Rwanda Backpackers Business and Financing Options - Case Study Example

Business analysis of the case study "Rwanda Backpackers (HBP)"

Opportunity

Kayi Davie and Abdullah Bawazir aims to set up a campsite for a backpacking start-up in a plot owned by Abdallah overlooking Lake Muhazi in eastern Rwanda. The location is located near Rwamagana bus terminus on a busy transportation corridor linking Tanzania. The partners opted for a backpacking business because they reasoned it would be less expensive to start and operate. Once operational, the partners consider operating their business only on weekends, for a start, scaling it further as they continue. This is in a bid to lower operating cost and provide better services.

The duo also anticipates exploiting the void in the Rwandan tourism industry. Though Rwanda’s tourism industry is on an upward surge with revenues topping $250 million, the development of the low-cost, high-traffic backpack tourism is minimal. Rwanda has a single youth hostel in Kigali and several backpacker accommodation options outside the capital. Rwanda’s tourism sector majorly focuses on the high-end, low-traffic eco-tourism comprising of the wealthy international tourists from Europe, North America, and Africa. Rwanda is a perfect tourist destination owing to its stable political climate, prevailing peace and safety, and abundant tourism destinations namely the Africa’s largest forest, Nyungwe National Park and mountain gorillas in Volcano National Park.

Business Definition

According to Lean Canvas model (Maurya, 2012), an effective plan for a business startup must comprise a problem definition, a set of solutions, significant activity, unique value proposition, cost structure and revenue. Similarly, Michael Porters value chain prescribe the activities that a firm conducts to provide products and services. The chain comprises of primary activities namely logistics, marketing and sales, and support services including procurement, human resources, and technologies. To develop a whole-round understanding of the business enterprise proposed by David and Bawazir, these aspects need to be deliberated upon. The key metric of the business will be discussed in this section while the problem and solution sections have been reviewed in the opportunity section. The unfair advantage the venture exhibits will be deliberated in the risk analysis section.

The backpacking industry in Rwanda is hugely untapped. The business model of Davie and Bawazir strictly follows the international backpacking definition. That is, it seeks to gather for youth and young adults between the ages of 18 and 40. The business focuses on the provision of inexpensive accommodation and transport options for its customers. The accommodation involves shared camping tents while transportation involves a combination of public and private means.

Davie and Bawazir seek to tap into traveling clients. They majorly comprise of international clients sampling the African tourism offerings across different countries. David and Bawazir will need to gather for local clients as well. It seeks to develop as a leading camping destination for the weekend getaway.

Demand

The projected demand is adjusted upwards from the initial considerations. Initially, the partners had approximated 15 shared two-person tents per night. This was purely based on international clients alone. However, there is a need to tap into the local customers. With effective advertising, the majority of the Rwandese would like to spend the weekend away from home, and the campsite would be a favorite destination. Thus, forecasting will be done based on 25 shared two-person tents.

This would mean that the campsite layout, as well as the fixed and variable projected cost, would change. The campsite layout will be as shown in Exhibit 1. The initial cost for setting up the business will adjust upwards to $19,800 to build the covered bar and lounge, washrooms, staff housing, and store. It would also require 10 more additional tents. The cost of other requirements such as television, fridge, electricity, and barbeque remain the same. The initial investment is presented in Table 1. The changes also imply that the working capital would increase by some margin, approximately $5000 in the first 18 months.

Financing options

Davie and Bawazir would hope for a financing option that is least expensive. Considering all the options available, a bank loan is most appropriate. The rule of the thumb in considering financing options is to go for a lender with the least interest requirements and favorable graze and repayment options.

First, the duo will inject their savings of $4,000 into the business. More money is required, and they will seek a soft loan from Bawazir’s father amounting $4,000 and to be paid within two years without interest. The remaining amount totaling $16,800 will be procured from BCR at an interest of 16.495 per annum. Bawazir’s land will act as a collateral together with the equipment they buy from their savings and a soft loan from Bawazir’s father. In the first year, their interest would be $2770. This amount is manageable considering that the campsite will operate at peak capacity for a fraction of the year. The risks associated with a bank loan are minimal compared to other forms of financing.

Marketing

The camp needs to establish a reliable customer base throughout the year to breakeven and make a profit. The initial capacity is planned at 50 guests per night although the value will appreciate and depreciate depending on the season and marketing efforts.

The pricing of the facility and products and services offered is appropriate. Bed costs $12 per night, and it is expected a customer will spend an average of $25 on food and drinks and $5 on other services per day.

The partners are lost within the marketing strategy that will result in the highest and a consistent number of occupants on a given night. A good marketing strategy according to Wang (2013) should seek to meet the needs of the tourist while also presenting the organizational widely and favorably. A marketing strategy should not only consider the price but also other factors. The prices in camping are a factor of the type of tents. In this case, the tents are of high quality and comfortable. The pricing strategy is appropriate, not too cheap to portray Lake Muhazi as a low-end destination with poor facilities, and not too expensive to scare away potential customers (Mintz, 2013). A neutral pricing strategy is adopted for the campsite considering the value of the experience the customer will receive.

To advertise its services effectively, Lake Muhazi campsite will partner with local businesses and provide commission fees on every customer they book. The method is more effective than distributing brochures and advertising material among local businesses in exchange for advertising space at the campsite. The cost of the partnership is $25 per weekend, but the proceeds from the additional guests it generates are five times. Mint (2013) found that collaborative marketing is critical for camping sites as it distributes the cost and the profit fairly. In tourism, the product is delivered to the customer, but the customer travels to get the product (Pavlou, 2015). Therefore, the location to distribute the information about the product is essential to making sales. The campsite will list their services in international booking sites such as Hostels.com and HostelWorld.com. Choosing international listing sites is appropriate because the camp targets international customers. Such websites optimize search engines to make it easy for the online customer to search and find the right service provider. Such information as sitemaps and meta tags makes the site highly visible to the online community (Pavlou, 2015). As with local customers, the collaboration with local business is sufficient. International booking sites would charge a 5-10% commission for every client they book at Lake Muhazi but the campsite benefits more since it guarantees a 5-8 additional guest.

Logistics

The campsite is considering buying a tourist van or hiring a private operator. While a tourist van will ensure a lot of flexibility during seasons when business sis low, it also introduces a cost on low capacity trips since the cost is constant. As a result, the prudent option would be to buy their van. The advantage with the purchased van is that it can ferry visitors between hotels and campsites, exposing potential customers to Lake Muhazi campsite and creating more business. This latter option is estimated to result in 8-12 additional customers.

The financing for the purchased van is an issue. However, the partners have an option of approaching the microfinance organization. COOPEDU-Kigali offers loans of up to $50,000 with a house or land as collateral. Davie and Bawazir have the option of using the houses on the camp as collateral to acquire the loan. As with credit report, they can negotiate that theirs is a starting business and have never taken a loan before. The interest rates for the loan is favorable and the repayment period is long.

Risk analysis

There are risks that are beyond the control of the partners and involve the external operating environment. First, most backpackers enter Rwanda by bus, and Rwanda being a landlocked country is sandwiched between Tanzania, Uganda, and DRC. There is an issue with the reliability of the bus networks connecting the four’s countries. Though there is relative peace in the region, there are instances where political instability and regional violence affecting traveling. Second, government policies and regional integration between Rwanda and its neighbors restrict the free movement of people. The Rwandan concentrates on high-end tourism, and little effort has been put to nurturing budget tourism. Though the government is supportive of private ventures, there are limiting factors such as a lengthy period of obtaining foreign visas and cost.

These risks can better be analyzed using a fishbone diagram.

A fishbone diagram identifies the possible causes of a problem in a business venture (Black, 2011). It acts as a brainstorming structure upon which the major inhibitors of business are gleaned and solutions developed. Davie and Bawazir are concerned that these two factors could lead to huge operational issues and lead to loss of business. The causes of problems as identified in a fishbone diagram are classified into the environment, machine, manpower, methods and materials.

From the fishbone diagram, it is possible that Davie and Bawazir could lose business if the predicted conditions were to occur. There is a need for mitigation strategies. Among the risk mitigation factors that may be considered include insurance, possession of rescue vans, and government interventions to create a safe and enabling environment for business. The business requires insurance coverage such that in the case of any eventuality, it can withstand and continue to serve its customers (Kochan, 1994). Second, the business requires resources such as vans and helicopters for rescue operations whenever insecurity issues occur. Tourists are the most important resource for this business, and their safety and welfare is of utmost importance. In cases of unpassable roads to regional conflicts, alternative means of getting tourists to safe destinations is mandatory. Finally, the government should create an enabling environment for private ventures to thrive. Subsidies and tax-incentives should be provided to promote local startups such as Lake Muhazi campsite. The government of Burundi should consider fast-tracking the processes of issuing visas for backpacker tourist and remove the prohibitive fees in Rwanda and neighboring countries if the industry is to develop to its potential.

Conclusion

This case analysis has informed Davie and Bawazi of the best approaches to take regarding the entrepreneurship approaches presented in the case. The partners should strictly define the business model using the opportunities arising from the external environment. Further, they should go for the best financing options since unfavorable financing streams will choke the business. The bank has been identified as a favorable option followed by a microfinance institution. The other aspect that have been deliberated include marketing and demand forecasting. It is important for the venture to accommodate both local and international customers to remain profitable all-round the year. While marketing focused more on international clients, themes should be created around offerings for local clients to attract them.

Appendices

Estimate

Low

Medium

High

Guest night/weekend

20

50

100

Guest nights/month

80

200

400

Table 1 Demand forecast

Tents

Gen.

Const.

Fur Bedding

Modems

Wiring

L/scaping

F/TV/BBQ

Total

$750

$550

$12,000

$3,300

$400

$300

$500

$2000

19800

Table 2 Initial investment at the campsite

Demand

Elect

Water

Damage

Telephone

C. Staff

Bar

Kitchen

Suppl

Ads

HI (100-200)

$220

$60

$60

$170

$150

$150

$150

$200

$50

Low(0-99)

$90

$30

$0

$170

$150

$150

$150

$200

$50

Table 3 Approximated fixed cost

The total fixed cost on a high demand month is $1,210 but decreases to $990 on a low season. The cost are based on the adjusted approximations derived from the partner’s forecasts.

Figure 1 Camp layout

Figure 2 Fishbone diagram