Investment Analysis of Vegetarian Restaurant - Essay Example

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Investment Analysis of Vegetarian Restaurant by 11/12 Contents Executive Summary 4 Introduction 5 Political Environment and Regulations 5 Political Stability 5 Regulations Regarding Restaurant Business 6 Insurance Requirements 8 Economic Environment 8 Role of Hospitality industry in the Economy 9 Future Outlook of the Industry 10 Economic Environment around the Restaurant Site (Edgware) 11 Social environment 12 Demographics of Edgware 12 Ageing Population of Britain 12 Increase in Working Females 13 Rise in Obesity 14 Increase in Vegetarians 14 Strategy for the Restaurant 15 Competitive Analysis 15 Market Segmentation and Targeting 15 Nature of Ownership 16 The Sole Proprietorship 16 Partnership 17 The Business Entity 17 Sustainability of the Restaurant 17 Building a Clientele 17 Financial Management 18 Operations Management 18 Staffing Issues for Restaurant 19 Technological Factors 19 Ethical and Environmental Issues 20 Conclusion 21 References 22 Executive Summary This paper discusses the macro-economic factors which will affect the running of a vegetarian restaurant in London. The location of the restaurant has been selected as Edgware, London. The paper begins with a short description of the type of restaurant that we are going to discuss. This is followed by the political macro-economic factors which will affect the business. After political factors economic contribution of the UK hospitality industry has been discussed and the affect of recession on the industry has also been discussed. The paper then goes on to discusses the social and demographic factors which will affect the operations of the restaurant. The paper finally ends with the discussion of environmental and technological factors related to the restaurant business. Introduction The paper will focus on the investment analysis of restaurant industry in London. It has been decided to analyse the opening up of a vegetarian Restaurant in Edgware, London. The restaurant will be started near the Broad Walk which is a prominent shopping centre of Edgware. We will provide a PEST analysis of the restaurant industry of London in the following sections. PEST analysis stands for Political, Economic, Social and Technical analysis (Philips Kotler et al, 2009).PEST analysis helps any start up business to identify the environment in which the business has to operate. Political Environment and Regulations Political Stability Political environment of the place in which the business has to be established plays a very important role for any business; restaurant business is not exception to this rule (Teresa Williams, 1997). United Kingdom in general and London in particular is considered to have a very stable political system in place. UK’s regulatory system is one of the best in the world and very business friendly. A recent assessment of 183 countries by World Bank ranked United Kingdom 4th for ‘ease of doing business’ (Investment, 2011). The UK offers a competitive tax environment with one of the lowest corporate tax rates and one of the lowest personal income tax rates in Europe (UK Tax system and Environment , 2006). Most of the authorities responsible for checking the fitness of restaurant will visit the premises themselves and inform the owners of the things that need to be done in order to bring the restaurant in line with regulations. It takes only about 13 days for a business to start in UK against an average of 32 days in the rest of Europe (Colin Barrow, 2011). Regulations Regarding Restaurant Business The first thing to be considered while opening any business are the various laws and regulations of the agencies that have to be followed. The main laws dealing with restaurant business in UK are Food Safety Act 1990 , Food Premises(Registration)Regulations 1991 , Food Safety (General Food Hygiene) 1995 and the Food Safety(Temperature Control) Regulations 1995(Bridget M.Hutter & Tola Amodu , 2008). Food Premises (Registration) Regulations 1991 require any new food catering business to register with the local authorities. This registration needs to be completed before 28 days of the opening of the restaurant and is a mandatory requirement. Before this registration is applied for ; the business owner has to ensure that the premises of his business fulfils the following requirements .These requirements are to be followed for compliance with the food hygiene regulations of the country. . There must be enough provisions for the staff as well as the customers to wash hands. Soap and disposable towels need to be provided for the staff as well as the customers. The staff of the restaurant needs to be provided with facilities for change of clothes There must be adequate supply of drinking water for the restaurant. There must be provision to wash and disinfect the equipments necessary for food production in the restaurant. The design of the premises must allow the food to be prepared in a hygienic manner. It should also keep out flies and rats Fire Safety is of paramount importance while opening a new place of business. The local fire station needs to be contacted in this regard. The local fire station will give the fire safety fitness certificate to the owner of the restaurant which needs to be displayed at all times. The menu of the restaurant also needs to follow certain regulations. The price on the bill of the customers has to in confirmation with the price mentioned on the menu. The menu should also inform the customers regarding the VAT charges and the service charge which has to be levied on them. The restaurant is also bound by law to describe the items correctly in their menu. The description of the items should not be misleading and any illustration of food items should resemble closely with the actual food items which are served to the customers. The restaurant also needs to follow regulations regarding temperature control regulations. The Food Safety Act of United Kingdom lays down laws which says that the food served to the customer needs to be edible. If it is proved that the food caused any health complications for the customers, severe penalties are imposed on the restaurant including closing of the business (Naomi Rees, 2000). A premises licence as well as an individual licence for bartender has to be obtained under Licensing Act 2003 if restaurant wishes to sell alcohol (Media and Spor House of common Culture, 2009). Apart from this the restaurant owner also needs to register for VAT .Registration for Vat can be done by submitting the form to HM Revenue & Customs (HMRC) for approval or it can also be done online (HM Revenue and Customs, 2011). Insurance Requirements It is a legal requirement to have the restaurant insured. Three different kinds of insurance which can be done for a restaurant are liability insurance , contents insurance and business interruption insurance. Liability insurance protects the restaurant in case of any accidents which may involve the restaurant owner , the staff or the customers of the restaurant. Business interruption insurance has become very popular in London after the London riots. This type of insurance gives you a payout for loss of business due to unforeseen circumstances .The most common type of insurance is the contents insurance. This insures all the contents of the restaurant against any mishap. This insurance is also known as the property coverage (David Webb, 1999). Economic Environment The UK hospitality and restaurant industry is one of the leading industries in UK. We will analyse the contribution of the industry towards the UK economy and also the current economic trends in London which are likely to affect the business to be set up. Role of Hospitality industry in the Economy The hospitality industry had an annual turnover of 90 billion pounds in the UK economy (Oxford Economics, 2010). The hospitality industry if which the restaurant business is a part gives direct employment to 2.44 million people in UK. Apart from this it also provides indirect employment to about 1.2 million people. The hospitality industry contributes about 34 billion pounds to the UK treasury. Hospitality industry also contributes 7.4 billion pounds in terms of foreign exchange to the UK treasury. Apart from its own contribution to the UK economy ; the hospitality industry also creates investments and jobs in other sectors as well.42% of the total investments made in UK are done by the hospitality sector A snapshot of the contribution of the hospitality industry towards the UK economy growth is presented below – Contribution Amount(in 000’s) Employment due to hotels 403 Employment due to Restaurants 1263 Employment due to Catering 754 Employment due to event management 20 Indirect employment 675 Turnover 90.5 pounds Tax Revenue 34 pounds Investment 7.9 pounds Source: (Oxford Economics, 2010). Thus with the help of above analysis we can say that the UK hospitality industry is a big contributor towards the economy of UK. The restaurant industry is an important part of this hospitality industry. In fact most of the contributions in terms of employment are with the help of restaurant industry. Thus it will be a wise decision to invest in this industry due to its prominence in the UK economy. Future Outlook of the Industry One of the major factors which has affected the restaurant business in UK is the recession which has engulfed the nation since 2009 and has come back to haunt Europe again due to the recent debt crisis. Due to recession, the disposable income of people has decreased drastically. People are now averse to visiting fancy eating out places which charge exorbitant prices (Matthew E.Kahn, 2010). However ‘value for money’ restaurants have seen an increase in their business since 2009 as people prefer to eat at places which provide good food as compared to places which sell ambience. These types of restaurants are most likely to succeed in the next 4-5 years as consumers demand more and more value for the money being spent by them. Two key macro-economic factors which influence the restaurant industry are interest rates and employment levels. Interest rates during 2011 have been all time low since 2009 but the effect of low interest rates is yet to be seen by the hospitality industry. This may take a few years (Stephen J.Hiemstra, 1994). Unemployment has been in fact rising and this presents a depressing environment for restaurants. High unemployment levels lead to low disposable income and thus a lower spending on ‘eating out’. The biggest factor which has been hitting the restaurant industry in Britain has been the credit crunch. It has been difficult for restaurants to even take loans for working capital from the banks(John Gieve 2008).According to Stephen Broome ; a consultant with Price Water Coppers more and more restaurants are going bust daily due to the credit crunch caused by world recession. In these conditions it will be difficult to find credit for starting a new restaurant. Thus the premise of the restaurant has to be on rent and there should be enough working capital to tide over the initial months. Economic Environment around the Restaurant Site (Edgware) Edgware in London forms part of both the London Borough of Barnet and the London Borough of Harrow. It has been identified in the London Plan as one of the 35 major centres in Great London. This area is principally a shopping and residential area. The shopping centre Boardwalk lies in the Edgware area. This is a major shopping centre and around 130,000 people visit the area for shopping purpose every week. (The Broad Walk Centre Edgware, 2011).this centre is open on all days from 9 to 7.Due to this shopping centre and also the presence of 3 tube stations nearby - Edgware Tube Station, Burnt Oak Tube station and Canons Park tube station the number of footfalls in the area are huge and thus the potential for restaurant owners are also immense. Due to the large number of foot-falls the place which has been chosen for opening the restaurant is perfect and likely to generate a lot of business. Due to the high number of footfalls in the area (130,000); the chances of one time customers visiting the restaurant as well as loyal customers is very large. The employees of the nearby shops will also be a potential source of business for the restaurants. Social environment In the social environment factors we will analyse the demographics of Edgware as well other macro factors which are likely to affect the opening of a new restaurant. Social environment in which the business operates is an important factor for deciding the business strategy (Lynch, 2005). Demographics of Edgware Apart from being a shopping centre and boasting of a major tube station; Edgware is also a residential area. Edgware is one of the major Jewish enclaves within London.36% of the population gave their religion as Jewish. Due to this reason the area has a substantial number of restaurants which cater to the Jewish community. However the area also has 28% Christians, 9% Hindu and 5% Muslims (UK government, 2001).Out of the total population 10% of the population is Indian, Pakistani or Bangladeshi. This section of the population is mainly prefers to eat vegetarian food and will form a good target market for our restaurant. Thus the demographics of the area are favourable for the setting up a vegetarian Restaurant. Ageing Population of Britain At present 10 million people in UK are over 65 years of age. The projection is that by 2050 the total population of people above 65 year old will be around 19 million (UK Parliament, 2011).If we consider the population of Edgware; the area where our resident is to be opened; around 13% of the population of Edgware is elderly population which is living on pension (UK Government, 2001) The ageing population is changing the dynamics of business in all industries and the restaurant industry is no exception to this trend. It has been said that with the ageing population ‘eating in’ is now going to become the norm as compared to ‘eating-out’. Elderly people are less likely to visit restaurants for dining experience. They might ‘eat out’ occasionally but the number of visits of this section of population will be much less than the population the working age. In order to cater to the elderly section of the population; the restaurant has to have a ‘home delivery’ option. Pensioners are most likely to order the food from the restaurant and eat in the privacy of their homes. In this case the only factor which will be important is the quality of food as ambience will not be a factor for this age group. Increase in Working Females The proportion of women in employment has increased to 69% in 2009 as compared to just 60% in 1971.The number of working women has been constantly raising. This is a major macro-economic trend which is likely to have a major effect on the restaurant business in UK. With the increase in number of working women; the number of restaurant visits is likely to increase. A research by Food and Grocery Expert has shown that a family with working women will visit the restaurant only on weekends but the amount of spend on such visits is likely to be on the higher side (The Food and Grocery Expert, 2011).Working women are also likely to try out different foods and hence there is a great chance of white women visiting our vegetarian restaurant. Rise in Obesity Obesity has been on the rise in UK as well as the entire western world. Obesity is also one of the causes of increasing diseases. According to a report tabled in the British Parliament more than 20% of people in UK are obese(House of Commons , 2004).The major cause of obesity has been identified as junk food. Due to this there is an increasing awareness among the people to find alternatives to junk food which causes obesity. This awareness has led to increase in the sales of diet cokes and healthy food. This provides a tremendous opportunity to the restaurant owners to steal business from the fast food outlets. The marketing department of the restaurant would have work in an overdrive to make the people aware about the benefits of vegetarian food and how vegetarian food can help them remove obesity. Increase in Vegetarians The Western world is becoming more and more influenced with Vedic thoughts and eastern traditions. As a result of this many people are turning vegans. With the increase in the age profile of the population, the number of people preferring vegetarian food is increasing day by day. This provides an opportunity for vegetarian restaurants as the chances of increased business are more. Some people have become forced vegetarians in order to save on food costs. Whatever is the reason for turning to vegetarian ways; the end result will be an increase in business for vegetarian restaurants. Strategy for the Restaurant Competitive Analysis The hospitality industry in general and the restaurant industry in specific are highly competitive in nature. In the Edgware area there are many restaurants which serve vegetarian food. Some of the prominent restaurants are The Regency Club, Satyam and Handi. The competition in restaurant industry takes place with respect to price, value, promotions, service, location and food quality. Although food quality is the ultimate source of competition; other factors too are important. Price and value for money have become very important in this day of economic downturn. Most people who were ready to shell out a lot of money for eating out; now prefer to visit restaurants which provide good food at a reasonable price. This provides a very tricky environment for a newly opened restaurant as a new restaurant will have to sustain its operations and also provide promotions and offers to attract new customers. Market Segmentation and Targeting Market segmentation means dividing the market into different segments according to their profitability (Philips Kotler et. All, 2009).By looking at the demographic profile of Edgware we can see that more than 45% of the population of Edgware consists of married couple living with their children. This means that the largest market segment of Edgware is the family. This segment has to be targeted in order to achieve the maximum business. The family segment of the market usually comes to ‘eat out’ along with the entire family and thus is likely to spend a large amount of money on food. This makes the segment very profitable to target. According to demographics college going student form other major part of Edgware population – 25%.this section of the market is the most price sensitive. We will advise the restaurant owners to not only ignore this section of the market but to actively discourage them from visiting the restaurant. Most of them are likely to spend a lot of time when they are out to hang out or with their dates but the average spending will be very less which makes this segment of customer difficult to maintain and service. Nature of Ownership The nature of ownership of the business is an important criterion before starting the business. Here we will analyse the different options available. The Sole Proprietorship This is the most common type of business ownership and the simplest one. However in sole proprietorship; the business and the owner is one; thus all the profits in the business have to be passed off as income of the owner. We as consultants will discourage the restaurant owners to start the business as sole proprietorship due to the following disadvantages – Lucrative tax concessions such as company funded medical insurance and retirement benefits cannot be availed in this form of business Any legal case against the business; automatically becomes a case against the owner of the restaurant. The owner will be responsible for all the debts of the restaurant and personal assets of the owner can also be used to pay off the debts of restaurant. Partnership A partnership is similar to sole proprietorship but with the change that it has two or more owners. The advantage with partnership over sole proprietorship is that it can hold assets and liabilities under its name. However in real sense they are distributed among the owners according to their share in the equity capital; thus making the owners responsible for the business. The Business Entity A private limited business entity is what we will propose the restaurant owners to go by. The major advantages being tax benefits which the business entity provides and also the protection it gives to the owner if the business goes under or fails. Sustainability of the Restaurant Once the restaurant business has started; it is not the end of the road for the promoters .They need to ensure that the business runs smoothly and without any glitches as customer satisfaction is the key in the restaurant business. Building a Clientele The most important part in sustaining the restaurant is to build a clientele. This is the most important and the most difficult part for any restaurant. All the restaurants which are our competitors are having a strong business (as discussed in the previous section) and all these restaurants will meet the basic criteria of serving good hygienic food to the customers. So to differentiate our restaurant we will have to create the ‘WOW’ effect. The ‘WOW” effect in short means surprising your customers , giving them the unexpected and leaving them with a good feeling(Mert Tokman, 2006).The ‘WOW’ effect creates the most effective type of marketing for the restaurant – word of mouth and not only creates a loyal set of customers but also invites new customers to the restaurant. Some of the things which can be used to create this effect are incentives, impartiality and fun. The fun element is the most important – customers should enjoy their stay at the restaurant and should look forward to their next visit. Financial Management The second thing to maintain the sustainability is to organise the finances well. There should be enough working capital arranged to ensure that the restaurant gets through the first six months of the operations even with minimal or no profits whatsoever. There should not be any delay in payment to suppliers or salaries to employees. Delayed payment creates dissatisfaction and dissatisfied employees will vent their anger on the customer which might ruin the business. Operations Management The last part which needs to be looked at for ensuring sustainability of the restaurant is the operations of the restaurant. As part of the operations; purchasing and inventory analysis is important. There will be some glitches during the initial days regarding the type and the amount of inventory which should be kept. Fewer inventories will turn the customers away whereas over-inventory will lead to wastage due to the perishable nature of food items. An important part of the operation is feedback. Verbal feedback is great but it cannot be stored; a proper feedback mechanism should be developed like asking the customers to fill a questionnaire which can be analysed later and acted upon. Staffing Issues for Restaurant Restaurant business is only as good as the people it employees. Chef and the waiters is the most important ingredient of a restaurant. It is quite difficult and cumbersome process to take the employees on the roll of the restaurant. It is much more easy to use and employment agency to recruit staff. The staff can be taken on contract basis from this employment agency. This prevents the restaurant from having permanent staff which they might find difficult to remove without paying compensation in case the restaurant does not work according to the plan. Waiters can also be employed on temporary basis either from local colleges in and around Edgware or through an employment agency. Technological Factors Restaurant is basically a service sector business and requires low amount of technology .However technology has also invaded the restaurant industry. Many restaurants have now introduced touch screen ordering .Some restaurants also provide with menu which are touch pads and the client can confirm his order on these touch pads. However touch screen ordering is mainly associated with self service restaurants’ full service restaurants which caters to the family segment does not require touch screen ordering. This will be an un-necessary expense which should be avoided. However online ordering is a factor which cannot be escaped. If the restaurant owner is looking to provide home deliveries; he will have to be present online. Online presence is also a good way of marketing. Most good restaurants have online presence. Social media such as face book and tweeter is a good way to create buzz around the restaurants when it has just started. Ethical and Environmental Issues Climate change has become a reality in today’s world. Every industry has to watch out the carbon footprints it is leaving on the society. The restaurant industry is also responsible for 18,000 tons of carbon emissions every year.75% of 600,000 glass bottles disposed off every day come from the restaurants and pubs. There are four ways in which a restaurant can be helpful for the environment. Segregation of waste products and disposing off the waste generated by the restaurant is a requirement according to laws of UK which have to follow by every restaurant. Apart from this the restaurant can help reduce the carbon footprint in the following four ways – Left Over food should not be dumped along with rest of the garbage. Leftover food is a very good source of compost. The restaurant will provide enormous benefit to the environment by tying up with a waste management company which can collect this left-over food and compost it to produce manure. Minimal use of plastics and use of recycled paper – A restaurant uses a lot of paper in its day to day operations. It can reduce its carbon footprint by a big amount if all the paper that is used by the restaurant is recycled. We should also try to make minimum use of plastic as it is non-biodegradable and harms the environment. The ideal situation is to not to make use of plastics at all. Restaurant also uses a lot of energy daily for cooking of food items and their storage. The type of energy to be used cannot really be controlled by a restaurant owner as most businesses run on rented premises. However the efficiency with which energy is used depends on the employees of the restaurant. Water – This is a source which is wasted a lot in a restaurant. Use of water is considered to be the norm in a restaurant and not much thought is given to the waste that takes place. Conclusion As we have discussed above, setting up a restaurant which serves vegetarian food will be a good idea in the region. We expect returns to start coming in within a year for the new restaurant. Although the economy is down and the business needs to be treated in a cautious ways; but if a few precautions as mentioned in the discussion above are followed , we are sure that the new restaurant will definitely give returns in the long run. 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