Zen Bar & Restaurant - Case Study Example

Introduction Zen Bar & Restaurant (Zen) a family-run small-medium enterprise (SME) started in February 2006, with eleven employees inclusive of a paid full-time manager. The restaurant offers authentic Chinese cuisine for eat-in, take-away, and delivery. All four partners have an equal share of the ownership. Zen is located in the working class town of Swindon, in the county of Wiltshire. The original business (trading a bar) was purchased with a view to converting it into Bar and Restaurant. The goal of this family-run business is to create a friendly environment in the area by attracting people to the new concept of Bar and Restaurant rather than being just another outlet. Competition: Going to pubs, clubs and bars is one of the most popular activities in UK with almost 80 percent of the population visiting the pubs thrice a month on an average (Mbplc, 2006). The annual sale of the UK pub market was approximately £20 billion in 2005. The pub market has grown faster than the GDP. The increase in demand for eating out has concentrated in the neighbourhood joints so new pubs can exploit these opportunities. The local pubs usually have low amenity standards and food offers are limited. Since this market is growing and highly competitive, quality food has to be offered and giving the customer value for money can help drive sales. The British are rich in cash but poor on time, hence they prefer to ‘graze’ over food. Hence competition comes from fast-food centres that offer, price, convenience and speed specially during lunch-time (IC, 2005). Competition is high while customer loyalty is low in the restaurant sector. Competitive edge can be derived from the service and the atmosphere. The interiors have to be tastefully planned. Thus it is important that SME’s develop originality as well as maintain a high level of personal service in order to cope with ever-changing market trends and larger (corporate) competitors’ e.g. Chains of bars such as Wagamamas etc. Since inception, the turnover at Zen has increased gradually, but has yet to reach the levels forecast in the business plans. It requires effective strategy and marketing techniques in order to survive. Zen faces various issues including market changes and shifting consumer tastes. Market research is essential as it may allow Zen to anticipate market trends rather than just react to them. Zen has a number of direct rivals within the area, with whom it competes for the market share. These include one pub, 3 CIU Clubs (Working Men’s Club and Institute Union) and one Chinese takeaway outlet. Zen is divided into two main parts - a bar area which offers a pub menu with two screens and a restaurant that offers low priced but quality Chinese food. Swindon is predominately a working-class residential area. The demographics of the area suggest that there have been few businesses of this nature in the past. Therefore, it was ascertained that a genuine opportunity exists to exploit a niche in this particular market. Traditionally, the area has been associated with sub-standard, more affordable bars and restaurants. Zen aims to offer a new and different experience to the local residents whilst still maintaining a viable pricing structure. If Zen cannot cope with the competition and cannot implement effective marketing strategies then the chances of survival are limited. Finance Management Lack of adequate funding is the major obstacle to the SMEs as most rely on long-tem funding through banks, financial institutions or venture capitalists. Banks in UK are risk-aversive and now provide only short term finance to SMEs (Lecture, 6, Finance and SMEs). Thus SMEs are in no position to work out long-term strategies (Hussain, Millman, & Matlay, 2006). The commercial banks have restrictions and have lost their lending flexibility. SMEs are unable to raise finance from alternate sources. They tend to first choose their own finance, then short term loans from friends and family and then turn towards long term loans. They may ultimately go in for equity finance but this affects control. Being a family-unit the significance of financial management is further enhanced. The ownership of Zen Bar & Restaurant is equally split between four partners. The start-up of the business was financed through a bank and private investment by the partners. Bank’s finance was split into a long-term loan for the freehold and a short-term loan required for the refurbishment of the premises. A freehold loan of £500000 is on a 20 years term with interest rate of 1.5% above base and another for refurbishment (£190000) is on a 4 year repayment @2% above base. Despite these, there is a shortfall of around £3,500-£4,000 a month depending on the turnover. Strategy formulation should be examined in the context of the firm’s various stakeholders, according to Ibrahim, McGuire, Soufani & Poutziouris (2004). In the case of Zen although there are four partners, only two can be termed as stakeholders as their individual circumstance and financial needs differ. For two partners Zen is not their only source of income and if the business were not to succeed, it would not cause as big as a financial loss as it would to the other two partners. Hence the individual financial investment carries stronger value for two of the partners and their vested interest in the business success is also that much stronger. Maintaining the cash flow, servicing of the business loan, budgetary control and the right use of finances is where financial management is required. Strong financial health and a wide capital base are important for succession planning in family units. Although the business plan was drawn-up and agreed with the finance provider (Bank), as the sales targets have not been achieved and the wage bills have been high, the deficit has to be borne by the partners. To counter this and to reduce the negative impact on the business, hard decisions had to be made. Of the initial 11 members of the staff, two members had to be laid off and a roster created for the partners to provide the support over the busy weekend period. The two increases in the base rate, in August and in November of 2006 had added to the problem to the already stretched cash flow. UK Interest Rate Year Date Base Rate Change +/- 2004 5th Aug 4.75 +0.25 2005 4th Aug 4.50 -0.25 2006 4th Aug 4.75 +0.25 2006 9th Nov 5.00 +0.25 Family Unit In family-owned businesses, the same individual has to fulfil the same obligations in both the units. Hence an over-emphasis in one area can lead to problems in another. According to Ward (2004), communication, planning and commitment is essential to any family-owned business and this challenge must be respected by every member as perspectives on issues may differ. The life-cycle forces influence family business (Lecture 7, SME in an International Context). Issue of succession and the firm’s strategy are intertwined (Ibrahim, McGuire, Soufani & Poutziouris, 2004). Transfer of ownership from one generation to the next is an important issue. Training and grooming of successor is also important. The universal formula for family-business states that the first generation founds the business, the second grows and develops it while the third generation destroys it. With an equal share ownership of the business, all four family members are jointly responsible for any decisions made regarding Zen Bar & Restaurant. This project is viewed as a long-term investment by all the family members therefore there have been legal discussions on succession planning. According to Poutziouris (2001), in most developed economies, family business accounts for about two-thirds of all enterprises and about half of the GDP economic activity. More than 90% of the firms in Italy are family-owned while the figure stands at 70% in UK, against 85% in EU. Global names like Levi, Benetton and until recently Marks & Spencer are all family-owned businesses (Lecture, 7). Hence the government of any nation cannot afford to ignore the SME or the family-owned sector (Desouza & Awazu, 2006). The strengths of a family business lies in the entrepreneurial talent, sense of loyalty, mutual trust, support, strategic long-term commitment, pride in the family values and tradition, the flexibility to make quick decisions and have a long-term vision. At the same time, being a closely held unit, they could suffer from lack of professionalism, family feuds, rigidity in adapting to new challenges and responding to external climate. There is a tendency to overlook growth opportunities as they are heavily dependent on internally generated funds. The entrepreneurial enterprises in UK generally aim too low and hence soon run out (Coxreview, n.d.). The Zen partners have different skills and attributes to manage this business successfully but as a business concern all partners must accept and understand the conditions of profitable business. Although, the family unit has significant knowledge on how SME’s operate, these can also be the reason for downfall of any business if decisions are made purely on emotional factors. ZEN has so far avoided this potential pitfall. They may enjoy support from the family and have loyal associates but strategy has to be in place with a long-term vision. Question 2. For each of the three influences above, explain how your chosen family-run SME will adapt in order to survive and prosper. Competition Competitive focus alone can result in cost reduction and quality improvement. In the case of Zen it would be service quality (Jordan, Lowe & Taylor, 1998). Competition at the micro level can be ascertained by observing the way a firm has been able to increase its market share in the sector. Product differentiation and customer relationships are critical areas. UK is a mature market and consumers demand service standards. To remain competitive, Zen must ensure that they continually update their range of services, including food menus and entertainment services. Market segmentation is essential so that expenditure on promotion remains focused. Studies of demographics showed majority of people that eat out in restaurants are from nearby businesses, hence leaflets/flyers to all existing business within a mile radius of the restaurant would be an excellent promotional strategy. Of late however, psychographics are used rather than demographics to understand and segment the market. Continued development of quality service would have to be ensured to sustain growth and position in the market. The marketing promotions should be based on how competition advertises in the area, focusing on the unique offers and differentiating profile of Zen. Quick fixed-menu lunches can be an attraction to take care of the rush hour to attract people from local business houses. Window display can help attract passer-byes. This can assist in client retention and loyalty. As a growing firm SMEs can provide a friendlier, more personalized service, closely tailored to customer needs and desires. Being an SME, Zen can offer discretionary discounts and price advantages to their customers that larger restaurant and bar chains would not be able to freely adapt to due to rigid franchise laws and pricing structures. “Chart showing price comparison between ZEN and the competitors.” CIU Clubs (*3) Swiss Chalet Pub ZEN Bar John Smiths & Fosters £2.10 £2.40 2.00 Sprits With Mixer £2.10 (25ml) £2.00 (25ml) £2.50 (35ml) Guinness £2.20 £2.60 £2.10 Special offer Happy Hour None None 3 Pints of John Smiths or Fosters for £5.00 The above chart shows that ZEN has implemented a competitive pricing strategy in order to attract customers. By providing attractive prices, a pleasant and modern environment, and quality beer, Zen has witnessed a marked improvement in terms of customer numbers and customer satisfaction. The recently launched loyalty card scheme for a price of £25 allows regulars a 20% discount on food bill over a 9-month period. This has brought in new clientele and provided an incentive for diners to return on a more frequent basis. Screening of popular sporting events has helped increase revenue in the bar area as it provides an attraction for those wish to socialise while enjoying football/rugby matches. Being an SME, it is not financially viable for Zen to compete with the marketing campaigns of Pizza Express, McDonalds, and Whitbread pubs that use TV, Radio, billboards, and internet. Zen must concentrate on service quality and local advertising. Internet exposure with drinks and dining offer promotions, coupled with newsletters outlining an itinerary of forthcoming events and joining leading websites that promote good, reasonably priced, and recommended restaurants such as toptable.co.uk should be the strategy to beat competition. Finance Management The government in UK spends an estimated £8bn on government services to assist the SMEs (CBI, 2006). It is further estimated that there are 2650 grants and support schemes in England alone but people are not aware of these. There has been no systematic evaluation and people are not aware of what schemes exist and which ones are effective. Zen intends to explore the possibilities of getting grants for this new start up keeping in mind that government is encouraging the growth of private sector firms of all sizes. This would help to reduce loans and debts to a large extent. The Regional Development Agencies (RDA) can be approached for this. Support from the Small Firms Loan Guarantee (SFLG) would also be explored which provides government guarantee to the lenders against defaulters in certain circumstances (BBA, n.d.). Guarantee for Bar and restaurant does not fall under the sectoral restrictions formed by Small Business Services (SBS, 2005). Appropriate budgets should be fixed in advance for all departments. Restaurants on an average spend 3-5% of their turnover on marketing (Edwards, 2003). Banks have become risk aversive especially to new businesses as it is difficult to judge their potential to service the debt. To maintain a steady cash flow planning is essential. The long-term loan should be utilized for fixed investments like kitchen equipments and vehicles while the short term loan can be used for working capital and stock-in-process (Lecture, 6, Finance and SMEs). Since the financing from bank is inadequate, other sources of financing should be planned. Zen would consider the possibilities of purchasing fixed assets under lease agreement to allow free cash for working capital. Receivables in SMEs are usually high and so are the creditors (Burns, 2001, Lecture 6). Care should be taken to avoid credit sales in the beginning. At the same time, purchases should be done on credit, which would allow liquidity. In case of institutional catering and other orders, bills can be discounted with banks but Zen must ensure the credentials of the customers. Besides, overdraft from bank can help to cover the monthly deficit. It has also been noted that in Britain 42% of the firms rely on overdraft finance against 17% in Germany. (Lecture, 6, Finance and SMEs). Financial policy is the source of failure of SMEs. Small firms are riskier investments. Smaller life cycle in SMEs is the key driver to probability of bankruptcy (Jordan, Lowe & Taylor, 1998). In the words of Poutziouris, Zen belongs to the Traditionalist group of the owner-managing director (OMD) segment in UK. Zen is willing to recruit outsiders but is not keen on joint ventures or raising external capital except loans through banks. About 61% of the family companies belong to this group as they have aversion to outside capital infusion. In terms of finance, it is essential that cash flow and profits are managed accurately and in accordance with the input provided by the owners. They should all continuously seek ways of improving the cash flow position to the business thus increasing the profits that can be available to all the owners. Family-unit Family businesses are not a homogenous group and what works for one family group may not work for another (Sharma, Chrisman, & Chua, 1997). It has also been observed that family and business goals are not always compatible, which could lead to organizational conflicts. Several issues have to be well planned in a family unit like power structure, succession and day to day operations. Being a closely held company, the risks cannot be overlooked. As such strategic planning is essential to improve management practice and organizational performance. To reduce costs, Zen has reduced staff and the partners are overseeing operations during weekends and rush hour. This may not be feasible in the long run and possibly could be the source of feud between partners. If a family run business is to survive and develop in the long-term they must adhere to standards, agreed upon procedures, and pre-adopted management policies. Zen should aim to hire employees that are qualified for the positions in the business, family members or otherwise. Professionalism has to be maintained to render the best possible service. Family members should be paid in accordance with market rates, qualifications, and performance not according to the needs of that particular individual. Zen should adopt strong business values. Decisions need to be unemotional and performance should be rewarded based on actual results. Training, appraisals and evaluations should be provided to everyone fairly in order to promote motivation and boost moral within the business. They should welcome change in the business and be able to adapt accordingly. A key consideration in family run SMEs is power, culture, and centralised decision making. Decisions can be taken without having to consult other stakeholders. Zen Bar & Restaurant may provide members and owners the type of career paths and levels of responsibility that they perhaps could not obtain outside the business. A struggling business may give rise to sibling rivalries, jealousy, and long working hours, leading to operational friction. Succession planning is an important factor of any family ownership. Where there is shared ownership of the business as with Zen, it is important that plans are in place in the event of relationship breakdown, or unexpected death of one of the partners. A suitable transition of financial control should be in effect. Potential successors should be trained by current managers and the partners for a significant amount of time before they join the businesses. Besides, second generation relatives may not be as united and may not want to continue the business with same direction and passion. Early recognition of these factors can help to create a contingency plan for the succession of the business. Running a SME is a difficult challenge where all factors need to be considered be it location or choosing the right business partner or family member. In today’s economy, 99% of all businesses are SME’s in the United Kingdom. This is a significant number and they also employee a fair share of the UK’s population. Bearing this in mind, competition, finance and management, and social factors such as the ‘partnership of the business owners’ are vital factors to consider in securing a prosperous venture that succeeds in not only financial means, but as strong contenders in today market. 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B., McGuire, J., Soufani, K., & Poutziouris, P. (2004), Patterns in strategy formation in a family firm, International Journal of Entrepreneurial Behaviour & Research Vol. 10 No. 1/2, 2004 pp. 127-140 IC (2005), Industry Sector Analysis on the UK Restaurant Market, 27 Nov 2006 Jordan, J., Lowe, J., & Taylor, P., (1998), Strategy and Financial Policy in UK small firms, Journal of Business Finance & Accounting, 25 (1) & (2), January/March 1998 Mbplc (2006), UK pub market, 27 Nov 2006 Poutziouris, P. Z. (2001), The Views of Family Companies on Venture Capital: Empirical Evidence from the UK Small to Medium-Size Enterprising Economy, FAMILY BUSINESS REVIEW, vol. XIV, no. 3, September 2001 SBS (2005), Small Firms Loan Guarantee - sectoral restrictions, 23 Nov 2006 Sharma, P., Chrisman, J., & Chua, J. H., (1997), Strategic Management of the Family Business: Past Research and Future Challenges, FAMILY BUSINESS REVIEW, vol. 10, no.1, Spring 1997 Ward, J. (2004), Perpetuating the Family Business – 50 Lessons Learned from Long-Lasting, Successful Families in Business, Palgrave MacMillan (Lecture notes 7). Read More