GMAT Essay Topic 514 - The following appeared as part of a memorandum from the loan department of the Frostbite National Bank. "We should not approve the business loan application of the local group that wants to open a franchise outlet for the Kool Kone chain of ice cream parlors. Frostbite is known for its cold winters, and cold weather can mean slow ice cream sales. For example, even though Frostbite is a town of 10,000 people, it has only one ice cream spot ? the Frigid Cow. Despite the lack of competition, the Frigid Cow's net revenues fell by 10 percent last winter." Discuss how well reasoned . . . Etc.
In their memo above, the Frostbite National Bank’s loan department is recommending to reject a local group’s business loan application that wishes to open a franchise outlet for the Kool Kone chain of ice cream parlors. This recommendation was based on the fact that Frostbite has cold winters which generally means slower ice cream sales. In addition, the town’s only ice cream spot – the Frigid Cow, saw a 10% decline in net revenue in the last winter. Although the line of reasoning may seem logical at first glance, upon further examination, it contains severe flaws that casts doubt on the validity of its conclusion.
Firstly, the bank makes the assumption that because Kool Kones might have slower sales during winter, it will also have bad business during the other months of the year. This is a very myopic view that ignores the big picture. The bank should consider the potential annual sales the business can generate instead of just focusing on the winter months. For example, if Frostbite also has a very long and hot summer, then there will be a huge demand for ice cream in those months. In addition, there is only one existing ice cream parlor in Frostbite, which means when demand spikes, there may not be enough supply to meet the demand, thus leading to a potential loss in revenue. If Kools Kones were to open, it will be able to capture all of these extra demand and become a profitable business.
Secondly, the bank makes the mistake of predicting the success of Kool Kones based on Rigid Cow’s poor performance during last winter. But this is an unfounded leap of faith because a variety of factors could have contributed to Rigid Cow’s decline in revenue. For example, the Rigid Cow might not have a central location, only offers a very limited of selection of flavors, and does not provide satisfactory customer service. Without knowing the details behind what actually drove the 10% drop in Rigid Cow’s revenue, it is irresponsible to assume that Kool Kones will suffer the same fate. In addition, the bank’s loan department’s objective is to generate interest income from the loans. If the local business group has excellent ability to pay back the loans, it would still be economically beneficial for the bank to make the loan even if Kool Kones does not become a booming success.
In conclusion, the points outlined in the loan department’s memo are short sighted and makes big assumptions without substantiate support. If the bank conducted a market survey among the Frostbite residents and found there’s a general lack of demand for ice cream, then it would make the argument a lot stronger. With the current information provided, the memo’s points are weak and its recommendation should not be relied upon.