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Medium Market Entry Profitability

Burger Palace

#Multiple #Restaurants #Fast Food and Beverages
ProHub Comment

This is a straightforward market entry profitability case requiring candidates to build a market sizing model from first principles. The case tests analytical rigor by requiring candidates to identify and quantify two distinct customer segments (passengers and employees), calculate contribution margins, and determine breakeven market share thresholds. The mathematical approach is relatively formulaic, but success depends on logical structuring and identifying all relevant revenue drivers.

Estimated Time 15 minutes
Difficulty Medium
Source Chicago Booth
50 / 100

Our client is Burger Palace, a Chicago area fast food restaurant with 20 locations. They have been approached by Midway Airport about opening a new location inside the main terminal.

They have asked us to come to a meeting with their CEO and tell them if we think this would be a profitable venture. How would you structure your approach to this question?

Clarifying Information

  1. The average transaction size is $10.
  2. Variable costs are approximately 80% of sales revenue.
  3. Fixed costs will include: $200,000 in annual rent and fixed operating costs (includes the initial construction of the new restaurant).
  4. $80,000 as an annual royalty fee to Midway Airport.
  5. There are currently 7 restaurants at Midway. They each have an equal market share.
  6. If Burger Palace were to open a restaurant, we expect that each of the 8 restaurants would then gain an equal market share.
  7. We do not expect the number of total customers to increase because of the new Burger Palace location.
  8. Hours/dates of operation: 6am – 10pm.
  9. Day open per year: 350 days
  10. Gates at Midway: 25
  11. Average planes per hour: 1 per hour per gate
  12. Average plane size: 175 passengers
  13. Average load factor: 80% (number of seats filled on average)
  14. Passengers who will eat each day: 5% of passengers will eat at Midway
  15. Number of employees: 2,000
  16. Employees who will eat each day: 60% of employees will eat at Midway