Mystic Monk Coffee

A case study by Travis Huber

00353504





Introduction
The Carmelite Order of monks in Clark, Wyoming consists of a small thirteen-monk
cloistered order dedicated to the Catholic Church, and lead a life of solitude and prayer. The
prior and leader of the Carmelite Order is father Daniel Mary, who has a vision of expanding the
order form its current four bedroom ranch home and adjoining 42-acres to a beautiful 496-acre
ranch that would accommodate 30 monks. The proposed site would allow for a gothic church, a
convent for Carmelite nuns, a retreat center for lay visitors, as well as a hermitage. The issue is
that the proposed real estate for the Mount Carmel site carries a sticker price of $8.9 million
dollars, which is beyond the monastery's current financial capabilities. The order has two sources
of income, one is through donations and the other is from a small coffee brewing company called
Mystic Monk Coffee currently based from their Wyoming monastery. The objective of this case
study will be to analyze the current financial situation and propose solutions to complete father
Daniel Marys vision of purchasing the Mount Carmel ranch.
Synopsis
Case Facts:
The monastery seeks to expand its current space to an $8.9 million dollar ranch.
Currently income is accrued primarily by their coffee business, Mystic Monk. Funding has also
been received in the form of outside donations, such as a substantial $250,000 donation to be put
towards the priors Mount Carmel vision. Daily life of the monks is largely devoted to prayer
and worship, leaving approximately six hours daily that can be devoted to work. Currently, they
have one head coffee roaster and one monk in charge of maintaining business function of the
company. Current operation capacity allows for an average of 540 lbs of coffee to be produced
daily. Divided hourly, the per-hour rate becomes 22.5 lbs. With the current HR capabilities of
6hrs daily, production is capped at 135 lbs. This figure could be increased with an investment in
a new roaster, which would raise operating capacity to 780 lbs daily at a cost of $32,000. Raw
premium fair-trade Arabica coffee beans are currently being purchased at prevailing market price
from a single broker based in Seattle, Washington. The market for the companys specialty fair
trade premium coffee exceeds 30 million consumers according to the text, with a target market of
Catholic coffee consumers. The market is also expanding healthily, with a 32% average growth
per year for the last 7 years. Through its current endeavors, it is quite obvious that the company
has chosen the focused differentiation strategy by focusing on the narrow Catholic buyer
segment. Currently, the company is selling its sample bags for $2.99 and its primary 12-ounce
bags for $9.95. The company also offers accessories such as mugs and t-shirts in addition to their
coffee. Customers also have the option of joining Mystic Monks coffee club which offers pre-
set monthly delivery of preferred flavors. The majority of the companys sales are processed on
their website, with phone ordering available as well. Mystic Monks offers free shipping for
three or more bag purchases, with their primary couriers being UPS and USPS. The majority of
brand awareness is currently achieved through word of mouth. Affiliate marketing is also utilized
on the website, but carries an 18% commision paid to affiliates. In addition, the company is now
also offering wholesale pricing to local shops and churches. At the end of year one, gross
revenues average $56,500 per month with a net profit margin of 11%. Expanded to yearly
figures, thats $678,000 gross with a net profit of $74,580.
Key Problems:
Less than satisfactory business model
Current strategy does not fit the companys internal situation
Lack of strategy beyond the obvious focused differentiation strategy
Lack of strategic vision - the vision is based upon the expansion, not the company itself.
Strategic Issues:
Lack of HR resources - Currently operating with one roaster at 6 hrs daily maximum, and
one secretary to oversee operations.
Limited production - Current daily production capped at 135 lbs.
High COGS - 52% of margin associated with input costs
Low profit margin - currently 11%
Disadvantages based on current output - minimum economies of scale, purchasing
leverage, etc.
Less than favorable marketing mix - High affiliate marketing cost - currently paying out
18% commision to affiliates. Affiliate sales are being sold at a loss when profit margins
reside at 11%.
Strategic Analysis
The business model is a managerial blueprint that lays out how the company will deliver
a valuable product to the customer while also yielding an attractive profit. All business models
are comprised of two metrics: the customer value proposition and profit formula. The customer
value proposition seeks to satisfy customer needs at a favorable price. In my opinion, MMC has
done a great job at building its CVP. However, the second part of a business model includes the
profit formula, which determines the cost structure in relation to the CVP. In my opinion, the
profit formula is unsubstantiated and below the sustainable level.
Recommendation: MMC needs to tweak its profit formula in order to build a sustainable
profit model. As the strategic issues above illustrate, the cost structure of MMCs current product
offerings are skewed. An 11% profit margin is not nearly enough to sustain the type of growth
that the prior is seeking. COGS is also quite high at 52%, the company should look into lowering
costs rather than raising prices as they are already on the top end of price in the market segment.
This strategy would also allow them to maintain their current CVP. Options such as seeking
more brokers for their fair trade coffee may be an option. Other contributing factors include high
marketing costs, with affiliate sales currently being sold at a loss. The company needs to
drastically reduce their affiliate payouts or seek other types of marketing strategies.
The next problem is that current strategy does not fit the internal situation of the
company. According to our text, the first metric of a winning strategy is that it must fit both the
external and internal situation. The external situation seems to be satisfactory, but clearly the key
problem of having only one roaster working a maximum of six hours daily is not a good internal
situation. The main issue is that the majority of the Monks available time is devoted to worship,
causing a lack of available HR resources which leads to a maximum daily output of only 135 lbs.
Recommendation: The main issue here is that the lions share of the monks time is
devoted to worship, and not to the company or its daily operations. This is a problem with the
internal situation of the company. As the case proposes the current available HR allocation to
roasting, the production is limited to 6 hrs or 135 lbs daily. Planned upgrades to a higher capacity
would increase output to 780 lbs daily, increasing daily output by a factor of 5.78. Assuming all
other variable are constant, this type of increase would bring net profits to $431,072 yearly. Even
with an output increase of nearly 6 fold, the company will still fall short of its $8.9 million
dollar fundraising goal within a reasonable time frame. Even with the first years profits, the
$250,000 donation, and the upgrade to the larger roaster, it would still take over 19 years to
accrue $8.9 million for the expansion (once again this is assuming all variables remain constant,
and demand is unlimited (which is very unlikely)) The main issue here is that there isn't
adequate HR to produce the type of output necessary for that type of funding. In my opinion,
MMC should bring on more monks that are capable of roasting the coffee to try to maximize
output. Another option would be to outsource all roasting altogether, which may increase output
and increase the profit margin if the process was streamlined.
Beyond the chosen focused differentiation strategy itself, a clear lack of strategy for the
company is another issue I have brought to light. According to the case information, the vision is
based solely upon raising the necessary funding for the Irma Lake Ranch real estate. However,
no clear strategy is laid out in terms of the actual company and its operations or performance.
According to our text, A companys strategy is managements game plan to attract and please
customers, compete successfully, conduct operations, and achieve targeted levels of
performance. Clearly the vision of raising $8.9 million dollars does little to satisfy the metrics
of a successful strategy. In the case of MMC, management has neglected to address most of the
basic strategic metrics.
Recommendation: The company needs to take a step back and take a long look at its
strategy formulation. As I mentioned, they are currently focused on the focused differentiation
strategy, but I think this is more by default than by decision. Many customers may purchase
solely because they sympathize with the objectives of the monastery. I believe the company
could benefit from utilizing all five stages of the strategy formulation process as portrayed in
figure 2.1 in our text. According to the text, A winning strategy must fit the companys external
and internal situation, build sustainable competitive advantage, and improve company
performance. I believe the company could benefit by first defining all of the above metrics and
building upon them. Laying out a clear and definite strategy will also benefit the monastery by
ensuring all monks are on the same page in regards to daily business function and operation.
The final key problem comes from the lack of a strategic vision. A strategic vision is
derived from a clear predetermined path in which the company will take into the future and
where focus should be placed in terms of the customer, the products, the market, and the
technology. Beyond the obvious goal of raising $8.9 million dollars for the monastery's
expansion, the reader is left wondering what path the management plans to follow in order to
reach these goals. This metric is also the very first step in the strategy formulation process, as
displayed in figure 2.1 in the text.
Recommendation: The company needs to develop a strategic vision beyond that of
raising the proposed $8.9 million dollar goal. Instead, it needs to focus upon its future
performance and market positioning prospects. By focusing on these metrics, the firm will be
able to determine if the changes to their current markets, customer focus, current product
offerings, and current technologies are necessary in order to bolster both future performance and
market positioning. For example, the case proposes that the current ordering system/website is
nearing capacity with current sales. For the type of expansion the company is hoping for, drastic
upgrades will be necessary in order to support the increase in sales. Developing a strategic vision
early on will ensure that the company is able to sustain expansion in the long run and avoid any
growing pains that might arise in the process.
Conclusion
In conclusion, the projected expansion to the $8.9 million dollar ranch cannot be
supported solely on the prosperity of the Mystic Monk Coffee Company. As proposed in my
analysis, even with rapid expansion and an equally rapid increase in customer demand, the
monastery will still be unable to reach their goal within a reasonable time frame. Outside
donations would need to account 50% or more of the Irma Lake Lodge purchase price for the
cloistered order of the Carmelite Monks of Cody, Wyoming to have a chance at purchasing the
parcel in a reasonable amount of time. The company could certainly expand its operations to be a
far more profitable operation by upgrading its business model, adjusting their strategy to further
adapt to its internal situation, and by forming a strategic vision and overall strategy that align
with both the religious obligations of the monastery as well as the business as a whole. Strategic
issues such as lack of HR, limited production, high costs of goods sold, low profit margins, and
the current marketing mix will all need to be addressed in order for the company to sustain
healthy operations going into the future.

Side Note
Unfortunately for the Carmel monks and MMC, the Irma Lake Lodge was purchased by
Bill Gates in 2009.


SWOT Analysis

Strengths:

Use of high quality, Fair trade
Weaknesses:

Limited production
Arabica Beans.

Flavor Variety

Variety of accessories offered

Working capital to expand operation



Limited HR resources

Large amount of time spent on daily prayer
and worship

Lack of business knowledge

Lack of management depth
Opportunities:

Expanding market

Expand product line

Large market segment of Catholic consumers

Economies of scale derived from business
expansion



Threats:

Competition from other small brewhouses
offering a similar product (some customers
may truly just want coffee and are not
sentimental to the mission of the order)

New entrants to the marketplace

Fluctuations in the market price of raw coffee
beans




References
Cover Photo:
http://en.wikipedia.org/wiki/Monks_of_the_Most_Blessed_Virgin_Mary_of_Mount_Carmel#me
diaviewer/File:Symbol_of_Mystic_Monk_Coffee_Image.jpg

http://www.examiner.com/article/bill-gates-buys-buffalo-bill-s-ranch-wyoming-monk-s-lose-
deal-gallery

Gamble, John, Peteraf, Margaret, Thompson, Arthur, Essentials of Strategic Management: The Quest for
Competitive Advantage. 4th Ed., McGraw Hill Education, 2013