Opening the Organic Food Restaurant - Case Study Example

Organic Food Restaurant 1.0 Introduction In the past two decades the organic food industry has experienced insurmountable growth. The annual sales of organic foods have rapidly gradually increased to nearly 20% since the year 19901. Notably, this growth is attributed to an increase in consumer confidence in these kinds of foods and also an increased level of health concerns among the current population2. Conventional food production methods are feared to pose various health risks and environmental damages, thus increasing inclination towards organic foods. The Organic Trade Association (OTA) reveals that natural and organic foods combined cover $20 billion business in the United States3. As such, these restaurants continue to get promoted and perform well in the hotel industry due to numerous supports from the health and environment conscious consumers concerned with healthy eating and preservation and conservation of the environment. Ministries related to health, agriculture and environment are increasingly supporting moves to encourage consumption of organic foods with the aim of improving health statuses and environmental conditions. Consequently, organic food business is currently considered to have numerous potentials in penetrating markets and attracting customer preferences as compared to other conventional foods businesses. 1.1 Organic Food Market The term ‘organic’ in most cases has been used in reference to vegetable and fruits4. Hardly has the term been to refer to beef, chicken and other sources of proteins. However, with the preference for higher quality and healthier meat by consumers, there is a tendency to opt for organically-raised animals for the meat content. These animals are free of hormonal additions, antibiotics, other drugs and Genetically Modified Foods (GMOs)5. Top hotel and restaurant chains such as Panera, Arby’s and Chipotle have made major changes to their foods with regards to considerations to organic diets6. Despite the relatively higher prizes of the meals, the hotels have recorded improved and increased sales since implementation of these changes. (Citation) points out that the demand for organic and natural foods and the well-documented trends of healthy living are significantly contributing nestling of a huge number of grocery stores, independent restaurants and college campuses7. As such (Citation) explains that to achieving success while solely relying on an independent organic restaurant is absolutely entirely possible. OTA further observes that the organic food market is experiencing dramatic growth all over the world. Increasing global health and environmental factors are contributing to this effect8. These concerns in different parts of the world have produced significant influences to public attitudes and acceptations towards various technologies, and now, to types of foods being consumed. Further research about organic foods in the US reveals that the sales of organic foods and natural foods and product through mass merchandisers and natural supermarkets doubled in estimation value from 2000, to $3.6 billion in 20069. This, OTA observes that globally, the sales of organic beverages and foods in 2006 reached an astounding $13.8 billion recording and increase of 38.4% in sales in 2004-200610. On a more positive note, the trend is expected to keep rising anticipating an 80% increase from 2010 through 201611. On a global market scale, it is clear that organic food and natural food and products have become mainstream. 1.2 Organic Food in the UAE In the United Arabs Emirates, the demand for Organic food and food products is increasingly on a rapid rise. This is according to a research conducted in all the emirates by UAE University. The research attributed this rise to a high per capita income, an increased level of awareness concerning healthy living in relation to food consumption and the diversity of the populations. Notably, the UAE food consumers are more likely to pay more for organic foods. This tendency, the research reveals, becomes more with age which increases health consciousness12. The Emiratis and larger households were observed to be more willing to purchase organic foods as compared to the non-Emiratis. The immigrants mostly have low pays and are lacking in resources and knowledge to take organic foods. Gulf Cooperation Council’s agriculture experts argue that there has been an increase in the number of medical complications resulting from lifestyles and dietary problems13. Cardio vascular diseases, diabetes and obesity among others are examples of such diseases associated with the diets. This has led to the population increasingly embracing organic foods. Besides, high disposable incomes in the GCC have also led to an increase in the demand for quality and healthy foods, organic foods. Consequently, there has been a rise in the number of Organic food stores and farms to cater for these needs. The Organic Food Café, for example, is one such business entity that has strongly benefited and independently stood out as an organic foods dealer. With the business having branches stores already 5 stores in the UAE, there is still an intention of establishing two more stores in Kuwait by the end of 201514. Besides, the shop still aims at expanding to Qatar, Saudi Arabia and Oman. The Organic Foods and Café’s founder, Nils El Accad, anticipates a revenue growth of 10% in 201615. On the other hand, Becky Balderstone, Ripe’s founder dealing with organic food supplies in the UAE, attests that in the last two years the Emirates of UAE have seen a rise Organic Café’s numbers16. This is insinuations suggest great potential of organic foods in the market and the ability to rely on organic food business for profitability. 1.3 Business Background Considering these dietary aspects and the increasing demands for healthy living in the UAE through dietary improvements, the aim of this proposal is to suggest a business venture in the organic food market. The project aims at setting up a new Organic Food Restaurant in Abu Dhabi, which in the long run is expected to develop into a chain of Organic Food Restaurants. This business will take advantage of the increase in demands for organic foods in the UAE as well as strategize on measures that would enhance competitive advantage in a highly competitive hotel industry. The Organic Food Restaurant targets to encourage healthy living by strategically preparing quality meals using natural ingredients and foods. In this way, the restaurants to provide 100% health safety guarantees to the consumer. The restaurant aims at developing setting up in Abu Dhabi, which is a potential market for organic foods. With a high population of Emiratis and citizens with high disposable incomes and a preference for healthy living, Abu Dhabi proves a strategic location for this business. On the other hand, Abu Dhabi is limited in Organic Food stores and supplies with the current supplier and stores being inadequate in catering for the increasing demands for organic foods17. This has forced the existing organic food businesses to operate under high pressure and in most cases quickly running out of supplies leading to consumer inconveniences18. This calls for drastic measures and a support system. The Organic Food Restaurant will, unlike the stores, provide readymade and cooked organic food ready for consumption either in the hotel or for take-away. As such, the restaurant not only offers a healthier option of food but also convenience through prior preparation. As a strategy, the business will serve the busy working population of Abu Dhabi. 1.4 Objectives Using the hypothesis that an independent Organic Food Restaurant in Abu Dhabi has the potential of generating constant profit by the fourth year of operation, the objectives for this paper include: Creating a business proposal for a new independent Organic Restaurant in Abu Dhabi Conduct various market analyses for the business using two theoretical frameworks SWOT analysis and Porter’s Five Forces Analysis Conduct a financial analysis of the business for the first four years of operation. 1.5 Justification Abu Dhabi provides a ready market for Fast Foods. The demand is extremely high that the current supplies for the organic foods are inadequate to meeting these demands19. Due to the increasing popularity of these foods, it is projected that the demand will significantly rise in the next coming years20. This indicates the availability of business opportunity investing in this enterprise. The market statistics for organic foods in the UAE indicate significant potential and the capability of an independent organic restaurant to flourish within Abu Dhabi21. This proposal will prove the feasibility of opening an organic restaurant in Abu Dhabi and the potentials of the business to earn profits. The proposal investigates the hypothesis and used this to come up with a business plan and conducting a profitability study. 2.0 Costs and Benefits The Organic Restaurant is expected to deliver significant profitability in its operations. As earlier observed, there is an increasing inclination of consumers towards healthier diet products in form of organic foods. To analyze the extents of profitability in operations, it is necessary to first consider the costs that would be incurred in setting up the restaurant and later the benefits. This is crucial in projecting the potential of operating the business in the UAE and essential in determining the payback time and analyzing subsequent profits. 2.1 Costs To effectively implement the start up process of any business to initiating operations, there requires being a substantial and significant level of investments in the business. This investments range from capital invested in the business, time and other resources allocated. These resources require critical consideration and strategic planning in allocation in order to ensure that all business needs and objectives are well structured before the commencement of operations. In most cases, strategic planning of costs and monitoring of expenses is significant in escaping overrunning costs. In addition, while emphasizing on quality it is essential to minimize costs incurred in order to strategically reduce the payback period to optimize benefits and profitability. In setting up the Organic Restaurants, various costs are tantamount for effective and strategic development of the various establishment phases. It is not only necessary for the implementation to consider the cost of assets to be used in the startup but also significantly consider other factors necessary to facilitate smooth business operation22. For the success of any business entity, strategic marketing plans and tools are tantamount to achieving business success. Businesses strategize on marketing platforms with the aim of penetrating markets and gaining and sustaining competitive advantage in highly competitive sectors. In UAE, while the demand for organic foods is increasingly on the rise, strategic investments in organic food entities are also on the rise leading to significantly high competition in the sector. This calls for effective strategy to counter this competition, gain market advantage and attract consumer preferences to entities’ organic products. To meet this standard of effectiveness in market performance demand significant investments in terms of costs incurred in setting up business structures, acquisition of resources and supplies and general strategic planning in the business23. In the organic restaurant therefore, it is essential to consider costs involved in starting up the business and facilitating the initial marketing strategies. This proposal identify some of the costs to be incurred in the business start up with major regards to resources required in setting up the facility. 2.1.1 Start up Assets Typically, startup assets refer to cash, usually in the bank as the business is starting and in most cases, the starting inventory24. These costs include both the long term and current assets in the business. For the Organic Restaurant, the costs include: Cash and Cash Equivalents Leasehold improvements Equipment Fixtures and Website development costs. 2.1.2 Start up expenses These, in prospect, refer to the expenses incurred before beginning the plan25. Several expenses ranging from legal costs, logo designs, site selections and improvements among others depending on the nature of the business are evident. In the Organic Restaurant, the following start up expenses are identified: Business License Rent Food Inventory Advertising budget Office/ Miscellaneous expenses Pre-opening Labor-staff/Management and Trainers Customer needs Payroll Utilities 2.1.3 Other Costs These costs for the Organic Restaurant Business include: Liabilities (Long term liabilities) Capital (Planned Investment) The startup funding required shall therefore include the startup assets to fund and startup expenses to fund. 2.2 Benefits and revenues The amount of revenue that the organic restaurant is expected to earn after each financial year is dependent on the variables which reduce the profit. These variables are known as expenses. In the cost analysis it was identified that some of the expenses that the organization would incur in the course of doing business include: business license, rent, food inventory, advertising and marketing budget, office and miscellaneous expenses, pre-opening labor-staff/ management/ trainers, customer needs (e.g. silverware), payroll and utilities. Despite the expenses that reduce the revenues that are expected to be earned by the restaurant, some benefits can be helpful in maximizing the profit of the restaurant. The restaurant needs to be located strategically where there are a large number of populations, the area should be accessible and the clientele should be of middle or high social class. The services offered by the restaurant should be top-notch with services that are tailor made to suit the needs of the client; this involves things like good food, courteous waiters and so on. The good services assists in retaining customers and the existing customers can spread the good word. Good management is a plus to the organic restaurant because a good management team will increase the sales with minimal resources i.e. bringing the cost of production time. Proper time management and timely procurement of necessary food or raw materials will ensure customer satisfaction. An economy of scale is important where the restaurant can join hands with other related business or neighboring businesses to forge a common interest. A good example is that the organic food restaurant goods can be delivered in collaboration with surrounding businesses acquiring related product in the same truck, this will split the cost of transportation. Time frame For this company to attain a stable rate of profit attainment, it would take an average of five years. The project is expected to break even in the end of the first year of operation. According to the net present value, as will be discussed later, the organic restaurant cash flows can be predicted and it will show both the breaking even and expected returns. The study will use the net present value to come up with an investment decision. The logic in the net present value is to compare the net cash inflows and the net cash outflows. If the net cash inflows exceed the net cash outflows the business proposal or the investment should be accepted and the vice versa is true. Cash flows are discounted back to their present value. Net present value = net cash inflow – net cash outflow If positive accept, if negative reject. The main objective of a business is to maximize the wealth of the share holders. Net present value (NPV) is consistent with shareholder wealth maximization criteria which makes it a viable method. Other merits of net present values include; NPV takes into account the time value of money and the magnitude of the cash flows, the NPV indicates the required rate of return by the investor, the NPV considers both the before and the after cash flows over the lifespan of the project and the NPV gives high priority to the risk and profitability of the project (Gollier, 2009). Some of the disadvantages of net present value include: if the amount of investment of mutually exclusive projects is not equal, then it cannot give the correct value, some perceive it difficult to use, it is difficult to obtain the discounting rate and if projects are not of equal life, then it be difficult to compare. Cost Analysis It is important to analyze the costs that are involved in starting and operating the business in order to determine the profitability of the business (Gulledge, 1989). This can be done by the use of - and macro-economic principles or models for inflation in the United Arab Emirates and depreciation over 5 years. Cost analysis Startup assets Cash and cash equivalents 250,000.00 Leasehold improvements 18,250.00 Equipment 220,572.00 Fixtures 24V Sunwize wind turbine 3,300.00 Mirage - Nanosat 5.0 Speaker System 2,450.00 LG - 60" Class / 1080p / 120Hz HDTV 8,125.00 3 year protection plan 930.00 Full-Motion Wall Mount 2,986.00 Geek squad installation 875.00 42 inch wall style booth x 4 8,760.00 4 seat island cluster seating x 2 7,350.00 Cluster unit (8-10 seats) x 2 12,340.00 Website (flash website) 9,650.00 Total Startup Assets 545,588.00 Startup expenses: Business license 7,780.00 Rent 140,432.00 Food inventory 36,760.00 Advertising budget 25,760.00 Office/Miscellaneous Expenses 23,452.00 Pre-opening Labor-staff/Mgmt/Trainers 16,430.00 Customer needs (e.g. silverware) 5,290.00 Payroll 95,430.00 Utilities 7,650.00 Total startup expenses 358,984.00 Liabilities: Long term liabilities 560,650.00 Total liabilities 560,650.00 Capital: Planned investment Personal 343,526.00 Total planned investment 343,526.00 Startup funding required: Startup assets to fund 545,588.00 Startup expenses to fund 358,984.00 Total funding required 904,176.00 Startup funds: Total capital 343,526.00 Total liabilities 560,650.00 Total funds 904,176.00 NB: All figures are in United Arab Emirates Dirham The inflation rate in the United Arab Emirates was recorded at 4.30 percent in May of 2015. Inflation Rate in the United Arab Emirates reached at the midpoint of 2.23 percent from 1990 until 2015, coming to a record-breaking high of 12.30 percent in December of 2008 and a record low of - 1.60 percent in January of 2011. Inflation Rate in the United Arab Emirates is accounted for by the National Bureau of Statistics, United Arab Emirates (United Arab Emirates, n.d). United Arab Emirates Inflation Rate is figure to go down to 4.1714 Percent in mid 2015. In the long haul, United Arab Emirates Inflation Rate is anticipated to meet to 5.2777 Percent. The inflation rate is expected to stabilize in the next five years which means the inflation rate is not going to affect the prices of organic foods that much (United Arab Emirates, n.d.). Administrative efficiency in United Arab Emirates has made strides. With no base capital obliged, starting up a business includes six strategies. Authorizing/licensing has been streamlined and is less immoderate. The non-compensation expense of utilizing a laborer is direct, and work codes by and large encourage work market productivity. The government policies to decrease fuel and power subsidies have made the cost of business to be low. The UAE's normal duty rate is 3.8 percent. Foreign firms are hindered in government procurement. All in all, outside interest in UAE organizations is topped at 49 percent. The aggressive and present day money related segment gives a full scope of administrations, despite the fact that the state's vicinity stays significant. Capital markets are transparent, with various foreign firms in operation. Sensitivity analysis A sensitivity analysis is used to analyze how certain independent variables will impact a dependent variable (Wassell, 2005). In the case of the organic restaurant the uncertainties that are going to be looked at include mass market share, exit earnings multiple, local residents’ adoption of organic foods, gross margin, unit sales, price, net margin at exit, international market multiplier, dilution, pre money evaluation and marketing during the early startup. Probability weighted MOI 0 5 10 15 20 25 30 Market share 5% 50% Exit earnings Multiple 20 80 32 Local residents’ adoption 10% 40% 26% Gross margin 20% 60% 36% Unit sales 1 5 3 Price 30% 100% 75% Marketing 15% 30% 25% Net margin at exit 10% 26% 21% International market multiplier 1 3 1.4% Dilution 76% 51% 68% Pre-money valuation 6 4 5 Base values Base value = 10 The horizontal scale at the top is the probability weighted multiple on investment (PWMOI) is the metric we think most about. Along the left half of the diagram, it’s recorded every one of the variables from the model. Along the right half of the diagram, we recorded every variable's base quality from the low/base/high range discourse. E.g. the base case for local residents’ adoption is 26 percent. With every variable set to its base case, the estimation of the organic restaurant PWMOI, shown to by the vertical line going through the center of the graph marked, Base Value = 10. Now a question can be posed: "Suppose it is possible that it is incorrect around one of the appraisals. Assume the organic restaurant Mass Market Share was just 5 percent, the low side of reach. Taking a look at the left end of the Mass Market Share bar, if Mass Market Share is at 5 percent then the PWMOI different drops beneath 5x. On the off chance that then again, Mass Market Share is 50 percent, shown to by the right end of the bar, the PWMOI is near to 30x. The extent of this bar speaks to how instability about Mass Market Share influences organic foods restaurant probability-weighted multiple, holding every single other uncertainties steady at their base qualities. We then rehashed this activity for every instability, swinging its worth from low to high while holding every single other uncertainty at their base quality. It’s recorded the swings as bars and sorted out them in a Pareto sense from the biggest to the smallest. Conclusion and Recommendation In conclusion, the organic food restaurant can be started in United Arab Emirates as the economic climate at present is stable and is expected to be stable in the near future. Studying the inflation rates of UAE, they are expected to be on an average of 5% without shifting much from this mean. The UAE has also reduced the cost of power and also tariffs which makes the cost of doing business being low. The investment decisions based on the formulated figures on these studies should be positive because according to the discounting technique used i.e. the net present value, the NPV was positive and thus the business should be carried. The NPV being positive does not mean the project will thrive and the rate of returns will be high, this has to be complemented by good managerial skills, strategic location, good service delivery, economies of scale and all the benefits that are meant to increase the revenues of the restaurant. The figures obtained in the cost analysis are an estimation obtained from research of previous studies of restaurants in the United Arab Emirates and therefore they are realistic. The figures can vary but not much from the stipulated values. A sensitivity analysis has been carried out to identify the different uncertainties that then organic restaurant might face and how they influence the startup and operation of the restaurant. The sensitivity analysis is able to solve the garbage in/garbage out issue. If one of the assessments is wrong in the sensitivity analysis, sometimes it might matter, sometimes it does not. For the case of mass market share, it does matter if the assessment is wrong. In this sensitivity the lower bars do not matter or matter least if the assessment made is not correct. References Basarir, A., and M.S. Gheblawi., Analyzing demand and consumers’ willingness to pay for organic fruits and vegetables: Journal of Food, Agriculture & Environment , 2012, pp. 14-18. Basha Mohamed, B., Driving factors of purchase intention towards organic food: A conceptual study. Engineering Technology and Technopreneuship (ICE2T), 2014 4th International Conference on. IEEE, 2014. Barrientos, S. (ed.), Ethical sourcing in the global food system. Taylor & Francis, 2012. Bryman, A., and E. Bell., Business research methods. Oxford university press, 2015. Counihan, C., and P.V. Esterik., Food and culture: A reader. Routledge, 2013. Gollier, C. (2009). Expected net present value, expected net future value, and the Ramsey rule. München: Univ., Center for Economic Studies. Gulledge, T. (1989). Cost analysis applications of economics and operations research: Proceedings of the Institute of Cost Analysis National Conference, Washington, D.C., July 5-7, 1989. Berlin: Springer-Verlag. Hjelmar, U., Consumers’ purchase of organic food products. A matter of convenience and reflexive practices. 2011. Ireland, J., and S. Rajabzadeh., UAE consumer concerns about halal products. Journal of Islamic Marketing 2.3, 2011, pp. 283-296. Jacob, S., J. Tambawel, F.M. Trooshi and Y. Alkhoury, Consumption patterns of nutritional health drinks and energy drinks among university students in Ajman, UAE. Gulf Medical Journal, 2, 2013, pp. 22-26. Mount, P., Growing local food: scale and local food systems governance. Agriculture and Human Values 29.1, 2012, pp. 107-121. Muhammad, S., F. Eihab and R. Ullah Ullah, Factors Affecting Consumers' Willingness to Pay for Certififed Organic Food Products in United Arab Emirates. Journal of Food Distribution Research 46.1, 2015. Smith-Spangler, C., Are organic foods safer or healthier than conventional alternatives?: a systematic review. Annals of Internal Medicine 157.5, 2012, pp. 348-366. United Arab Emirates. (n.d.). Retrieved July 16, 2015. United Arab Emirates Inflation Rate | Forecast. (n.d.). Retrieved July 16, 2015. Wassell, J. (2005). Sensitivity Analysis in Practice. (Book Review). Technometrics. Zakowska-Biemans, S., Polish consumer food choices and beliefs about organic food. British Food Journal 113.1, 2011, pp. 122-137. Read More