Harqeen Coffee: profit down 20 percent

Revenue is flat, so the fall must come from cost. Coffee is a traded commodity whose price moves a lot, so my hypothesis is that an input cost, most likely coffee beans, has risen. I will split cost to test it.

1. Step 1: Size the problem

   What a strong candidate does: Profit fell from AED 10 million to AED 8 million, a drop of AED 2 million, which is a 20 percent fall. Profit margin went from 10 percent to 8 percent.

   Profit fall (AED m): 10 - 8 = 2

2. Step 2: Confirm the cost rise

   What a strong candidate does: Cost is revenue minus profit: AED 90 million last year and AED 92 million this year. Cost rose by the same AED 2 million that profit fell.

   Cost rise (AED m): (100 - 8) - (100 - 10) = 2

3. Step 3: Read the exhibit

   What a strong candidate does: The cost breakdown shows rent, wages, milk and other ingredients, and other costs flat. Only coffee beans rose, from AED 8 million to AED 10 million. That rise is the entire profit drop.

   Bean cost rise (AED m): 10 - 8 = 2

4. Step 4: Ask, do not assume

   What a strong candidate does: Bean cost is cups sold times grams of coffee per cup times price per kilogram. Flat revenue does not prove that cups sold are flat: a price rise could hide fewer cups. So the candidate asks. Ask: Did the average price per cup or the number of cups change? Answer: Both are flat. Ask: Did the recipe or cup size change? Answer: No.

5. Step 5: Find the input-price rise

   What a strong candidate does: Cups and grams per cup are unchanged, so the whole rise in bean cost is the price per kilogram, up about 25 percent. This is an input-price problem, not a demand or pricing problem.

   Bean price rise (%): (10 - 8) ÷ 8 × 100 = 25

6. Step 6: Check the market

   What a strong candidate does: Ask: Are competitors facing the same bean prices? Answer: Yes, world coffee prices rose and rivals report the same pressure. That matters: if rivals face the same cost, a small price rise is less likely to send customers to them.

7. Step 7: Size a price response

   What a strong candidate does: To recover AED 2 million on AED 100 million of revenue with the same number of cups, the average price must rise about 2 percent.

   Price rise needed (%): 2 ÷ 100 × 100 = 2

8. Step 8: How many cups can the price rise lose?

   What a strong candidate does: Variable costs are beans (AED 10 million) plus milk and other ingredients (AED 12 million), so contribution is AED 78 for every AED 100 of revenue. After a 2 percent price rise it is AED 80 for the same cups. The rise still adds profit unless cups fall by more than about 2.5 percent.

   Break-even fall in cups (%): (1 - 78 ÷ 80) × 100 = 2.5

The whole AED 2 million profit fall comes from coffee-bean prices, so the fix is to recover that cost, not to chase demand. First, every cost bucket except beans is flat, and bean cost rose AED 2 million, about 25 percent, with cups, prices, and the recipe unchanged. Second, competitors face the same bean prices, so a small price rise is realistic: about 2 percent on average recovers the full AED 2 million if cups hold. Third, that rise still adds profit unless cups fall by more than about 2.5 percent. I recommend three actions: fix part of next year's bean cost through longer supplier contracts or hedging (agreeing a price now for future purchases); pilot a 2 percent price rise in a few stores, focused on drinks where customers are least price-sensitive, and watch cup volume; and test blend or sourcing changes that protect taste at a lower cost.

Risks a strong answer names: A price rise could cut cups sold by more than 2.5 percent if customers are more price-sensitive than expected; Locking in bean prices could cost more than the market if world prices fall; A new blend or supplier could change the taste customers expect.

Next steps: Open supplier and hedging discussions this month; Pilot a 2 percent price rise in 10 stores for six weeks and track cups sold.