New Entrepreneurial Venture - Maple Leaf Restaurants - Case Study Example

Introduction Company Profile I have been working as a business development manager at the Maple Leaf restaurants from the last 3 years. The restaurant was found by two friends, i.e. Mr. Smith and Mr. John in 2002, with a capital investment of $30,000. In the start, they had established two restaurants, where they were offering different sort of foods, ranging from traditional local dishes to continental dishes. The company had made handsome net profits in the first two years of its inception, i.e. $13,000 and $14,500 in 2002 and 2003 respectively. Therefore, it was decided by the owners of the restaurants to expand their restaurants chain to the other localities of United States as well, which was resulted in an aggressive expansion campaign and the company had opened 20 new restaurants in different states of the country by the end of 2010 with a net profits figure of $1.2 million. Now the company wants to enter into the hotelling business by opening a mid-sized 70 to 100 rooms hotel in Florida, the company went public by the end of 2012 in order to raise sufficient capital resources for the proposed venture. Being the business development manager of the company, I have been assigned the task to conduct an extensive market analysis and feasibility study to evaluate the impact of economic conditions and country’s overall stability over the new entrepreneurial venture of the company. For this purpose I have conducted the following analysis. Market Analysis Florida is one of the most favorite destinations of the world for tourism and traveling. It is known for its beautiful beaches, warmth temperature and other beautiful and attractive places, which attracts more than 60 million people from all around the world during a year. It was nominated as the most favorite destination of America for spending vacations in 2011 and about 42% of the people residing in the Northeast United States always planned to visit Florida in their spring vacations. There are a number of parks that attracts the attention of tourists towards Florida, including Amusement Park in Orlando, the Walt Disney World Resort, SeaWorld, Busch Garden and Universal Orlando resorts. Apart from these locations there are a number of beaches that attracts the attention of tourists. In 2011, more than 48 million tourists had visited Florida and spent about $46.9 billion. There is very tough competition in the hotelling industry of Florida with about 543 hotels in Orlando, 413 hotels in Miami and 282 hotels in Fort Lauderdale. Orlando is visited by a high number of visitors due to the presence of large number of entertainment parks and especially the Disney Land and theme parks, but on the other side Miami has also a high number of visitors during the Miami fashion week. So, both the places are ideal for the company to make investment, but here the company will face a single disadvantage, which is in the form of tough competition from the well known and already established brands. Therefore, it is important to make critical analysis of the market and economy before starting the new venture. For this purpose, I would like to conduct the economic analysis of the country and specifically for the state of Florida to check the viability of the investment in the new venture. Economic Analysis Following is the list of the key economic indicators that can affect the viability of the investment in Florida. Inflation Income Recession Exchange Rate Interest Rate Inflation Inflation is the most important factors to be considered by the company because the company is planning to enter into the hotelling business, which is a highly customer centric business and depends upon the purchasing power of the customers for their success. Increase in the rate of inflation will decrease the purchasing power of the customers and they will not be able to consume money on luxury goods due to high and unaffordable prices. (Doll, Krantz, & Trahan. 2011). It will also refrain the company from setting low prices to attract customers because it is not possible for the management of Maple Leaf to bear huge losses from the newly established business. As the increasing inflation can adversely affect the economic growth of the country, which will reduce savings and the company will be unable to raise sufficient funds for their new project even after listing the company publically. (Browne. 1981). The increasing inflation in a country can make the nominal values uncertain, which make it difficult for the companies to plan their new investments. (Morley, 1971). According to the report of US Bureau of Economics and Business Affairs, the inflation rate in the country is falling down from 2012 onwards and the latest figure is 1.95% rate of inflation during the month of April. (See Appendices). This shows that the economy is stable and suitable for making new investments. Income Income has a twofold affect over the prospective investment of the company in the new entrepreneurial venture, i.e. the impact of household income of the country and the impact of net earnings of the company during the past year, which is also referred as the amount of reserves that the company maintained in their retain earnings. The company income is most important to be taken into account because it is impossible to start a new venture on the basis of the debt from financial institutions or the expected investment from the stock market. Because these resources are always considered as secondary resources before execution of the investment in new venture, therefore, it is necessary for the company to have sufficient funds in their retain earnings to finance the initial phases of the project. (Tyagi, & Warren. 2004). Whereas, the household income of the country affects both the return over investment and the pre-investment phases because, if a country has a low household income index, it’s mean that the residents of the country are unable to make investment in the stock market, which will affect the fund raising of the company for the proposed project. On the other hand, due to low household income people are unable to afford luxury and consume only on necessities, which will make the future return on investment unclear and the company will be unable to make clear projections for their new venture. According to the report of U.S. Census Bureau, the number of those people whose average income is computed as less than $2 per day, before adding any sort of government benefits is increased from 636,000 to 1.46 million between 1996 to 2011, where the figure is further increased to 4.26 million by adding the 2.8 million children as well. The household income has been declined due to the direct impact of the global financial crisis of 2008 over the American economy. The annual average household income of the American shows that they earn about $71,274 annually, which is just a bit above the average percentile computation. (Brady. 2012). This shows that the American’s average propensity to consume is not too much attractive, therefore it will not be a best option for the company to execute its investment plan in the new venture. I think the company should wait for some suitable time or make the investment in such a manner that they can easily target the base of the payramid. Recession It is a phase in business cycle, when the economy enjoys a long term growth and reached to the stability and peak point, then it must have to experience a downfall , just like the famous saying “what goes up must come down”. This downfall brings a huge unemployement and instability in the economy, which eventually lower down the purchaising power of the people and their standard of living. Whenever, an entrepurer want to make investment during the recession phase, he shall consider two points before going ahead. First, he should assess that how long the recession phase shall last and how long its affect will prevail in the economy, and second, he should check the performance matrics of some other businessess that have the same worth as the one he is doing, that up to how much extent these business are affected by the downfall. But in case of executing a new venture, the entrepenurer shall consider the first point only. Although, American economy has recovered from the great recession of 2008, but still there is a high percentage of poverty prevail in the country with a high rate of unemployment. (Stelter, & Rhodes. 2010). I think, being an entrepenurer it is a good opportunity to execute the investment on new venture because the economy is facing the recovery phase and this will benefit the Mepal Leaf company to arrange cheap human resource and other capital resources for their new venture. The company can also get benefit from the huge potential of the economy for the growth and will be able to enjoy profits from the start, just like its restaurant business. (Lion. 2013). Exchnage Rate In the past, it was believed that the exchange rate uncertainty reduces the level of investment in the economy and especially discouraged those businesses who have a direct dependence or interaction with the foreign clients. But this has been challenged by the modern economists, as it is stated by Pindyck and Dixit (1994) that the investment is an irreversible activity. They argued that it is the market conditions or considerations that causes fall or rise in the investment. For example the market is experiencing high prices and passess through a phase of inflations then it will be better for the invetors to wait until the situations become normal or the competitors comes up to make investments. But on the other hand I believe that exchange rate fluctuations has a great impact over the market uncertainty because people make their decisions on the basis of the purchasing power of their money and exchange rate can directly affect the purchaising power of the people. According to the IMF (International Monetary Fund), most of the countries wants to do business in other currencies due to the declining value of US dollar and its instability in the international market, i.e. the value of the US dollas has declined to the 15 years low value. However, still the US currency holds about 62% of the $6 trillion amount that has been allocated to the foreign exchange holdings by the World’s Central Bank. (Holly.1995). Therefore, exchange rate fluctuations and the instability of the US currency will not affect the decision of Mepal Leaf restaurants regarding their investment in the new venture. However, they should analyse the market considerations closely and make their decision according to the market conditions of Florida. Interest Rate Interest rate has a direct impact over the decision of the investors regarding making investment in a new venture because it is the interest rate that can determine, whether the money increase its value by saving in the fixed deposit accounts or investing in the money market instruments. This can also affect the decision of investors regarding investing their income in the execution of a new business venture. (Jha. 2011). The increase in interest rate can negatively affect the investment in a country because the cost of raising capital become very high in such situation. Since the last three years the United States of America has fixed their real interest rate at a very low figure i.e. 1.3, 1.5 and 1.7 in 2011, 2012 and 2013, respectively. Because the country’s economy is facing a recovery stage from the last recession of 2008, therefore, the government want to increase investment in the country. (Rebonato.1998). Hence, the situation for raising capital from the market become more easy for the Mapel Leaf restaurants for their new entrepenurial venture and it will be a suitable time to execute this venture in the current economic conditions. On the basis of the above discussion, it has been evaluated that Maple Leaf Resturants should execute the investment in the new entrepenurial venture and develop a hotel in Orlando because it will be a profitable business for the company due to favorable market and economic conditions. Appendices References Dixit, and Pindyck. (1994). “Investment under Uncertainty”, Princeton University Press, Princeton,N.J Holly. (1995). “Exchange Rate Uncertainty and Export Performance: Supply and Demand Effects”,Scottish Journal of Political Economy, 42, 381-391 Doll, Krantz, & Trahan. (2011). The Era of Uncertanity: Global Investment Strategies For Inflation, Deflation, and the Middle Ground. Browne. (1981). Inflation Proofing your Investment. Brady. (2012). Income Investing with Bonds, Stock and Money Markets. Tyagi, & Warren. (2004). The Two Income Trap: Why Middle Class Parents are Going Broke, International Edition. Stelter, & Rhodes. (2010). Accelerating out of the Great Recession: How to Win in a Slow Growth Economy. Lion. (2013). Some Investments are Recession Proof (feat. Roads Collide). Rebonato. (1998). Interest-Rate Option Models: Understanding, Analysing and Using Models for Exotic Interest-Rate Options. Jha. (2011). Interest Rate Markets: A Practical Approach to Fixed Income. Read More