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Feasibility Study- Pastry Shop with Chocolate Production

1/3/07

TABLE OF CONTENTS

1 2 3 4

EXECUTIVE SUMMARY .............................................................................. 2 PROJECT DESCRIPTION............................................................................ 3 PRODUCT STRATEGY................................................................................ 3 DESCRIPTION OF PRODUCTION PROCESS ............................................ 4 4.1 4.2 CHOCOLATE PRODUCTION ......................................................................... 4 ICE CREAM PRODUCTION ........................................................................... 5

MARKET ANALYSIS: .................................................................................. 6 5.1 LOCAL MARKET......................................................................................... 6 5.2 CHOCOLATE CONSUMPTION IN LEBANON .................................................... 7 5.3 MAIN COMPETITION ................................................................................. 10 5.3.1 Chocolate factories ....................................................................... 10 5.3.2 French pastries ............................................................................. 10 5.4 TARGET MARKET .................................................................................... 11 5.4.1 Chocolate...................................................................................... 11 5.4.2 Pastry shop................................................................................... 12 5.4.3 Ice cream ...................................................................................... 12 5.5 SWOT ANALYSIS ................................................................................... 13 5.5.1 Strengths ...................................................................................... 13 5.5.2 Weaknesses ................................................................................. 14 5.5.3 Opportunities ................................................................................ 14 5.5.4 Threats.......................................................................................... 14

MARKETING PLAN.................................................................................... 15 6.1 6.2 6.3 PRICING................................................................................................. 15 SALES CHANNELS ................................................................................... 16 ADVERTISING AND PROMOTION ................................................................ 16 EQUIPMENT COSTS ................................................................................. 17 MAJOR ASSUMPTIONS ............................................................................. 18 PROJECTED INCOME STATEMENT ............................................................ 22 PROJECTED BALANCE SHEET .................................................................. 23 PROJECTED CASH FLOWS ....................................................................... 24 RATIO ANALYSIS: .................................................................................... 24 BREAK- EVEN ANALYSIS: ......................................................................... 25 SENSITIVITY ANALYSIS: ........................................................................... 27

FINANCIAL PLAN ...................................................................................... 17 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8

8 9

RECOMMENDATIONS AND KEY SUCCESS FACTORS ......................... 27 ECONOMIC IMPACT EVALUATION ......................................................... 28

Etudes et Consultations Economiques s.a.r.l.

Feasibility Study- Pastry Shop with Chocolate Production

1/3/07

1 Executive Summary
The proposed project consists in establishing a pastry shop shop in Bint Jbeil caza. The pastry shop will produce three categories of sweets: chocolate, ice cream, and French pastries. The pastry shop will have three major target markets. First, it will target restaurants, hotels and other pastry shops. The second aim consists in catering for special occasions such as weddings, births and religious events. Finally, there will be a kind of coffee shop where clients will be able to consume any product in-house. The targeted region is the Mohafaza of Nabatieh, which includes the cazas of Bint Jbeil, Hasbaya, Nabatieh and Majaayoun, and the city of Tyre. Based on our market study, we found that there are no chocolate factories in this region. However, the pastry shop will produce a variety of products in order to circumvent seasonality associated with specific products. The population in South Lebanon increases substantially during the summer, and the pastry shop will be able to seize this opportunity, by producing ice cream. The total investment amounts to $117,703; it includes equipment with a total value of $82,125, other fixed assets (fixtures, furniture, office equipment and computers) amounting to $19,000, and working capital needs of $16,578. The main financial assumptions take into consideration the socio-economic conditions in South Lebanon, and are, therefore, relatively conservative. There is a very important gap between the sales expected in the summer versus those expected during the nine other months. The projections are taken over a period of 5 years. We expect net income to be around $ 18,220 the first year and to reach $ 28,209 by the 5th year of production. The pastry shop will also be able to distribute dividends of $ 20,000 for the 2nd and the 3rd year, and of $ 40,000 for the 4th and the 5th year. The pastry shop provides an internal rate of return (IRR) of 30% for the 1st year and a payback period of 4.8 years. These results clearly show that this project is feasible and that it will provide satisfactory results to its shareholders. A worst-case scenario was developed assuming that sales would be 15% less than those expected. It gave an IRR of 10% and a payback period of 9 years. A best- case scenario was also developed considering that sales would be 10% higher than those we really expect. In this case, the IRR is of 39% and the payback period is of 3.8 years. According to our study, the project will provide good returns to the investors. More important, however, is the socio-economic impact of such a project. It will create 10 decent jobs with respectable wages. Moreover, the fact that certain

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Feasibility Study- Pastry Shop with Chocolate Production

1/3/07

jobs are reserved for women will contribute in women empowerment in a region where huge gaps subsist between male and female unemployment. Furthermore, the staff that needs specific skills will be thoroughly trained; as a result their output will have a concrete value added.

2 Project description
The aim of this project is to develop a pastry shop in the caza of Bint Jbeil. The pastry shop will have three different lines of products. 1. Chocolate production and decoration unit 2. Ice cream production unit 3. French pastry production The workshop will be divided into two main areas: On one hand, the kitchens and decoration area in which all the production process will take place, and on the other a seating area for customers.

3 Product strategy
The main strategic objective of the pastry shop will be to gain a substantive market share in the Mohafaza of Nabatieh, and eventually in the city of Tyre. The main objectives for the production unit are: To use good quality inputs To maintain quality control by enforcing strict hygiene standards on the personnel, Stress on the professionalism of the craft men and their value-added in the goods produced. Taking into consideration the seasonality associated with the consumption of certain products in pastry shops such as chocolate and ice cream, producing a diversity of sweets will allow the pastry shop to function all year round.

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Feasibility Study- Pastry Shop with Chocolate Production

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The main items that will be produced are:

Items Normally decorated chocolate Decorated chocolate for special occasions Natural ice cream French pastry shop (foret noire, blanche, fraisier) Puff pastry shop (croissant, mille feuilles, boules au chocolat) Cakes, muffins Petits fours Mary cream Coffee Fresh juice Canned juice, sodas

4 Description of production process


4.1 Chocolate production

The steps of production that will take place in the production unit are: Tempering: After mixing and grinding the chocolate mass is subjected to intensive mixing at high temperature. Tempering is a key part of chocolate production. It is a long and complex process, which requires great experience and skill. Tempering is necessary for the cocoa butter to obtain the most stable consistency.

Tempering Machine

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Feasibility Study- Pastry Shop with Chocolate Production

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Molding: After tempering, the chocolate is poured into heated moulds. At this stage, if the recipe requires it, various additives (for example, nuts) are put into the chocolate. After that, the chocolate is put into coolers. Then the moulds with the solid chocolate are upturned and shaken on to the conveyor. When the chocolate has cooled, the entire piece is cut into strips. These strips are then lifted, turned and cut again to create individual rectangular shaped chocolate pieces.

Rectangular shaped chocolate pieces

The untidy pieces at the side are removed Chocolate pieces are packed and decorated by hand. Each box is checked for both weight and perfection. Then a protective cushion is added. Each box is wrapped up and bow-tied by hand with ribbon. Packaging, decorating and labeling: The last stage in the manufacture of chocolate is its packaging and labeling. This stage of production is expected to mobilize around five craftsmen (or craftswomen) during special events who will decorate chocolate for presentation boxes and on special occasions.

4.2

Ice cream production

The basic steps in the manufacturing of ice cream are generally as follows: - Blending: The ingredients are selected based on the desired recipe, then the ingredients are weighed and blended together to produce what is known as the "ice cream mix". Blending requires rapid agitation to incorporate powders, and often high speed blenders are used. - Pasteurization: The mix is pasteurized. Pasteurization is the biological control point in the system, designed for the destruction of pathogenic bacteria. - Homogenization: The mix is also homogenized which forms the fat emulsion - Ageing: The mix is then aged for at least four hours and usually overnight. Aging improves whipping qualities of mix and body and texture of ice cream.

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Feasibility Study- Pastry Shop with Chocolate Production

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- Freezing and Hardening: Following mix processing, the mix is drawn into a flavor tank where any liquid flavors, fruit purees, or colors are added. -Hardening: After the particulates have been added, the ice cream is packaged and is placed into a blast freezer at -30 to -40 C where most of the remainder of the water is frozen.

5 Market Analysis:
5.1 Local market

The regions the project will cover include the Mohafaza of Nabatieh (cazas of Bint Jbeil, Marjaayoun, Nabatieh, and Hasbaya) and the city of Tyre. According to the most recent data, the population of these cazas is as follows: - Bint JbeilL: 77,840 - Tyr: 132,111 - Marjaayoun: 41,298 - Nabatieh: 92,363 - Hasbaya: 19,460 The population of South Lebanon varies greatly between winter and summer, for

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Feasibility Study- Pastry Shop with Chocolate Production

1/3/07

instance, in Bint Jbeil qaza, the population grows by 126% during these two seasons because expatriates and those who work in Lebanons major towns tend to spend summer in their villages. However, South Lebanons population in general and in Bint Jbeil specifically are among the poorest in Lebanon. Therefore the production must be able to combine good standards of quality and taste with prices that would be affordable to locals.

5.2

Chocolate consumption in Lebanon

An average Lebanese household spends around US$ 420 per month on food. The sharing-out of this budget is usually done as such: US$ 112 or 26.7% is spend on fruits and vegetables, US$ 49.7 or 11.8% is spent on cereals, US$ 85.4 or 20.3% is spent on dairy products, US$ 71.25 or 17% is spent on pastries, and US$ 25.6 or 6% is spent on honey.

Taking into consideration the harsh socio-economic condition in the region concerned, the average household in South Lebanon might spend less on food because the items bought are less expensive. Moreover, it is practically certain that the families concerned spend less than 17% of their food budget on pastries. Nevertheless, we consider that a chocolate factory and a pastry shop would still be a successful venture in Bint Jbeil, especially if the management is able to build a loyal and diverse clientele. The fact is that chocolate remains the preferred sweet to be offered and is perceived to be the most suitable, or appropriate gift to offer for special occasions. A study conducted in 1998 on a sample of 350 Lebanese persons from all age brackets, covering all the Lebanese territory, and from all social classes gave very interesting results concerning chocolate consumption in Lebanon. When asked whether or not they consumed chocolate, 317 respondents, or 90.7% of the sample answered positively.
Men Women Respondents % Respondents % Total 152 86.4% 165 94.8% 90.7% 24 13.6% 9 5.2% 9.3% 176 100% 174 100% 100%

Yes No Total

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Feasibility Study- Pastry Shop with Chocolate Production

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Chocolate consumption by sex


100% 80% 60% 40% 20% 0% Men Women Yes No Total

Moreover, the age structure of chocolate consumers shows that more than 90% of people aged below 40 years eat chocolate. The age bracket between 40 and 59 years old witnesses a decline in chocolate consumption, mainly due to the fact that it makes people get fatter, and because it increases diabetes and blood cholesterol. This declining trend is confirmed for respondents over 60 years old of whom only 63.6% consume chocolate.
10 to 18 19 to 24 25 to 39 40 to 59 >60 Resp. % Resp. % Resp. % Resp. % Resp. % 88 96.7 125 92.6 44 95.6 46 83.1 14 63.6 3 3.3 10 7.4 2 4.4 10 17.9 8 36.4 91 100 135 100 46 100 56 100 22 100

Yes No Total

chocolate consumption by age bracket


100 90 80 70 60 50 40 30 20 10 0 10 to 18 19 to 24 25 to 39 Yes No 40 to 59 >60

Finally, the distribution of consumption according to various kinds of chocolates

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Feasibility Study- Pastry Shop with Chocolate Production

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showed that 46% of people consume chocolate as small pieces offered, and that 42.3% consume it as chocolate cake, items that will be produced in the pastry shop.

The nature of chocolate consumed is as follows:


Number Bar 266 Small pieces 146 Chocolate cakes 134 Chocomax 108 Mousse au Chocolat 86 Hot chocolate 81 Others 12 % 84 46 42.3 34 27.1 25.5 2.8

Distribution of chocolate consumption according to type


90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Bar Small pieces Hot Chocolate Chocomax M ousse chocolate cake au Chocolat Others

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Feasibility Study- Pastry Shop with Chocolate Production

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5.3

Main competition

5.3.1 Chocolate factories

Chocolate producers in South Lebanon Name Location Mondiale Bnaafoul (caza of Saida) Daoud Bnaafoul (caza of Saida) La Roche Bnaafoul (caza of Saida)

Moreover, there is only one chocolate factory in Bint Jbeil caza, in Rmeich, and it produces sporadically, for special occasions only. The distribution of chocolate factories throughout South Lebanon is thus favorable to the establishment of such a production unit since the nearest competitors are located in the caza of Saida, which is outside the region targeted.

5.3.2 French pastries


Distribution of French pastries in South Lebanon Name Location Dallas Nabatieh Taeb Nabatieh Ganita Nabatieh Wehbeh Nabatieh El Razi Nabatieh Rahal Harouf, Nabatieh Abbas El Doueir, Nabatieh Bourgi Tyre El Rammal Tyre Gharanity Tyre Eblaoui Tyre El Badaoui Tyre El Chammas Tyre Beit el Kahweh Tyre El Nabil Tyre El Bohsali Tyre Krayyem Bint Jbeil, Harris

Although there are several French pastry shops in South Lebanon, the majority of them are outside the targeted region. In the caza of Bint Jbeil, there are 13 pastry shops but only one of them is a well-established one.

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5.4

Target market

The objective of the pastry shop is to reach three specific markets: First, the pastry shop will cater for events such as weddings and births, as well as private parties taking place in South Lebanon. Second, it will distribute to main pastries, restaurants and hotels in the region. Third, there will be a point of sale with a terrace linked to the production unit, in order to welcome directly customers.

5.4.1 Chocolate As was shown by the graphs above, chocolate is consumed by almost all people, with no difference between sexes, and there is a minor consumption difference between age brackets, except for people above 60. Moreover, we deducted from data about yearly chocolate consumption per person in European- Mediterranean countries that in Lebanon, per capita consumption should be around 2 kgs a year. Taking into consideration the socioeconomic realities in South Lebanon, we can assume that in this region, chocolate consumption does not exceed 0.75 kg per capita on a yearly basis. The regions the project would cover include the Mohafaza of Nabatieh and the city of Tyre.

Hasbaya Bint Jbeil Marjaayoun Nabatiyeh Mohafaza Nabatiyeh Tyre

Number of inhabitants 19,460 52,710 40,879 92,363 205,412 130,83

Total

235,495

Approximately 251,622 kgs of chocolate are consumed in the Mohafaza of Nabatiyeh and Tyre each year. Taking into consideration the fact that almost 46% of the chocolate eaten is of the small individual pieces, this leaves us with a potential market of 115,746 kgs per year. Our objective consists in being able to sell, on average, around twelve tons of decorated chocolate per year. Our aim is thus to capture 10.3% of chocolate consumption, and to sell, on average, 40 kgs of chocolate per day.

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5.4.2 Pastry shop Our target market for pastry shop is practically the same as for chocolate, however, the competition is somehow different. On one hand, the pastry shop could expect to sell relatively more pastries than chocolate, since there are very few direct substitutes to a piece of French pastry, whereas chocolate can be consumed in many different ways. On the other hand, the product that nevertheless competes with French pastry is the Arab sweets, which are more anchored in Southerners habits. One of the marketing goals of the pastry shop will therefore be to direct people to its products as more original and casual. Here again, the clients are classified in three groups: Other pastry shops, restaurants, hotels, supermarkets and groceries, to which the production unit will cater and deliver pastries. Customers that consume goods in the pastry shop Take-away pastries Moreover, one major advantage of French pastry over chocolate or ice cream is that its consumption is less constrained by seasonality factors than the other two products. Therefore, our expectation is that we could sell on average 50 pieces, as a start, throughout the targeted region on a daily basis. 5.4.3 Ice cream The growth in the number of residents and visitors in the summer season more than doubles in the South region, which offers important sales opportunities for ice cream. Moreover those who come back for the summer are usually better off than the regular inhabitants, their relatively higher purchasing power is beneficial for the whole region in general, and for the pastry shop in particular. Furthermore, the climate in South Lebanon is hot; the period of time during which ice cream is consumed is longer than the three months of June, July and August.

The pastry shop will produce three different types of ice cream:

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Natural ice cream produced from juice fruit such as orange, carrot, lemon, melon, prickly pear etc Moreover, the fruits would be bought from local production, hence creating a backward linkage and enhancing local farmers businesses. Italian ice cream production, which is done from fruit essence, such as strawberry, blueberries, etc Mary cream

Mary cream

Given the fact that the population increases considerably during the three months of June, July and August, we can safely assume that sales during each one of these months would be around 33 kgs per day. For the months of April, May, September and October when the climate is cooler and population is composed of regular inhabitants only, we assume that daily sales will be around 10 kgs per day. In this case, clients are classified along three main categories: Pastries, restaurants, hotels, supermarkets and groceries to which the production unit will cater and deliver ice cream. Particulars who want to buy relatively small quantities, 1 kg, for instance, for home consumption. Clients who will stay in the pastry shop and buy a cone or some scoops of ice cream.

5.5

SWOT Analysis

5.5.1 Strengths The pastry shop will offer high quality goods. A professional quality team will supervise the production; one of the major strengths will be the ability to build a solid and loyal relationship with both local customers (individuals, restaurants) and expatriates who might ask for western standards. The price per quality will be very attractive; the pastry shop will offer discounts to key clients.

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The production unit will produce a diversified range of products, which can help smooth out seasonality factors. There are a number of special occasions and holidays that the pastry shop could benefit from: Eid al Fitr Ramadan Eid al Adha Al Hejira Independence Day Christmas Easter Valentine First Communion Weddings Births Circumcisions

5.5.2 Weaknesses Inhabitants of rural areas, such as South Lebanon are more used to Arabic sweets than French pastries and may not consider these products as valid substitutes. Given that the majority of people have limited income, pastries and decorated chocolate might be considered a luxurious item. Although the range of products theoretically satisfies preferences at any time during the year, the caza is much less populated during the nine months outside the summer and therefore the profitability of the business will be squeezed during the off-season months. 5.5.3 Opportunities Labor, which is the main factor of production of decorated chocolate, is cheaper in Bint Jbeil than in major cities. Hence, the expected price difference between chocolate produced in Bint Jbeil and those in main cities could open up new opportunities to contract deals with chocolate distributors in Beirut or other cities. Another opportunity is possible by establishing contracts with clients such as hotels and restaurants. The pastry shop will take advantage of the fact that during the summer months the number of residents increases considerably, especially to sell ice cream. 5.5.4 Threats There is a risk that the turnover achieved does not reach expectations and

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therefore, the business would not be able to cover its operating expenses. In addition, there is a risk that the economic condition in the region does not improve, or even gets worse; this would definitely impede the profitability of the business.

6 Marketing plan
The pastry shop will capitalize on several advantages in order to build up a solid, loyal and diversified network of clients. It will therefore focus on the following objectives: Cleanness and high quality of inputs used, as well as high quality standards of production. Competitive pricing Attractive decorations for chocolates to please different tastes Delivery of chocolates, French pastries, and ice cream to various points of sales and pastry shops. Pricing

6.1

The prices the pastry shop will charge are determined by the standards of living of the targeted regions, by the production costs, and by the competition.

Pricing Rates 1kg of normally decorated chocolate $15 1kg of extra decorated chocolate $21 1kg of ice cream (natural) $7.3 1kg of ice cream (Italian) $9.5 French pastry (per piece, foret noire, blanche, fraisier) $0.7 French pastry (croissant, mille feuilles, boules au chocolat) $0.5 Cakes (muffin, cake, clair) $0.3 Sabls, petits fours (kg) $5.3 Mary cream $0.7 Coffee $0.3 Fresh juice $1.0 Canned juice, sodas $0.5

The pastry shop will offer differentiated pricing according to the quantities purchased by the customers. The price list above is applied for retail selling.

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6.2

Sales channels

The production unit will establish strategic alliances with the hotels, restaurants, supermarkets, municipalities and other key clients to be the exclusive distributor of sweets for special occasions. This requires good quality services including timely delivery, freshness of goods etc to be competitive in order to attract and retain a large base of clients. 6.3 Advertising and promotion

On the launching day, the pastry shop will organize an open cocktail party to invite key clients and the local residents to visit and taste the varieties to be offered. The production unit will allocate a budget of $4,000 for the first year on advertisement and $2,000 for subsequent years. The budget will cover brochures and posters to be displayed in the pastry shop. Brochures will be distributed to potential key clients including hotels, restaurants, and other pastry shops.

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7 Financial Plan
This section details the calculations, assumptions and methodology used as a basis for the projection of the expected financial performance of the pastry shop.

7.1

Equipment costs
Initial Investment Cost Items Refrigerated room Tempering machine for chocolate Shaker for chocolate Spoons for ice cream Marycream machine Mixer (pastry) Mixture slimmer Convection oven Oven for pastry baking Plates and trays Other small equipment (mainly decoration) Thermometer Moulds Pasteurizer Coffee machine Orange Juice squeezer Freezer Refrigerated pick-up Total equipment Other fixed assets Fittings & installations Furniture Office equip, computers, TV Total fixed assets Working capital needs Total initial investment Quantity 1 1 1 4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Unit cost Total cost 5,000 5,000 2,850 2,850 1,000 1,000 80 320 3,500 3,500 4,000 4,000 7,000 7,000 7,000 7,000 5,000 5,000 2,500 2,500 2,500 2,500 30 30 425 425 13,200 13,200 300 300 500 500 15,000 15,000 12,000 12,000 82,125

12,000 4,000 3,000 101,125 16,578 117,703

Source: Vresso, Jal-el-Dib Boulanges, Jal-el-Dib Samtec, Dekwaneh

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Beginning inventory Description Chocolate (Kg) Ingredients for ice cream (kg) Ingredients for french pastries (units) Puff pastry (units) Ingredients for cakes (units) Ingredients for petits fours (kg) Ingredients for Mary cream (units) Coffee (units) Fresh juice (units) Canned juice, sodas (units) Total beginning inventory

Quantity Unit cost ($) 615 5.00 495 3.33 525 0.35 525 0.25 525 0.17 225 2.13 750 0.09 500 0.33 225 0.33 1,500 0.27

Amount $3,075 $1,650 $184 $131 $88 $480 $70 $167 $75 $400 6,319

Source: Boulanges, Jal-el-Dib

The first table displays the costs of the equipments needed in order to produce the three kinds of sweets. The cost of the equipment directly related to production is of USD 82,125, it includes the refrigerated room, tempering machine, shaker for chocolate etc Other fixed assets include fittings and installations, furniture, and office equipment. The total cost of the project is evaluated at USD 117,703 including working capital needs and beginning inventories. The beginning inventory includes perishable raw material such as chocolate, ingredients for ice cream, for French pastries, for cakes and for fresh juice covering two weeks of sales on average. Other goods such as canned juice, sodas and coffee will cover about 1 month of sales. The beginning inventory amounts to $6,319.

7.2

Major assumptions

Sales assumptions are rather conservative and are based on a clear-sighted understanding of the socio-economic condition of the targeted region. Moreover, the proposed pricing of goods is based on market price levels in the region.

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The pastry shop will have various products to sell with the following pricing:

Items

Price ($) 1kg of normally decorated chocolate 15.0 1kg of extra decorated chocolate 21.0 1kg of ice cream (natural) 7.3 French pastry (per piece, foret noire, blanche, fraisier) 0.7 French pastry (croissant, mille feuilles, boules au choco)0.5 Cake (muffin, cake, clair) 0.3 Petits fours (kg) 5.3 Mary cream 0.7 Coffee 0.3 Fresh juice 0.7 Canned juice, sodas 0.5 The expected sales for one year are expected to be as follows:

Items
Normally decorated chocolate (kg) Extra decorated chocolate (Kg) Ice cream (kg) Mary cream (cones) Pastries (pcs) (all kinds) Petits fours (kg) Coffee Fresh juice Canned juice, sodas

Quantity
9,000 3,000 4,170 8,100 16,000 3,200 8,600 4,400 15,925

Because there exists a seasonality associated with the goods produced, and the region targeted is much more populated in summer than in winter, the assumptions are split in summer and winter season sales: 9,000 kgs of normally decorated chocolate with an average of 30 kgs per day for 300 days a year. 3,000 kgs of extra decorated chocolate with an average of 10 kgs per day for 300 days a year. 4,170 kgs of ice cream distributed as follows: 33 kgs per day for the 90 days of summer (June, July, and August), and 10 kgs per day for the months of April, May, September and October. 8,100 cones of Mary cream distributed as follows: 70 cones per day for the 90 days of summer, and an average of 20 cones per day for the 90 days that precede and follow the three summer months.

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Approximately 16,000 pieces of pastries will be sold annually with an average of 50 pieces per day over 320 days. Approximately 320 kgs of petits fours will be sold annually with an average of 10 kgs per day over 320 days. 8,600 cups of coffee are expected to be sold: 40 cups per day during 85 days in the summer and 20 cups per day for the remaining 260 days. As for fresh orange juice, it is estimated that 20 glasses will be sold daily during the 85 days of summer, and that only 10 glasses will be consumed daily for the remaining 270 days. Finally, it is estimated that 65 bottles of canned juice and sodas will be sold during the 85 days of summer and that 40 will be sold for the remaining 260 days.
Year 1 Year 2 5% Year 3 5% Year 4 2% Year 5 1%

Growth in sales

It is assumed that sales will increase by 5% during the 2nd and 3rd year of exercise, by 2% during the 4th, and at 1% during the 5th year. The following table shows the main assumptions for the income statement. It is assumed that general expenses will grow by 2% annually and maintenance expenses of equipment, fixtures and installations will increase by 2% annually. On the personnel side, wages are expected to increase by 2% annually and the income tax rate is 15%.
Income Statement Assumptions Annual increase in general expenses Maintenance expenses Annual increase in salaries Income Tax Rate

2% 2%of fixtures & installations 2%annually 15%

The following table shows the balance sheet assumptions:


Balance Sheet Assumptions Accounts Receivable Inventories Accounts payable Expenses payable

20%sales 0.5 month of consumables 10%of consumables 20%of general expenses

The depreciation rates used in the following table follow international accounting standards:
DEPRECIATION RATES Furniture Fixtures & installations Office equipment and computers Equipment

7.5% 7.5% 20% 10%

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The cost of rental of the pastry shop is shown below:


Pastry shop to be rented Pastry shop area in square meters Rental per square meter in USD Annual rent

250 10 2,500

Staff structure: Regarding the administrative staff, the pastry shop will hire a General Manager and a Marketing and Sales responsible with substantive skills, and a presentable and friendly salesperson. On the production side, the pastry shop will have a chef, a cook, and 5 craftswomen, which will receive a serious training in order to acquire the required skills. Staff selection and training is crucial; the team must be as efficient and motivated as possible in order to ensure high quality products and services.
STAFF STRUCTURE Number of employees Management & Sales Manager 1 Marketing & sales 1 Salesperson 1 Chef 1 Cook 1 Craft-women 5 TOTAL 10

Monthly Salaries 1,000 700 350 800 400 300 3,550

Total salaries 1,000 700 350 800 1,200 1,500 5,550

Total Monthly T NSSF Transport ransport Total 215 151 172 172 258 968 104 104 104 104 104 104 104 104 104 104 520 1,319 955 626 1,076 1,562 1,500 7,038

The total number of employees is 10 all year round. The monthly salaries including social security charges and transport are around USD 7,038.

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7.3

Projected Income Statement

The following income statement is based on expected market levels for revenues and costs.
PASTRY SHOP Projected Income Statement Decorated chocolate Extra decorated chocolate Ice cream Marycream Pastry Sabls, petits fours Coffee Fresh juice Canned juice, sodas Total Revenues Decorated chocolate Extra decorated chocolate Ice cream Mary cream Pastry Petits fours Coffee Fresh juice Canned juice, sodas Marketing expenses Salaries & wages-production Social Security Charges Transport-staff Total cost of sales Gross margin Gross profit margin% General & administrative expenses Rental expenses Utilities:Electricity,water,telephone Transport expenses Supplies Maintenance Salaries-Administrative Social Security Charges Transport-staff Other expenses Total General & Administrative Exp EBITDA Depreciation expenses Tax expenses Net Income Net profit Margin

Year 1 135,000 63,000 30,580 5,400 8,000 17,067 2,867 3,080 7,963 272,956 68,400 37,500 13,900 756 4,800 6,827 860 1,467 4,247 4,000 42,000 5,160 2,496 192,412 80,544 30% 2,500 1,920 3,840 3,000 1,643 24,600 6,450 3,744 2,000 49,697 30,847 9,413 3,215 18,220 7%

Year 2 5% 141,750 66,150 32,109 5,670 8,400 17,920 3,010 3,234 8,361 286,604 71,820 39,375 14,595 794 5,040 7,168 903 1,540 4,459 2,000 42,840 5,263 2,546 198,343 88,261 31% 2,500 1,958 4,032 3,150 1,675 25,092 6,579 3,819 2,040 50,846 37,415 9,413 4,200 23,802 8%

Year 3 5% 148,838 69,458 33,714 5,954 8,820 18,816 3,161 3,396 8,779 300,934 75,411 41,344 15,325 833 5,292 7,526 948 1,617 4,682 2,040 43,697 5,368 2,597 206,681 94,253 31% 2,500 1,998 4,234 3,308 1,709 25,594 6,711 3,895 2,081 52,028 42,225 9,413 4,922 27,891 9%

Year 4 2% 151,814 70,847 34,389 6,073 8,996 19,192 3,224 3,464 8,954 306,952 76,919 42,171 15,631 850 5,398 7,677 967 1,649 4,776 2,081 44,571 5,476 2,649 210,814 96,138 31% 2,500 2,038 4,318 3,374 1,743 26,106 6,845 3,973 2,122 53,019 43,120 9,413 5,056 28,651 9%

Year 5 1% 153,332 71,555 34,733 6,133 9,086 19,384 3,256 3,498 9,044 310,022 77,688 42,592 15,788 859 5,452 7,754 977 1,666 4,823 2,122 45,462 5,585 2,702 213,470 96,552 31% 2,500 2,078 4,361 3,407 1,778 26,628 6,982 4,053 2,165 53,952 42,600 9,413 4,978 28,209 9%

The income statement shows reasonable income levels with average net income of $25,000 annually and an average net profit margin of 9%.

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7.4

Projected Balance Sheet

The balance sheet shows the projected assets and liabilities of the company.
PASTRY SHOP Projected Balance Sheet

Year 1

Year 2

Year 3

Year 4

Year 5

Cash & Equivalents Accounts Receivable Inventory Current Assets Fixtures & installations Equipment Furniture Office equip, computers, telecom Accumulated Depreciation Net Fixed Assets Total Assets Accounts payable Expenses payables Total Liabilities Invested Capital Retained Earnings Shareholders Equity Total Liab. & Shrholders Equity

5,417 54,591 8,017 68,025 12,000 82,125 4,000 3,000 9,413 91,713 159,737 13,876 9,939 23,815 117,703 18,220 135,923 159,737

16,578 57,321 8,264 82,163 12,000 82,125 4,000 3,000 18,825 82,300 164,463 14,569 10,169 24,739 117,703 22,022 139,725 164,463

31,633 60,187 8,612 100,431 12,000 82,125 4,000 3,000 28,238 72,888 173,319 15,298 10,406 25,703 117,703 29,913 147,616 173,319

28,825 61,390 8,784 98,999 12,000 82,125 4,000 3,000 37,650 63,475 162,474 15,604 10,604 26,208 117,703 18,564 136,267 162,474

26,065 62,004 8,895 96,964 12,000 82,125 4,000 3,000 47,063 54,063 151,026 15,760 10,790 26,550 117,703 6,773 124,476 151,026

Stat. Of Retained Earnings Begin. Retained Earnings Net income Dividends Paid Ending Retained Earnings

Year 1 18,220 18,220

Year 2 18,220 23,802 20,000 22,022

Year 3 22,022 27,891 20,000 29,913

Year 4 29,913 28,651 40,000 18,564

Year 5 18,564 28,209 40,000 6,773

The pastry shop is expected to start distributing dividends of $20,000 in year 2 and 3. In year 4 and 5 the company will be able to distribute dividends of $40,000.

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7.5

Projected Cash Flows

The following table shows the projected cash flows of the pastry shop.

PASTRY SHOP STATEMENT OF CASH FLOWS Net income Adjustments to reconcile net income to cash provided by operating activities Depreciation Changes in Working Capital Total Adjustments Cash provided by operating activities Cash Flow from Investing Activities Capital expenditures Investment in fixed assets Net cash used in investing activities Cash flow from financing activities Net Investment by owners Net borrowings & repayments of loans Dividends distributed Cash provided by financing activities Cash at beginning of year Changes in cash Cash at end of year

Year 1 18,220

Year 2 23,802

Year 3 27,891

Year 4 28,651

Year 5 28,209

9,413 (38,793) (29,381) (11,161)

9,413 (2,053) 7,359 31,162

9,413 (2,248) 7,164 35,055

9,413 (872) 8,541 37,192

9,413 (382) 9,031 37,240

(101,125) (101,125)

117,703 (20,000) (20,000) 5,417 11,162 16,578 (20,000) (20,000) 16,578 15,055 31,633 (40,000) (40,000) 31,633 (2,808) 28,825 (40,000) (40,000) 28,825 (2,760) 26,065

117,703 5,417 5,417

The projected cash flows shows the initial net investment in fixed assets and the net invested capital by the owners. The distributed dividends are shown starting in year 2. 7.6 Ratio analysis:

The following table shows the main financial ratios for the pastry shop.

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Ratio Analysis Current Ratio Return on Average Assets Total Assets Turnover: Sales / total assets Gross Profit Margin Operating Profit Margin Net Profit Margin Return On Average Equity=ROE Return on Investment = ROI

Year 1

Year 2

Year 3

Year 4

Year 5

2.86 11.4% 171% 30% 11% 7% 13% 15%

3.32 14.7% 174% 31% 13% 8% 17% 20%

3.91 16.5% 174% 31% 14% 9% 19% 24%

3.78 17.1% 189% 31% 14% 9% 20% 24%

3.65 18.0% 205% 31% 14% 9% 22% 24%

- The current ratio (obtained by dividing current assets by current liabilities), which indicates liquidity, is satisfactory in all years (levels over 2 are considered satisfactory). - The return on average assets increases over the years as the net income of the pastry shop increases. It shows that assets are used in an efficient way to generate returns. - The total assets turnover increases is very high in all years and is due to high levels of sales in comparison with the assets base. - The profitability margins are satisfactory in all years. - The return on average equity increases from 13% in year 1 to 22% in year 5, and is on average 18.4% over the 5 years. The return on investment is also satisfactory, it increases from 15% to 24% over the 5 years, and has an average of 21.5%. These are attractive return rates. The internal rate of return (IRR) is 30% and the payback period, which is the period necessary to pay back all the initial investment, is 4.8 years. 7.7 Break- even analysis:

The following table shows the minimum annual revenue levels needed for the pastry shop to break- even. Thus, an average of USD 200,000 per year is a minimum level of revenue for the pastry shop to stay in business.

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PASTRY SHOP BREAK-EVEN ANALYSIS

Year 1

Year 2

Year 3

Year 4

Year 5

Total Revenues Total Variable Costs Total Fixed Costs


Break-even revenues

272,956 192,412 59,109


200,315

286,604 198,343 60,258


195,673

300,934 206,681 61,441


196,169

306,952 210,814 62,431


199,331

310,022 213,470 63,365


203,459

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7.8

Sensitivity analysis:

A worst-case scenario is assumed whereby the level of sales would be 15% less than the level expected. This would yield an average net income of USD 6,831 instead of USD 25,355. Moreover, the internal rate of return would be of 10% instead of 30%. The payback period is 9 years in this case. A best-case scenario was also developed assuming that sales would be 10% higher than in the most likely scenario. In this case, average net income is $37,703. Moreover, the internal rate of return is 39% instead of 30%, and finally the payback period is 3.8 years instead of 4.8 years.
Worst-case Most likely Best-case Normally decorated chocolate (kg) 7,650 9,000 9,900 Extra decorated chocolate (Kg) 2,550 3,000 3,300 Ice cream (kg) 3,545 4,170 4,587 Mary cream (cones) 6,885 8,100 8,910 Pastries (pcs) (all kinds) 13,600 16,000 17,600 Petits fours (kg) 2,720 3,200 3,520 Coffee 7,310 8,600 9,460 Fresh juice 3,740 4,400 4,840 Canned juice, sodas 13,536 15,925 17,518
PASTRY SHOP

Average net income Average net profit margin Internal rate of return Payback period in years

6,831 3% 10% 9 years

25,355 9%

37,703 12%

30% 39% 4.8 years 3.8 years

8 Recommendations and key success factors


In order to achieve satisfactory results, there are some key success factors that should be highlighted: All the personnel of the pastry shop must be very qualified. The craft women, the chef, the cook and the sales person will receive all the necessary training in order to perform according to high standards. The managerial personnel and the chef will be selected according to their merits and previous experience. As a first stage the pastry shop should follow a policy of market penetration, trying to seize any opportunity in order to get a wide array of clients. The pastry shop will make full use of its marketing resources in order to market itself as a destination and as the most competent chocolate, ice

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cream and pastry shop producer in the region. After a certain period of functioning, the pastry shop would have acquired some key clients, on which it will focus as the primary target market. The pastry shop should try to differentiate itself from other French pastries building up on its main assets: quality, cleanness and affordable prices. Regarding the decorated chocolate, the manager should take into consideration the life cycle of certain models, and will make sure to introduce new models once the market for specific products has attained the maturity stage. The shop seating area ought to be as pleasant as possible, in order to attract visiting expatriates and tourists. Finally, let us stress one more time the importance of cleanness, high standards of production and good quality of inputs.

9 Economic impact evaluation


Establishing this pastry shop in the caza of Bint Jbeil will have several positive repercussions on the socio- economic state of the region: Building up such a craft shop will allow for an economic diversification in a region where agriculture and other low-skilled jobs are predominant. The pastry shop will create 10 full-time jobs; it will offer new career opportunities to young people, especially women in Bint Jbeil. These jobs will also contribute in restraining the migratory floods, which is draining Bint Jbeils most capable people to big cities and out of Lebanon. Creating jobs for women will empower them; it will help them to increase the household income in a very positive and comfortable way. Furthermore, the creation of these jobs will ensure to employees respectable wages and thus helps to lift up the standard of living of the concerned households. The production of pastries and especially of fresh juice has backward linkages that will be beneficial to the whole region, mainly through the use of fresh fruits, milk, and flour, produced in the area. Moreover, the training the employees will have received will equip them with valuable skills for future job opportunities. Finally, the pastry shop will be seen as a new attraction, and as one of the reasons to spend some additional time in Bint Jbeil.

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