After the Internet investment bubble burst, the original concept of easyInternetcaf? (eIc) was just not working out.
After the Internet investment bubble burst, the original concept of easyInternetcaf? (eIc) was just not working out. The management decided to retrench, closing and downsizing some of the original cafes. Their new philosophy was to franchise the operations. So far the company had created about 20 franchised cafes, mostly in Europe, with 5 in the New York City area. The company has established itself as the per-eminent internet caf? chain in Europe, but it has still not made a profit. Stelios, the CEO of the parent company is running out of patience, and if the losses are not stemmed soon, will pull the plug. He has given the company 9 month to start showing radical improvement. Currently, they were basically operating off the cuff, with no real operating plan for how to supply and open each new franchise. In order to address this problem, Roger Jones, Managing Director of eIc hired Raj Chopra, an MBA student from a highly regarded business school as an intern to analyze their current operations and provide a report on options for the future. Raj was an IT major during his undergraduate years, and saw this as a way to really combine his new skills from his MBA with his IT and internet knowledge.A brief history and background of easyGroupeasyInternetcaf? Ltd. (www.easyinternetcafe.com) was part of the easyGroup (www.easygroup.co.uk), founded and promoted by the well-renowned Greek entrepreneur Stelios Haji-Ioannou (www.stelios.com). Other companies in the group included easyJet, easyCar, easyCinema, easy.com, easyMoney and easyValue. He was also in the process of launching new companies such as easyBus, easyPizza, easyCruise, and easyDorm.Stelios called himself a serial entrepreneur. He acted as a venture capitalist, founding and funding his ideas, turning them into businesses with a long-term intent to take them public.Stelios, the son of a Greek shipping tycoon, joined his father?s shipping business after graduation. A few years later, he borrowed some money from his father and founded his first venture, Stelmar Tankers in 1992. He soon achieved success with this company and it was subsequently listed on New York Stock Exchange. Later, in 1995, he founded easyJet, the first company of easygroup. easyJet was a no-frills, low cost airline company. He took advantage of the high consumer prices charged by other airlines during that time and the recent deregulation of the airline industry in Europe. Soon easyJet grew to be the largest no-frills airline in Europe and was listed on London stock exchange in 2000. With an intention of extending the brand further, he formed the holding company easyGroup in 1998. Soon, other ventures followed. Building on his success with easyjet, he extended the ?easy? brand and founded his next venture easyInternetcaf? in 1999, with an aim to provide consumers access to the Internet at the lowest cost. He launched easyCar in 2000, a car rental company that provided car hire services at a very low cost. The same year also saw the launch of easyValue.com, offering impartial comparisons for online shopping and easy.com, a free email service. In 2001, easyMoney, offering credit card services was launched. And most recently, in 2003, he launched easyCinema, offering a no-frills, low cost 1st run movie theatre. All these companies were currently held under the umbrella company easyGroup and were all private companies, with the exception of easyJet which was the only publicly listed company in the group at the time.History and objectives of easyInternetcaf? Ltd. (eIc)With the exuberance of Internet boom of late 1990s and with forecasts of high growth in expected demand, Internet caf?s seemed to be a promising and profitable business. Applying the yield management model1 to this business seemed to strengthen the optimism, based on the assumption that offering very low prices would increase demand significantly. Thus, to capitalise on the potential, Stelios planned to set up a chain of Internet caf?s in 1999 and launched a new company, easyEverything. The name was later changed to easyInternetcaf? in October 2001. With his success with 1 For a more detailed discussion of yield management, see the case study by N. Kumar, ?easyJet ? The Web?s Favorite Airline?, August 8, 2000easyJet he wanted to take the yield management business model further. He invested several million pounds sterling in occupying high street locations in the heart of big cities in UK, Europe and U.S. with an expectation that such busy locations would attract higher traffic. He also installed a large number of PC terminals at every store, increasing the fixed cost base. Many other services were also offered, which required a staff commitment at every store. All these decisions involved heavy investments in the first few years, Store launches in initial years The first store was opened on 21st June 1999 at Victoria, London with 330 PCs at a single cafe2. More stores soon followed. (See Exhibit 1: Current eIc stores). The Friday after Thanksgiving saw the first store in the US open in Times Square, New York with 8002 PCs, which was the largest Internet caf? in the world to date1. In 2000, the operations spread to Continental Europe. The first store in Amsterdam opened with 6002 PCs, followed by other large stores in many cities across Europe with between 250 and 600 PCs each. The company received excellent support from the public, who visited these in hordes, even waiting in queues to enter the cafes. New store launches continued in 2000 all across Europe and the UK, In 2000, as a result of the dotcom boom and the huge store launches, eIc and Stelios earned many accolades for their innovation, marketing, use of technology and investments in large and attractive retail properties. For example: ?The new media marketer of the year? in March 2000 from Revolution magazine ?Retail Launch of the Year? at the ?Retail Week Awards 2000?, Networking Industry Award for 2000 - Most Innovative Use of Networking Products and Services, e-company of the year at the Future UK Internet Awards ceremony, the winner was chosen by the public, International Property Strategy and Development, Design, Innovation and Concept at the MAPIC awards in Cannes, France - one of the most prestigious awards ceremonies in the International Retail Real Estate sector. 2easyInternetcaf? Ltd. (2003) http://www.easyinternetcafe.comIn light of all these factors of the dotcom boom, high expectations of growth opportunities, growing the ?easy? brand image and public appeal, in May 2000 eIc received funding from Apax Partners and Hewlett Packard, together investing ?25 million into the venture. Losses During these years, from 1999 to 2002, easyInternetcaf? owned and operated all their own stores. Despite these accolades and fanfare, the high expectations of growth in demand and revenues did not materialise. The dotcom/internet bubble had deflated, as did the crowds of customers. As a result, eIc incurred cumulative losses of ?80- ?100 million over the period. Flaw identification and felt need for strategic change In 2003, with losses continuing to mount, eIc decided to radically revamp their operations. They realised that the high investments made by them were not justified in the Internet caf? business. The revenues required to break even were huge for each single location with 250-600 PC terminals to fill, and the possibility of achieving such high revenue levels were bleak. Consequently, in 2003, in order to eliminate the need for future investments in new stores, the strategy was changed. It was decided to appoint franchisees for the new stores and also, if possible, for the existing legacy stores (i.e. Company-owned stores). According to the new strategy, the franchisee would be required to bear the costs of the property and the hardware. It was hoped that these actions would reduce eIc?s drain on capital. Stelios and Roger also decided that smaller stores with 20 to 30 PCs was the way forward. A plan to create quick growth was to be implemented, with a goal of opening 10 stores per week over the next 2-3 years. The goal was to create Internet cafes that could be completely unmanned, with no staff required at any store aside from regular maintenance. Some members of the management team thought that it was important that every cafe looked the same, with common signage, furnishings and PCs, currently HP branded due to their venture capital investment.Back to Core competenceAs a result of the above process of strategic analysis & decision-making and the resultant strategic change, eIc decided to stick to their core competence and outsource all the non-core activities. Their core competence was thought to be the yield management business model applied to the Internet caf? business and the proprietary hardware and software to implement it. This core competence was supplemented by the ?easy? brand, which enjoyed excellent brand recognition in Europe and the UK. Logistics ? a bottleneck for scalability In order to achieve the goal of five-fold growth and a level of 10 stores openings per week, (this is the first that the reader has heard of these goals ? introduce before reference to them) the company had to be capable of handling the increased level of activity. Logistics had become one of the integral activities of eIc following the change in strategy and it also remained one of the few non-core operational activities remaining in direct control of the company. Logistics for eIc really meant supplying the stores with their initial assets, including all of the furniture and PCs. Under the new business model, eIc only needed to research and award franchises and deliver the equipment to the franchisees. All other activities, which were earlier undertaken by eIc, were now the responsibility of the franchisees. Since the company?s focus was also on opening numerous stores simultaneously, the logistics system needed to be robust, efficient, effective and flexible enough to cope with the increase in the level of activity and to enable smooth, easy and more importantly, a cost-effective logistics process for the provision of equipment to the franchisee. Roger perceived the current logistics system to be a drag on scalability, efficiency and a bottleneck for growth and the main reason for spiralling high costs and continuing losses. The Roger required an evaluation of the present system and intended to explore other alternative options that would make the system scalable at the lowest cost and still meet their needs.Organizing for ScalabilityRaj?s first major insight was that each store opening was really a ?project? in project management terms. There was a starting event that set the project in motion (with the signing of a franchise agreement, in most cases) and an ending point with the actual opening of the store. Some of these ?activities? were logistics-related while others were not. Starting with the non-logistical activities, Raj found that the negotiations, investigation and discussions with a potential franchisee could take days for a simple individual franchise to several months for some of the more complex deals that included multiple locations. However, the real process began once the franchise agreement was signed. If the franchisee did not already have space for the caf?, eIc would assist in recommendations with locations. The broadband internet connection had to be installed by the local telecoms supplier. This unfortunately could take several months, as one Italian franchisee found out to his dismay. Now armed with a more specific planning process, Raj suggested that the company should combine orders for equipment for stores opening within the same window of opportunity. This meant that the company could wait for several new store?s requests to come in, as long as the delay in ordering would not delay the project plan for any particular store. Economies from larger orders were significant in that unit cost could be kept low. This could now be combined with the logistics operations options discussed below.??
? *eIc will endeavor to keep the CVMs in stock due to the long lead time. Stores could not open with out the CVM as there would be no way to sell the internet time with out them. ? Note: This activity table does not take the lead times listed in Table 3 into effect. This is only related to the installation activities. Therefore, orders for the various components to be delivered on time need to be made in advance of the planned date by the amount of the lead time. Current Logistics Situation Raj's research calculated that if they continued using their current in-house method eIc would have to spend approximately ?1300 for all the logistics activities involved in opening a new store, not including the outbound transport to the franchisee. This figure included eIc labor costs of ?602 per store. All calculations were based on a forecast of opening 4 new franchises per week for the next 3 years. In other words, the total annual logistics costs (excluding outbound transport costs which were eventually billed to the franchisee) were approximately ?270,000, which included annual labor costs of ?125,250 (based on 208 stores opening per year). It was noted that if store openings were fewer, the labor costs were still considered to be fixed.Outbound transportation costs of eIc?s equipment to each franchisee was divided into 3 zones based on distance from the UK: ? Zone 1 - closest to UK (France, Spain, Netherlands) - ?300 per store ? Zone 2 - mid-range from UK (Poland, Czech, Finland) - ?450 per store ? Zone 3 ? farthest from UK (Greece, Turkey, Bulgaria) - ?750 per store. After his initial presentation, management wanted to look at ways to decrease this cost. Raj's next task was looking into viable alternatives. After a bit of reasearch, he found 4 alternatives. 2 were considered pure logistics service providers and 2 were categorized as integrated supply chain solution providers. UPS Global Logistics UPS required eIc to procure the equipment themselves and arrange with their suppliers to deliver it to UPS warehouse where UPS would consolidate the orders, configure the equipment, kit it together into a pallet and arrange for transportation to the franchisee. UPS would not provide billing services direct to the franchisee. eIc would still need to buy the equipment from the suppliers and take ownership of the goods, i.e. incur cost of capital. eIc would also need to pay a consolidated invoice for the outbound delivery charges to the franchisee locations and later collect these expenses from the franchisee. Because of the warehousing that UPS would provide, eIc's labor costs were estimated to decrease to ?477 per store. The total cost of implementing UPS proposal was ?1110 of which ?477 was eIc labor costs. Outbound transportation costs were estimated to be approximately 10% lower using the UPS contract. Exel Exel offered a similar services to UPS's, with the addition of supplier management services. They would need to appoint two dedicated personnel, a contracts manager and an administrator. Exel would manage the present stock of eIc, forecast store openings, manage purchase requirements, co-ordinate & manage delivery & returns, audit invoices, be a point of contact for franchisees and manage the whole account at a cost of ?57,000 p.a. (per annum) Exel would also arrange for the inbound logistics transport to a merge-in-transit location where all pallets would be kitted together and sent to the franchisee as a complete package. They would also provide configurationservices for the computer equipment. Like UPS, they would not bill the franchisee for the equipment and logistics costs. This arrangement would still require eIc to provide those activities. it was thought that even though Exel provided additional services, labor costs would remain similar to the proposal from UPS due to the need to still provide the billing services to the franchisee and first contact with the key suppliers. Total cost was estimated to be ?1,434 per store, of which ?957 was the logistics costs and ?477 eIc labor costs Again, outbound transportation costs were approximately 10% below current rates. Globalserve Globalserve provided complete IT supply chain services globally, including IT procurement, delivery and support solutions with various global IT suppliers and Value Added Resellers (VARs) in 260 countries. This would enable eIc to obtain economies of scale by consolidating their purchases with Globalserve and yet receive local delivery, payment facility (in local currencies) and support. Raj thought that this model seemed suitable for eIc as long as they were willing to change some of their suppliers which would enable them to agree on a global price for nearly all the equipment required. Globalserve would pass that order to the local VAR in the franchisee?s country. The VAR would deliver the products locally and collect the cost of equipment and delivery charges from franchisee directly. The VAR could also provide additional services at the franchisee?s discretion, such as configuration, store set-up support, etc. As the VAR would be in the country of franchisee, they would speak the same language and would understand the working practices of that country. This would enable eIc to devolve the management of the delivery and allied support services to the VAR, thus freeing the personnel of eIc to focus on the core activity of the company. Globalserve would charge a transaction fee of 3.25% and local reseller mark-up of 5% of the equipment purchase value for each transaction. There would also be a one-off cost for service set up amounting to ?10,000 (is this for the contract as a whole or for each franchise or each VAR ? unclear) and a ?2,000 set up cost per country wherever eIc wants this system. Since the CVM, spares, desks and signage would still be provided by eIc?s current suppliers, Globalserve would incorporate the suppliers of these itemsinto the system with only the 3.25% transaction fee. These items would be shipped directly from the supplier to the franchisee using Globalserve?s transportation services, bypassing the VAR in each country. As can be seen in Exhibit 2, the total basic cost (excl VAT) of equipment per store amounts to ?22,573. Fees would be charged at 3.25%. Subtracting out the items supplied to Globalserve by eIc?s current suppliers, the total value was ?19,933, which would be charged at the 5% reseller mark up fee. EIc currently had franchises in 10 countries, and without expanding to other countries, the total country set up costs would be ?20,000. It was also assumed that the country set up and the initial service set up fee of ?10,000 were to be amortised over a period of one year. Thus the cost per store would be:??
The only other costs are eIc staff costs, which were estimated to be reduced to ?381 per store. Thus, the total cost per store would be ?1,875 + ?381 = ?2,256. Ingram Micro Ingram Micro was the world?s largest B2B trade-only wholesale provider of technology products and services, including supply chain management. As opposed to Globalserve, which did not sell products itself but rather through its network of VARs, Ingram Micro would sell directly to eIc. In addition, Ingram Micro provided complete integrated solutions including procurement, warehousing, transportation, configuration, billing & payment collection facilities and returns management. Ingram Micro had relations with various large IT vendors for all IT products. They could also provide a billing & payment collection facility where they could bill the franchisee directly for the equipment and services, and even arrange leasing terms if required. For the moment, they could provide franchisee billing and payment collection facilities only in the UK, France, Sweden, Belgium and Spain. For supply to other countries it would be necessary for eIc to first collect the money from franchisee and then pay Ingram Microfor supply in those countries. Ingram Micro could also store the proprietory products for eIc in the UK and ship to European countries, as needed. Ingram earned a certain mark up percentage, for e.g. 3 to 4% for products they supply. If Ingram Micro was the procurement source for products, they would make their margin on the supply deal and effectively would not charge extra for warehousing, order management, stocking & kitting the standard IT products. Such an arrangement would eliminate most of the logistics costs of eIc. A monthly fee of ?1,500 would be charged and eIc would have to pay for the inbound transport and warehousing at a rate of approximately ?5 per pallet per week for the proprietary products like the CVM, etc. Total costs if products bought from Ingram Micro summarized in the following table:
The price of the computer equipment purchased from Ingram (including their mark-up) came out to be lower than existing supplier contracts by nearly 12%. Astonished at the low price, Raj checked again to make sure the offer was correct. Ingram's low delivery charges were correct, as long as eIc committed to buying their equipment from them. However, Raj realized that price alone should not be the only factor and thought about what other factors he should now add to his analysis. For comparison, Ingram also quoted for the same service, but using eIc current suppliers. In case of procuring equipment from elsewhere and not from Ingram Micro, they would charge 4% for standard IT products. In that case costs would be:? To summarize the Ingram bid: if Ingram supplied, stocked, configured, kit together, transported and collected payments on eIc's behalf, then the staff costs would be similar to that of Globalserve, i.e. ?381 for a total of ?560 (?179 logistics cost + 381 eIc labor cost). In the latter case, where Ingram provides the logistics services, but not procurement, the staff costs would be similar to other logistics companies (UPS and Exel) at ?477. Total costs for the second option would be ?1453 (?976 logistics cost + ?477 eIc labor cost). Armed with all of this information, Raj realized that he had to re-organize it so he could present it coherently to Roger. There was the ?project? nature of each opening linked with the logistics of supplying each new store in a timely basis. Finally, there was the choice of supplier and service provider. At this point, Raj was left to analyze the proposals and make his recommendation to the eIc management.?
?? Source: http://www.easyinternetcafe.com