Startups in Food & Beverages Sectors Copy | www.ehospitalitystudies.com

1.STARTUP INTRODUCTION

Starting a new business can be a daunting task for any food and beverage manager / entrepreneur. In India there are around 100–120 closures per year in any larger city although these reduced to 60–65 in times of high economic growth times and although the numbers for new restaurant openings are countering the closures, one cannot help but wonder why so many establishments close, often within one or two years of their operation. The answer could very well be that many investors fail to understand their market and often they rush into an investment without ensuring that the potential is there. Often they allow their ‘Gut Feeling’ to lead their business decisions without taking any steps to minimize the risks involved. It is important that the market is understood and that an initial investment is undertaken to ensure that the much larger investment into the project will be justified.

Understanding the first steps that are needed to take in starting a new restaurant will give the reader an insight into the food and beverage business and the key issues that need to be taken into consideration. This chapter aims to give an initial understanding of some of the tools available to prospective food and beverage managers and how current managers approach a new operation.

2 THE CONCEPT

Restaurants are businesses that require a creative flair and passion, a good concept is often what separates success from failure. Sometimes the concept will become apparent only after the feasibility study is conducted, but most often the future restaurateur has a good idea as to what she wants to achieve, based on his/her experience and available talent.

The problem arises if the restaurateur is so engrossed in his/her concept that even if the feasibility study clearly shows that the concept is unlikely to work in a particular location they go ahead anyway. There are many examples of concepts that although successful with their first operation they then branched out and found failure when trying to establish a chain of restaurants.

For example, the cases of Pizza center or retail bakery, with extremely successful original concepts they expanded too quick and have had to close a number of their restaurants. A good restaurateur must always keep an eye on the pulse of the market and plan ahead before making key decisions that will affect the business whilst remaining flexible enough to be able to respond to sudden market changes.

In choosing a startup concept there are three primary categories.

1. Restaurants that rely on low margins but high volume of sales (fast food, takeaways, etc).

2. Mid-scale restaurants that offer a full meal but at relatively low prices.

3. Upscale restaurants that rely on high margins (see Michelin star restaurants).

Furthermore, the restaurant may be themed with food from a particular ethnicity such as Chinese, Japanese, Korean, Italian, Greek, Mexican, Caribbean, English, French, German, Indian and Thai to name a few. In the UK, the two most popular Ethnic type of food is Chinese and Indian (Mintel).

Gaps in the market are always a good place to start when considering the concept, wish to develop in the area. If for example, your local area has a good number of Chinese restaurants,

you might wish to consider an alternative location or change your theme completely. Restaurant owners tend to consider how formal or informal they want their establishment to be. Then decide on creating the right atmosphere by carefully considering not only the interior design of the restaurant but the menu items featured for the furniture and cutlery crockery used as well as lighting, the acoustics and type of music of the restaurant may feature.

Another important consideration is that of selling alcoholic beverages. This decision not only affects the overall feel of the restaurant but also the kind of license the restauranteur will need to possess. The Menu is the next key decision and Chapter 6 covers the Menu in some detail. Pricing is of course of paramount importance as overpriced menu items or menu items that offer no profit may set the business in a difficult financial position. One final decision is whether the restaurant will offer takeaway or delivery service. For some restaurants food deliveries often match revenue generated by sit in customers.

3 FEASIBILITY STUDY OF STARTUP

The feasibility study is a crucial tool for determining whether a project has a good chance of succeeding or failing. A feasibility study is a document that is developed after the restaurateur has studied the market and analysed the economy so that he/she has a good knowledge of the environment that the business is proposed to be developed in and the expected return on the investment.

Although there are many guides about conducting feasibility studies the key areas that need to be covered remain largely the same. Here we propose an approach to the feasibility study from

the specific to the more generic. Since the most difficult and time consuming task can be the collection of data, starting with the location might save valuable time and resources.

Location

There are two major questions that any future restaurateur wishes to address. What type of restaurant should I open? Where do I open it? The first question is often addressed and redefined by the completion of the feasibility study and the answer to the second question can be the difference between success and failure.

Committing resources to a specific site simply because it has a surprisingly low lease without considering the market or the compatibility of the location to concept is a mistake made far too often. No matter how great the concept of a restaurant is, if it is not accessible it can easily be an empty restaurant. For example, during peak summer times potential customers would prefer to walk in the side of the street that offers shadow if the restaurant is positioned at the wrong side of the road customers would not even consider stopping to look at the menu. A restaurant with limited or no parking that requires a long walk could deter potential customers. Disabled access must also be considered as well as how close the restaurant is to major streets.

A restaurant must also be visible, many restaurants rely on walk in business, if the restaurant cannot be seen or it is hard to find it can be put up to guide potential customers is important. External lighting that both attracts and guides the customer is essential. The building appearance can be a deterrent or an attraction. How close is the restaurant to potential business sources such as offices, hospitals or hotels as well as how close to potential competitors.

It is a good idea to project potential customers by market segment based on distance from the restaurant. The traffic volume can also be a key factor so looking out for traffic and pedestrian

patterns as well as identifying peak and off-peak periods is useful. There are other considerations such as future developments in the area, safety environmental issues and restrictions to name a few. It is important that a complete profile of the location and the

immediate area is constructed to ensure that the site is a good match for the type of restaurant intended.

Local market area Having the location in mind makes it easier to define the geographic

size of the market. Overestimating the amount of miles potential customers are willing to travel to get to the business is a common mistake. It is often better to have a pessimistic approach

rather than an over optimistic. The next step involves obtaining demographic data about the people that reside or work in the area specified. Demographics such as age, gender, education

and income as well as business growth trends, tourist visits, etc. can be obtained through local chambers of commerce, business development centers, market reports and local economic development agencies.

Consultancy firms often produce reports that illustrate dining out behaviour and preferences such as menu item preference, dining frequency, preferred restaurants, etc. Such reports can

help to understand the economic characteristics of the population and further refi ne the concept.

Competition

Analysing the competition enables to analyse the demand and opportunities in the market. A common mistake is to only analyse restaurants that fi t the particular concept. So a fast-food

operator might be tempted to cut corners and only analyse similar operations in the market and avoid investigating other type of restaurants. It is important to remember that each restaurant is competing for customers disposable income and disposable time therefore all food and beverage operators no matter what their concept is will affect the business.

By visiting existing restaurants one can gain access to valuable information such as the type of menu offered, quality of food and service, pricing policies and even estimate the turnover of the competitor. How many of your competitors are independently owned and how many are part of a chain that can affect your profitability. Chain restaurants, for example, will have an opportunity to lower prices as economies of scale enable them to buy goods at lower Once all the data is collected and location, market, competition and industry has been analysed the restaurateur is ready to make some projections to estimate the business turnover and be

more specific about expected numbers in areas such as customer average expenditure, number of covers and potential costs.

It is advisable to look at financial projections using weekly, monthly and annual projections as seasonality will affect the business and splitting the year to a number of seasons will make it

easier to forecast more accurately. Restaurants are easily affected also by the day of the week, often a restaurant will find that a particular day is the busiest whilst another might be the quiet

day. For a new restaurant this might be hard to predict although competitor analysis should have helped. If the restaurant is an existing one historical data makes it easier to do forecasts.

Existing restaurants may wish to do a feasibility study if they consider expanding the business or wish to open a second or third operation.

Refining the concept The information gained so far will enable the restaurateur to evaluate the business idea and come to conclusions as to whether it is a feasible operation or not. The concept can then be rejected or refined in order to achieve better returns on the investment.

The key to the concept is customer preference and for most type of concepts this can be relatively easy to predict, however for brand new concepts that have never been tested before it may not be as easy. Often with a new concept the consumer may not know that it would prefer such a product so although asking the consumer may yield negative results, when the product is actually offered it can be found that the consumer actually likes the product.

The business plan

The business plan is a document that spells out a company’s expected course of action for a specified period, usually including a detailed listing and analysis of risks and uncertainties.

For the small business, it examines the proposed products, the market, the industry, the management policies, the marketing policies, production needs and financial needs. It is worth noting that often there is confusion between a restaurant feasibility study and the business plan, this may be so because a number of information that become apparent in the feasibility study will then be used in the development of the business plan. In the business plan the manager addresses significant issues that have been identified in the feasibility study and states how he/she is going to address them.

Who will be reading the business plan can have an effect on how it is written, although the key information remains the same, there is emphasis in different sections of the plan if the

operator goes for bank financing (debt finance) as opposed to investors (equity finance). A bank may be looking for a solid plan and assets that will ensure repayments of the loan whilst potential investors may be looking for high returns on investment.

A well-developed business plan makes all Elements of restaurant business plan the difference when approaching potential investors. Investors and lenders will request a copy of the business plan and it is often one of the key tools that helps them make a decision as to whether they will invest or not. The heart of a good business plan is the unique differentiation point. The key innovation that makes the business stand out and ensures potential investors will consider financing the business. The following sections illustrate the main parts of a business plan.

Business threats Potential threats that may affect the company are disclosed. By disclosing such possibilities, the restaurateur is letting the reader know up-front that there are risks associated with the business. Potential investors appreciate such honesty and expert businessmen will expect business risks been included in the business plan as a norm. Some of the areas that should be covered are external and internal threats, insurance provisions and contingency

plans.

4 FINANCIAL PROJECTIONS

If the business does not make sense financially then there would be no reason as to why one should invest. The financial reports should show a good understanding of the business and its viability. New businesses can also show forecasts but existing companies should also show three to five years of previous actual data. The expected financial statements are normally a profit and loss statement, statement of cash flow and a balance sheet. Forecasts are shown in no less than five years. Financial projections are available by month, quarter and annual reports. A break-even analysis is also normally included.

4.1 Commercial bank loans

Getting a bank loan especially if the restauranteur does not have a proven track record can be very difficult. Nevertheless, a good business plan most certainly helps. It is may often be the case managers visiting a number of bank managers before getting a positive response. In cases where this is a loan to fund a second property, having a track record makes thinks easier. If the operator already runs one or two successful restaurants, chances of receiving a bank loan increase. The problem with commercial bank loans is that if the business does not do well you will still have to pay back the loan whilst with investors who purchase equity on the business they share the risk. The advantage of the commercial bank loan is that if the business is a success the restauranteur can still have full control of the business.

4.2 Small business grants and loans

There are various opportunities for alternative sources of funding for small businesses for example, the ‘Early Growth Fund a programme that was developed to encourage risk funding

for startups and growth fi rms. It makes available to successful applicants an average of £50,000 another interesting source of funding is the Small Firms Loan Guarantee which considers

businesses with viable business plans but was unsuccessful in securing a conventional loan due to lack of asset.

4.3 Investors

Attracting investors can be hard but it can be a good way of financing the first operation. Good networking is crucial and often the new restaurateur would seek small investments from often they will buy equity in the business and a good business structure would ensure that the restaurateur still has control of the business. Investment banks can also be a source of funding

but often they will only consider established restauranteurs.

4.4 Partnerships

A partnership may be a good way of raising capital but the potential partner should be aware of all the risks involved. There is a number of positive outcomes from having a business partner.

For example, the risks and responsibility is shared, other strengths are brought in to the company, often partners will feed of each other in terms of ideas and develop solutions that would otherwise go unnoticed. It is imperative that the terms of the partnership are laid out well in advance because if a partnership turns sour the litigation costs to break up the partnership can be very high. Often friendships may end due to the strain the business

may put on them, either because of conflict of interest or because of one partner underperforming.

4.5 Personal finances

A personal loan, such as a home-equity loan can provide supplemental funding. Personal savings, Individual retirement (Ira) accounts, Credit cards could be sources of part financing a

project. Personal loans may often carry a high interest rate and the added risk of losing, personal assets.

4.6 Venture capital

Well-established restaurateurs may consider the possibility of a venture-capital firm willing to invest. Such firms invest significant funds in companies in which they foresee major expansion.

Compared with other investors, venture-capital firms usually require a much greater partnership and will help determine the company’ s direction. They expect to see a large return of their investment within about five years.

11.5 FRANCHISE

A franchise can be a good business set up in ensuring funding. A good franchisor will have a positive impact in the decision-making of banks and investors in lending money to the operation. Companies with successful restaurant concepts (franchisor) may be willing to franchise their concept to the restauranteur (the franchisee). Franchising is an arrangement in which the franchisor (main company) grants to the franchisee (new restauranteur) a license to use particular commercial methods of operation which he has developed.

The franchisee contributes the necessary capital to start up an operation, effort and motivation to run the establishment, and agrees to be controlled by the franchisor; the franchisor in return contributes to the training of the franchisee, the procedures of operation and other managerial expertise.

Advantages of Franchisee

1. It offers the opportunity for immediate entry into business.

2. It offers immediate entry into a particular market with a proven successful ‘package’, that is, a brand product.

3. Assistance is offered in finding and evaluating sites.

4. Assistance is given with initial layouts, shop fitting specifications, and advice with planning applications.

5. Assistance is given with initial training of management and staff.

6. The franchisor provides menus, and sells (or nominates suppliers) all food, beverage, small equipment, etc. to the franchisee.

7. The franchisor provides all operational documents.

8. The franchisor provides regional and national promotional support.

9. The franchisor provides regular advice and assessment.

The advantages to the franchisor are:

1. It enables the franchisor to expand the business with speed using the franchisee ’s investment capital.

2. It enables the franchisor to achieve market penetration with relative ease and speed using the franchisee’ s capital, time and energy.

3. It reduces the number (if any) of development staff to find sites and to be involved in lengthy openings of new units.

4. It increases the benefits to the franchisor by providing significantly greater market exposure of the product.

5. It enables the franchisor to be the required supplier of the food, beverages, disposable commodities, equipment and at times fixtures and fittings, to the exclusion of competitors’

6. products in all forms.

7. It enables the franchisor to have the franchisee under a period contract, to pay for entry into

8. the franchise, to pay a commission fee based on turnover, and often to pay a specific

9. percentage of turnover towards regional and national advertising and promotions. An example

10. of a franchisor would be McDonalds restaurants. The franchisor in this case is McDonalds and the franchisee is any operator that wishes to buy a franchise from McDonalds. Often there might be confusion between a franchise and a chain. In a chain all outlets are owned by the main company. In a franchise some outlets are owned by individual operators who then pay fees to the main company.

11.6 STARTUP PROCEDURE

The idea of starting up own F&B business may seem daunting, especially when the outlook for start-ups is bleak. Research shows that as many as 90% of new restaurants fail. The silver lining is that 10% don’t.

To guide budding entrepreneurs, plan of action is given below as a startup procedure:

1. Make a Business Plan
2. Secure your financing
3. Choose location
4. Design the layout of your space
5. Choose suppliers
6. Get licenses and permits
7. Hiring employees
8. Advertise the business

1. Make a Business Plan

The first thing to do before making any investment is do research, diligently. Write a business plan for the investors after spending a few weeks (or even months) better knowing the larger foodservice landscape, customer target, current trends, and rivals.

Think of it as exploring 4C’s:
customer, consumer, channel and context.

1. Define your target market

2. Define your USP

3. Define style of restaurant

4. Select your food type/menu offering

5. Define your brand

2. Secure financing

1. Get a business loan

2. Turn to family/friends

3. Bring in a partner or find outside investors

4. Use crowdfunding

5. Government aid to get

It's important to keep in mind that you'll probably have to wait years before you make your first profit, and money will be scarce at first. So think about starting small and choose a business partners wisely, because they’ll be around for a good while.

3. Choose location

The location selected for establishment will depend on a number of factors, and unless owner relying heavily on foot-traffic, they don’t necessarily need to be in the hottest new retail location.

· Cost: based on your sales and profit projections, what can you afford to spend on rent?

· Accessibility to potential customers: how are you customers getting to your restaurant, by foot, by car, by public transport?

· Restrictive ordinances: some neighborhoods have strict noise regulations or restrictions on the times when your suppliers can deliver your produce

· Proximity to other businesses: competitors and other businesses can influence your traffic, so map out what’s happening around you, and how it could affect your business

· Plans for the future: consider what the neighborhood will look like in 2, 5, 10 years, and if there are any major development projects underway that could change the local landscape

4. The layout of your space design

Once the venue is decided, start working on the layout and design your space.

Depending on the type of establishment, restaurants often devote between 45 and 60 percent of their space to the eating area, approximately 35 percent to the kitchen, and the remaining space to storage and offices.

Make sure there is a seamless transition between the kitchen and eating spaces by carefully considering their layout. Make sure your chefs have adequate room to serve, garnish, and decorate their meals. Prep space is also essential.

5. Choose suppliers

Entrepreneurs should look for a trustworthy supplier, who has a good track record of providing quality products and rota of successful partnerships. For food suppliers, one need to be sure about suppliers delivery schedules and food safety management practices. And go local – they usually offer fresher ingredients.

6. Get licenses and permits
When it comes to regulations, every country, county and city is different. But it need to check in with local regulatory office, and consider getting legal counsel to make sure to adhere to all of the local health & safety codes and food regulations.

7. Hiring employees

Look for candidates with sufficient experience and a successful track-record, who are quick on their feet, can multi-task and are efficient. All of the employees should work well under pressure, and customer-facing staff should have exceptional social skills.

8. Advertise the business

Before opening restaurant, a fair amount of advertising to alert for local community that there’s a new eatery on the block.

1. Build a wise website: make sure that it’s easy to navigate and includes all of the key information, including your opening times, menu, a booking engine and if/how to cater to special requests.

2. Utilize social media: register for accounts on Facebook, Twitter, LinkedIn, and Instagram, and post pertinent information and stunning images of the restaurant and the preparations for opening day as soon as possible.

3. Advertise in the neighborhood paper (and online news platform).

4. Host a soft opening: this is not only a great practice-run before opening day, but will also help create some buzz about the restaurant within the local community.

5. Offer promotions to new guests: offer a free drink or dessert for the first 10, 50 or 100 customers – it will be remembered for the hospitality and generosity.

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Specialised F & B Service Management

Beverages Service
Paperback
January 2020 Edition
Author:
Dr. Deepa Prasad Venkatraman
Ulhas Chaudhari

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Food & Beverage Services Practical & Techniques
Paperback
January 2020 Edition
Author:
Dr. Deepa Prasad Venkatraman
Ulhas Chaudhari

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