

Extensive efforts placed on having a strong presence in social media platforms can be seen from the constant updates on Facebook and Twitter. Its Facebook page which frequently updates its fans on its promotions and deals has garnered 3811 likes.

Fig 2.1: Brand Shares (%) - Euromonitor

Killiney Kopitiam - Objective: Customer orientated

It appears to be a less aggressive player in the industry as it focuses on building its brand equity and customer satisfaction so as to maintain or increase their sales revenue.

Toast Box - Objective: Growth and Profitability

Toast Box, on the other hand, is an aggressive player despite being a latecomer as they embarked on various platforms to reach out effectively to the consumer which is evident from the huge jump on brand share growth (Fig 2.1). Apart from expanding rapidly by increasing the number of outlets, they also injected technological advances into the stores and implemented various social media interaction to capture more consumer dollars and ensure efficient interaction with the customers.

Identifying competitors’ competitive strategies

Killiney Kopitiam

Middle-of-the-roaders: Differentiation and Cost Leadership Strategy

Differentiation based on ingredients

Killiney Kopitiam emphasizes on the quality of the ingredients that go into the making of the breakfast set. Firstly, the bread it uses is produced exclusively by their own factory. Secondly, the bread is ‘custom-made’ to be heavier than the ones selling in markets. Lastly, it uses fresh kaya as it is being made daily in all shops. Through this, Killiney Kopitiam is able to present itself as a maker of quality toast who takes time to care about the process (Killiney Kopitiam 2007).

Differentiation based on selective distribution

It is often rooted in selective areas where "crowds in groups" can be found such as Singapore Tourism Board, SIA Sports Club, Mapletree Business City, Singapore Turf Club and Tanah Merah Ferry Terminal (Killiney Kopitiam 2007).

Cost Leadership

It is able to keep prices competitive by adopting a division of labour which allows it to hire low wages employees who may be untrained such as retirees. Its low reliance on managers who generally draw higher wages also helps to save labour costs.

Toast Box

Differentiation Strategy

Product differentiation

Its website communicates thick toasts as one of its signature food such as Peanut Butter Thick Toast and Ice Cream Thick Toast, other than Laksa and Curry Chicken. Toast Box’s use of thick toast instead of the regular bread toast slices creates a new offering to customers and with its extensive menu revolving its thick toast, these new offerings also offer a refreshing experience.

Innovator

A modernized approach to interior design for all outlets such as white paint and furniture signify classiness and interesting retro decorations infuse ‘fun, passion and vibrancy’ while retaining the feel of nostalgia (Toast Box 2012). This successfully creates a divergence in the approach of selling heritage, as opposed to Ya Kun and Killiney’s brown paint and furniture interior.

Workers in stores are dressed in exquisite Dutch clothings to fit into the store theme as opposed to the regular attire that servers wear in local kopitiams.

Customer experience

Toast Box stores are in prime and convenient locations like Marina Bay Sands and heartland malls and often located near to different brands under Breadtalk Group such as Food Republic or Breadtalk (Euromonitor 2012). This successfully delivers convenience and creates brand exposure to customers by placing themselves at high traffic places.

Collection method is a whole new experience as it gives customers vibrator tools that will light up and vibrate when their orders are ready for collection. This allows customers to wait in ease by going back to their seats without worrying having to miss their turn or call-out and the constant need to watch out for their numbers.

Strong marketing

It engaged in a wide range of marketing activities such as local film sponsorship; Ah Boys to Men (ASIAONE), Facebook group, Twitter account, cards promotion, in-store promotions like Sure-Win Scratch & Win and website updates on promotions. This helps to create great brand exposure and brand awareness on its target audience; the locals, especially by sponsoring local films.

Competitors’ market position

Market Leader – Toast Box

Toast Box has the largest brand shares of 7.5% in this sector and is known to be the market leader, as explained earlier in Part 3, it displayed aggressiveness through its new product introductions, heavy promotion and distribution coverage.

Product innovations: Extensive menu on its thick toasts

Consistent promotional support: Some highlights of the cards promotion will be NTUC Plus! Card Treats, NTU Economics Society Members Privilege, Passion Card and SAFRA Members Privilege

Dominance in advertising and sponsorship

Very focused on expanding demand by expanding its outlets rapidly as seen brand shares grew from 5.2% to 7.2% in 3 years

Market Follower – Killiney Kopitiam

It is the 2nd runner up possessing only 2.1% of brand share in 2012.

Low or no growth in brand share and remains to capture about 2% over a four year period

It is an imitator as it embarked on a small expansion of menu that includes local delights such as Mee Siam, Laksa and Curry Chicken to match Toast Box’s extensive offerings

It tries to win a modest share of new consumers by engaging in coupon promotions like Groupon deal; $15 for $30 cash voucher (Groupon) and deal.com.sg (Deal.com.sg) and, loyalty scheme of 5 stamps to get a free coffee at selected outlets so as to diffuse Toast Box card promotions’ attack

Assessing competitors’ strengths and weaknesses

Killiney Kopitiam

Strengths

Threat of substitutes: Able to adopt low pricing to against substitutes due to lower labour costs

Rivalry: Better edge in competing on price

Addition of local delights in the menus may be a distinctive advantage as more variety and choices is given when both boils down to the same core offering

Weaknesses:

Less aggressive marketing efforts directed to reach out to the audience; Facebook as the only social media platform

Limited financial capability as it is a family business ran by an entrepreneur who used his savings as a start-up (Spirit of Enterprise 2006)

Low service quality due to the hiring of lowly paid and unskilled workers

Toast Box

Strengths:

Threat of substitutes: Customers will form an attachment to its differentiating attribute, lower possibility they will switch to substitutes

Rivalry: Creates stronger brand loyalty through heavy marketing and huge exposure by putting themselves in high traffic areas.

Strong financial capability which is benefitted from BreadTalk Group which includes ‘sourcing and distribution network’ throughout the island (Euromonitor 2012).

Weaknesses:

Diluted feel of heritage with regards to Generation X as there is a divergence in the resemblance of a traditional Kopitiam.

Ya Kun’s position, strategy and respond

Ya Kun as Market Challenger

Ya Kun takes on the role of a Market Challenger by being the runner up in the market and its aggressiveness in gaining more market demand by expanding to 100 outlets in Singapore by 2015 (ASIAONE2012). (Asiaone 2012).

Ya Kun takes on a Cost Leadership Strategy

Retirees and housewives form the bulk of the Ya Kun’s workforce and by hiring these low wages workers, it is able to press down prices through savings in wages (ASIAONE2012). It also adopts penetration pricing strategy as seen it charges only $3.70 for its Kaya Toast set as opposed to $4.20 in Killiney Kopitiam and Toast Box (Asianewsnet 2010)

Implications for Ya Kun’s Competitive Strategies

Killiney Kopitiam

Killiney Kopitiam has similar financial background as Ya Kun; a limited financial capability as it is a family business and is founded by an entrepreneur. It should challenge Killiney Kopitiam as it is of same size and there are several weaknesses that Ya Kun can well capitalize on.

Toast Box

However, Ya Kun should avoid challenging Toast Box who is the market leader as it is a brand from a big organization with very sustainable financial backing. This is because, if they are to compete based on low price, it may face problem in trying to compete with Toast Box based on low price as the latter is able to hold out longer due to its great sourcing and distribution network in Singapore and a larger scale of operations to lower cost per unit. Most importantly, Toast Box gain an edge over low cost largely due to rental savings as larger space is taken, being alongside with Food Republic and Breadtalk.

Perceived Competitors Marketing Strategies and possible corresponding respond

Direct Competitors

Perceived strategy used by competitor

Ya Kun’s Response

Killiney Kopitiam

Expand its menu to adding local delights

Trying to gain more consumer dollars by launching promotions like coupon and deals that has the potential to attract Ya Kun’s existing customers

Ya Kun should launch a frontal attack since Killiney has relative limited financial ability and core offerings are poorly differentiated (kaya toast).

Offer higher quality of toast by using premium bread, butter and kaya.

Engage in more marketing activities such by devoting more marketing dollars to create more marketing expressions on Ya Kun.

Since Ya Kun has a larger scale of operation, it may want to launch a price cut due to its edge over costs. In addition, it should offer aggressive or better promotions and deals on similar platforms such as Groupon.

Toast Box

Heavy marketing activities such as local film sponsorship to enhance its brand positioning

Ya Kun should engage flanking defence which requires it to protect the more vulnerable area which is the retaining of existing customers that may be drawn away by Toast Box’s strong marketing activities.

As such, it should geared up for additional intensive marketing activities or create more brand exposure. In addition, it should also explore new product lines and introduce new products.

Forecasting Analysis

This section presents the forecast recommended for the sale of the Shophouse Pack.

Based on the records given, the results from various forecasting models are represented as below:

Forecasting Model

Criteria

Forecast for N = 9

MAD

Moving Averages

P = 2

8,065

1,492

P = 3

7,637

1,971

P = 4

7,195

2,459

P = 5

6,706

2,901

Moving Average Using Absolute Change

P = 2

9,780

314

P = 3

9,750

286

P = 4

9,788

385

P = 5

9,786

506

Exponential Smoothing

α = 0.2

5,486

2,883

α = 0.8

8,462

1,252

α = 0.9

8,630

1,140

Linear Regression

Y=1004.4X+668.93

9,709

143

Most Accurate Results Achieved by each model

The most accurate result we are able to achieve with each model is represented as below:

Forecasting Model

Criteria

Forecast for N = 9

MAD

Moving Averages

P = 2

8,065

1,492

Moving Average Using Absolute Change

P = 3

9,750

286

Exponential Smoothing

α = 0.9

8,630

1,140

Linear Regression

Y=1004.4X+668.93

9,709

143

Recommended Forecasting Model

Linear Regression

Base on the statistics above, the linear regression forecasting method has yield the lowest MAD the rest of the models. MAD reflects the deviation of sales from the forecast. Thus, the smaller the MAD, the more accurate the forecast is and the more reliable it is.

Furthermore, the data displayed a strong positive linear correlation. Thus, it is highly credible that the forecast will reflect the actual sales with high accuracy.

Both the moving average methods and the exponential smoothing method are not as suitable as a model to use as compare to the linear regression model. Moving average methods work best when the data display an irregular pattern or trend. Exponential smoothing is used when the sales portray seasonal or cyclical patterns where more weights are given to the periods nearer to the forecasting period. These patterns are not reflected on the data provided and because of the nature of the business, it is unlikely that Ya Kun’s business follows any seasonal and cyclical trend.

As a food service operator, Ya Kun’s demands are not greatly affected by external environment forces. Thus, sales are relatively stable (with little fluctuations) at an increasing rate.

Factors to Consider Before Finalising on Forecast

The above statistics are generated solely based on the data that Ya Kun has provided. The credibility of them largely extends only to the data. Therefore, Ya Kun should consider employing other forecasting methods to further support or otherwise, rejects our forecasts. The judgmental model is an alternative forecasting method that is based on judgments, opinions and probabilities. Ya Kun can seek advices of experts who are able to provide in-depth analysis of the market or gather opinions of the frontline staff to generate the forecast.

Financial Analysis

The Gross Margin%, Net Profit% and Stockturn rate are presented as below. Possible reasons of why Ya Kun results differ are also stated below.

Gross Profit %

Gross Margin % measures the relationship between net sales and cost of goods sold.

Gross Margin %: 68.08%

For each dollar that Ya Kun earns, $0.68 is used to cover the operating expense and profit

Possible reasons GM% higher than industry average of 58%

Lower cost of goods sold than industry average.

Lower returns and/or spoilage account.

Higher prices as compared to competitors resulting in higher net sales.

Net Profit %

Net Profit % is the net profit percentage is the ratio of after-tax profits to net sales

Net Profit % : 11.39%

The net income that Ya Kun keeps is 11.39% of the company's revenue.

Possible reasons NP% higher than industry average of 4%

Lower expenses as compared to industry average.

Stockturn Rate

Stockturn Rate is the ratio of a company's annual sales to its inventory

Stockturn Rate : 1.82 times

Possible reasons Stockturn rate is lower than industry average of 4 times per year.

High inventory levels

Poor sale resulting in excessive of inventory

Is difference in NP due to difference in GM?

If GM% was 58%, Gross Profit = 58% * 1800000

= $1,044,000

Therefore, Net Profit = $23,500

NP% = 1.31%

Yes, NP% was reduced significantly to 1.31%, below the 4% average when Gross Profit was reduced.

Risks of Stockturn rate being too high or too low

Too-High Stockturn Rate

Loss of sales due to lack of sufficient inventory should sales be increased by more than the calculated amount that can be sold before the next purchasing period.

Increased chances of delays to get inventory on time.

Must have sufficient revenue during each purchasing period.

Too-Low Stockturn Rate

Products deteriorate as they stock in warehouse.

Increased costs of holding the inventory due to excess inventory.

Break Even Analysis

Selling Price of gift pack: $15.30

Breakeven Point : 1638 Gift Packs

Breakeven Pont +Profit : 4225 Gift Packs

Net Profit % : 23.20%

Recommendations to Improve Profitability

Ya Kun can increase profitability through increasing sales and/or efficiency.

Ya Kun can increase sales by developing a market or entering a new market segment. For instance, Ya Kun can extend its products to include more types of traditional local delicacies such as Mee Pok or Wanton Mee to attract a wider range of consumers.

Ya Kun can increase efficiency by reducing on input costs. One way will be, to increase stockturn rate so as to reduce the holding cost required for inventory. Being one of the market leaders, economies of scale will exponentially aid Ya Kun in reducing its cost.

Ya Kun can increase efficiency by increasing output through better managing the marketing mix. Increase in promotions allows more awareness to be created. Having more distribution channels will allow Ya Kun products to reach more consumers.