Restaurant business – guess who is coming to dinner?

takeway ideas

Outside Looking In

D E Wasake, FCCA

About my Guest Writer

Mr. Fred Kizito is the manager of Mr. Tasty- a local fast food chain with 4 branches in the Kampala metropolitan business district. He has over 8 years of experience in the fast food business and has a wealth of experience in the sector from stints at KFC Kenya and the prestigious Formula One hotel. He can be reached on +256 775618587.

About the Writer

For over 10 years I have worked with several clients in Uganda, The Bahamas and the United Kingdom in providing audit, tax, accounting and advisory services. My experience with various clients in different sectors enables me to have a good understanding of this business.To see the full depth of my experience, please see my profile.

Article Summary

Despite catering for a basic human need, a fast growing youth and urban population who prefer fast food as well as the abundance of food in Uganda, why is it that many restaurants, including fast food restaurants continually fail? Worldwide trends indicate that 57% of restaurants fail within 1 year and only 20% of restaurants surviving beyond year 3!

Assuming you survive the 1-3 year curse, our analysis indicates that with an investment of Shs. 45m, you can get a return on investment of 0.34 years. This success however hinges on a few key factors including:

  1. Location, location, location
  2. Poor cash flows
  3. Poor controls and monitoring including over the critical area of stocks

Introduction

Writing this article has had a two-fold effect on me; one is that it is nostalgic. My business partner (my sister) and I decided to financially support a family member achieve a dream of operating a restaurant. It never lasted a few months and the investment failed (and I will tell you why), and secondly researching deeper into this sector has shown me that the failed restaurant could actually have succeeded – but then I was not physically present to have given this insight.

Family business aside, takeaways are places where most first (or is it fast?) dates occur. Well at least during my University days, that was the norm, who knows where children of these days have their first dates??

But then  we know campus girls (note the letter ‘c’) never change and they always enjoy the delights of being taken out on dates in restaurants where the 3c’s (chips, chicken and chaps) are served. It’s rumored in some circles that they love anything that starts with ‘c’ like cash, cute, car, crib, cuddling et al….This statement of course is merely tongue in cheek and doesn’t necessarily reflect on all girls eating out in restaurants.

On a more serious note, the growth of fast food restaurants, commonly known as ‘takeaways’ in Uganda have been rapid, especially around Universities and busy areas in the cities.

As per research findings, Wandegeya alone, for which Makerere University is in the vicinity, has over 30 restaurants that specialize in fast food, while Uganda Christian University, Mukono has around 21 as per time of writing.

Drawing from this experience, we present, the core activities and do’s and don’ts of operating this sort of business that is hinged on positive cash flows, customer care service, establishing a strong brand and identity.

As per industry stats, restaurant business has one of the highest failure rates in all businesses.

The industry average placed at 57%, with only two out of 10 restaurants (20%) making it past the three year mark!

With an ever increasing middle class and the highest youth population in the world, the demand for home food delivery and easier payment systems have resulted in the birth of unprecedented business models such as Home Duuka, which deals in online shopping and offers home delivery with an option for mobile money payment.

The customer now can enjoy the benefits of good food without cooking it, picking it up or cleaning up. This is the key reasons the fast food sector is poised to grow.

In addition, there are a number of franchises that have penetrated the Ugandan market like Nandos, Steers, Ranchers steak house, Javas and of recent KFC.

Thus, the question would be why franchises are more successful and are less likely to fail compared to stand alone fast food models?

In answering the above question and learning more about the fast food industry, we used the success model of Mr. Tasty an established fast food restaurant with 4 outlets in metropolitan Kampala (Freedom city, Ntinda, Ben Kiwanuka Street and Lugogo).

According to Euromonitor International, there was a 4.6 percent increase in the value of global consumer foodservice to reach an astonishing sales volume of $2.6 trillion dollars in 2013. The report further details that the Middle East, Africa and Asia Pacific led compound annual growth from 2008-2013 with 10.7 percent and 6.6 percent, respectively.

The above, would simply mean that there are increasingly more restaurants specializing in fast food operating in Africa.

Part 1: So, why do Uganda restaurants really fail?

Before, we look at why restaurants succeed or how established brands like McDonalds and KFC have been able to withstand the test of time, we need to look at the origins and what such companies did to ensure their survival past year one to become globally recognized brands.

Below is a summary of why our restaurant or any other start-up will fail;

1. Poor cash flows. This affects all businesses one way or another, but in the restaurant sector, it is highly critical to have enough money for the start-up and operations cash for the first 8-12 months at least to cover overheads like rent, salary, advertising and utility bills.

2. Location. This is double edged, as a good location will drive business, while a poorly located area will stunt its growth. Good locations in upscale malls have high rent costs that the start-up may not afford which increases the cost of doing business and increases the break even points for the company. Analyze all these above variables before making your final decisions to open up.

3. Lack of Inventory control and monitoring systems. The failure to reliably monitor food stock numbers, break-down of servings and control of the procurement and purchases work played a hand in our failure. It turns out, that often times, the boy who was charged with doing the purchases would hike the prices,  buy less items or wouldn’t buy anything at all and rely on left-over food to sell the next day. Thus as a basis, stock taking is a must on a daily basis.

4. Owner absenteeism. Tied to the need to have proper controls is the need to know key business ratios or averages. It is typical that the owner will be present, at least in the early days

In our case, the family member who was directly in charge for operations and administration was often absent and this created a vacuum that the unscrupulous manager took advantage of to bleed the business dry of its few profits. If he had actually been present and learnt a thing or two about cooking, calculating the food ratio servicing’s and book keeping activities instead of delegating this vital function, it would have still been open.

To avoid a similar fate, it is critical to physically be present and learn the trade, after which time you can then think about hiring a manager and also know where to put adequate controls in place.

5. Lack of an established Niche. All of the world’s most successful restaurants have a specialty or a niche (what they are known for).

KFC has the bucket specials with “finger licking good chicken”, Dominos for its Pizza and Uhuru restaurant serves the best pilawo rice in Kampala (whose recipe is still a secret).

For the restaurant to stand out, being unique is a must! However, be mindful of certain demographics like religion and culture before introducing certain items like pork and alcohol on your menu.

6. Customer care and service delivery. Good customer care is at the helm of any business, customer. Note that, for every one complaint received, there are about three others that have not been registered. It is therefore essential to train staff in etiquette, handling clients and efficiency especially when dealing with many customers at a time.

7. Other factors including:

  • Poorly trained staff
  • Lack of adherence to standards like health and hygiene
  • Short sightedness and lack of vision from proprietor
  • Poor tax compliance

Part 2: Getting started and Foreword

In getting started, you can either choose between franchising or setting up your personal business.

In case you choose the franchising route, it will involve paying someone else for the right to use their concept and brand. Even with advantages such as instant popularity, ready market and support from the franchise owner, you will have to cope with the interminable rules. These include, remitting a percentage of your profits, location restrictions, menu and design restrictions, and of course, the initial cost of purchasing the franchise rights

However, if you choose to go the independent route, there critical areas that you will need to pay attention to before operations can commence.

These are similar to the franchising model requirements, but since it will be a proprietorship, the efforts placed will be more; the critical areas to focus on in brief are;

1. Focus on building a brand and customer identity. This will help your business to relate with customers and for them to be a part of the service provided. This is critical and will ensure customer loyalty.

2. Location. As already mentioned before, location is a key component, be critical about the price, population spread, availability of utilities, parking space, renovation costs and fittings, competition analysis, landlord tenant agreements et al.  Considering undertaking market research combined with use of a broker to assist in this critical aspect.

3. Marketing Strategy. This is important in consideration to your budget and cash flows. Most conventional means of marketing and advertising like print, billboard or radio are expensive. Consider cheaper means that can fit into the restaurants start up budget like social media (Face book advertising) and the traditional word of mouth referrals (e.g nearby offices or buildings).

4. Special Recipe/ Niche/ What are you known for. That’s exactly what you need to be asking yourself? This is the difference between the amateurs and the professionals in the business…Pick a side!

5. Training and retention of staff members. Adding a personal touch of training and appraising, of your staff will mould them and equip them with skills to perform highly. Make training (accounting, marketing, customer care, stores management etc.) an essential element for your employees and set up incentives and rewards for exceptional performance.

6. Minimize wastage of food. You could sell the left-over food as animal feed for dogs and pigs. Use refrigeration to keep foods like chicken and meat for longer periods, however, don’t over-do it as some bacteria can grow on food and cause food poisoning.

7. Procurement and purchases management. If you are not in control of the actual dealings with the suppliers or actually stock counting, then your business is bound to fail. Establish a good working relationship with potential suppliers as there will be times when a credit extension will be required.

8. Doing food deliveries. Starting up a distribution network will ensure two things, one, the ease at which people will give you money and two, the speed at which you will collect the money while delivering food.

Part 3: PROS AND CONS

First the pros…

1. Tapping into the growing and emerging market

Since a lot of fast food is consumed by youth (especially students and single people) who don’t have the time or patience to cook and deal with the after math of dishes, this segment of the population is the biggest in Uganda. Setting up the restaurant around universities and busy areas will ensure constant flow of customers owing to this factor.

2. Increased operational hours

Additionally, operating the business at night will endear night revelers and Kampala’s party animals to have a bite before heading home. Hence incorporating and planning to have a 24hr operation manual is necessary to maximize profitability for the company.

3. Availability of cheap food and labor force

There is availability of most food varieties in Uganda. Consider, sourcing food from villages where it is cheaper. The current youth population is a contributing factor for a raw labor force.

4. Expansion potential into drinks, other services

Overtime you can grow your business to add the sale of a variety of items like coffee, alcoholic drinks etc. Other services can be inclusive of a delivery service, the likes of Nandos are already using this model.

However, addition of certain services will dilute your focus from the core values of your restaurant. A good number of “potential clients” will end up shunning the premises totally on religious and traditional grounds if you include items like pork and alcohol.

5. Increment in revenue during peak days

During peaks starting on Friday and ending on Monday, sales usually double and this can only mean one thing for the business, increased sales and revenue! It however consequently leads to an increased work load and the need for increased supervision from you the business owner.

6. Potential of Franchising

Banking on the annual profits volumes, more and more branches can be rolled out to replicate the success levels of the original branch. This will lead to increased revenue and sales.

….And now the cons

1. Managing Cash flows

I can’t stress this enough. Failure to manage cash flows is one of; if not the leading reason restaurants fail. Therefore, before you get into this venture, thoroughly examine your position and have a cash cushion. Sadly, this is to say, it is not a business for the regular Joe.

2. Getting a reliable and consistent supply chain management

My guest writer comments: “Strive to create and maintain a good working relationship with your suppliers. This will allow you the luxury of ordering goods and paying after sales have been made, otherwise you’re going to choke on the expenses.”

With that, supply on credit is bound to happen at least once during operations.

3. Retention of staff/ fighting off poachers

If you have trained and groomed your staff well, that is a good thing. But be wary of poachers or the staff themselves leaving for better offers and opportunities. Though this is bound to happen in every business, in a restaurant it’s a different for it would be equivalent to losing the engine of your vehicle if you lost your head chef who takes with him all your recipes to a competitor.

4. Menu Selection/ factoring in price changes/ fluctuations

The food industry is subject to price fluctuations which means you will have to deal with unstable operating costs especially for food items. Finding equilibrium on your menu will be something you have to watch out for. Customers wouldn’t want to be treated to a different price at every dining.

5. Monitoring and stock count

Every venture requires your time and constant monitoring and food service is not any different. Kiss your personal and social life goodbye because according to my guest writer, weekends and evenings are the busiest and most demanding times.

Set up control measures to avert the vice and if you suspect theft, investigate it fully and avoid  making false accusations as it could cast you as an enemy to your employees. After confirmation, involve the police and avoid taking the law into your own hands, as I presume you are aware of the Panamera tragedy.

6. Unstable power supply and high utility bills

Like any other service related business, restaurants require easily accessible premises which don’t come cheap. High rental fees will be the least of your problems as finding an available space in urban Uganda is fraught with difficulty. With the need for constant refrigeration, heating, lighting and water usage, high utility bills will send your monthly operational costs through the roof.

Part 4: But just how profitable is this sector?

On the basis of our model analysis:

  • Startup Capital (A): 45,108,000 Ugx
  • Average profit per year using five year projections (B): 129,380,744 Ugx
  • Return on Investment/Capital (years to get capital back) (A/B): 0.34 years

Our model is below:

Fast food restaurant model

P.S Clicking the above link will take you to the Inachee Databank where the full version of this document can be dowloaded after you register. 

SUMMARISING AND THE FINAL WORD

The basics you must get right before venturing into this sector:

  1. Location is everything. Use a market research firm and/or a broker if necessary to ensure you choose an appropriate location.
  2. Cash flows. Ensure you have a reserve cash flow or enter into arrangement with suppliers to ensure you can manage your cash flows better.
  3. Controls over stocks and correlation to sales. You need to get firsthand experience of how the stocks and the sales ratios work (e.g how many sacks of potatoes translate into how many plates of chips?)
  4. Unique – What will your restaurant be known for?
  5. Customer service. “A hungry man is an angry man” – You therefore need staff with excellent skills in handling clients particularly during peak hours.

So in order to turn your cooking passion into an actual money making venture, I  couldn’t have made it much simpler for you.  Unfortunately for me, the ill fated family investment set me back and you are learning at this expense and that was not the last time I have suffered, how I suffered with those “bu campus girls” and their love of the 3 Cs – chips, chaps and chicken!

I promise, if I run a restaurant myself, they will “suffer” when I unveil my unique recipe of ‘the Campus girl special!’

END

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