CASE ANALYSIS – The Case of Mystic Monk Coffee
BUS 5480 Strategic Management
January 25, 2015

Executive Summary The case of the Mystic Monk Coffee operations details the business vision of the Clark, Wyoming Carmelite monastery’s father prior. Father Prior Daniel Mary sought to expand Mount Carmel, his small monastery, which accommodated 13 cloistered monks. He envisioned a monastery much larger than the small four-bedroom home he and the other monks occupied. The Irma Lake Ranch, located outside of Cody, Wyoming, was the 496-acre ranch he found that would live up to his vision of comfortably accommodating 30 monks, a convent for Carmelite Nuns, a Gothic church, a hermitage, and a retreat center for lay visitors. While the Irma Lake Ranch fit beautifully into what he planned to establish with the new Mount Carmel, it came with an $8.9 million obstacle. The $8.9 million price tag on the ranch led Father Prior Daniel Mary to consider ways in which to gain the required funds. In its first year, Mystic Monk Coffee, the monastery’s coffee business earned approximately around $75,000. In addition, the monastery received a donation of $250,000 and local Cody business owners started a foundation for Mount Carmel as well. While this was a decent start, the monastery would need to collect much more money to purchase the ranch. The monks of Mount Carmel believed that through earnings from Mystic Monk Coffee and public donations, they would soon reach their goal. Recommendations are to begin expanding the Mystic Monk Coffee by investing $35,000 for the larger roaster; improve marketing strategy through the internet, local businesses, and the Catholic community; decrease commissions; expand roasting working hours with volunteers; establish a better cost strategy; save the $250,000 donation; do not purchase the Irma Lake Ranch; allow their coffee business to expand for a year or two and after determining how the business has grown, they can decide on whether to find more affordable land or to purchase the Irma Lake Ranch.

CASE ANALYSIS – The Case of Mystic Monk Coffee Father Daniel Mary, the prior of the Carmelite Order of monks in Clark, Wyoming, has a vision of creating a new monastery in the Rocky Mountains. At the time, his small monastery accommodates only 13 monks living in a small home also being used as a makeshift rectory. Father Daniel Mary would like to transform his monastery into a 500-acre monastery that would include accommodations for 30 monks, a Gothic church, a convent for Carmelite nuns, a retreat for visitors, and a hermitage. He has located a property that would meet his needs with a current listing price of $8.9 million. The Carmelites have received a donation of $250,000 they could use towards the purchase as well as $75,000 in coffee sales. In addition a group of Cody business owners have formed a foundation to help the monks raise money. (Thompson, Peteraf, Gamble, & Strickland III, 2014) The Carmelite monks produce specialty coffee roasted by them at the monastery. This type of coffee would be in the same market as big companies such as Starbucks, Biggby, etc. Because much of their time is spent in worship, only 6 hours per day is dedicated to this work. The roaster they currently use has the capacity to roast 540 lbs of coffee beans a day. (Thompson, Peteraf, Gamble, & Strickland III, 2014) Demand has not yet succeeded this amount, but the monks are planning on purchasing a larger roaster with the capability to roast 130 lbs per hour for $35,000. The new roaster will come close to doubling the amount of beans they can roast. Yet again, they must also consider that they are understaffed in when it comes to being able to roast at maximum capacity. Because the Carmelite order is such a secluded one, monks are not permitted to leave their monastery. Some of the only reasons why they would be allowed to leave are due to medical needs or the death of a family member. Because of this, the monks primarily use word of mouth through Catholic churches across the United States to promote their coffee. Most orders come in through their website as well as telephone orders placed with the monk’s secretary. They have expanded and used banners across secular websites as well but this comes with a hefty charge of 18% commission on any sales generated through these banners. Currently the monks are generating revenues of $56,000. The costs of goods sold are 52% and operating expenses are 37% leaving the monks with a profit of only 11% of their revenues. The coffee sales are a means of support from the outside world and could possibly provide financial resources to buy the land. (Thompson, Peteraf, Gamble, & Strickland III, 2014) Mystic Monk Coffee generates average yearly revenue of $678,000 with an average yearly net profit of $74,580. This results in a gross margin profit of 48% and a net profit margin of 11%. A successful cafe's base profits should equal roughly 10% to 18% of its sales. (Heibutzki, n.d.) This indicates Mystic Monk Coffee is achieving a low profit margin as compared to the industry. Mystic Monk Coffee currently has a limited roasting capacity of 90lbs per hour of coffee beans per workday with an average workday being 6 hours. The business is considering purchasing a higher yield coffee roaster, which roasts 130lbs of coffee per hour with a capital expenditure cost of $35,000. The payback period for purchasing the higher yield coffee roaster is 66 hours of production generating additional 222% revenue or $91,062 additional profit. Purchasing this additional roaster would also increase the labor for packaging and preparing the additional roasted coffee beans, which is not considered in this estimate. Assuming a constant yearly revenue and purchasing the higher yield roaster would require 52.2 years of operation to generate the $8,900,000 (less $250,000 donation) for purchasing the ranch.

There are several strong and, relatively, no weak forces in the specialty coffee industry, which makes profitability challenging. In addition, Mystic Monk Coffee has a high cost of goods sold and operating expenses when considering their business has no retail locations and only sells through word of mouth, their website, and most recently wholesale. In addition, each sale they conduct from a buyer using an affiliate website they lose money due to the 18% commission they pay (Mystic Monk Coffee net profit margin is 11%).

Recommendation Our recommendation is that the Carmelite Monks should not consider purchasing the 496-acre ranch at this time. They are not in a financial situation to afford the $8.9 million price tag just yet. They need to work on the expansion of their business, Mystic Monk Coffee. It is promising that they are reaching their current capacity in the first year of operation. We also recommend that they should purchase the larger roaster they are considering, but will need to improve in several areas to take full advantage of it. They will either need to recruit more members or volunteers to help with labor for the added capacity without increasing costs. The monks will need to beef up marketing through the Internet, local businesses, and the Catholic Church community to improve brand recognition and increase sales. Brand loyalty has the potential to be high with Catholics. They need to increase their profit margin, 11% is low compared with the industry standards. “The average coffee shop…has a gross margin of 85 percent.” (Butner, n.d.) Of course, this is not a coffee shop they are running, but just an example of what the industry looks like as a whole. Because of this, the monks should switch to an activity based costing structure. This will enable them to understand their costs and more accurately identify where the costs can be lowered to achieve a higher profit margin. The affiliated website commission needs to be renegotiated to 5% or eliminated completely. They pay 18% commission on these sales but only achieve 11% profit. These sales lose money for Mystic Monk Coffee. The new Foundation could also prove useful for fundraising activities but this is yet to be a reliable source of income to help purchase the ranch. The $8.9 million sale price may also be negotiated lower. At this point they should save the $250,000 donation, implement the needed changes to Mystic Monk coffee, and reevaluate their financial situation in one year. The new ranch is a great dream but there is work to do before this dream can be realized. In a year they will be better able to evaluate whether they should buy the ranch (if it is still available), improve their existing property, or look for another more suitable property. In conclusion at this point in time, we would not recommend that the Carmelite monks of Wyoming purchase a new property with an $8.9 million price tag. Their coffee business is in the early stages of development and would not be a good source of income to fund this purchase, even with a few other sources of income and potential investments. If they purchase a roaster worth $35,000, this could help their business expand in terms of production. Yet because of their nature as monks, they would need some help when it comes to labor and financial strategy. Father Prior’s dream of building a new Mount Carmel could come to life, if they change some of their strategies in order to come up with the money for this large of a purchase.
References
Butner, S. (n.d.). What Is a Good Coffee Shop Profit Margin? Retrieved January 24, 2015, from http://smallbusiness.chron.com/good-coffee-shop-profit-margin-70391.html

Heibutzki, R. (n.d.). The Average Profits for a Small Cafe. Retrieved January 23, 2015, from http://smallbusiness.chron.com/average-profits-small-cafe-30768.html

Thompson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland III, A. J. (2014). Mystic Monk Coffee. In Crafting and executing strategy: The quest for competitive advantage: concepts and cases (pp. C2-C5).