The Commerce Tavern
Executive Summary
The Commerce Tavern was a popular restaurant located in Merchants Square, Colonial Williamsburg. H. Franklin Nilson established The Commerce in 1982, and he has been operating this restaurant very well. Recently, Nilson had a conversation with Anne Hamlet from The Virginia Merchants Bank about the acceptance of credit card consumption at The Commerce Tavern. VMB was willing to give The Commerce authorization of the use of MasterCard and Visa cards at the tavern. However, the general payment method of The Commerce was cash-only, Nilson was not sure if this traditional method could always working well for his business in a long term, and if he should make some changes on the cash-only policy. In addition, if Nilson adopted the credit policy at the tavern, there would be related fees levied by VMB along with the increased business of The Commerce. Thus, Nilson must collect useful information and make a deep analysis before making the final decision.
Decision Problems
In this case of The Commerce Tavern, the major decision problem was that whether or not Nilson should accept credit cards as a kind of payment method at his Tavern. Under this decision problem, Nilson should think about if the cash-only payment method was too simplex to maintain or improve his business in the future; in addition, he had to consider the problem of the levied fees of credit cards.
Background of The Commerce Tavern Nilson established the commerce Tavern in 1982 in Colonial Williamsburg, and it was located in Merchants Square where had a free bus stop. The Commerce had built its popularity for over a decade, having stable customers, and convenient traffic; Besides, The Commerce offered an elegant environment for his guests; its charm of colonial style was a bright spot to attract the customers. In addition, The Commerce had authentic Colonial gourmet food and wine/liquor with reasonable price. About its patrons, a large portion was local people, which laid a strong foundation of local customers, and a small part was visitors of Williamsburg. In view of the background of The Commerce Tavern, it had excellent conditions to attract customers, so this advantage would not be influenced by the change of payment method.
Looking at the credit cards agreement
The standard bank credit-card-participation agreement from VMB stated in detail the responsibilities of The Commerce Tavern, especially checking the expiration date of the card, making sure that the card number did not be restricted or revoked, etc. It also stated that VMB would credit The Commerce immediately for the face amount of the sales slip subtract the fees calculated at the rate that time.
About the rate, Hamlet told Nilson VMB would charge The Commerce, a new participant, at the rate of 4 percent, and this rate would remain for one year. However, at the end of the year, VMB would reset the rate according to The Commerce’ s credit-card sales of the total year.
The rule of setting the rate was shown as follows: Credit-card sales ($) | Rate | Greater than 5000,000 | 2% | Between 200,000 and 5000,000 | 3% | Less than 200,000 | 4% |

Analysis of the credit-card usage
Hamlet provided a chart with credit-card usage information of other restaurants to Nilson, which could be used to estimate the rate of The Commerce after one year. Due to Nilson was familiar with all the restaurants on the list, there were eight restaurants could be used for reference. These eight restaurants had a comparable price range, and distinctive cooking and decoration, which could attract similar guests to those of The Commerce. Therefore, the data of the eight restaurants could provide a good reference for The Commerce.
The credit-card usage of the eight restaurants in 1992 was shown as follows: Restaurant | Credit-card usage | Madison Inn | 39% | Lordsmill | 38% | Grecian Urn | 52% | Black Beard’ s Hold | 69% | Settlement Dining Room | 25% | The Sailty Dog Inn | 42% | Neptune’ s Seafood Pavilion | 44% | Peyton’ s Ordinary | 61% |
The median of the data above was observed as a usage rate of 43%, and then the data was divided in half again by 38% and 57%. These figures could be used as the reference data of The Commerce in 1993.

The average credit-card usage of the eight restaurants in the past three years was shown as follows: Restaurant | Average credit-card useage | Madison Inn | 39% | Lordsmill | 37% | Grecian Urn | 51% | Black Beard’ s Hold | 70% | Settlement Dining Room | 28% | The Sailty Dog Inn | 42% | Neptune’ s Seafood Pavilion | 45% | Peyton’ s Ordinary | 61% |
Through observation, the median of the data above was about a usage rate of 44%, which means the average level of the credit-card usage of the eight restaurants in the past three years was 44 percent. This figure could be used as the estimated credit-card usage of The Commerce. For Nilson’ decision of accepting credit cards fro payment, the credit-card usage rate of 44 percent made the acceptance of credit cards considerable to some extent.

Analysis of the rate of fees
The expenses of The Commerce in 1993 was shown as follows: Items | Figures ($) | Food | 168,000 | Wine/liquor | 44,000 | Staff | 68,000 | Utilities | 60,000 | Other | 115,500 | Total | 456,300 |
The revenues of The Commerce in 1993 was shown as follows: Items | Figures ($) | Food | 560,000 | Wine/liquor | 180,000 | Total Revenues | 740,000 |

First, assuming the credit-card usage of The Commerce had three possibilities of 43 percent, 38 percent, and 57 percent, and the credit-card sales in 1993 could be calculated as follows: Credit-card usage | Credit-card sales ($) | 38% | 269,952 | 43% | 305,472 | 57% | 404,928 |
These three figures of $269,000, $305,000, and $404,928 were all between $200,000 and $500,000, thus, the new rate was likely to be 3 percent.
Second, assuming the credit-card usage of The Commerce was 44 percent, the credit-card sales in 1993 could be calculated like this:
740,000 * 44% = $325,600
325,600 * (1 – 4%) = $312,576
The credit-card sales of $312,576 was between $200,000 and $500,000, the new rate would be set at 3 percent in the next a couple of years.
In a word, no matter looking at the credit-card usage of the eight restaurants in 1992 or the average credit-card usage of the eight restaurants in the past three years, the credit-card sales are all between $200,000 and $500,000, which greatly increased the accuracy of the estimated new rate, and the new rate would be 3 percent. The rate of fees levied by the bank was lowered.

Analysis of other information
Nilson found the article that was mentioned by Hamlet, and looked up the content about credit cards used in restaurants. That article reported a figure of 1-in-10, which means the acceptance of credit cards would bring one additional customer in 10 to The Commerce, increasing the number of customers to some extent, even though Nilson did not think The Commerce could benefit from the small growth of the number of customers. However, the acceptance of credit cards would actually bring more conveniences for the customers. For example, the customers who were accustomed to use credit cards do not need to worry about if they have sufficient cash to pay for the bill, especially for the tourists who usually do not bring too much cash. The Commerce had a part of guests was just the tourists visiting the Williamsburg. The more conveniences a restaurant provides, the more customers will be attracted to the restaurant.
Then, to hold more information, Nilson consulted several acquaintances in the restaurant industry. One friend told him that the customers using credit cards would generally spend more than the customers using cash, and the credit-card policy had been working well in the restaurant. However, another friend told Nilson some problems of accepting the credit cards, like the possible errors of filling out the sales slip, especially the problem of 4 percent sales tax and tips charged on the credit cards. For those tips charged on credit cards, Nilson planed to reimburse his staff, even though the staff would get less than the tips charged on credit cards, in the other hand, the credit-card customers would be likely to give more tips than the cash customers; for the 4 percent sales tax, it would be a very small amount that could be ignored.
In addition, there was a crucial factor in the process of decision-making, which was that the customers would spend more on food and wine when they used credit cards than that of using cash. However, Nilson could not find other ways to figure out this data except his own experience over the years he operated The Commerce. According to his experience and the bills, Bilson found that the increase of the spending paid by credit cards was either more than 5 percent or less than 5 percent when compared to the spending paid by cash, and the possibility of the increase of more than 5 percent and less than 5 percent was the same. And he also found that the increase of the yearly credit-card sales over what the same customers might use cash to pay was at least 1 percent, and 15 percent at most. Finally, basing on a optimistic estimate, Nilson concluded that the possibility of yearly increase of less than 8 percent was three times as much as that of more than 8 percent, and at the same time, the possibility of yearly increase of more than 3 percent was three times as much as that of less than 3 percent. Thus, the possibility of a year’s increased spending thought accepting credit cards was likely to be between 3 percent and 8 percent.

Analysis of the hurdle rate
According to the revenues in 1993, which was showed as $740,000, in the next three years, through a rough calculation, if there was no unexpected circumstances, the estimated revenues would be shown as follows: Year | Revenue as minimum ($) | Revenue as maximum ($) | Average Revenue | 1994 | 762,200 | 799,200 | 780,700 | 1995 | 785,066 | 863,136 | 824,101 | 1996 | 808,618 | 932,187 | 870,403 | Through a set of analysis, Nilson thought the hinge to help him with the final decision was to balance the increase in sales and the discount taken by VMB to reach the hurdle rate of 20 percent.
Assuming the expenses of The Commerce of the next three years were 456,300, and the rate of fees was 3 percent, the average ROI of the next three years would shown as follows: Year | Profit ($) | Cost ($) | Average ROI | 1994 | 300,979 | 479,721 | 63% | 1995 | 343,078 | 481,023 | 71% | 1996 | 387,991 | 482,412 | 80% |
It was obvious to see that the ROI of the next three years were all much greater than the hurdle rate of 20 percent, so the acceptance of credit cards was profitable for The Commerce.

Conclusion/Recommendation
Recently, Nilson, as the operator of The Commerce Tavern, was thinking about a decision of accepting a credit-card payment method. The Commerce had been a popular restaurant with stable customers, which would not be reduced customers because of the acceptance of credit cards; Through the analysis of the credit-card usage, and the rate of fees, the rate of fees levied by the bank in the next couple of years was lowered at 3 percent; Adding the analysis of the hurdle rate, the ROI of the next three years were much greater than the hurdle rate, which means the decision of adopting credit cards would be profitable; Considering other information collected through different channels, accepting credit cards would bring conveniences for customers, especially those who were not accustomed to use cash to pay the bill, increase the spending of customers, and attract more customers. In addition, if Nilson would like to cancel the agreement with VMB when he found that the acceptance of credit cards was not profitable, there was no any penalty from the bank. Based on those reasons above, Nilson could make a decision of accepting credit cards as a new payment method in The Commerce Tavern.

Reference Samuel, B., Robert, C., Sherwood, F.J., & Phillip, P. (1998). Quantitative Business Analysis: Text and Cases. Boston, Massachusetts: Irwin McGraw-Hill.