Infusions Where Chocolate Meets Tea · 2012-07-27 · Sonoma Chocolatiers Business Plan Page 4...

Prepared by Financial Services Forum Consulting Group

College of Management

University of Massachusetts - Boston

Principal Investigator: Xingyuan Fei

Project Team Members:

Diana Kohlhagen, Pojaman Thasana-ekachit and Ying Zhao

Significant Contributor:

Yu Zhang

Project Supervisor:

Arindam Bandopadhyaya

Infusions – Where Chocolate Meets Tea

Business Name: Infusions

Address: 6988 McKinley

Sebastopol, CA 95472

Telephone: (707) 829 1181

E‐mail: [email protected]

mailto:[email protected]

Sonoma Chocolatiers Business Plan

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Table of Contents

Table of Contents............................................................................................................. 2

Executive Summary ......................................................................................................... 3

General Company Description .........................................................................................5

Products and Services.......................................................................................................8

Marketing Plan ................................................................................................................10

Management and Organization .........................................................................................16

Strategy and Implementation ... ........................................................................................18

Financial Plan ...................................................................................................................23

Appendix ..........................................................................................................................35

Disclaimer ........................................................................................................................37

References ........................................................................................................................38


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Executive Summary

Mission

Sonoma Chocolatiers’ goal is to provide the finest dark chocolate truffles, caramels, and

other chocolate delights available with the lowest environmental impact. The goal of

“Infusions Teahouse” is to provide premium teas and food in a relaxed and fun atmosphere,

with the lowest environmental impact.

Objectives

1. To produce and distribute fine dark chocolates to target markets in CA, OR, & WA, and

through the Internet.

2. To operate a successful tea café and chocolate shop in Sonoma County.

3. To have products in: high-end food markets, such as Whole Foods & Dean and

Delucca’s; gourmet cheese shops; wineries and wine shops; and in high-end B&Bs and

Inns.

4. To expand Internet sales of tea and chocolate.

5. To achieve sales of $5,000,000 in 2016.

6. To maintain an average gross margin of sixty percent.

7. To produce a reasonable net profit by June of 2013.

Keys to Success

Experienced Owners: David Gambill and Susan McCarn have years of experience in

these industries.

Product Quality: Sonoma Chocolatiers sells the finest organic teas and chocolates.

Excellent Customer Service: each customer is treated as an honored guest in “Infusions”.

Sonoma Chocolatiers has been voted as the best chocolatier in Sonoma County for the

last three years by the North Bay’s largest newspaper, The Bohemian.


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Sonoma Chocolatiers has added about two new wholesale customers a week for the last

year.

Highlights

Sonoma Chocolatiers, comprising of “Infusions Teahouse” and “Sonoma

Chocolatiers”, is a start-up in the Sebastopol area of Sonoma County, California. It is

a privately held corporation, managed by its owners, David Gambill and Susan

McCarn.

Sonoma Chocolatiers offers over 100 kinds of organic teas, tea wares, and light food,

and nearly 90 flavors of dark chocolates. Sonoma Chocolatiers has three main market

segments: Internet sales, sales to local upper-middle class residents, and sales to

tourists. “Infusions Teahouse” also serves business people in Sonoma County as a

place to hold meetings and conduct business away from a home office.

Sonoma Chocolatiers will expand both Internet sales and in-store sales to increase our

market share. Sonoma Chocolatiers aims to expand into Whole Foods stores and

other high-end retail outlets in the next year.

Sonoma Chocolatiers has competitive advantages over other competitors due to its

organic ingredients, environmental consideration, excellent reputation, and unusual

product quality and flavors.

Sonoma Chocolatiers projects a positive net profit in the year 2013 of $20,523.31,

with steadily increasing net income for the foreseeable future. Net profit is projected

to approach $550,000 in 2016.

Sonoma Chocolatiers is seeking two long-term small business loans provided by

“Slow Money” investors to finance its cash flows and expand the business size. The

first loan is $75,000. The second loan is $2,000,000.


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1.0 General Company Description

“Infusions Teahouse” in Sebastopol, CA, offers the largest selection of organic teas and

tisanes from San Francisco to Seattle; all the teas and herbal tisanes are certified organic and

are loose-leaf tea. The teas are sold in the Teahouse or via Internet. “Infusions Teahouse” is

a special place to explore the ancient traditions of tea alongside new tea rituals being created

every day. It is also a place where people can relax and reconnect. Accompanying tea

serving, Infusions offers a variety of light meals inspired by various tea cultures and baked

goods prepared in house. The food is local, seasonal, and organic.

“Sonoma Chocolatiers” produces chocolates in the chocolate kitchen built in the Teahouse.

The chocolates are hand-made in the heart of California's wine country. “Sonoma

Chocolatiers” sells premium handmade dark chocolates and truffles, and other indulgences

in the Teahouse or through the Internet. It wholesales: gourmet, handmade caramels; solid,

flavored chocolate Nibbles; chocolate-coated organic almonds dusted with cinnamon or

sugar; and small chocolate bars. The goal of “Sonoma Chocolatiers” is to provide the finest

dark chocolates available.

1.1 Company Ownership

As a privately held corporation in the State of California, ownership of Sonoma Chocolatiers

is that David Gambill and Susan McCarn own Sonoma Chocolatiers. There are no shares in

the public market.

1.2 Financial Data Summary

Sonoma Chocolatiers is seeking long-term small business loans provided by “Slow Money”

investors to finance its cash flows and expand the business size. “Slow Money” investors are

those investors who recognize that small businesses are the lifeblood of the economy and

look for two to three percent return rate on the investment. The first loan Sonoma


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Chocolatiers is trying to obtain is $75,000 and the second is $2,000,000. Sonoma

Chocolatiers plans to pay these loans back in full within 30 years, at a 2%-3% interest rate.

Figure 1: 2010 and 2011 Financial Data

Highlights:

Both the assets and loans increased in 2011.

The loans increased to provide capital needed to expand the business.

Sales increased 17% from $210k in 2010 to $244k in 2011. At the same time,

Sonoma Chocolatiers expanded staff, increased staff wages, and was still able to cut

expenses from 101% of income to 88% of income. The relative decline in expenses

resulted from focused efforts to cut waste and lower overall expenses.

The increase in salaries has allowed Sonoma Chocolatiers to attract and retain higher-

skilled staff. The skilled staff has significantly improved customer service in the

Teahouse and enabled the Teahouse to increase our customer base. More chocolate-

making staff has allowed Sonoma Chocolatiers to expand wholesale production and

to ensure a more reliable product supply for our wholesale customers.


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Figure 2: Projected Financial Data

Highlights:

Sales are projected to increase at 24-50% from year 2012.

Gross profit is expected to be 65% of sales.

Net income is increasing over years 2012 to 2016, and expected to become positive in

2013.

Our improved staff has significantly improved the profitability of the teahouse.


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2.0 Products and Services

Sonoma Chocolatiers specializes in finest organic teas and dark chocolates. Its full traditional

“teahouse” experience is complemented by an assortment of loose teas, tea wares, light

meals, and premium dark chocolates. The main goal is to provide the finest premium teas and

chocolates that have the lowest environmental impact to customers in a relaxed and fun

atmosphere.

Hundred kinds of tea

“Infusions Teahouse” offers well over hundred organic teas, which fall into five categories:

Black, Green, White, Oolong, and Puerh. All can further be categorized as scented or

blended. All teas come from the same plant, the Camellia sinensis. “Infusions Teahouse”

provides instructions on the best brewing temperature and time for each of its teas.

Chocolates

“Sonoma Chocolatiers” offers nearly fifty flavors of dark chocolate truffles, twenty kinds of

melt-in-your-mouth caramels, and thirteen other indulgences; it comes up with new

delicacies nearly every month. These products provide unique and bold flavor combinations

that offer new ways to enjoy chocolate, such as the Gold Medal-winning Rosemary Goat

Cheese truffle and Cinnamon Rose caramel. “Sonoma Chocolatiers” uses only Sharffen

Berger chocolate in all products. Their unique blends provide a strong, nuanced chocolate

flavor that lasts long on the tongue, without a bitter or dry after taste. To this end, “Sonoma

Chocolatiers” adds only organic, local and seasonal ingredients and makes all the products

by hand.

Tea Ware

“Infusions Teahouse” carries a wide selection of authentic and unique tea wares. The

“Teahouse” tries to provide the customers with the experience of tea, as it is experienced in


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the varying tea drinking cultures. “Infusions Teahouse” also carries the tools to perform

the ritual of tea drinking, in its many different forms.

Food

Sonoma Chocolatiers supplies savory and sweet light food. The food menu contains a variety

of light meals inspired by different tea cultures and baked goods prepared with tea. The

“Teahouse” is expanding their selection of gluten-free baked goods, which are the perfect

complements to tea. The vegetarian menu is made with organic and local ingredients.

“Infusions Teahouse” now serves an elegant high tea on the first and second weekends of

each month. The high tea menu includes traditional tea sandwiches, unique homemade soups,

fresh-baked scones with our own lemon curd, and unexpected sweets from our kitchen. The

menu changes every month.


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3.0 The Market

The Tea Market

The American tea market is growing rapidly. The tea industry has fared better than most

other industries during the past three years and 2010 has seen a dramatic increase in tea

imports up, over an estimated ten percent from 2009 to a new record of more than 274

pounds (TeaTrends). The American consumer’s concern for health has already had a

dramatic effect on the Food & Beverage Industry. Spurred by studies touting tea’s health

effects, and increasing familiarity with Asian and South Asian cuisine and its tea customs,

American consumers have been turning towards tea as a more original, more “natural”

affordable luxury. In addition, the cultural connection of tea with all things “civilized” has

made tea knowledge, including the choice of a favorite teahouse, a mark of sophistication

among many American middle class women. Clearly old and new consumers alike have

discovered all the benefits of tea consumption and continue to propel the beverage to new

levels of popularity.

The Chocolate Market

The chocolate segment accounts for the maximum share of the overall confectionery market

in the U.S. The inherent characteristic of this segment is that it is the most impulsive food

product. The demand for premium and dark chocolate has significantly expanded in recent

years and this growth is expected to continue. Dark chocolates are gaining popularity due to

the newly perceived healthiness. Studies have shown that dark chocolate has antioxidant

properties and may provide cardiovascular benefits. American’s appreciation of the fine

flavors of premium chocolate is also growing in the way that the appreciation of fine wine

grew in the 1970s through the 1990s. This growing appreciation for chocolate is significantly

fueling the growth in the premium chocolate market.

According to Packaged Facts, U.S. chocolate retail sales increased from $14.9 billion in 2003

to $17.3 billion in 2009; dark chocolate sales increased faster than the overall chocolate


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market. In 2011, chocolate sales are growing to $18 billion (Story of Chocolate). This growth

is attributed to the 75% of Americans who have purchased chocolate products since 2008 and

that people view chocolate as an affordable indulgence--price increases did not discourage

budget-conscious households from buying quality chocolate.

Sonoma Chocolatiers has adopted unique positioning to differentiate itself from other small

artisanal chocolatiers in the Sonoma County and other parts of the US. Their focus on

organic, artisanal, dark chocolate reflects the changing tastes and priorities of local residents

and tourists, and online consumers. All of these trends would lead Sonoma Chocolatiers to

greater success.

3.1 Market Segmentation and Size

Sonoma Chocolatiers’ current customers include:

Sonoma county residents who know the Teahouse as the most relaxed place to meet

and socialize.

Sonoma County and Bay area residents who are learning the reputation of Sonoma

Chocolatiers.

Western Sonoma County business people who want to work outside their office or

home.

Western Sonoma County residents who enjoy live music on weekend evenings.

Customers and retailers who buy teas and chocolates via Internet.

Wine tourists who want to add something special to their wine trips.

Almost 100 high-end retail outlets across Sonoma County, Marin County, the Santa

Cruz area, Davis, CA, and San Francisco. We have been picked up by two of the

toniest grocery markets chains in Marin County.

Western Sonoma County business people looking for a meeting space, especially

morning meetings.

Women from 35-60 for social meetings, especially in the mornings.


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More weekend music lovers through a more aggressive event planning campaign.

Locals

Sonoma County's population was estimated as 483,878 people in 2010, of which 7,379

people are living in the city of Sebastopol. Many people in Sonoma County are well

educated. Most of the current customers for the dark chocolates tend to be women, age

twenty-five or up, within the middle- to upper-income bracket. Sonoma Chocolatiers’ food

and tea selection and prices are upscale. From U.S. census data for local income levels, we

thus estimate that roughly two-thirds of Sonoma County’s residents have pre-existing brand

loyalties or economic constraints that would discourage them from visiting our teahouse. Our

local target market is therefore about 161,290 people.

Tourists

Sonoma County is the heart of California’s wine industry. Wine tourists tend to be educated,

high-end, and with middle to upper class incomes. Most wine tourists are looking for

something extra to add to the wine trip such as buying the finest organic chocolates. Sonoma

Chocolatiers benefits economically from tourist visits all year round, with our combination

of seasonal cultural events. There are about 7.4 million tourists a year in Sonoma County. We

estimate a potential market of at least 100,000 tourists annually for our business.

Internet Sales

Internet sale of teas and chocolates accounts for about 35% of the total sales. Internet sales

are more profitable because the marketing expenses are much lower and the buyers cover the

shipping costs. More importantly, 15% of the Internet sales revenue for the wholesale is

exempt from income taxes. Since Internet sales generate much higher profits, Sonoma

Chocolatiers is currently working on a marketing campaign that would expand their Internet

sales. As part of this campaign Sonoma Chocolatiers has redesigned its website and many

customers have commented that is very impressive. We have a social marketing campaign to

drive customers to the new website. We have redesigned a new tea website in February

2012.


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Figure 3: Market Segmentation and Size

3.2 Buying Patterns

The holiday season is the most important and profitable season for Sonoma Chocolatiers.

60%-80% of the annual chocolate sales occur around Thanksgiving, Christmas, New Year,

Valentine’s Day and Mother’s Day. During the holiday season, seventy-five percent of

chocolate are sold to the local residents. During the rest of the year, chocolate sales are split

fifty-fifty between the local residents and tourists.

3.3 Market Segment Strategy

Sonoma Chocolatiers provides the local middle-upper-class community with a place to

socialize, where they can indulge with fine teas and organic meals, and find unique

chocolates. For tourists, Sonoma Chocolatiers can be a destination stop in their tour of the

wine country. Their customers are willing to pay the price premium in exchange for the

higher quality, great taste, and sense of prestige they receive. In fact, higher prices for some

items may encourage higher sales - these kinds of customers eagerly accept the idea that

higher prices equal higher quality, and want to buy “only the best.”


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Sonoma Chocolatiers aims to expand both Internet sales and in-store sales to increase our

market share. For the Internet sales, Sonoma Chocolatiers will target middle and upper class

women by designing more educational and informative websites. In the local market,

Sonoma Chocolatiers is trying to get into high-end markets that focus on organic and healthy

foods. Our target customers include:

A number of wineries in Sonoma County that have expressed interest in our product

or that we have done business with. We will approach them to carry our products in

their tasting room. Late in 2011 we picked up Korbel winery; we added three major

wineries in a week alone—Benzinger and Chateau St. Jean in the Valley of the Moon

and Viansa in Sonoma Valley. We can only market to 2-4 wineries in any valley,

depending on the size of the valley. We want one more winery in Sonoma Valley, one

more in Valley of the Moon, 2-3 in Alexandria Valley, and 3 more in Dry Creek

Valley where we already work with Kachina Vineyards. Accordingly, this marketing

strategy is well on the way.

Whole Foods stores across the Bay area and Raley’s in parts of the Bay area.

Retail outlets in the highest-income town in the Healdsburg County.

High-end food and cheese outlets and renowned chocolate stores in San Francisco

and the East Bay that feature high-end chocolates. And within 2012, we will expand

our targets to high-end retail outlets.

Tea and dark chocolate lovers who like shopping through the Internet.

Middle- and upper-income West Sonoma County residents who work outside their

homes and need a place to hold 1-on-1 (or -2 or -3) business meetings.

30- to 60-year old women in Western Sonoma County.

Moreover, we have our Butts-on-seats campaign, which is gearing up to get more people in

the doors of the teahouse during the day, especially in the morning. If we can get 12 more

people a day to spend $5 each, our financial health will change radically. We are also

working on a social marketing campaign to do this, with rewards for current customers to


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bring in new clients, and rewards to new people who come in for the first time. We greatly

expanded our client base by using a coupon through Social Living in the fall. We’ll run

another coupon through them in February and March, 2012. We have also been revamping

our food menu to add variety to appeal to more people. Our new kale-&-quinoa salad has

become very popular. Our new house-made tamales and chocolate mole sauce have gotten

many compliments. Next we are adding a vegetarian tikka masala dish to replace the

samosas we can no longer obtain.

3.4 Competition

In the gourmet teahouse industry, competition depends on quality of teas and food,

knowledgeable tea tenders, excellent customer services, and cultivation and education of a

loyal customer base.

There are a few chocolatiers in the local market. The local competition for the most part is

from one chocolatier called Wine Country Chocolates that has been established since 2000.

Their products are sold at the retail stores, online and in local wineries. Since the sales of

winery are very seasonal, we intend to get into that market in only a select number of

wineries to help fill in for slow teahouse sales during the summer tourist season. The food

market that sells the most of our chocolates is just around the corner from the home store of

Wine Country Chocolates, and we just landed Benzinger Winery as a client, which is 5

blocks from Wine Country Chocolates.

Because Sonoma Chocolatiers is rapidly taking a larger percentage of the chocolate markets,

the competition will become less of an issue as our name recognition increases.


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4.0 Management and Organization

Sonoma Chocolatiers is a small company owned and operated by husband and wife David

Gambill and Susan McCarn. David, the Chief Chocolatier, had been making chocolates for

fun for over twenty years before making them professionally. Before being a chocolatier,

David worked in international environmental policy and conservation and helped

organizations with strategic and project planning. Susan was a psychotherapist in

Washington D.C. They started Sonoma Chocolatiers in February 2008. They have extensive

experience in strategic planning and in managing diverse staff; Susan had extensive

experience with tea before taking over the teahouse. They will leverage their knowledge of

tea and of planning and management to create success for Sonoma Chocolatiers.

Sonoma Chocolatiers’ management style reflects the participation of the owners. Sonoma

Chocolatiers is not hierarchical, and encourages all employees to learn as much as possible

about all aspects of the business. As a family business, the company respects its community

of co-workers, and will treat all workers well.

4.1 Personnel Plan

As in every business, Sonoma Chocolatiers’ success depends on our employees. All our

employees make well above minimum wage and we have a bonus program to reward staff

for excellent performance. As we grow, our priority will be to increase all employee salaries.

Although the company is too small to pay health insurance for all employees, we offer group

rates for a range of supplemental insurance options, such as critical care insurance and

income protection for all employees.

Typically, “Infusions Teahouse” has two people working full time. In late 2011 we added a

full-time dishwasher for five days a week to improve customer service; this change has

improved sales and customer retention. During seasonal holidays such as Christmas and

Valentines, we require four teahouse workers to meet the increased demand for chocolates.

We also have two part-time staff dedicated to producing our wholesale products and an


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Assistant Chief Chocolatier/Teahouse Manager, and a part-time, highly skilled chef who

helps make chocolates and create new savory dishes. A part-time pastry/entree cook makes

all our pastries and savory entrées.

The largest expense is salaries. A large part of the salary costs has been to train workers,

which is very expensive. Increasing salaries in late 2011 has greatly increased employee

retention and reduced training costs. Therefore, although sales revenues go up during the

holiday seasons, the expenses also increase accordingly.


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5.0 Strategy and Implementation

Sonoma Chocolatiers will combine local advertising with special events and targeted

promotions to introduce local residents and tourists to “Infusions Teahouse”, and to premium

teas and chocolates in general. Repeat sales depend on consistently high quality products and

service. Every ingredient we add to our chocolate is certified organic or grown organically.

Sonoma Chocolatiers also considers the environmental impact of their products. The packing

bags we use for chocolate covered nuts, bars, and Nibbles are made from recycled wood and

are compostable.

Sonoma Chocolatiers’ teas and chocolates are offered at a price premium that encourages

customers seeking high-quality goods. This not only enhances the feeling of prestige

customers get when patronizing the teahouse, but also ensures that customers will have

similar expectations of service and quality, based on their socio-economic class.

5.1 Competitive Edge

Key Competitive Strengths:

David’s lifetime of experience in fine dining and exploring new flavors in his own

cooking helps him develop unexpected and unique flavor combinations.

David’s many years of experience as a chocolate maker.

The ingredients for Sonoma Chocolatiers’ products are all organic.

Sonoma Chocolatiers has the best name recognition in the Sonoma County.

Sonoma Chocolatiers has products in almost all the high-end stores in the County.

Sonoma Chocolatiers is the only retailer offering such a wide array of premium

chocolates in the Sebastopol and West County area.

Sonoma Chocolatiers is committed to providing only high-quality products and services.

Competitive Weaknesses:


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Sonoma Chocolatiers’ primary weakness is that we are a new business competing against

established local stores and chains. To significantly build sales, Sonoma Chocolatiers must

not just find new customers – we must take customers away from existing competition and

from their coffee-drinking habits. We can accomplish this only by offering a superior

selection of teas and chocolates, and focusing on high-quality service and full service

delivery.

5.2 Marketing Strategy

Sonoma Chocolatiers’ marketing strategy needs to accomplish two things: first, to make

potential customers aware of Sonoma Chocolatiers’ business and location; second, to educate

potential customers as to why “Infusions” is so wonderful.

The marketing budget will not exceed 2.5% of its gross annual sales. Sonoma Chocolatiers

will maintain its advertising in one magazine that said that their “Chocolatier is the best in

the County”. In addition, Sonoma Chocolatiers intends to advertise in the local newspaper

with the widest circulation. Within the County, some of the newspapers have the weekly

circulation of 250,000. Sonoma Chocolatiers is getting a lot of exposure by using newspapers

as media. In the future, we aim to use Facebook, Twitter and our own websites as main

marketing tools. For the tourism, we will advertise in tourist maps for the upcoming holiday

season.

For social marketing, we have started online campaigns to encourage people to come into the

teahouse and to meet at the teahouse. We are offering rewards (free pot of tea when you

bring a friend; share a pot of tea with a friend for 50% off; etc.). We’re upgrading the

teahouse website and our new chocolate website is drawing attention.

We are working with packaging and a graphic designer to upgrade our packaging based on

customers’ responses. This will open up more high-end markets and increase our profit

margin. In addition, we intend to design small fliers for both the Teahouse and Sonoma

Chocolatiers, which are known as the most profitable marketing tool based on other small


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businesses’ experiences in the region. We will post them in all Tourist Centers and distribute

them to the local B&Bs, the high-end hotels, the tour group leaders and wine-country tour

buses, etc. We can print them on thick glossy stock with four-color, for $0.12 each through a

printer in the East Bay.

Two workers in Sonoma Chocolatiers are marketing our products to San Francisco markets,

in hope of adding two new markets a week through January. Our next target market is the

East Bay. The markets we are focusing on are high-end boutique grocery stores, cheese shops

and boutique chocolate shops that do not make chocolate but offer only high-end chocolates.

5.3 Industry Growth Rate Analysis

A report by market research firm IBIS World predicts that healthy eating and living trends

will drive growth for the U.S. tea industry in the years ahead (TeaTrends). As consumers

change their dietary patterns and seek healthy alternatives to soft drinks and coffee, the U.S.

market for tea sold at retail will reach $6.5 billion in 2011, up five percent over the last year

(Marketwire). The gourmet and specialty tea segments will likely be the largest beneficiaries

of these trends, because they cater specifically to fragmented consumer needs. Other growth

drivers will be the increasing variety of flavors, strengths and sweeteners, as well as

marketing messages based on various health benefits of tea consumption. This represents a

compounded annual growth rate of eleven percent for the organic tea industry (TeaTrends).

Within the chocolate category, competition is centering on gourmet and premium chocolates.

Sales of premium brands in the mass market have grown at a compound annual growth rate

of about sixteen percent, while sales of organic chocolates are growing at a thirty percent

clip, compared to three-four percent growth rates for chocolate candy overall (Packagedfact).

5.4 Sales Forecast

Sonoma Chocolatiers sells fine chocolates through our stores, “Infusions Teahouse” and

“Sonoma Chocolatiers”, at farmer’s markets, over the Internet, and through many boutique


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stores, wineries, gourmet food stores, caterers, restaurants and other outlets in Sonoma

County and a few towns in Northern California. Our teas are sold in the “Teahouse” or via

Internet and to a few wholesale customers in Sonoma County. We are growing quickly and

adding new retail outlets regularly and are always looking for new outlets. We hope to

expand the number of stores this year that sell our products in surrounding counties.

Because Sonoma Chocolatiers is a new entity, we understand that we will have to prove our

company’s worth to upscale tea and chocolate buyers in order to earn their respect and

business. Our sales forecast depends on establishing a loyal customer base that visits our

“Teahouse” at least once every month. We expect a few committed tea drinking “regulars”

and chocolate lovers who will come in more than once a week. We also expect a significant

increase in Internet sales of tea and chocolate. To achieve this kind of repeat business, every

customer, whether on the first visit or their hundredth, will be treated graciously and with

superior service.

Sonoma Chocolatiers expects average annual Teahouse sales to grow at 10% and chocolate

sales to increase at 85% for the next five years, as we build name recognition in the

community, gain a larger percentage of the market share and increase the customer base

beyond Sonoma County and into the connecting counties. These assumptions are based on

the following facts. Our chocolate sales increased 33% from 2010 to 2011, and we have

already doubled sales of chocolate in January 2012 compared to January 2011. Teahouse

sales (gross income excluding wholesale chocolate sales) increased 12% from 2010 to 2011.

Most that increase was in the last third of 2011. As the economy slowly recovers and we

ramp up our marketing this year with pamphlets and social marketing, we expect teahouse

sales to go up a minimum of 15% in 2012 and wholesale chocolates to grow by about 50% in

2012. The following table gives a highlight of forecasted sales. We expect sales to

increase extensively during the holiday seasons such as Thanksgiving, Christmas, New Year,

Valentine's Day and Mother's Day.


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Table 1: Sales Forecast

Pro Forma Profit

and Loss

2012 2013 2014 2015 2016

Sales $303,594.00 $405,007.00 $587,617.00 $851,648.00 $1,288,558.00

Total Cost of Sales $106,257.90 $141,752.45 $205,665.95 $298,076.80 $450,995.30

Year 2012 2013 2014 2015 2016

Chocolate growth rate 75% 100% 100% 75% 75%

Teahouse growth 13% 10% 10% 10% 8%

Teahouse sales $224,644 $247,108 $271,819 $299,001 $321,426

Wholesale chocolate

sales $78,950 $157,899 $315,798 $552,647 $967,131

Total sales $303,594 $405,007 $587,617 $851,648 $1,288,558

Highlights:

Both sales and cost of sales are assumed to be increasing at the growth rate of 24%-50%.

Cost of sales accounts for 35% of total sales.


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6.0 Financial Plan

Sonoma Chocolatiers’ financial plan is based on a sound industry analysis and thorough

research into similar businesses. Our top financial priorities in the next five years are: paying

long-term loan interests, paying employees fairly, covering expenses on time, and generating

a modest profit. We anticipate steadily increasing profits and net income as Sonoma

Chocolatiers becomes well known and establishes a loyal clientele.

We anticipate a sales increase of roughly 24%-50% annually for the next five years.

Marketing expenses are budgeted approximately at 2.5% of total sales.

6.1 Important Assumptions

There are some non-financial assumptions guiding our forecasts. We assume:

No other teahouses opening in the Sebastopol area in the next year.

A continued gradual increase in the population and socio-economic class of Sonoma

County.

Continued tourist interest in our area.

Increasing consumer interest in tea, chocolate, and other “healthy” foods.

Premium chocolates will continue to symbolize luxury and romance as gift choices.

We are able to continue to expand our wholesale distribution network.

6.2 General growth rates assumptions

Sales growth rate is 24% - 50%.

Operating expenses growth rate is 5%.

Other expenses growth rate is zero.

Balance sheet accounts growth rate is 15%.

Gross profit is 65% of sales.

Weighted Average Cost of Capital is 7.2%.


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6.3 Break-even Analysis

The break-even analysis is based on the projected cost and price structure for the year 2013.

As Sonoma Chocolatiers grows, the fixed costs will grow in proportion to the number of

employees.

Table 2: Break-even Analysis

Break-even Analysis

Yearly Revenue Break-even $404,550

Assumptions:

Average Percent Variable Cost 40%

2013 Fixed Cost $242,730

Figure 4: Break-even Analysis

Highlights:

Based on the numbers above, the net profit will equal zero when sales reach $404,550, which

is break-even point. The net income is negative when sales are below $404,550. The net

profit will become positive as sales increase above $404,550.


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6.4 Projected Profit and Loss

The following table shows Sonoma Chocolatiers’ profit and loss projections for the next five

years. Sonoma Chocolatiers will become profitable in the year 2013, with net profits

continuing to rise as sales increase. Sales and marketing expenses include the costs of all

advertisements and promotions.

Figure 5: Net Annual Profit

Highlights:

Net income keeps increasing every year, and becomes positive during 2013.

Based on the overall performance, the company’s profit trend would become gradually

better because of its excellent product.


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Figure 6: Gross Annual Profit

Highlights:

Gross profit is increasing every year, with 24%-50% growth rate.


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Table 3: Profit and Loss Projection

Pro Forma Profit and

Loss

2012 2013 2014 2015 2016

Sales $303,594.00 $405,007.00 $587,617.00 $851,648.00 $1,288,558.00

Total Cost of Sales $106,257.90 $141,752.45 $205,665.95 $298,076.80 $450,995.30

Gross Margin $197,336.10 $263,254.55 $381,951.05 $553,571.20 $837,562.70

Expenses

General &

Administrative $21,615.31 $22,696.07 $23,830.88 $25,022.42 $26,273.54

Chocolate supplies $350.00 $371.00 $393.26 $416.86 $441.87

Marketing $7,589.85 $10,125.18 $14,690.45 $21,291.20 $32,213.95

Operating $14,418.66 $15,139.60 $15,896.58 $16,691.40 $17,525.97

Wages & Salaries $149,283.20 $156,747.36 $164,584.73 $172,813.96 $181,454.66

Employee benefits $12,381.68 $13,000.77 $13,650.81 $14,333.35 $15,050.01

Occupancy costs $22,512.59 $23,638.22 $24,820.13 $26,061.13 $27,364.19

Total Operating

Expenses $228,151.29 $239,558.86 $251,536.80 $264,113.64 $277,319.32

Operating profit ($30,815.19) $23,695.69 $130,414.25 $289,457.56 $560,243.38

Other expenses $3,172.38 $3,172.38 $3,172.38 $3,172.38 $3,026.37

Net Profit ($33,987.57) $20,523.31 $127,241.87 $286,285.18 $557,217.01

Net Profit/Sales -11.20% 5.07% 21.65% 33.62% 43.24%


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6.5 Projected Balance Sheet

Assumptions used to project balance sheet are based on economic cycle activity, regional

industry strength, and future cash flow possibilities.

Table 4: Balance Sheet Projection

Pro Forma Balance

Sheet

2012 2013 2014 2015 2016

Assets

Current Assets

Cash ($13,645.24) ($15,692.03) ($18,045.84) ($20,752.71) ($23,865.62)

Inventory $21,850.00 $25,127.50 $28,896.63 $33,231.12 $38,215.79

Other Current Assets $27,057.45 $31,116.07 $35,783.48 $41,151.00 $47,323.65

Total Current Assets $35,262.21 $40,551.54 $46,634.27 $53,629.41 $61,673.82

Total Fixed Assets $133,260.34 $153,249.40 $176,236.80 $202,672.33 $233,073.17

Total Intangible

Assets $116,792.62 $134,311.51 $154,458.24 $177,626.98 $204,271.02

Total Assets $285,315.17 $328,112.45 $377,329.32 $433,928.71 $499,018.02

Liabilities and Equity 2012 2013 2014 2015 2016

Current Liabilities

Accounts Payable $8,945.77 $10,287.63 $11,830.78 $13,605.40 $15,646.21

Credit Cards $7,055.22 $8,113.50 $9,330.52 $10,730.10 $12,339.62

Other Current

Liabilities ($62,882.47) ($72,314.84) ($83,162.07) ($95,636.38) ($109,981.84)

Total Current

Liabilities ($46,881.49) ($53,913.71) ($62,000.77) ($71,300.88) ($81,996.01)

Long-term Liabilities $307,006.96 $353,058.00 $406,016.70 $466,919.20 $536,957.08

Accumulated

Amortization $17,045.30 $19,602.10 $22,542.41 $25,923.77 $29,812.34

Total Liabilities $277,170.77 $318,746.38 $366,558.34 $421,542.09 $484,773.41

Owner/shareholder

equity $403,820.69 $464,393.80 $534,052.87 $614,160.80 $706,284.92

Retained Earnings ($395,676.29) ($455,027.73) ($523,281.89) ($601,774.18) ($692,040.31)

Total Equity $8,144.40 $9,366.06 $10,770.97 $12,386.62 $14,244.61

Total Liabilities and

Equity $285,315.17 $328,112.45 $377,329.32 $433,928.71 $499,018.02


6.6 Projected Cash Flow

“Sonoma Chocolatiers” projected cash flow is outlined in the following tables.

Table 5: Free Cash Flow Projection

Actual Projected

2010 2011 2012E 2013E 2014E 2015E 2016E

Total Revenue $208,410.31 $244,041.52 $303,594.00 $405,007.00 $587,617.00 $851,648.00 $1,288,558.00

Cost of Sales $75,554.80 $95,243.38 $106,257.90 $141,752.45 $205,665.95 $298,076.80 $450,995.30

Gross Profit $132,855.51 $148,798.14 $197,336.10 $263,254.55 $381,951.05 $553,571.20 $837,562.70

G&A Expense $21,082.08 $20,391.80 $21,615.31 $22,696.07 $23,830.88 $25,022.42 $26,273.54

Other Expenses (Income) $8,482.39 $3,172.38 $3,172.38 $3,172.38 $3,172.38 $3,172.38 $3,026.37

EBIT (On Income Statement) ($77,826.48) ($67,658.38) ($33,987.57) $20,523.31 $127,241.87 $286,285.18 $557,217.01

EBIT excluding "Other" ($69,344.09) ($64,486.00) ($30,815.19) $23,695.69 $130,414.25 $289,457.56 $560,243.38

Taxes ($20,803.23) ($19,345.80) ($9,244.56) $7,108.71 $39,124.28 $86,837.27 $168,073.01

NOPAT ($48,540.86) ($45,140.20) ($21,570.63) $16,586.98 $91,289.98 $202,620.29 $392,170.37

Amortization $14,822.00 $25,409.14 $24,287.52 $32,400.56 $41,133.19 $59,615.36 $77,313.48

Deprecation $18,563.00 $31,822.29 $45,539.10 $60,751.05 $88,142.55 $127,747.20 $193,283.70

Net Capital Investment $2,784.45 $4,773.34 $6,830.87 $9,112.66 $13,221.38 $19,162.08 $28,992.56

Change Net Working Capital $1,983.45 $2,200.18 $3,903.75 $6,319.29 $8,743.73 $13,826.01

Free Cash Flow ($17,940.31) $5,334.44 $39,224.94 $96,722.18 $201,025.04 $362,077.04 $619,948.98


Table 6: Discount Cash Flow

Actual Projected

2010 2011 2012E 2013E 2014E 2015E 2016E

EBIT ($77,826.48) ($67,658.38) ($33,987.57) $20,523.31 $127,241.87 $286,285.18 $557,217.01

EBITDA ($44,441.48) ($10,426.95) $35,839.05 $113,674.92 $256,517.61 $473,647.74 $827,814.19

NOPAT ($48,540.86) ($45,140.20) ($21,570.63) $16,586.98 $91,289.98 $202,620.29 $392,170.37

Plus: Depreciation & Amortization 33,385.00 57,231.43 69,826.62 93,151.61 129,275.74 187,362.56 270,597.18

Less: CapEX 21,347 36,596 52,370 69,864 101,364 146,909 222,276

Less: Net Working Capital 1,983.45 2,200.18 3,903.75 6,319.29 8,743.73 13,826.01

Unlevered Free Cash Flow ($36,503.31) ($26,487.85) ($6,314.16) $35,971.13 $112,882.49 $234,329.84 $426,665.28

0.9442

WACC 0.072

NPV of Unlevered Free Cash Flow $595,860.36

Terminal Value Undiscounted TV Discounted TV Perpetuity Growth (in FCF) after 2016 3.00% $10,463,458.10 $7,390,967.84

Implied Enterprise Value $7,986,828.20


6.7 Business Ratios

Business ratios for the next five years are shown below.

Table 7: Financial Ratios

2010 2011 2012 2013 2014 2015 2016

Return on Assets (ROA) -0.38 -0.17 -0.12 0.06 0.34 0.66 1.12

Return on owner's equity -6.19 -9.55 -4.17 2.19 11.81 23.11 39.12

Profit margin -0.37 -0.28 -0.11 0.05 0.22 0.34 0.43

Assets turnover ratio 1.02 0.63 1.06 1.23 1.56 1.96 2.58

Accounts receivable turnover ratio 43.37 17.45 18.42 21.37 26.96 33.97 44.70

Inventory turnover ratio 3.98 2.92 4.86 5.64 7.12 8.97 11.80

Figure 7: Return on Assets

Return on assets is expected to be increasing and positive over year 2013 to 2016.


Figure 8: Return on Equity

Return on equity is expected to be increasing and positive through year 2013 and 2016.

Figure 9: Profit Margin

Profit margin is expected to be increasing and become positive through year 2013 and 2016.


Figure 10: Assets Turnover Ratio

From year 2011, assets turnover ratio turns on an increasing trend.

Figure 11: Accounts Receivable Turnover Ratio

Accounts receivable turnover ratio is increasing over years 2011 to 2016.


Figure 12: Inventory Turnover Ratio

Inventory turnover ratio turns on an increasing trend over years 2011 to 2016.


Appendix

Project Team Member Bios

Arindam Bandopadhyaya

Dr. Arindam Bandopadhyaya received his PhD in Economics and Finance from Indiana University,

Bloomington. He is currently the Chair and Professor of Finance in the Accounting and Finance

Department at UMASS-Boston. A two-time recipient of the Dean’s Award for Distinguished Research,

Dr. Bandopadhyaya has published in journals like the Journal of International Money and Finance,

Journal of Empirical Finance, Journal of Banking and Finance, and Review of Economics and Statistics.

Dr. Bandopadhyaya teaches courses in the areas of corporate finance, international finance, managerial

economics and portfolio management. He has received coveted teaching awards in the College of

Management, including two-times the “Professor of the Year Award” and the Betty Diener Award for

Teaching Excellence. He was the College of Management nominee for the Chancellor’s Award for

Distinguished Teaching several times in recent years.

Dr. Bandopadhyaya is also the Director of the College of Management’s Financial Services Forum (FSF),

which is a source of current information and commentary on the health and critical issues facing the

financial services industry. The FSF produces a semi-annual report, has a working paper series, hosts

speakers from the industry, and has created and publishes every month an index that measures investment

sentiment in financial markets.

Xingyuan Fei

Xingyuan Fei has been a graduate student in the MSA program at UMass Boston since Fall 2010. Earlier,

she received her BS in Education, Beijing Broadcasting Institute, Beijing, China. After graduation,

Xingyuan passed the National Judicial Examination and became a lawyer in China. Her objective is to

develop the professional knowledge about business and accounting which is required in the competitive

world today.


Diana Kohlhagen

Diana Kohlhagen received her Bachelor in Business Administration (concentration in Finance) in May

2010. She is currently pursuing both her MBA and her Master of Science in Finance at the University of

Massachusetts, Boston. Diana will graduate in May 2012. Her goal is to become a CFO or to pursue a

career in investments.

Pojaman Thasana-ekachitPojaman Thasana-ekachit received her BS in Economics with a minor in

Finance, from Thammasat University in Bangkok, Thailand. After graduating, Pojaman worked as an

office assistant at Thasanavej Hospital. Currently she is pursuing her MBA degree at UMass Boston,

which will help her develop the professional knowledge and leadership that is required in the current

competitive business environment. Her research interests include Corporate Financial Policy and

Governance, Financial Markets and Institutions, and International Finance.

Ying Zhao

Ying Zhao received her BS in Business Administration, with a concentration in Accounting from

California State University. She is currently pursuing her MSA degree at UMass Boston. Her career

pursuit is to practice accounting in a public accounting firm.

Yu Zhang

Yu Zhang received her Bachelor of Management (concentration in Financial Management) in June 2011,

from Central University of Finance and Economics in Beijing, China. Currently, she is pursuing her MSF

at the University of Massachusetts, Boston. Her research interests include Corporate Finance, International

Finance, and the implications of accounting information for firms’ future performance.


Disclaimer

The financial projections that appear in this Business Plan are estimated revenues, expenses, and cash

flow, which are based on research, market movement and the assumptions discussed throughout this

Business Plan. The assumptions disclosed herein are those that management believes are significant to the

projections. They represent the best estimate of the owners and our knowledge and beliefs, and are also

based on actual operations from previous years. The Company's expected revenues, expenses, and cash

flow for the projected periods are subject to the Company's ability to develop sales and production levels

at the price and costs estimated by management. Accordingly, these projections reflect management's

estimates as of February 2012 and its expected course of action if such sales and production levels are

attained at the anticipated price and costs.


References

Marketwire, Tea Market Thrives Despite Tough Economy, December 05, 2011.

http://www.marketwire.com/press-release/tea-market-thrives-despite-tough-economy-1594664.htm

TeaTrends, US retail tea industry reaches $6.5 billion in sales, December 2011.

http://www.teatrends.com/article.html?category=Industry

Packagedfact, The U.S. Market for Chocolate, February 2005.

http://www.packagedfacts.com/sitemap/product.asp?productid=1037709;

Story of Chocolate, Profile of the U.S. Chocolate Industry, August, 2011.

http://thestoryofchocolate.com/About/content.cfm?ItemNumber=3623

Infusions Teahouse, http://www.infusionsteashop.com

Sonoma Chocolatiers, http://www.sonomachocolatiers.com

Information provided by interview between David Gambill and Financial Services Forum Consulting

Group

http://www.marketwire.com/press-release/tea-market-thrives-despite-tough-economy-1594664.htm

http://www.teatrends.com/article.html?category=Industry

http://www.packagedfacts.com/sitemap/product.asp?productid=1037709

http://thestoryofchocolate.com/About/content.cfm?ItemNumber=3623

http://www.infusionsteashop.com/

http://www.sonomachocolatiers.com/

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