You’re having lunch with an old friend from university, and she’s looking for some business advice. She is thinking of opening a coffee shop in Cambridge, England, a large university city an hour and a half away from London.
She sees potential in this business but wants your help in determining whether opening a coffee shop is a good idea.
What do you think?
Start any case by understanding the question you’re asked to solve. Ask your interviewer questions if you feel confused or need more information. We want you to succeed in your interviews!
Take the time (1-2 minutes) to think about how you would approach the problem. Always structure your thinking, and communicate your ideas with your interviewer.
Here are some sample questions to ask yourself:
- How big is the opportunity?
- How much does it cost to open a coffee shop?
- What is the shop’s go-to-market strategy?
Show example setup
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You show your proposed framework to your friend, and she really likes it! She’s especially interested in figuring out how big the market is to best estimate how much coffee she can sell. She knows the market probably includes commuters, visitors, etc., but for now, she wants you to focus on Cambridge residents alone.
How do you estimate the size of the market?
Two potential approaches come to mind when estimating market size:
- "Top-down" approach: Start with a large number (e.g. total relevant population) and progressively narrow down.
- "Bottom-up" approach: Start with a small number (e.g. average cups of coffee consumed per day) and progressively scale up.
After you show her the potential options for estimating market size, she wants you to approximate the market size using your framework. Assume that Cambridge has a population of 100,000 people and, on average, each drinks 1 cup of coffee per day.
*Note: When making assumptions about market size, there is no “right” or “wrong” answer. Base your estimations on your reasonable assumptions about the market.
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Now that you have the market size, your friend wants to gain a better understanding of how much coffee she would need to sell to break even in her first year.
How much coffee does she need to sell to break even in the first year?
Here is some additional information:
- Price per coffee = £3
- Cost to open shop = £245,610
- Cost to run shop each year = £163,740
- Cost per cup of coffee = £1
(Price * Quantity) - (Fixed costs + variable costs) = £0
Profit = £0
Revenue - Cost = £0
(3*Q) – (163,740 +245,610+ [1*Q]) = 0
2Q - 409,350 = 0
Q = 204,675 cups to breakeven
After running through the calculations, do you think it's reasonable for her to open up a coffee shop?
A good answer
Yes! Because there are 7,000,000 cups sold and the break-even point is 204,675 cups, which is ~3% of the market share, breaking even is achievable.
A better answer
A better answer would take into account how long it would take for her to recoup the cost to open the store and other considerations before proceeding.
Breaking even is achievable, but we’d want to understand more about our friend’s investment timeline. Depending on how many years she plans to run the store, it might be difficult to recoup the cost of opening it.
Other key questions she needs to think about before proceeding include:
What is CoffeeCo's go-to-market strategy?
How will the organization differentiate itself among its competitors?
Is there a dominant player that will make it difficult to win share?
Is the market full of smaller competitors that CoffeeCo could beat?