Feasibility for a New Business Venture - Case Study Example

Feasibility Study Executive Summary The paper presents a feasibility study for a proposed new business venture, in this case a mid-sized multi-cuisine restaurant at the Waterfront in Sydney. The restaurant would follow the business model of partnership, wherein, I would be a major partner with 60 per cent stakes and would also look after the financial issues. My partner (name) would hold the rest of the 40 per cent stakes and would oversee operational issues. The restaurant aims to target the foreign tourists, inbound tourists as well as local residents by providing them with ethnic cuisines from around the world under a single roof. The business is expected to start getting profits by the operation’s second year and substantial profit by the next year. Thus, the feasibility report states that the venture is a viable business option. Introduction and Background This restaurant feasibility study is for “Cuisine of the World”, a new medium-sized multi-cuisine venture to be located in the up-market neighbourhood of Waterfront in the bay area of Sydney. The emphasis of this restaurant is to provide different cuisines from the world over by retaining its ethnic flavour. Business model In order to make a business successful, it is imperative to choose the right business model. Such a business model should not just aim at making profits but should also be sustainable in the long run. While starting a business, we were faced with many choices regarding the business model. We could start a business which could be either part-time or full-time, from home, through online or in a commercial complex. The first and the foremost step towards choosing the right business model was to identify the amount of time we could devote to the business. In case we decide to start a full-time business, we had to commit wholeheartedly to the process and were required to spend considerable amount of time working to establish the business. Thereafter, we had to decide on the model to be adapted, whether to set-up a home-based business or one in a business complex. Further, we also had to define the type of ownership for the business as well (Kuratko & Hodgetts, 2007). We decided that the business model for the restaurant would be based on a simple parternship model i.e. the business would be owned by the founders, with a 60:40 partnership ratio. The owners of the restaurant would be (name of the client) and (name of another partner). (Name of the client) would look after the financial strategies, while (name of partner) would oversee operational issues within the restaurant. Both the owners have earned their major in Business management from the University of (name of the university from where the partners have graduated). Due to the business’s nature, we would have to devote full-time into the business. Further, we also need to run the business from a suitable location, ideally a busy commercial complex or a famous tourist spot. An ideal location for the restaurant at the Waterfront has been secured for a lease of $2000 per month. It is expected that the restaurant would start generating profit by the year end. The place secured had been an old restaurant; therefore, infrastructure cost would not be much as the place is already equipped for starting a restaurant. Feasibility study A feasibility study is undertaken to identify the problems and opportunities, determine the aims and objectives, define the possible outcome, access the cost and benefits as well as find out solutions for the problems before starting a new venture. It helps in making decision on the basis of cost-benefit analysis for the venture and by creating a project viability report. This process is undertaken prior to creating a formal business plan to understand whether the project would be viable enough or not (Drucker, 1985; Hoagland & Williamson, 2000). The findings from a feasibility report are studied by the potential investors to understand the credibility and viability of the project. Generally, such a study consists of analysing the market, technical, business model, management model and financial model viabilities (Thompson, 2003). For this venture we would undertake the analyses of the management model, market research, operations plan, marketing plan, financial plan etc. Management Team As discussed earlier, the organisation would be based on partnership. Therefore, we as owners would have greater responsibilities towards the restaurant’s success and have to oversee the financial along with operations matters as well. I would be the Chairman for the restaurant. I have worked in various financial companies after undertaking my finance degree. I have also worked in major restaurant chains in their accounts department, such as McDonalds. My financial skills, combined with my restaurant experience would help in making the business profitable. My partner would be the CEO of the restaurant and would look after the operational responsibilities. He has extensive knowledge as well as experience in the field of business management. Before undertaking the graduate programme in business management, he had worked in several restaurants in supervisory as well as operational roles and is aware of the nuances of the business. The venture would be financed through personal finances majorly. We have pulled in their resources to start the venture. However, we may also require bank financing or investors’ backing at the later stage to expand the business. The major investment into the business, besides the infrastructure ones, would be centered on employing the right resources. The owners plan to invest into forming a robust team and provide them with good compensations. The staff is being planned as per the restaurant’s size and revenues that are projected. Staff Compensation (annual) Total compensation (annual) Manager (2 nos.) $50,000 $100,000 Chef (4 nos.) $42,000 $168,000 Assistant (4 nos.) $35,000 $140,000 Hostess (2 nos.) $35,000 $70,000 Waiters (5 nos.) $30,000 $150,000 Cleaning (2 nos.) $25,000 $50,000 Other people (1 nos.) $20,000 $20,000 Total people 20 Total payout $698,000 Industry size and company In Australia, the restaurant business is considered to be an integral entity of the cultural and social communities. It is although a dynamic business, but is also very dispersed in nature. In 2001, the country recorded around 29,000 registered restaurants that employed close to 189,000 people (ABS, 2001). The business accounted for around 0.61 per cent of the total GDP in 2002-03, with a turnover of around $10,134 million (ABS, 2003). The business is dominated by small restaurants, with around 91 per cent of the businesses employing less than 20 people (ABS, 2000). The profits in this business are influenced by the increase in production and labour costs. The most important expenses in this industry are the purchases and labour costs, which is around 43 per cent and 31 per cent, respectively, of the total cost (ABS, 2000). Nonetheless, the restaurant business plays a very vital role in the Australian economy. It is one among the biggest purchasers of raw food materials and contributes majorly to the tourism industry (ABS, 2002). The sector does not use too much of technologically advanced tools. Around 72 per cent of the restaurant businesses in the country use computers, as compared to around 84 per cent by other industries. Further, around 57 per cent have access to Internet, as compared to 72 per cent by other industries (ABS, 2003). The sector has to abide by various complex industrial rules and regulations established by the Federal, State as well as Territory tribunals. These regulations include penalty clauses for working outside the normal working hours. The Company and the Concept The ‘Cuisines of the World’ would a multi-cuisine mid-sized restaurant at the prime location of Waterfront in Sydney. It would cater to the tourists coming from various parts of the world as well as provide the taste of different flavours under one-roof to the local residents. It would be a specialty restaurant with a difference as it would not just focus on one cuisine but various cuisines around the world, for instance, Italian, Lebanese, Chinese, Indian, Thai, Continental etc. The restaurant would have an open-air as well as inside sitting. The open-air décor would match that of Italian roadside cafes. Also, small kiosks would be set-up for providing street foods of various countries. Each of these kiosks would have the distinct mark of the country it represents. The indoor restaurant would be a big hall with nice and cozy sitting areas. Each of the corners would be dedicated to a cuisine and information about the country of its origin and the menu would be displayed in graphics, pictures, maps, ingredients and souvenirs. The restaurant would have open kitchens, one for each cuisine. The chefs would dress up as per the cuisine they are preparing. Services The menu would be well-planned and provide various specialties from each of the cuisines. In order to reduce waste, the menu would also have special chef’s recommendation that would consist of at least 85 per cent of the meals that is being commonly ordered. The chefs would be selected as per their cuisine specialty. The restaurant aims to provide at least eight cuisines initially. Therefore, the chefs would be required to be proficient in making at least two cuisines. Further, the hostesses and the managers would imparted training about the menu and the different cuisines, so that they could guide the customers with their orders. The chefs would also require producing ethnic ingredients and recipes from different cultures of the world. The restaurant aims to procure authentic ingredients so that the true value of the restaurant is retained. Entry and growth strategy The restaurant business is highly competitive and does not offer high profit margins. However, it has very few entry barriers. The business requires skill and knowledge to survive. Further, the trade is often seasonal and is influenced by external variables such as political unrest, terrorist attacks etc. It is also difficult to predict long-term growth plans as the business is prone to many fluctuations (Coulter, 2000). The business should provide quality product and service to gain an edge over the competitors. Further, it is tough to find skilled staff, as only around 30 per cent of employees in the sector have any formal qualification (ABS, 2001). Thus, the growth strategy for this business has to center around addressing these issues at the onset. As it is tough to predict the business profits ten-year down the line, due to the external influences and risks associated with the sector, the growth plan should instead focus on short-term planning. Further, it should have enough flexibility to incorporate changes as per the current situation. The restaurant would also employ a quality matrix to measure the quality of food and services provided. Also, through training would be given to the new staff members about the restaurant culture before allowing them to serve the customers. Market Research and Analysis The multi-cuisine restaurant aims to target the national and international tourists, along with the local residents as well. Waterfront is a popular hang-out and tourist destination in Sydney. Further, it is nearby the famous Opera house as well. This would help in targeting the niche audience as well as the tourists towards this restaurant. It intends to become a landmark in Sydney for offering various cuisines and attract not only domestic tourists but also local public and as well as international tourists, politicians, rock stars/movie stars and opera/theatre attendees. The location where we are planning to establish the restaurant has around 30,000 residents, with around 42 per cent people being Australian born. Of the people who are born overseas, the top two countries of origin are China and Indonesia. This indicates that there would be demand for ethnic food due to the diversity in the location. Around 44 per cent of the residents are in age group of 20-39 years, who are also the high income group. This young group also forms the major audience for this type of restaurant business. Further, around 27 per cent of the residents are in the age group of 40-59 years. Although, this age group might not be the target audience, but this group also has considerable amount of disposable income due to retirement funds and other savings, which they might want to spend on special occasions by eating out in specialty restaurants. As per the data compiled by SHFA by studying the visitor profiles of The Rocks during Janurary-Decemeber 2006, the restaurant was visited by around 13,750,000 people during the given timeframe. This is quite a massive number, which even newer restaurant may tap into. It was further found that most tourists on an average visited the restaurant at least twice in a year, with the residents of Sydney making at least five visits to the restaurant during the year. The data further revealed that around 58 per cent international tourists and 62 per cent domestic visitors stated that they visited the restaurants in the area to eat at the restaurants/cafes or have fast foods. Competitive strategy The restaurant would follow the Broad Based Differentiation Strategy propagated by Michael Porter. This strategy calls for providing high quality and as well as innovative wine and world cuisine to its customers, along with superior customer services. Such a strategy undoubtedly complements the fantastic location on which the restaurant would be situated. This strategy also helps the restaurant in following the unique proposition that other restaurants that has advantage of location also follows (Porter, 1980). Thus, the central character of the restaurant would remain similar to its competitors, namely the restaurants around the Circular Quay, East Circular Quay, West Circular Quay and The Rocks, all of whom also follow the same strategy of providing excellent food and services, complementing with the fantastic location. However, the restaurant would also look at creating a niche for itself by implementing the following strategies: Emphasising on the theme of the restaurant: As it is a multi-cuisine restaurant, we decided to emphasise on the various cuisines and project the same in the restaurant. We may tie up with various cultural organisations to educate or provide trivia to our customers. Focusing on the CSR initiatives: The restaurant may look at cleaning the harbour in and around the restaurant as well as help in protecting the marine life. This would send a strong message among its stakeholders and create a responsible brand image for the restaurant. Undertaking various promotional events: The restaurant may also engage its customers by conducting promotional events, especially during the lean season. It would organise cookery competitions, wine tasting events or even discussions on various cuisines of the world. Operational strategy Operational strategies are undertaken to support the competitive strategies of the organisation. The operational strategy of the restaurant is to provide an innovative menu and wine collection by procuring the best quality food and create excellent kitchen processes. The restaurant would look at training its staff, retaining good staff and serving the customers by providing information about the menu (Dollinger, 1999). Some of the operational strategies that the restaurant may implement are as follows: Hiring temporary staff for peak seasons: Instead of going for full-time, permanent staff, the restaurant may hire graduate students or temporary staff during the peak season or peak time. This would help the restaurant to address the problem of over-staffing during the lean period and firing people during such times. Further, the restaurant would be able to retain and provide more benefits to the permanent staff members. Training the staff: The staff would be trained about the menu thoroughly and provide suggestions to the customers about the menu and the wine that can complement the food. The staff would also be trained to spot repeat customers and give them extra attention. Further, the staff would be given proper training to ask the customers about their experience in the restaurant and solicit feedback from them. Regulatory and Legal Issues The most important regulator that would influence the business is the Sydney Harbour Foreshore Authority (SHFA). Evaluating the opportunity An opportunity can be identified through a creative process, intuition or scientific analysis. An entrepreneur can identify an opportunity while solving an issue or trying to create value for the people. Therefore, a good business opportunity would be the one that would not only solve some everyday issue but would also create value. In this venture as well, we are trying to address the need for the local residents and tourists for a single outlet that would provide them with a wider cuisine choice. Further, by providing them with ethnic food under the same roof, we are creating added value for the business. However, there are various pitfalls in undertaking a new venture as well. In this case, the restaurant might get impacted by external factors such as security issues and unrests, which would affect the overall profitability of the business. These factors are discussed in detail in the next section. In order to make a business successful and viable, it is very important to choose a correct market. For instance, in this venture, we are trying to create a niche market for the restaurant by catering to the specialist needs of our target audience. Our customers would be mainly foreign residents and tourists who are looking for authentic ethnic cuisine. We are also offering a unique concept, wherein the customers are able to taste different cuisines under the same roof. Nonetheless, there are various risk factors associated with the venture which might result in the failure of the business. For instance, in case of a terrorist attack on the place or nearby location, the customers may get wary to visit the restaurant and the reputation of the restaurant would suffer considerably. This may in the long run affect the profitability as well. Further, lack of skilled employees may also hamper the growth of the venture as it is a labour intensive business and is dependent on the skills of its employees. Critical risks and issues The restaurant sector gets impacted the most by external factors such as financial instability, political unrest, natural disasters etc. For instance, the recent recessionary trend in the economy also affected the restaurant business in Australia. People became wary of spending money on eating-out and instead spent them on buying essential commodities. Further, any act of violence, such as a terrorist attack may also hamper the business. People might get scared to visit the location again, unless proper security is provided to them. Rise in the prices of essential commodities and raw materials also affect the business and the restaurant might have to increase the prices as well. As profit is already tight in such a competitive environment, any rise in price would mean loosing out on customers. Further, the regulations governing the sector are also very tough and in case of non-abidance, the restaurant may loose its license as well (Schaper & Volery, 2004). Financial plan As per the financial analysis, the venture would require a capital of $750,000. It would be able to generate around $1,073,769 in sales by the year end, around $1,211,088 by the second year and $1,279,204 by the third year. The restaurant is expected to earn considerable profits from the second year onwards. Cuisines of the World – partnership company with two founding shareholders Target market – residents, foreign nationals, tourists – both domestic and international in the age group of 20-39 years residing or visiting Waterfront in the Sydney bay area. In order to launch the restaurant, we would require a total capital investment of around $750,000, out of which, $600,000 would be allocated as start-up fund, while the rest would be used as cash reserve for business operations. We are going to submit the plan to the banks to secure a business loan of around $440,000. This loan amount would help us in purchasing the equipments, constructing the site and for covering other operational expenses. We would invest around $120,000 in personal capital. The remaining $190,000 would be raised through private investors. Startup capital requirements Fixed Capital Working Capital (two month’s expenses) Kitchenware 150,000 Wages 116,000 Software 50,000 Rent 4,000 Materials 60,000 Supplies 1,000 Furniture 35,000 Advertising 14,000 Contingency 15,000 Security 10,000 Communication 5,000 Contingency 14,000 Total $310,000 Total $290,000 Total startup capital requirement: $600,000 Profit and loss forecast Year 1 Year 2 Year 3 Sales $1,073,769 $1,211,088 $1,279,204 Less Operating Expenses: VC Management fee (2%) 5,000 6,500 8,000 Wages 698,000 710,000 73,000 Rent 24,000 24,000 24,000 Supplies 6,000 8,000 10,000 Advertising 14,000 12,000 10,000 Other expenses 10,000 10,000 8,000 Depreciation 20,000 20,000 20,000 Total Expenses 777,000 790,500 810,000 Gross Profit 296,769 420,588 469,204 Tax (30%) 89,030 126,176 140,761 Profit After Tax (NPAT) $207,739 $294,412 $328,443 Cash flow statement   Year 1 Year 2 Year 3 Cash received       Cash from operations       Cash sales $1,073,769 $1,211,088 $1,279,204 Subtotal cash from operations $0 $0 $0 Additional Cash Received $0 $0 $0 Sales Tax, VAT, HST/GST $0 $0 $0 Received $0 $0 $0 New Current Borrowing $0 $0 $0 New Other liabilities (interest- free) $0 $0 $0 New Long-term liabilities $0 $0 $0 Sales of other current assets $0 $0 $0 Sales of long-term assets $0 $0 $0 New investment received $0 $0 $0 Subtotal cash from operations $1,073,769 $1,211,088 $1,279,204 Expenditures       Cash spending $399,588 $400,788 $429,828 Bill payments $601,114 $724,989 $745,324 Subtotal spent on operations $1,000,702 $1,125,777 $1,175,152 Long-term liabilities principal repayment $47,772 $47,772 $47,772 Dividends $0 $20,000 $10,000 Subtotal cash spent $1,048,474 $1,193,549 $1,232,924 New cash flow $25,295 $17,539 $46,280 Cash balance $172,276 $189,815 $236,095 Balance sheet statement   Year 1 Year 2 Year 3 Assets       Current Assets:       - Cash $172,276 $189,815 $236,095 - Accounts receivable $73,311 $73,311 $73,311 - Materials $37,839 $39,175 $38,109 Total Current Assets $283,426 $302,300 $347,514         Long-term Assets (net of depreciation): 20,000 20,000 20,000 Total LT Assets 65,000 65,000 65,000         Total Assets $328,426 $347,300 $392,514         Liabilities       Accounts Payable $58,194 $59,713 $61,398 Long-term liabilities $252,228 $204,456 $156,684 Total Liabilities $310,422 $254,169 $218,082         Shareholder’s Equity       Capital $440,000 $440,000 $440,000 Retained Earnings ($427,209) ($428,496) ($359,869)         Total Equity and Liabilities $341,926 $354,300 $393,014 Conclusion The business has a good potential to grow due to its unique proposition for providing various cuisines under the same roof. Further, due to the advantage of the location, the business is expected to receive many foreign tourists, celebrities as well as local residents. The financial analysis reveals that the business would become considerably profitable by the second year of its operation, thus, the gestation period for this business is also not very high. However, we need be very careful of the risk factors associated with restaurant business. We should be prepared for any contingencies and always remain vigilant. The staff should be provided proper training to serve the customers in order to create a brand value for the restaurant. Further, we should abide by all the regulations so that the license is not revoked by the authorities. We also need to focus at working for the community to create a strong brand image in the market. Installation of latest technological gadgets and tools would also help in increasing the efficiency of the staff and serving the customers in a better manner. The business has a unique selling proposition and can be a viable business option, as the business is projected to start earning considerable profit within the second year of its operation. References: ABS, 2000, Cafés and Restaurants Industry Australia, ABS Catalogue number 8655.0, p. 4. ABS, 2001, Census of Population and Housing. ABS, 2002, Labour Force Supplementary Survey. ABS, 2003, Business Use of Information Technology, ABS Catalogue number 8129.0. ABS, Aug 2003, Retail Trade, ABS Catalogue number 8501.0, p. 11. Drucker, P.F. (1985). Innovation & Enterpreneruship. New York, HarperTrade. Hoagland, H. and Williamson, L. (2000). Feasibility Studies. Kentucky, University of Kentucky. Thompson, A. (2003). Business Feasibility Studies: Dimensions of Business Viability. Perth, Best Entrepreneur. Porter, M.E. (1980). Competitive Strategy. Free Press, New York. Schaper, M. and Volery, T. (2004), Entrepreneurship and Small Business: A Pacific Rim Perspective, Milton, Qld: John Wiley & Sons Australia. Kuratko, D. F., & Hodgetts, R. M. (2007). Entrepreneurship: Theory, Process, Practice (7th ed.). Mason, OH: Thomson/South Western Publishing. Read More