Ω Ψ Φ Ξ SILVERLINE MANAGEMENT CONSULTANTS & SOFTWARE ENGINEERS A STARTUP: BUSINESS PLAN FAST FOOD RESTAURANT Prepared By: MUSTAFA BILAL 7/17/2011 Ω Ψ Φ Ξ WELCOME To PAKISTAN Ω Ψ Φ Ξ 3D Burger, Fries, Regular A Hot Dog, Regular Fries, Drink Can Drink Ω Ψ Φ Ξ Table of Contents Ψ Strategic Analysis 01. Industry Analysis 02. Market Trends 03. Critical Success Factors 04. Barriers of Entry 05. Bargaining Power Of Suppliers 06. Bargaining Power Of Customers 07. Substitutes Products 08. Competitive Rivalry 09. Strengths, Weaknesses, Opportunities, Threats (SWOT) Ω Investment Appraisal Summary 01. Summary Φ Assumptions 01. Summary 02. Limitations 03. Menu & Deals 04. Cost & Revenue Sheet 05. Daily & Monthly Sales Ξ Financial Projections (10 Years) 01. Income Statement 02. Balance Sheet 03. Cash Flow Statement Ω Ψ Φ Ξ Ψ STRATEGIC ANALYSIS Industry Analysis In Pakistan fast food industry is growing year on year at a very fast rate due to innovation and the presence of multinational chains like (McDonald’s, KFC, and Subway). These multinational chains have set high levels of revenue generation by using market Led approach and by modifying their menus. In Pakistan, multinational chains are considerably more expensive, they usually are frequented because they are considered chic and somewhat glamorous and because they usually are much cleaner than local eateries. Due to such aspect there is a rapid increase in trend of fast food restaurants outlets in recent years. These are ‘satellite ‘shaped outlets which have a very little or no seating capacity formed in non-traditional places such as plazas, office buildings, airports. Etc. This is done to provide more convenience to the final consumer. There is nowadays not just in Pakistan but all over the world hectic jobs which people try to cover on daily routine and tend not to go to places to eat instead they call in urgency for food. Such scenarios also build the rate of growth of a product. In Pakistan, similar kind of situation has been developed over the past years and people are trying to save their job time as much as they can. Secondly an option has increased due to innovation of fast food in the category of eatables and it has become a taste for the consumers of all ages due to separate type of meals with different prices suitable for everyone. Many consumers see multinational fast food restaurants as symbols of the wealth, progress and well-ordered openness of Western society and therefore become trendy attractions in many cities around Pakistan, particularly among younger people with more varied tastes. Ω Ψ Φ Ξ Market Trend Pakistan, currently ranked as 6th population growth rate of 1.9% (Pakistan Economic Survey 2005) and is set to take the top three positions in terms of total population with already 153.4 Million people registered in 2005.1 With this, the per capita income has increased to US$ 736 while the productive age group (15 to 64) years is said to take the major chunk of population (67% of total population) by 2020. augmented by the rapid increase in aging between 20 to 29 years (fast food the overall income generated is expected to The Pakistani economy is becoming increasingly service the foodservice industries that offer the highest levels of convenience rewarded with strong sales growth. In the face of rising population, incomes and increasingly hectic work schedules, a continue to drive fast food sales. Fast products even more accessible. Many more table service restaurants, which traditionally focus on full dining, will likely try to capture part of this market by offering take experimenting with home delivery. in terms of total population, is characterized by a high , The growth rate in food consumption is also the employment rate for males /female population goers) hence the greater income contribution to be higher. service-oriented, in the days to come have been singly nearly insatiable demand for convenience will Food Outlets will strive to find ways to make their full-service in house take-out, and possibly The value of consumer time, as well as the demand come, d Ω Ψ Φ Ξ for consistent, high-quality food products today, will continue to shape up the fast food industry. Fast food, once considered a novelty, has become an increasingly significant part of the young generation’s diet. The role of convenience in this dietary shift cannot be over-emphasized, and the future growth of the rest of the foodservice industry will be driven in large part by its ability to find new ways to save consumers’ time. Critical Success Factors 01. Setting up a mission statement. This should be not vague and rather not wishful thinking. Also for long term success propose some indicators to monitor the activities to achieve the goals. 02. Set up a Market Led strategy to keep up to date on changing consumer trends and their liking behaviors, because it’s one thing to earn a profit and it’s another to sustain the level of revenue generation. 03. Setting up different policies and strategies at management and operational level, implementing them and then monitoring and controlling them on regular basis to ensure consistency. 04. To be thinking like a customer, that If I am going to a restaurant what I will like in it to make me eat the food there. 05. Quality should well be considered above all and should not be compromised. Suppliers should be reliable as good suppliers are the base of long term success for a fast food restaurant. Customer & Supplier relations should be strong. 06. Menu pricing strategies are a tricky gesture and should be looked over after performing consumer surveys, market surveys, and consumer questionnaires. Also keeping a view on elasticity of price and demand of every product and its cost, after setting suitable profit percentages. 07. One major aspect is identifying your target market. The people and your criteria of attracting those people. It’s not an easy task to perform some intelligent minds and suitable strategies are required, where already a lot of multinational chains have set their outlets and major proportion of consumers are attracted to them. If this goes wrong this may tame everything. Ω Ψ Φ Ξ Barriers of entry Following a setup in a new geographical area there are certain threats/barriers always present, which are needed to be overlooked. Generally for a fast food restaurant these are as follows, 01. Do we have the required investment it requires? 02. Are we able to exhibit the level of marketing that would be sufficient enough? 03. Can we achieve challenge the stronghold of other fast food restaurants and show our presence? 04. What are the culture, beliefs, religion, and ethics? 05. Are we able to come across legal requirements following the investment? 06. Certain political stability issues/crisis? 07. The effect of exchange rate if the company of fast food is not local? 08. The inflation affect, and purchasing power of consumers? 09. Supplier’s availability and their bargaining powers? 10. Does the government provide subsidy or not on the products? (And more…..) Bargaining Power of Suppliers There are some times when the supplier powers are strong and conditions are worse for a new entrant. As, there are a few reliable and good quality raw materials suppliers with a healthy product range. In Pakistan supplier’s power is very strong due to following factors:-01. In Pakistan fast food restaurants outlets are in big no. with a very few suppliers. 02. The switching costs are very high for customers. 03. Many consumers see multinational fast food restaurants as symbols of the wealth, progress and well-ordered openness of Western Society so, as to maintain this there are only few suppliers available. Ω Ψ Φ Ξ Bargaining Power of Customers The bargaining power of customers is the opposite of suppliers in same geographical area. As, there are a large no. of customers and a few buyers so, suppliers have the upper hand in negotiations and placing their demand in front of customers. In Pakistan same situation follows due to following factors. 01. The switching costs are low for suppliers. 02. Customer’s powers are concentrated. 03. Due to similar products negotiation powers are almost negligible. 04. Customers earn low profits on their received supplies. Substitute Products This is more over a general issue present in any market segment where people always tend to find alternatives of a product due to following factors. 01. Price sensitive people. 02. Quality sensitive people. 03. People who require on time delivery or urgent food due to job timings. 04. People who have a sense of family ego in themselves and for show they try to go to expensive restaurants. 05. People prefer to go to suitable and healthy and pleasant environments with friends and families for spending a day out. 06. Some people also try to find restaurants where price is attainable for them as well as good quality food is available. 07. Some try to find the restaurants which produces the one type of food which is their core product Competitive Rivalry This component grows eagerly where there is even a little amount of competition. This makes a restaurant build its restaurant up to the level best and to create new innovations in product range, menus, deals, technology. In Pakistan this has grown like nuts and every year on certain national holidays and other events these restaurants competitive rivalry is always at its peak. Some examples of how it is created are as follows:-Ω Ψ Φ Ξ 01. Extensive marketing approaches. 02. Too much restaurants in a certain geographical area. 03. Due to high fixed costs. 04. Very low switching costs. 05. Strategic stakes are enormous due to capturing market share. 06. Exit barriers are high. All of these and the list go on according to the circumstances available for the investor. Every investor requires an understanding with care to adjust his ideas in relation to these to make a long term success for his business. Strengths, Weaknesses, Opportunities, Threats Every business has its core competencies which are its strengths. Which it always tries to sustain above all other. For a fast food restaurant generally these are, 01. The quality of the food? Low price with sustained quality. 02. Flexibility of order delivery. 03. Strong market share being market leader or a good competitor. 04. Good Healthy environment at the restaurant. 05. Healthy range of food recipes available at all time. 06. Making different types of deals for different age levels of people. 07. A specialty of making certain food at best than all others. 08. Compliance with Health and Safety Regulations. 09. Quality Certified Certificates. (ISO 9001/9002…) (And more……) Side by side to these strengths there are also sometimes weaknesses, which every restaurant has with it due to internal failures. 01. Machine breakdown. 02. Inefficient and lazy employees. 03. Unskilled labor. 04. Low quality food. 05. Bad eating environment. 06. Non-compliance with Health and Safety Regulations….(And more…..) Ω Ψ Φ Ξ Both of the above sections give us an analysis of an organization internally, to analyze the effect of external environment, we find the opportunities and threats related to our business. For a fast food restaurant these generally are: Opportunities: 01. Investment opportunities. 02. Merger opportunities. 03. Expansion opportunities. 04. Option to delay the restaurant opportunities. 05. Increase market share/growth opportunities. 06. Hiring reliable and best suppliers of the area opportunities. 07. Obtaining subsidized funds from government when available opportunities. (And more…..) Threats 01. Exchange rate factor increase/decrease. 02. Macro environmental factors affecting restaurant. 03. Inflation rise/fall factor affecting the financials of the restaurant. 04. Suppliers provided quality of raw material is not a sustainable one. 05. Legal fines to pay if non-compliance with legal requirements. (And more….) Ω Ψ Φ Ξ Ω INVESTMENT APPRAISAL SUMMARY SUMMARY (All Figures are in RS.) Construction Cost 1,307,000 Dining & Office Furniture 542,250 Equipment & Machinery 967,000 Advance Rent 1, 200,000 Preliminary Expenses 50,000 Working Capital 1,036,000 Total Initial Cost 5,102,250 (All costs are inclusive of taxes.) IRR 57% N.P.V Rs. 13,076,676 Pay-back Period 2.5 Years. Cost of Capital 17.5% Ω Ψ Φ Ξ ΦASSUMPTIONS:-Summary:-· Revenue will be earned with following probabilities in following categories. Dine In 60% Take Away 20% Delivery 20% (Price includes General Sales Tax) (Sales will be all in cash basis) · The minimum delivery order size is assumed to be Rs. 250/-per order with 3 delivery riders being employed at the charge out rate of Rs. 25 per delivery order where in no transportation fuel is provided by the fast food outlet. For Take Away and Home Delivery another 1% of sales added cost due to packing is assumed. · The rent for the assumed premises will be Rs. 100,000/-per month. It is assumed that Rs.1, 200,000 will be given in advance before possession of premises. This will include 6 months deposit and 6 month advance rent. The rent would be payable on a monthly basis and is expected to increase at the rate of 10% per annum for the projected period. · Utility requirements. 01. Electricity will cost RS 25000. 02. Water will cost RS 2000 03. Gas will cost RS 15000 04. Telephone will cost RS 10000 · Depreciation on Shop, Equipment, Machinery and Fixtures is assumed to be at the rate of 10% per annum based on the diminishing balance method for the projected period. · Working Capital costs include the following:-01. Utilities will cost up to RS 208000 02. Salaries will cost up to RS 358000 03. Raw materials inventory will cost up to RS 70000 04. Rent will cost up to RS 400000 · The provision of pre-operating costs is assumed to be RS 50,000 which will be amortized equally over a 5 year period. Ω Ψ Φ Ξ · Miscellaneous expenses are assumed to be RS 6000 per month (200 per day) and expected to increase at 10% per annum for the projected period. · It is assumed that long-term financing for 5 years will be obtained in order to finance the fast food setup which would mainly include construction & décor of Building, Purchase of machinery & equipment, purchase of inventory etc. This facility would be required at a rate of 15% (including 1% insurance premium) per annum with 60 monthly installments over a period of five years. The installments are assumed to be paid at the end of every month. · Debt and equity ratio is 50:50. The return on equity is 20% and cost of finance is 15%. So, the weighted average cost of capital (WACC) is 17.5%. · Inflation assumptions (Per annum rates):-01. Sales will rise up to 15% 02. Cost of raw materials will rise up to 10% 03. Increase in staff salaries by 10%. 04. Increase in utilities by 10% 05. Increase in rent by 10% 06. Increase in office expenses by 10% · Equipment annual maintenance cost 2.5% of W.D.V. · Income tax rate same as salaried individuals. Limitations:-Following limitations which a restaurant or any other business investor faces in a region like Pakistan which is underdeveloped country are as follows. 01. The sales figure might not be achieved. 02. The cost of sales might increase of what has been estimated. 03. The inflation might change due to political instability. 04. The exchange rate might change due to rise and fall of stock markets. 05. The cost of capital is difficult to calculate accurately as the systematic factor changes with the change in stock markets and that’s an uncontrollable factor. 06. The debt financing interest charge estimation might be different at the start of project due to reason if a new government establishes its own rules on state bank. Furthermore there are many things to discuss under this heading depending upon the business specifically. Which tells what limits the business in the present and its future? Ω Ψ Φ Ξ Menu & Deals:-Starting Menu:-Sr No. Product Price Sr No. Product Price Broast Chinese 1 Chicken Broast (QTr) 65 13 Hot & Sour Soup (2 Servings) 75 2 Chicken Broast (Half) 125 14 Hot & Sour Soup (4 Servings) 140 3 Chicken Broast (Full) 250 15 Chicken Corn Soup (2 Servings) 75 16 Chicken Corn Soup (4 Servings) 140 Burgers 17 Plain Rice 40 4 Chicken Burger 50 18 Chicken Fried Rice 80 5 Chicken Cheese Burger 55 19 Vegetable Fried Rice 60 6 Beef Burger 40 20 Egg Fried Rice 70 7 Beef Cheese Burger 45 21 Beef Fried Rice 80 8 Zinger Burger 80 22 Beef Chili (w/o rice) 75 23 Chicken Chili (w/o rice) 85 Sandwiches 9 Chicken Sandwich 55 24 French Fries (Per Plate) 25 10 Egg Sandwich 40 25 Cole Slaw 15 11 Beef Sandwich 45 26 Soft Drinks (Large) 50 12 Club Sandwich 80 27 Soft Drinks (Regular) 15 Starting Deals:-Combos Item Prices Price Combo Deal 1 Zinger Burger /French Fries /Regular Drink 105 Combo Deal 2 Chicken Broast (Qtr.) /French Fries /Regular Drink 90 Combo Deal 3 Chicken Burger, Broast (Qtr.), French Fries, Regular Drink 135 Combo Deal 4 Club Sandwich /French Fries /Regular Drink 105 Family Deal 1 Full Broast /Zinger Burger /Club Sandwich /French Fries (4) /Large Drink 535 Family Deal 2 Zinger Burger (2) /Club Sandwich (2) /Broast (Half) /Large Drink /Fries (2) 515 Jumbo Deal 5% discount on purchase above Rs. 1,000/-Ω Ψ Φ Ξ Cost & Revenue Sheet:-Product Cost Price Unit Sales Total Cost Total Sales Chicken Broast ( Qtr) 35 65 36 1,260 2,340 Chicken Broast (Half) 70 125 18 1,260 2,250 Chicken Broast (Full) 140 250 6 840 1,500 BURGERS Chicken Burger 20 50 24 480 1,200 Chicken Cheese Burger 25 55 36 900 1,980 Beef Burger 18 40 18 324 720 Beef Cheese Burger 23 45 18 414 810 Zinger Burger 40 80 24 960 1,920 SANDWICHES Chicken Sandwich 20 55 21 420 1,155 Egg Sandwich 12 40 6 72 240 Beef Sandwich 20 45 3 60 135 Club Sandwich 35 80 30 1,050 2,400 Total 8,040 16,650 CHINESE Hot & Sour Soup( 2 Servings) 25 75 6 150 450 Hot & Sour Soup ( 4 Servings) 50 140 3 150 420 Chicken Corn Soup ( 2 Servings) 25 75 6 150 450 Chicken Corn Soup ( 4 Servings) 50 140 3 150 420 Plain Rice 12 40 3 36 120 Chicken Fried Rice 20 80 12 240 960 Egg Fried Rice 18 60 6 108 360 Vegetable Fried Rice 18 70 3 54 210 Beef Fried Rice 20 80 3 60 240 Chicken Chili w/o Rice 30 75 6 180 450 Beef Chili w/o Rice 35 85 9 315 765 French Fries (Per Plate) 8 25 5 40 125 Cole Slaw 6 15 5 30 75 Soft Drinks (Large) 40 50 10 400 500 Soft Drinks ( Regular) 9 15 375 3,375 5,625 Total 5,438 11,170 Ω Ψ Φ Ξ Daily & Monthly Sales:-Daily Monthly Additional Final Total Sales 27,820 834,600 834,600 Total RM Cost 13,478 404,340 4,838 409,178 Gross Profit 14,342 430,260 425,422 Sales Break Down Daily Basis Orders Values Packing Costs Delivery Cost Add Cost Dine In 60% 180 500,760 Take Away 20% 60 166,920 1,669 1,669 Delivery 20% 60 166,920 1,669 1,500 3,169 300 834,600 3,338 1,500 4,838 Note:-All above estimated figures are taken as average after surveying all over Pakistan. Prices and cost values might change on seasonal conditions and demands as well as on national holidays and certain events. Values reflect current inflation and tax inclusion, which may change as the time passes by. This menu relates on opening a simple restaurant in a local place with its cost and benefit analysis. Further more if you wish to increase your products new technology and skilled labor with more place for the restaurant will be required. Ω Ψ Φ Ξ Financial Projections:-First 5 Years:-Projected Income Statement (Figures are in RS 000's) Years 1 2 3 4 5 Revenue 10,015 11,517 13,245 15,232 17,517 Cost of Sales Raw Material Costs 4,910 5,401 5,941 6,535 7,189 Labor and Salaries 1,074 1,181 1,300 1,429 1,572 Utilities 624 686 755 831 914 Total Cost of Sales 6,608 7,268 7,996 8,795 9,675 Gross Profit 3,407 4,248 5,249 6,437 7,842 General Administrative an Selling Expenses Rent Expense 1,200 1,320 1,452 1,597 1,757 Office and Miscellaneous Expense 72 79 87 95 105 Amortization Expense 10 10 10 10 10 Depreciation Expense 282 253 228 205 185 Maintenance Expense 22 20 18 16 14 Total Expenses 1,586 1,682 1,795 1,923 2,071 Net Operating income 1,822 2,566 3,454 4,512 5,770 Financial Charges @15% per annum 358 298 229 149 56 Earnings Before Taxes 1,464 2,268 3,225 4,363 5,714 Tax @25% 366 567 806 1,091 1,429 Net Profit 1,098 1,701 2,419 3,272 4,285 Monthly Profit After tax 92 142 202 273 357 Ω Ψ Φ Ξ Last 5 years:-Projected Income Statement Years 6 7 8 9 10 Revenue 20,144 23,166 26,641 30,637 35,232 Cost of Sales Raw Material Costs 7,908 8,699 9,568 10,525 11,578 Labor and Salaries 1,730 1,903 2,093 2,302 2,532 Utilities 1,005 1,105 1,216 1,338 1,471 Total Cost of Sales 10,643 11,707 12,877 14,165 15,581 Gross Profit 9,501 11,459 13,763 16,472 19,651 General Administrative an Selling Expenses Rent Expense 1,933 2,126 2,338 2,572 2,830 Office and Miscellaneous Expense 116 128 140 154 170 Amortization Expense 0 0 0 0 0 Depreciation Expense 166 150 135 121 109 Maintenance Expense 13 12 10 9 8 Total Expenses 2,228 2,416 2,623 2,856 3,117 Net Operating income 7,273 9,043 11,140 13,616 16,534 Financial Charges @15% per annum 0 0 0 0 0 Earnings Before Taxes 7,273 9,043 11,140 13,616 16,534 Tax @25% 1,818 2,261 2,785 3,404 4,134 Net Profit 5,455 6,782 8,355 10,212 12,403 Monthly Profit After tax 455 565 696 851 1,034 Ω Ψ Φ Ξ First 5 years:-Projected Balance Sheet (Figures are in RS 000's) Years 0 1 2 3 4 5 Assets Current Assets Cash & bank balance 1,036 2,055 3,590 5,747 8,656 12,464 Prepaid Rent 1,200 1,200 1,200 1,200 1,200 1,200 Total Current Assets 2,236 3,255 4,790 6,947 9,856 13,664 Fixed Assets Fast Food Machinery 967 870 783 705 634 571 Shop 1,307 1,176 1,059 953 858 772 Office Fixtures 542 488 439 395 356 320 Total Fixed Assets 2,816 2,534 2,281 2,053 1,848 1,663 Preliminary Expenses 50 40 30 20 10 0 Total Assets 5,102 5,829 7,101 9,020 11,714 15,327 Equity and liabilities Owner's Equity 2,551 3,649 5,350 7,769 11,041 15,327 Long term Liability 2,551 2,180 1,751 1,251 672 0 Total Equity and Liabilities 5102 5829 7101 9020 11714 15327 Ω Ψ Φ Ξ Last 5 Years:-Projected Balance Sheet (Figures are in RS 000's) Years 6 7 8 9 10 Assets Current Assets Cash & bank balance 18,086 25,019 33,508 43,840 56,349 Prepaid Rent 1,200 1,200 1,200 1,200 1,200 Total Current Assets 19,286 26,219 34,708 45,040 57,549 Fixed Assets Fast Food Machinery 514 463 416 375 337 Shop 695 625 563 506 456 Office Fixtures 288 259 233 210 189 Total Fixed Assets 1,497 1,347 1,212 1,091 982 Preliminary Expenses 0 0 0 0 0 Total Assets 20,783 27,566 35,920 46,131 58,531 Equity and liabilities Owner's Equity 20,782 27,566 35,920 46,131 58,531 Long term Liability 0 0 0 0 0 Total Equity and Liabilities 20783 27566 35920 46131 58531 Ω Ψ Φ Ξ First 5 Years:-Projected Cash Flow Statement. (Figures are in RS 000's) Years 0 1 2 3 4 5 Cash flow from Operating Activities Net Profit 0 1,098 1,701 2,419 3,272 4,286 Add:-Depreciation Expense 0 282 253 228 205 185 Amortization Expense 0 10 10 10 10 10 Net Cash Flow From Operations 0 1,389 1,964 2,657 3,488 4,481 Cash Flow From Financing Activities Receipt of Long-term Debt 2,551 Repayment of Long-term Debt -370 -430 -499 -579 -672 Owner's Equity 2,551 Net Cash Flow From Financing Activities 5,102 -370 -430 -499 -579 -672 Cash Flow From investing Activities Construction Cost -1,307 Office Furniture -967 Equipment & Machinery Cost -542 Advance Rent -1,200 Preliminary Expenses -50 Net Cash Flow From investing Activities -4,066 0 0 0 0 0 NET CASH FLOW 1,036 1,019 1,534 2,157 2,908 3,808 Cash at Beginning of Period 0 1,036 2,056 3,590 5,748 8,656 Last 5 Years:-Ω Ψ Φ Ξ Projected Cash Flow Statement. (Figures are in RS 000's) Years 6 7 8 9 10 Cash flow from Operating Activities Net Profit 5,455 6,783 8,354 10,211 12,400 Add:-Depreciation Expense 166 150 135 121 109 Amortization Expense 0 0 0 0 0 Net Cash Flow From Operations 5,622 6,933 8,489 10,332 12,509 Cash Flow From Financing Activities Receipt of Long-term Debt Repayment of Long-term Debt 0 0 0 0 0 Owner's Equity Net Cash Flow From Financing Activities 0 0 0 0 0 Cash Flow From investing Activities Construction Cost Office Furniture Equipment & Machinery Cost Advance Rent Preliminary Expenses Net Cash Flow From investing Activities 0 0 0 0 0 NET CASH FLOW 5,622 6,933 8,489 10,332 12,509 Cash at Beginning of Period 12,464 18,086 25,019 33,508 43,840