CaribbeanInternetCafe.pdf

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998B02

CARIBBEAN INTERNET CAFÉ

Michelle Theobalds prepared this case under the supervision of Professor Murray Bryant solely to provide material for class
discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may
have disguised certain names and other identifying information to protect confidentiality.

Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of
this material is not covered under authorization by any reproduction rights organization. To copies or request permission to
reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of
Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected].

Copyright © 1998, Ivey Management Services Version: (A) 2009-09-09

In June 1996, David Grant was visiting his home in Kingston, Jamaica, while on summer vacation from the
MBA program at the Richard Ivey School of Business in London, Ontario. He was gathering information
on the feasibility of opening an Internet café in Kingston upon his graduation from the MBA program in
1997. David had always wanted to be his own “boss,” and he felt that the timing was right to pursue this
business opportunity in Jamaica.

Prior to entering the MBA program, David had worked as a computer systems engineer at the local
telephone company, Jamaica Telecommunications Limited (JTL). JTL, 80 per cent owned by a British
telecommunications company, was one of seven Internet service providers on the island. If this venture
turned out to be feasible, David intended to lease the telephone lines from JTL. He had also worked as a
part-time teacher at the University of Technology and as a computer programmer in Jamaica.

THE CONCEPT

A “typical” Internet café offered computer services (including access to the Internet), a small menu of light
snack foods and an assortment of beverages. While he was studying in London, David visited a number of
Internet cafés and became intrigued by the concept. A café seemed to be the perfect vehicle for people to
use the Internet and other computer services without making an expensive investment in computer
hardware. In addition, a cybercafé provided a social outlet: customers could “surf the net” together, listen
to music or simply relax and socialize.

COMPETITIVE ENVIRONMENT

In Jamaica, although there was high awareness of the Internet, there was very low accessibility and usage.
Mainly corporations and universities used the Internet. However, even at these institutions, individuals had
to reserve time to access the Internet and they were limited to short time periods. Private usage was still
low and David expected that it would remain that way at least for the next three years. The main reasons Do

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Page 2 9A98B002

for the low penetration rates were: a) the high cost of computers as a percentage of average salary, b) the
lack of telephone lines in some areas in Kingston, and, c) the high rates currently being charged by the
existing Internet service providers. Most providers charged a flat rate for a fixed number of hours per
month, and then hourly rates for any extra usage. This pricing scheme tended to penalize those users who
only checked e-mail and used the Internet for a few hours per month. The average hourly rate charged by
the service providers was $90.1

There were a large number of restaurants and “cafés” in Kingston, however, none of these establishments
provided Internet services. Most of the cafés provided outdoor seating, music, games or other
entertainment, and traditional drinks and restaurant fare. Most cafés did not serve coffee as, traditionally,
the beverage was not very popular in Jamaica.

CARIBBEAN INTERNET CAFÉ

David planned to introduce the European café concept to Jamaica, offering brewed coffee (e.g. local and
imported premium coffee beans, espresso, cappuccino and café latte), imported wines, fresh tropical juices,
and baked products such as croissants, bagels, donuts and other pastries. He envisioned three areas in his
café: a computer area with booths, a wine lounge with some comfortable sofas, and a general café area
with tables and chairs. Initially, he would purchase five “Pentium” processor computers and connect to the
Internet via a 56 kbps2 telephone line leased from JTL. The café would also provide printing services, a
scanner and the latest office software (spreadsheet, word processing and presentations). Caribbean Internet
Café (CIC) would not have a kitchen. All the baked products would be sourced from local bakeries as
needed.

The target market would be computer literate 18 to 35 year old university students and professionals with a
relatively high disposable income. Most of these persons would have limited access to the Internet at work
or school, but might wish additional access for leisure or research. This group would also be busy and
trendy, and would appreciate a venue where they could relax and unwind, but where they would also have
access to the facilities to work if necessary. David estimated the total size of his target segment in Kingston
to be about 20,000. CIC would initially accommodate 50 seats: 15 at the computer terminals (three per
booth), 15 in the wine lounge, and 20 in the general area.

David thought that New Kingston, the city’s business district, would be a good location. Most banks,
insurance companies, other financial institutions and corporations had head offices or branches in this area.
There were also two major hotels and a shopping centre. Most workers in New Kingston were in white-
collar jobs such as banking, insurance, programming and consulting. In addition, New Kingston was close
to several affluent suburbs from which CIC could attract patrons.

PRELIMINARY INVESTIGATIONS

While visiting Kingston, David began to gather data on the investments and costs that would be necessary
to start his venture. He first made a list of the equipment that he would need. He intended to purchase most
of these items in the United States and ship them to the island himself. In this manner, he could save the

1All dollar amounts in the case are in Jamaican currency, unless otherwise stated. The exchange rate was approximately
JA$25 = Cdn$1 and JA$35 = US$1.
2kbps = kilobytes per second Do

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Page 3 9A98B002

exorbitant mark-ups that many stores charged in Jamaica. The list of equipment and costs is shown in
Exhibit 1.

David intended to staff CIC with university students majoring in computer science and hospitality. They
would work part-time for about 15 hours per week, and would double as Internet tutors and waiters. Wages
for the students would be approximately $40 per hour. The café would be open to the public for 84 hours,
six days per week, and employees would be needed for around 90 hours per week. An average of two
employees on duty would be required. Although he planned to be on hand to manage the finances and to
oversee the operation, David intended to hire a manager with experience in the Jamaican restaurant
industry. This person would assist with the start-up, staffing, training, menu development, quality control
and customer service. He estimated that the salary for this person would be $40,000 per month.

David found a number of suitable sites in New Kingston, and estimated that the lease costs would be
$30,000 per month. He preferred to lease rather than purchase the property, since mortgage rates were
currently very high (25 per cent per annum) and he did not want to fund a down payment. He estimated
that telephone bills and utilities would cost $15,000 per month and that he would need to make an initial
deposit with the utility companies of $7,000. David spoke to a former co-worker at JTL and determined
that he could lease the link to the Internet for $10,000 per month. Internet service would be provided by
JTL at a cost of $60 per computer per hour. He also obtained a quote from an insurance company to insure
the contents of the facility for a premium of $10,000 per month.

Advertising, marketing and promotion would cost $10,000 per month. However, he expected to spend an
additional $20,000 on advertising just prior to opening the café. Other up-front costs such as legal fees,
incorporation expenses, licences and permits, and decorating expenses were estimated at a total of
$120,000. Miscellaneous monthly administrative and maintenance expenses would be $50,000.

PRICING

After examining the rates of the local Internet service providers, David decided that he would charge a 30
per cent premium on their average hourly rates for a total of $120 per hour. He thought that customers
would accept this rate since they would not have to purchase several hours up-front. Time on the
computers would be available in one-hour slots. David estimated that 40 per cent of his customers would
pay for access to a computer. The other clients would probably share a computer with a friend, or simply
socialize in the café or wine lounge. All customers would spend an average of one hour in the café. He
expected that the average customer would spend $140 on drinks and $60 on food. Average costs per
customer for drinks and food would be $50 and $30 respectively.

AN OFFER FROM JTL

As David looked over his list of expenses, he felt overwhelmed. He wondered how he would finance the
venture. He had approximately $500,000 in savings that he was willing to invest in the café. He
approached friends, relatives and other potential investors with his idea, but to no avail. Finally, he
contacted his former boss at JTL and showed her his business plan. Together, they prepared a proposal for
the senior management. JTL expressed some interest in the proposal; management thought that the café
would increase usage and awareness of the Internet in general, thereby increasing JTL’s sales of Internet
service.
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Page 4 9A98B002

After several rounds of meetings and negotiations, JTL made David an offer. JTL proposed to invest
$500,000 in shares in CIC (50 per cent partner) and to provide a further $1,250,000 as a long-term loan to
the company. CIC would be charged a special concessionary interest rate of 10 per cent per annum on the
loan. In addition, JTL commissioned a market study conducted by an independent market research firm.
The firm agreed with David’s estimate of the total segment size, and then made three estimates of potential
usage of the café in the first year. The market research firm projected that, optimistically, 50 per cent of the
segment would visit the cafe, on average, five times per year. A realistic projection was that 40 per cent of
the segment would visit the cafe an average of three times per year. Finally, a pessimistic estimate was that
30 per cent of the segment would visit twice per year.

THE DECISION

After an exhausting “vacation,” David sat down to review his notes. He wondered if he should proceed
with the CIC venture, and, if so, if it would be a profitable business for him and JTL.

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[email protected] or 617.783.7860

Page 5 9A98B002

Exhibit 1

EQUIPMENT REQUIRED FOR THE CARIBBEAN INTERNET CAFÉ

EQUIPMENT LIST

ITEM

NUMBER OF
ITEMS

UNIT COST
(US$)

TOTAL COST
(JA$)3

General Equipment
Telephone system 1 $150 $5,250
Counter fixtures 1 $10,000 $350,000
Espresso machines 2 $2,000 $140,000
Cash register 1 $50,000
Photocopier 1 $800 $28,000
Hardware

Pentium systems, colour monitors, CD
ROMs and modems 5 $2,000 $350,000

Colour ink-jet printer 1 $400 $14,000
Laser printer 1 $800 $28,000
Software
Windows 95 1 $100 $3,500
Microsoft Office 1 $350 $12,250
Furniture
Tables or booths 20 $150 $105,000
Chairs or stools 50 $100 $175,000
Sofas 2 $50,000
Other
Artwork/sculptures 4 $10,000
China, cutlery, glassware $100,000
Flowers/plants $5,000
TOTAL $1,426,000

3Inclusive of import duties and taxes. Do

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This document is authorized for educator review use only by Qadri Aljabri, University of Business and Technology (UBT) until Aug 2021. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860