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La Farine Bakery

Should They Open a New Bakery in North Nazimabad?

A Case Study Prepared by Aman U. Saiyed


Assistant Professor – Department of Accounting and Law
Institute of Business Administration, Karachi

Data for this study was gathered by:

Ali Yaqub
Faiza Altaf
S. M. Haider Raza Zaidi
S. M. Irtiza Zaidi

All of Class of Project Evaluation and Financing – Spring 2010

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Company Profile
The first La Farine - Oven Fresh bakery was established in September, 2007
aiming at providing quality bakery food products at premium prices to its
target market, which happens to be a small but growing segment of the
population. The owner, Khalid Shah opened this bakery after working as a
pastry chef for over 20 years in the kitchen of a 5 star hotel. He believed that
he could create a niche market by serving fresh and good quality bakery
products. The customers who like fresh bakery products are willing to pay
premium price for such products. He imported cooking and packing
equipment from Taiwan and hired qualified professionals. The basic products
provided by La Farine are snacks, cakes, desserts, biscuits and the traditional
bakery items like breads and loafs.

La Farine is a relatively new entrepreneurial startup in the niche segment for


premium quality baked items in Pakistan. Currently, the company stands at
the survival stage in line with the business growth model after two years of
operations, as it has proved the merit of its ideas and is now trying to venture
out into newer product lines and geographical markets. The company's
customer base is restricted in terms of the explicit geographical reach to
Karachi, where it has opened their first outlet in a posh locality over its two
year ago. The bakery in our view is serving a market gap created as a result
of the rising affluence of variety seeking consumers who are willing to pay a
higher price for select bakery goods. The company at present employs a
small workforce of twenty workers as food preparers, distributors and sellers
and is engaged in a policy of constant growth and innovation. This strategic
goal of the firm poses several organizing related dilemmas that have been
discussed in the subsequent sections of the report.

The owner has set ambitious goals. He intends to achieve the heights of
success that the market gaps in the hospitality and confectionery industries
offer but at the same time his business faces competition from already
established bakeries and the bakery shops being opened in the newly
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established supermarkets such as Makro and Metro. The business therefore,
needs a strong organizational function and very careful analysis of future
expansion plans to achieve its future goals.

Strategic Planning
It is imperative to define what La Farine is striving to do to in order to
correctly determine the issues it faces to procure and deploy its limited
resources. The vision of the firm is “to become a well established premium
food chain”. The emphasis here is to be on Established and Premium Food
Chain. The company has a strategic goal to become a vertically integrated
food chain. The founder owner of the chain lays great emphasis on the
maintenance of quality of the food products. At present, the company is at a
stage where it manufactures and sells the products on its own, i.e. only the
raw material procurement function is performed externally. In other words,
the firm is partially vertically integrated. The owners would like to bring the
process of raw material procurement to delivery of premium food products to
customers on a centrally organized and controlled basis. He thus intends to
keep the administrative costs at the minimum and standardization of the
products at the maximum.

Industry Overview

There are a number of bakeries in almost every small or large neighborhood


in Karachi that are fulfilling the needs of the people in that area. La Farine is a
boutique bakery that provides oven fresh products made right in front of the
eyes of the customers. Their main competitor in the market is a new entrant
and is located at two places in Karachi. La Farine plans to open two more
outlets within a span of two years to maximize revenues and achieve
economies of scale in its operations. The industry is widely untapped and
there are great opportunities for the company to expand. Karachi is a
cosmopolitan city with diversified markets and needs of people. By gaining a
large market share and providing quality service the bakery can create
customer loyalty and make it a barrier to entry for other aspirants.

Production/Work Flow

The raw material is acquired from several sources and semi-finished products
are made at the kitchen facilities at the Korangi Industrial Area. The
production area is approximately 1,000 square feet that holds 15 machines of
different types that have been imported from Taiwan. The equipment is state
of the art, which results in the firm delivering consistent high quality products
with maximum efficiency. The owner supervises a staff of cooks, kitchen
assistants, packers and distributors with the help of his son who is currently
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studying towards a degree in Bachelors degree in business administration.
The products are completed at the outlet just before they are needed. This
work flow makes it possible for the bakery to deliver high quality fresh
products on time.

Cooking Equipment

The cooking equipment has been imported from a kitchen equipment


manufacturer by the name of Chanmag (Pvt.) Ltd. This company is renowned
worldwide for its kitchen equipments and cooking ware. The equipment is
state of the art and comprises of ovens, refrigerators, dough machines, ice
making machines and cooking plates and counters. The equipment can easily
handle the load of ten bakeries at a time. At present only one bakery is being
served, in future the equipment will be sufficient for expansion plans. Other
equipment has been bought from Kold Kraft Engineering, a renowned name
in the field of kitchen equipment products. The equipment is efficient and
reduces the amount of wastages present in a process. Special care is taken
from the start to the end of the production process.

Raw Material Procurement and Inventory


Raw material inventory is bought periodically and is kept in two store rooms.
Some inventory is imported through different suppliers and delivered at the
kitchen facility in Korangi Industrial Area. The local products are bought from
Makro-Habib and any small amounts from local supermarkets. The whole
inventory acquiring process is systematic and properly organized to minimize
wastages and inappropriate buying. Receipts are issued and produced to the
accountant, who makes the entries on a daily basis. Random checking is done
by the store in charge to check any discrepancy in the inventory available in
the store. The procurement process is standardized so that the managers are
able to control for and manage the procurement process.

Delivery / Catering

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The dough and other main ingredients are made at the kitchen facility at
Korangi and then transported in refrigerated trucks to the outlet. Through the
delivery process special care is taken so that the products are not
contaminated by unhygienic air or melting. The refrigerated truck has been
customized keeping in view the needs of the bakery and its products.
Delivery is on time and made twice everyday so that the customers always
get high quality and fresh products.

In-house Production Facility

As mentioned earlier, semi finished goods are transported to the bakery, and
it is then further processed in the production facility inside the bakery. This
ensures continuous availability of fresh goods. The kitchen in the bakery is
200 sq. ft. It has two state of the art machines that handle the final cooking of
the goods. Goods like pizza are made to order, while loaves, muffins and
sandwiches are made on a daily basis. The supervisor at the shop is a trained
cook who prepares the fresh products at the bakery.

The Bakery's Location


The retail outlet is located at Sharfabad, Karachi. It is a prime location and
is frequented by many people daily. At the corner of a shopping center and
near a residential area, the bakery fulfills the needs of people in search of
snacks and bakery items. The outlet was chosen because the area is
occupied by affluent people who are mostly businessmen and women and
serve as the right target market for such a boutique bakery. The property
prices are high in the area, but bakery requires a small area to operate, so
it fits well within the budget. Another option for the location was around
Tariq Road, but it was rejected because it the area is basically commercial
and already has many snack and fast food places. Khalid Shah preferred a
location that was amidst a residential area. The business hours for the
outlet are from 10 am to 11 pm on weekdays and 8 am to 12 pm on
weekends. The main kitchen facility in Korangi operates from 8 am to 6

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pm daily, during which the semi-finished products are made and delivered
to the outlet for sales.

Project Profile
The proposed project is to set up a new outlet of La Farine bakery. The
proposed location is at 5 Star Chowrangi, North Nazimabad. Major
products sold at this location would be cakes, snacks, sweets and nimko,
biscuits, bread and general items. All the products including breads, rusk
and other breakfast items will be produced at the production facility of La
Farine situated at Korangi Industrial Area. The new outlet will be supplied
from the same production facility. However it will require certain additional
machinery and labor to fulfill the demand of the new outlet.

Project Capacity and Rationale

Project capacity cannot be based on machinery capacity, as the same oven will be having dif
capacities for different products. This business segment is labor intensive. The proposed bak
outlet will be working from 6.00-am morning to 12.00 midnight. These outlets determine
the factory timings for production. It is proposed that now 2 shifts are necessary for producti
The interesting fact is that these two shifts include only 3 or 4 pure working hours. Number o
working days has been taken as 365 with average 2 shifts per day. Initial capacity of the ba
is calculated on the basis of total expected sales of items. Maximum sales are expected in fe
months and in winter or spring seasons. However, in order to calculate average monthly sale
potential revenue is estimated by using the potential demand estimates.

Project Investment

Total cost of the project is as follows:

Head Percentage Amount


Advance Rent – One Year 600,000
Civil Works 1,500,000
Plant and Machinery 450,000
Furniture, Fixture and Office Equipment 700,000
Motor Vehicle 550,000
Contingencies 5% 37,500
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Net Working Capital 750,000
Total Investment 4,587,500
Debt to Equity Ratio
Debt 40% 1,835,000
Equity 60% 2,752,500
Total Investment 4,587,500

The son (Wajid Shah) has come up with the following assumptions to
determine the feasibility of the project. He believes that based on their very
professional and congenial relationship with the bank manager, they can raise
Rs. 1,835,000 loan. Because of the robust cash flow from the proposed new
bakery they expect to pay off the loan at the end of the second year of
operation.

Operating Assumptions
Number of working days in one year 365
Number of working hours in one day 8
Number of hours the outlet stays open 16
Sale, sale price, and cost growth rate per 10%
year
Contingencies 5%
Wages and salaries growth rate per year 5%

Financial Assumptions
Debt to equity ratio 40:60
Debt interest rate 15%
Depreciation – Straight line 20%
Income tax rate 30%

The owner, who has experience as a pastry chef in a five star hotel believes
that the raw material costs are directly tied to the items produced. He has
been producing bakery items for the Sharfabad outlet and he used the same
estimates for sale price and raw material costs for the proposed bakery. He
estimates that the North Nazimabad neighborhood is home to a prosperous
community and he can sell the estimated bakery items there. Still, while
talking to Wajid Shah he mentioned the fact that he was getting an average of
30% return on his investment from the Sharfabad bakery, the new outlet at
least ought to give him similar return.

After talking to his father and gathering information from the accountant,
Wajid Shah has compiled the following estimated sale prices, quantities to be
sold and the relative costs and expenses for the proposed outlet in North
Nazimabad:

Annual Sales
Item Quantity Sold Average Price Total Amount
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Fresh cream 5,000 200 1,000,000
cake
Fresh pastries 9,000 25 225,000
Bread 5,500 25 137,500
Dry cakes 3,000 65 195,000
Snacks 55,000 25 1,375,000
Sweets and 10,000 100 1,000,000
Nimco
Biscuits 2,000 250 500,000
Total 4,432,500

Raw Materials
Item Percentage of Average Cost Total Amount
Sale Price
Fresh cream 30% 60 300,000
cake
Fresh pastries 30% 7.5 67,500
Bread 35% 8.75 48,125
Dry cakes 30% 19.5 58,500
Snacks 25% 6.25 343,750
Sweets and 25% 25 250,000
Nimco
Biscuits 20% 50 100,000
Total 1,167,875

Operating Expenses
Number Per Month
Salaries:
Cashier 1 8,000
Supervisor 1 16,000
Salesmen 2 8,000
Sweeper 1 3,000
Security guard 1 5,500
Driver 1 7,000
Other:
Rent * 50,000
Utilities 36,000

*The initial rent contract is for five years. The contract can be extended with
mutual consent.

The Korangi kitchen facility is currently providing baking and distribution


facility to the Sharfabad outlet. It is a tightly controlled operation and the
owner supervises all aspects of operations and expenditure. He charges part
of the Korangi operation to the Sharfabad outlet as production overhead. Last
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year, the cost of providing production overhead was Rs. 600,000. Khalid Shah
thinks that his staff at the Korangi facility is underemployed. He can double
the production from this facility without incurring any additional fixed costs.

Below is the breakdown of production overhead incurred last year:

Production Overhead
Salaries and wages – Production 350,000
Salary - Accountant 90,000
Supplies, etc 10,000
Depreciation – Equipment and delivery 150,000
van
Total Production Overhead 600,000

Required:

1. Wajid Shah has collected the above information. He now wants to


prepare a project evaluation for his father. This evaluation will include pro
forma income statements and cash flow information for five years to help him
convince his father and the bank manager that the project is feasible.

2. He needs to show to his father that the evaluation tools used indicate
that the project is profitable and can be pursued.