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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And now the disclaimer: While I/we have taken steps to research this information as well as based on our experience, you should not solely rely on the information given here to base your investment decisions.

You should seek business advice from a professional knowledgeable of your specific circumstances. I (or Inachee) shall therefore not be held responsible for any loss you may incur when acting on this information.

It’s a nerd’s world – can you make money from video games?

Outside Looking In

D E Wasake, FCCA

About my guest writer(s)

Ayub Mubiru is the proprietor of Gamers’ Hell. He can be contacted on: +256 701 190 579+256 701 190 579

Shadrack Kuteesa is the proprietor of Games 4 U. He can be contacted on +256700993925+256700993925 or +256782300142+256782300142

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

With one of the youngest populations in the world – 78% estimated to be below the age of 30, the video game sector is potentially ripe for investment in Uganda. This combined with a change in the world wide gaming demographic – the average user being 30 years old and increasingly mainstream means this is no longer a purely “nerd’s world”.

The article estimates a good return on investment by in investing in a communal gaming parlour (with the opportunity to franchise).

Introduction

Women, violence – in a virtual world, who cares for that stuff?  What is Grand Theft Auto V anyway? You might wonder looking at the image above?

For the uninitiated, within twenty-four hours of its release in September 2013, Grand Theft Auto V ("GTA V") generated more than $800 million in worldwide revenue. Three days after release, the video game had surpassed $1 billion in sales, making it the fastest selling entertainment product in history!

Welcome to the real world – yes that’s right, the real world is indeed a virtual world, judging by the sales figures for GTA V (as its fans say). And that is just one of them.

I remember as a boy, playing my first video games with my brothers and having constant arguments/fighting for playing turns and much filled fun with the latest gaming console at the time (play station 1).

Before this, we often borrowed a Chinese cartridge game where we enjoyed the delights of Super Mario. So out went the traditional games like “dool”[a form of marbles] and “Tapo” [hide and seek] together some of my ‘local’ neighborhood friends and in came the video games! Much to my mum’s delight – the gaming console that would keep us in doors and out of neighborhood trouble, her prayers had been answered!

There are many more fond memories such as of the car racing games, with one of my brothers being the navigator through the dirt roads of Laguna Seca and the smoky Mountains in Grand Turisimo and the unforgettable grim adventures of vampire slayer Raziel in Soul Reaver: Legacy of Kane (which I swear, we would never have completed till this day, without the help of a cheat code from our friend Joel).

That said, little did I know then, that you would be able to play games and also make money from being a gaming geek and fanatic.

Just how big is the gaming industry?

The gaming industry is one of the most lucrative businesses worldwide, with over $10.5 billion in sales revenues on average in the last five years starting from 2009-to date(www.ersb.com) with major software companies Microsoft, Sony, Nintendo and Sega, among others being market leaders each with their different gaming consoles.

Today there are quite a number of gaming consoles on the market each with different features to suit the pleasures of the gamers needs.

From the Nintendo WII, Play station series 1 to 4, X Box series et al. Access to games has never been more in this generation than it was ever, today you can access a game to play as long as you own a smart phone at the very least. Gaming companies are now shifting increasingly to online gaming, together with multi player options.

There has been gradual advancement from “simpler” games like Super Mario and Packman to the current games of today like GTA V which by the way had surpassed another unprecended record – Call of Duty: Black Ops 3 which had taken “only” 15 days to surpass $1 billion in sales!

From the above, it is obvious the gaming industry can be very lucrative and growing by the day and hence be a key for an investor especially in Uganda as video game penetration and gaming parlors have not been fully exploited and realized and yet our population is one of the youngest in the world – with an estimate of 78% being below the age of 30.

When we carried out research in this sector for a client, we noted for example that there were less than two or no gaming parlors from the three major districts of each of the regions of Uganda. Western region (Mbarara) had none, Eastern region (Mbale) only had one, while Northern region (Gulu) also had one only.

It was only the central region in the capital Kampala that had about 30 establishments in and around the suburbs. From this, it was a clear indication of the lack of deep penetration in this segment commercially – particularly in the up country locations.

Our guest writer, Ayub who has been operating a gaming franchise (Gamers hell) for the last 5yrs weighs in:

“This business has mainly university students and working class people coming in to play, I normally close at midnight because the customers are many and I’m also situated on Kampala road. This is a good location and easily accessible, I also charge low rates of 3,000sh per hour and occasionally give bonus and good customer care, this business has paid off more than I expected.”

Ayub’s success has paid off and he has opened up another branch in town and gone on to franchise the gamers hell brand to third parties who operate in the Ntinda business district. His success keeps coming and in 2012 his team organized the first annual video game tournament and challenge sponsored by soft drink giants Mountain Dew!

Another one of our gaming experts and veteran in the field, Shadrak who operates gaming company Games 4 u had this to say:

Yes it is lucrative especially when the kids are back from school, but also from the corporate and adult crowd, I see grownups playing all the time and wonder no more since I’m above 18 and yet I still love playing games. We have also been able to grow because of companies hiring out our consoles and the additional income from repairs and selling of the games. I had to learn to repair games as the consoles would always get faulty and control pads damaged, other than that, it’s a very lucrative business, I love it because I love to play games and have fun as well.”

Video games played by adults? Really?

Times have indeed changed since my childhood. In fact video game companies these days are making games specifically for adults. Check out some “fun facts” below:

  • The average gamer is 30 years old and has been playing for at least 13 years.
  • 68% of gamers are 18 or over – proving that games are not only for children!
  • 45% of all players are women! Today, adult women represent a greater portion of the game playing population (31%) than boys aged 17 or younger (19%). So don’t mess with these girls, they are the real deal!
  • 62% of gamers play with others, either in person or online. 77% of these gamers play with others at least one hour per week.
  • 93% of parents pay attention to the contents of the games their children play and are present when games are purchased on rented.
  • In the USA alone, an approximate 70% of all households have and play video games or have video game consoles.
  • Studies have shown that there is no direct correlation between violent and action games and violent destructive behavior patterns in teens.

So what next? In our article, we are assuming that the “advanced thinking” business will set up a business that provides “gaming facilities” – playing of games, sale of games and consoles as well as repairs. If it succeeds, the concept can be franchised.

Before we go into the financial analysis of this enterprise:

FIRST THE CONS (what might hold you back)

  • Location is the most important aspect of this enterprise. This is after all a retail business and thus if the establishment is not strategically placed, flow of business will be low and result into loss making. Urban centres are therefore of course a key location – some considerations could be set up near large educational institutions but an “advanced thinking option” would be to deliberately set up for example “25 and above” only sections  – to appeal to the “older” gamers – who after all statistics show are the core of the industry.
  • Accessories and replacement parts. Games and consoles are bound to high levels of wear and tear owing to constant usage. At times gamers are “aggressive” and will misuse and abuse the equipment, thus, you should have stock or quick access to spare parts and repair avenues for the consoles and other equipment like the television sets, sound systems et al.
  • Piracy and counterfeits are some of the main and leading problems in this industry, particularly in Uganda. Majority of the games sold in the market are pirated and hence cost less than the original games. This is one of the reasons for the high levels of video game availability to the masses. So, if you are selling or dealing in strictly authentic games that cost 10 times as much as the fakes this will be potential challenging to the enterprise as not all your competitors act ethically and Uganda’s copy right, Intellectual Properties and Trade Marking policies are not that strict as of yet.One “advanced thinking” strategy that I tested when I did sell video games (another day’s story!) was to source for good quality second hand games from markets like the UK. This is especially because gamers often quickly move on or want to exchange games and so there is a large and robust 2nd hand market for games. Blockbuster and HMV before they shut in the UK for example had used game sections.  Another alternative might be to rent on a monthly basis multi player game options say a 30 day rental. This is offered by online rental gaming companies like gamefly.com, gamerang.com and redbox.
  • Growth of income levels. As income levels increase, gamers especially those in urban dwelling homesteads can afford to have consoles for their children already. Combined with the increased access to cheap internet, which means they can easily play online with other player but from home) communal gaming areas can be at risk.Your marketing strategy therefore needs to deliberately emphasise your facility giving “companionship” which comes from playing physically “side by side” rather than “alone at home”.  Alternatively build a community through “off line” only gatherings.

Now the Pros (the good stuff)

  • Growing and dynamic population. The percentage of people in the ideal gamers’ age groups of between 12 and above is gold. After all in the US the average gamer is 30years old – this works in favour of the Ugandan gaming provider.
  • Recession proof industry(?). Many in the industry argue that video games are “recession proof” –Because video games are cheap and relatively affordable to access, people keep playing, even when they need to escape the gloomy reality. Respected newspaper the economist is not fully convinced – but there is one fact – more and more households are increasingly accessing all types of gaming consoles, and they are becoming more main stream – for example due to the WII consoles and the increasingly mobile games (candy crush saga anyone?)
  • Linkages. This business can be merged with others such as an internet café, coffee and confectionary bistro or with other gaming consoles like slot machines (dependant on the location of the business and the entrepreneur’s interests and limitations to minors et al).
  • Alternative entertainment. There is also market for the gaming consoles and services for outdoor events, tournament’s and children’s parties. For instance many corporate clients will hire the gaming consoles for their staff for purposes of recreation and in other cases, functions and events like children’s parties will provide an opportunity to provide gaming consoles at such avenues through the year.
  • Work as you play hard. Finally (at least according to my guest writers) you will make money while at the same time enjoy what you do. The combination of work and play have never worked better!

Just how profitable is this sector?

From our model, and using a 3 year horizon as a basis for comparison, we estimate the following:

  • The initial investment requirement shall be 18,000,000Ugsh (A)
  • Average returns per year will be approximately, 15,372,160Ugsh (B)
  • Hence total Return on Investment (ROI) (C = A/B) will equate to approximately 1.17 years.

Our model is below:

Gaming parlour 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.

Now the basics you must get rights before you get the games started:

Location: This is the most important aspect of this business, so preferably set up, the businesses in a busy shopping mall and arcade area, where parents and children are bound to be. Alternatively next to a university or secondary school district or any other very busy location of the business area.

Games and consoles: Have a wide selection of game varieties like sports, adventure and action games especially. Gamers can be very territorial and so you MUST have a number of different gaming consoles like Play stations, XBox, Nintendo’s et al. This will provide the customers a wide range of games to select from to enjoy the gamers experience, in addition, you can install play gadgets like virtual reality shades, driving simulation sets et al. Access to an online rental might help you reduce the costs of buying games and help you counter the counterfeit games challenge in Uganda.

Focused marketing: The gaming clientele though cover a considerable % of the population, they are very niche and selective in nature (some call they “nerds” or “weirdos” but I disagree – this is now a “Nerd’s” world) – Hence all the advertising and strategic planning should be very niche, from gaming promotions and organization of tournaments, the focus clientele need to be treated with special good customer care services. Some of the marketing strategies to implement include:

  • Seasonal campaign offers (considering some clients are at school part of the time)
  • Low cost options and bundling offers – As older games are less demanded than the news ones offer a bundling offer to get rid of old stock by factoring their prices within new ones e.g “buy 2 new games and get a 3rd one free”.
  • Customer loyalty scheme including for walk ins, perhaps ask if they are interested in taking an extra minute or two to get a loyalty card which allows you to provide them more information, discounts (including on online play) and quicker service (e.g members’ only consoles to reduce waiting time).

Final word

We are living in strange times. It used to be a man’s world, now it is a nerd’s world. It used to be that our closest friends were real friends with whom we played “dool” but now our closest friends might be virtual friends with whom we share a gun in the latest installment of GTA V or speak to about the latest game via Face book. I suppose then the only question is – if you are not in the virtual world, what are you waiting for?

Welcome to the real world!

END

Share the article! Did you like this article and know someone else who might benefit from it? Please share it, simply click the link of the article, copy and paste it to an email and send!

Join advanced thinking. Would you like more regular support or information? The easiest means of keeping up to date with new articles on this page and the website is via email.

In addition we regularly provide tips on marketing, corporate governance; accounting, entrepreneurship and best practice to help you successfully start, run and grow your investment/business. Please click here to join the email subscription list.

And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not solely rely on the information given here to base your investment decisions.

You should seek business advice from a professional knowledgeable of your specific circumstances. I (or Inachee) shall therefore not be held responsible for any loss you may incur when acting on this information.

Investing in pharmacy in Uganda? Weep and Reap business?

Outside Looking in

D E Wasake, FCCA

About my guest writer:

Nakayima Beatrice is a pharmacist technician at a prominent pharmacy in town she has been doing that job for three years and she got to learn the different tactics involved in the business. Her knowledge about the business makes you think that given the funding she would start a similar business of her own. Beatrice has a bachelor’s degree in nursing at Makerere University.

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

The opportunity to invest in the pharmacy business in Uganda is driven by the following key factors:

  • A significant shortage of pharmacies per population. Current estimates are 1 pharmacy per 88,000 people, way below the recommended World Health Organisation (WHO) ratio of 1: 2,000.
  • A sector that is not very heavily regulated and Class B and C drugs such as antibiotics and analgesics can be purchased over the counter
  • A growing middle class who have the need and the ability to purchase drugs and related healthy lifestyle options.

Introduction

Prior to putting pen to paper for this article I called up my mother. Shortly after exchanging Christmas holiday pleasantries, I quickly got down to business (she said she was playing Monopoly with the family and so needed to get back to Euston road), and asked her point blank :

Is pharmacy business profitable?”

You see at one point of her entrepreneurial career she run a pharmacy and supported 7 children at the time. Drug names like Magnesium Tricilicate and Penicillin V therefore easily rolled off my tongue from early childhood. I therefore believed she would help me.

Her simple response (in my mother tongue):

“Yes, but the pharmacies are always playing cat and mouse with the authorities and you need to watch for theft of the drugs.”

In her simple lay person terms, and without a pharmacy degree or formal training, she had laid out the key risk factors to look out for if you are to invest in this business. But before I highlight these in detail, why invest in this sector?

Why invest in the pharmacy business in Uganda?

The title of the article highlights the double jeopardy of this sector.

Cat and mouse: Government vs hospitals, where are the drugs?

You cry (or weep) for our beloved country because it would seem that many reports indicate that whereas the Government is constantly allocating money to hospitals for buying medication, when you get to the hospital the doctors tell you there are no drugs in stock and you will have to buy them from somewhere else.

Ugandan hospitals appear to have therefore been transitioned into diagnosis clinics identifying underlying health issues of patients and then sending them out to look for medication. The doctors claim there are no drugs in stock. It’s therefore common for patients in Uganda to go to government hospitals, receive diagnosis for their diseases and leave without even the basic medication of pain killers. The government claims they send the medicine to the hospitals but the hospitals claim they never receive the drugs so the big question is where do the drugs go?

The state of the health sector in Uganda

The health sector in Uganda is underfunded and medicines are no exception. In the budgets for FY 2013/14 and 2012/13, the sector allocation was only 7.2% and 7.6% respectively – both less than Abuja Declaration by African Heads of State to spend 15% of the national budgets on health. With the population growth rate of 3.4% p.a, the medicines needs continue to grow especially among the 10,000,000 (UBOS, 2008) people that live below the poverty line.

The pharmacy sector in Uganda: More weeping

According to the Pharmaceutical society of Uganda, the body responsible for the sector, there are currently 465 qualified pharmacists, of whom 70 are abroad, leaving about 395 practicing within the country.

With a population of approximately 34 million people, this represents a pharmacist to population ratio of 1: 88,000 which is way below the recommended World Health Organisation (WHO) 1: 2,000 ratio.

The chronic shortage is being addressed by the pharmaceutical society in conjunction with Universities to among others increase the number of pharmacists being trained but in the meantime, illegal pharmacies continue coming up, the cat and mouse games with National Drug Authority (NDA), the regulator, continue and meanwhile the population suffers as a result of the imbalance.

Key challenges of this shortage include:

  • Problems getting the right type of medicines to the right people at the right time;
  • There are essential medicines out of stock;
  • documented expiry of large quantities prior to utilization;
  • unqualified personnel at the prescription/dispensing window; and
  • self medication or medication unto others (child) – which has led to consequences of increased or chronic ill health, under-doze or over-doze, treatment failure, emergence of drug resistance, socio-economic consequences, and in some cases death.

A reason to reap?

In the midst of the sorrow of our situation, there is a reason to reap for the investor, who is also conscious of the plight of the Ugandan population and seeks to make a difference – socially and economically.

As per the National Drug Authority, the regulator of the sector, at October 2013 there were only about 414 registered pharmacies. Some press reports say that the total of clinics in the country is over 10,000 which means the majority in the country are illegal. For the ethical acting business person/investor, therein lies an opportunity.

Only 414 pharmacies in Uganda?

We have analyzed these 414 registered pharmacies in the country to assess their makeup and the statistics show the following:

Table: Registered pharmacies in Uganda – regional distribution.

 
Region Number %
Central 320 77%
Eastern 36 9%
Northern 14 3%
Western 44 11%
Total 414 100%

Source: Inachee analysis

P.S Of the 320 pharmacies in Central region, 292 were located in Kampala and suburbs (incl. Entebbe and Wakiso), this alone represents 77% of all pharmacies in Uganda!

Of the pharmacies in the rest of the country, the bulk was in Mbarara, Jinja and Mbale. Furthermore some 22% of all pharmacies are some form of branch network (meaning more than 1 owned).

We have analyzed these clinics in further detail and compared this to the population by region. Ask us for this report on request.

The opportunity in the sector therefore lies perhaps especially in setting up country pharmacies as Kampala appears over saturated, compared to the rest of the country. But even so, there is still a shortage in Kampala.

Trends from other countries (and the future)

In the US and the UK for example, the sector is more regulated and pharmacies only dispense, even antibiotics on prescription from a doctor. In Uganda, this is not the case, antibiotics and a lot of other medication (called Class B and C drugs) can be obtained over the counter from a pharmacy.

It will therefore not surprise me if the larger stores in Uganda, such as the supermarkets move into this sector together with their other offerings just like for example Walgreens in the US and Boots and Tesco in the UK.

It will mean that the current pharmacies particularly the independent ones will need to focus on customer service to survive.

So, with the above in mind, how do you set up a pharmacy business?

FIRST, THE CONS (WHAT MIGHT HOLD YOU BACK)

1. Regulatory matters

A: Drug license

In Uganda every pharmacy must have a drug license and this license is obtained from the National drug authority and renewed every year. The pharmacy can be owned by individuals, partnerships or body corporate. The Individual must hold a pharmacist license and be a Uganda resident while with partnership or body corporate, one partner or director must be a pharmacist and Uganda resident.

You therefore need to ensure that you check that the pharmacist you use is one of the 465 with an up to date annual practicing certificate issued by the Pharmaceutical society.

This can possibly be a selling point for your pharmacy in an industry rife with “fakes” – hence a clear display of the NDA certificate including the pharmacists’ certificate might help instill credibility and hence bring more customers.

Our Advanced tips to manage the drug license regulatory risk

(i) Hiring variation. The cost of a pharmacist, considering the scarcity is therefore bound to be high. Staff costs are therefore the highest costs of a pharmacy after the direct costs. An advanced thinking strategy is therefore to include the following:

  1. hire qualified pharmacy technician to parse out prescription drugs and instruct patients on proper use of each product.
  2. Hire interns (perhaps in the medical field) to act as assistants including for research into trends and breakthroughs, contacts with local drug manufacturers or importers – they could also handle the marketing (see customer care section below).

(ii) Develop manuals and leaflets. One of our recommended strategies is to in conjunction with the pharmacist and the assistants build a profile of the most common drugs needed and to then develop leaflets of information as well as a diagnostic tool such as a flow charts or access to recognized online medical sites.

These tools will help the staff to handle the more routine prescriptions and limit the time the pharmacist spends to the more complex, non routine cases.

Tied to the above, would be to expand the role of technicians. A study published in the "American Journal of Hospital Pharmacy" showed that by allowing pharmacy technicians to enter drug orders into the computer, check other technicians and dispense certain drugs, overall productivity increased.

Alter your training manual and operating methods to include greater responsibilities for the technicians. By increasing productivity, your pharmacy can take on more prescription orders and free valuable time for the pharmacist to talk to patients.

This also reduces the waiting times at pharmacies – something Kampala pharmacies are increasingly becoming notorious for.

(iii) Regulatory checklist. Another key tool that needs to be developed is a regulatory/quality control checklist.  This is needed to ensure compliance with NDA requirements.

We believe all staff will need to be aware of this checklist so as to ensure quality as well as compliance is consistently maintained.  

As the investor/manager of the pharmacy, as this a key risk, you should ensure that you review this checklist or if not, ask your accountant/auditor to specifically check for regulatory compliance as part of their work so as to prevent risk of shut  down of the pharmacy on a technicality e.g sale of expired drugs.

You also need to understand Uganda National Drug Policy

B: Drugs

We have drugs of three categories.

  • Class A – these include but are not limited to Tranclusires e.g. valium, codeine, penovadinton and strong analgesics e.g. morphine. P:S: Pharmacies are not allowed to sell drugs in class A as these are addictive drugs.
  • Class B – which include antibiotics and injectories; and
  • Class C which include the mild analgesics and vitamins.

The pharmacy makes money by selling drugs in Class B and Class C but also supplements those sales by selling over the counter drugs (These also include health facility supplies such as health facility laundry supplies such as liquid soaps , chroral hexidin topicals and skin lubricants) and drugs in the dispensing unit.

In order to manage this CON, you therefore need to have a deliberate strategy on key aspects like:

  • Generic vs branded drugs – where and how do you mix the two considering generic drugs are often cheaper and can be marketed to the rural, who comprise the bulk of Uganda’s population.
  • Suppliers – do you purchase from local wholesalers/manufacturers or apply for an NDA import licence to import the drugs yourself including from online suppliers.

2. Retail business considerations

At its core, a pharmacy is a retail business and so understanding the basics of retail in addition to financial management aspects (sales, cost of sales, gross profits and margins, stocks is critical). In hiring staff therefore for example, affiliated retail experience could help you succeed. Key retail business considerations to look at therefore include:

(a) Stock management. Like my mother alluded to, a stock monitoring system to prevent theft is critical. This includes having regular stock counts to ensure adequate monitoring.

A good stock management system used in conjunction with capturing sales/customer information could help you get unique insights such as to differentiate between:

  • Walk in;
  • Regular customers; and
  • Referrals from hospitals/other clinics/specific doctors

At its simplest, an excel spreadsheet could be used for this. At more complex levels, software solutions are critical. From my simple google search I found the following:

http://www.ascribe.com/solutions-services/Pages/pharmacy.aspx

http://www.omnicell.com/Products/Central_Pharmacy_Automation/WorkflowRx_System.aspx

http://www.cornerstoneautosys.co.uk/pharmacy-inventory-control.htm

(b) Location

Like any retail, it’s about numbers of customers – In choosing the pharmacy location, have you considered the possibility of expansion space including for sales display units and additional storage or a privacy unit?

How about customer parking, local amenities, flow of customers to other businesses (some studies say supermarkets like Tesco in the UK operate their pharmacies as loss leaders – they benefit from the foot flow to other sections). A pharmacy near a supermarket and in a mall is therefore perhaps a good idea.

Likewise the obvious – a pharmacy near a hospital or clinic should be considered.

Note from NDA on location:  In line with “guidelines for equitable distribution for drug outlets “No persons shall open up or transfer any drug outlet anywhere without the prior approval of the location by the National Drug Authority.

An application of the location of the proposed premises should be submitted to NDA prior to any financial of legal commitment to the premises and the approval should be obtained in writing following pre-inspection. This is to avoid loss in case of rejection of application based on these and any other guidelines.

This approval shall be valid for a period of three months and if not implemented or delay not justified in writing thereafter shall be null and NDA may authorize a new applicant in the location.” 

c) Customer care (and marketing considerations)

It would appear that the severe shortage of pharmacies means that the staff might be over burdened, or indeed see no need to be nice to their customers (their illnesses/pain notwithstanding).  After all, they may reason – the customers will come back?

This might work in the short term but with increasing competition, particularly in Kampala, it is key to consider marketing and good customer care.

Is it a crime for pharmacists (and their assistants) to smile and ask patients how they are? Will it diminish the solemnity of the profession (and diminishe their efforts after the extra high cut off points to get to University)?

Don't forget, though, that the patients on the other side of the counter are just like another customer to any retail shop. They want good customer service, friendly conversation and the feeling that the pharmacist is paying attention to their needs. Get to know customers. Address them by their first names. Develop relationships with them that go beyond their direct medical needs.

There are therefore many marketing strategies that can be employed in this area to help the pharmacy stand out. These include:

  • Seasonal campaigns: E.g Anti malarial tablets during the sick season, flu/common cold medication or even health options (e.g slimming pills) during January when people make New Year resolutions to keep fit;
  • Low cost options: Market low cost generic drug options instead of branded products for price sensitive customers, particularly our rural and urban poor;
  • Customer loyalty scheme – Like any business, most customers are probably repeat clients (e.g those suffering from illnesses requiring regular medication). Rewarding them with a scheme that allows them to call in advance for example or to pay in bulk or get discounts amongst others would go a long way in helping.
  • For walk in customers, perhaps ask if they are interested in taking an extra minute or two to get a loyalty card which allows you to provide them more information, discounts and quicker service the next time including e-mail and telephone, late night service?
  • Privacy section any one? For Purchasers of Condoms?  Sexually Transmitted Disease (STD) medication, Emergency contraception? A simple screen to give the customer privacy could boost sales and perhaps such customers may even be willing to pay a premium e.g for home delivery or over the telephone order and simply come and pick up at convenience?
  • Referral scheme. In this industry, as doctors often refer patients to pharmacies, the business needs to identify local clinics/doctors and partner with them in a mutual benefit scheme (an ethical one we hope, if allowed).
  • Website/internet strategy: Ugandan businesses seem to hate websites but with a young population increasingly using the internet, a simple website even with the locations of the pharmacy (using google maps) makes it simple to find.
  • As a start, create an online presence. Add your pharmacy information to as many online business listing sites as you can. Ugandans are transitioning into a web based generation. People have started looking for a pharmacy with Internet search and you want your company to appear in the local listing results. The major location-based search engines include Google Maps, Yahoo Local, Bing Local and AOL Local among others you can try those listed for a start.
  • Tied to this, the website can be used for email marketing, which especially works to sell affiliated products like health and beauty supplements, fitness supplements and other lifestyle medication which are not immediately known when a customer goes to a Ugandan pharmacy.
  • The website is a good option for developing your customer loyalty scheme as well as a remote order system that would significantly increase efficiency and hence reduce waiting times for customers, particularly in busier pharmacies.

THE PROS

1. Pharmacies are protected by the Ugandan law.

The pharmacy business is legal and is guided by the pharmacy and drugs act of 1971. According to the law, all pharmacy businesses should be registered as we highlighted in the introduction.

This is therefore is also a PRO as we mentioned in one of the CONS that a clear display of the NDA certificate including the pharmacists’ certificate might help instill credibility and hence bring customers who might otherwise be afraid of going to a “fake pharmacy.”

2. Availability of customers and middle class growth

The lack of drugs in hospitals combined with the clear pharmacy imbalance of 1: 88,000 means that this is a blessing in disguise. In addition competition is not a major issue and hence there is little need for marketing.

While it is recognized that the majority of Uganda’s population (about 88%) is rural and hence cannot afford drugs, this is changing. In 2010, Uganda’s middle class was estimated to be 32.6% of the population. An increase from 28.7% in 2006. This represents almost a 1% growth per year. Assuming this constant growth, the middle class is estimated to be almost 36% in 2013.

A similar trend is at play in Africa. The African Development bank report titled the middle of the pyramid stated that by 2010, the continent's middle class had risen to an estimated 34% of its population, up from about 27 per cent in 1980.

This middle class in addition to having the money to buy prescription medication, can buy over the counter health related items like vitamin and nutrition supplements (the like of which are making forever living products and swissgarde household names)

3. Good return on investment

In this article, we estimate that pharmacies can give total revenue of about Shs. 184 million per year and a net profit of about Shs. 19 million which gives a return on investment of 0.87 years (hence less than 1 year!).

In our model, we assume that the return on investment will be achieved on the following basis

  • The pharmacy will have four sources of revenue i.e selling of drugs of Class B (Under wholesale ) Class C, Over the counter and dispensing Unit
  • The start up costs are 43m of which 30m relates to working capital for drug purchase.

Our model is below

Pharmacy ROI 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.

My Guest writer weighs in.

"I got this job when I knew little about medical prescription but along the way I got to learn most of the things that are involved in it. Like how to fill prescriptions, doctors handwritings, what medicines are most required by patients and the like. One thing I can tell you is that it’s a profitable business. I have seen the business bring in stock and clearing it within a short period of time and our attachments to the different doctors have not disappointed us so all in all business is good."

Now the basics you must get right:

1) Drug License. You need to comply with NDA requirements at the start and on an ongoing basis. Contact them prior to starting to ensure you get it right.

2) Stock management. Drugs and medicines can be notoriously many and small. You must therefore have a good stock management system. It will also help in segmenting customers.

3) Location. At its core, a pharmacy is a retail business and so you need to consider location considerations e.g space for expansion, nearby amenities and customer flow.

Final word

In a country characterized with limited availability of medicine in the government hospitals, more and more pharmacists and businessmen have seen an opportunity to open independent pharmacies. They do this because of the unsatisfied demand for medication by the patients who don’t get it in the hospitals.

It is a business where we all weep for the state of our country, and then those who see the opportunity to help create change (while making money) reap (perhaps with little gnashing of teeth).

END

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Black coffee, no sugar no cream?

Outside Looking In

D E Wasake, FCCA

About my guest contributor:

Gerald Kajubi is a barista (a person who prepares espresso based coffee drinks) at one of the prominent coffee shops in Kampala Uganda. Having taken a barista training course he developed the specialist skill for the sector. He has been doing the job for one and a half years. Gerald has a Bachelor’s degree in Arts in Arts and after seeking for a job for one year with no hope he decided to go and study this skill. His contact is +256(0)71 800 3583

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 sector experience with clients in various sectors including consumer industrial products enables me have good understanding of this sector. To see the full depth of my experience, please see my profile

Article summary

The opportunity to invest in a coffee shop and roasting business is driven by 3 key factors:

  • The middle class of Uganda is growing. It is estimated to be 36% in 2013. Up from 28.7% in 2006.
  • Uganda is Africa’s 3rd largest producer of coffee. There is no shortage of produce and we believe it is possible to develop a coffee drinking culture. After all about 6% of the whole population directly relies on coffee in one way or another for their livelihood.
  • Internet access, and hence usage has increased rapidly from only 2.5% in 2006 to 17% in 2012!

The Uganda Coffee Development Authority (UCDA) indeed lists this as one of the opportunities for investment besides primary coffee processing and soluble coffee manufacture.

But how profitable is this sector? This article explores the ins and outs of setting up and running a coffee shop in the spirit of the likes of global brands like Starbucks, Java, Lavezza and Café Nero.

Introduction

When I was writing this article, I searched for a title. I finally settled on “Black coffee no sugar no cream” not because of a similarly titled 1994 song by Heavy D but because I actually used it as a chat up line. It was a Saturday afternoon on a rocky outcrop at Plemont beach in Jersey.

Remembering the corny nature in which I used it, I smile…. she fell for it! Oh the folly of youth. Now I am an old man and instead I reminisce more about the time when every Wednesday evening after a poetry open mic session in Nassau, Bahamas I sat in the Starbucks coffee shop at the Crystal palace Hotel with my poet friends, Obie and Dawn. We often debated so intensely that I was not sure if it was the coffee or the debates that kept us chatting past midnight. I even wrote a poem about these experiences:

At the coffee house,
time escaped our watches,
like sleep, our coffee drowned eyes.

So if love and life has been started at a coffee shop (not counting that my mother was educated from the proceeds of coffee), it is therefore only natural that my interest was piqued to investigate this sector.

Why invest in the coffee café business in Uganda?

There are 4 interrelated factors that are important to consider for this sector.

Middle class and population dynamics

In 2010, Uganda’s middle class was estimated to be 32.6% of the population. An increase from 28.7% in 2006. This represents almost a 1% growth per year. Assuming this constant growth, the middle class is estimated to be almost 36% in 2013.

A similar trend is at play in Africa. The African Development bank report titled the middle of the pyramid stated that by 2010, the continent's middle class had risen to an estimated 34% of its population, up from about 27 per cent in 1980.

The second factor to consider is the age of our population. According to a State of Uganda population Report 2012, Uganda has the youngest population in the world with over 78% being below 30 years of age.

This generation travels (not counting the Ugandans in Diaspora who return home for holiday every year, hence called “Summers” or “kyeyo” as they are sometimes fondly referred to).

It has also grown up watching movies and American TV series (with Hollywood cops grabbing a quick cup of coffee and dunkin donuts). This generation surfs the internet and is generally experiencing a higher standard of living than just 2 generations ago (their Parents’ generation).

The generation is therefore inclined to embrace the global coffee drinking culture!

Internet growth.

Coffee shops typically offer free WIFI and so a 3rd factor comes into play for this sector. Internet usage and its growth. WIFI usage in coffee shops is after all part of the coffee drinking culture. Internet costs are cheaper and there is definitely more usage by the population.

By 2011, according to the World Bank, 13% of Uganda’s population (estimated at 34.5m) or 4.5m people had internet access. The number of users had surpassed 6 million by December 2012, according to a Uganda Communications Commission (UCC) report: “Status of the communication sector in Uganda.” This represented about 17% of the estimated 35m population.

Coffee history and culture

Finally, Uganda being Africa’s 3rd largest coffee producer (after Ivory Coast and Ethiopia) means that there is no shortage of coffee raw material (both robusta and the higher quality Arabica coffee). About 6% of the population directly earns their living from coffee. Indirectly, this is signficantly higher considering coffee is Uganda's largest export.

I therefore believe that it should not be hard to develop a coffee drinking culture in Uganda. Brazil the number one coffee producing country has a strong coffee culture and so there are definitely lessons we can learn from those Samba lovers, but I believe we are at the tipping point of a coffee drinking culture and it takes a few ideas to get us there.

How about the coffee roaster for example offering a coupon to give a free cup of coffee to every one of his coffee farmer suppliers. Imagine how many farmers will want to literally taste the fruits of their labour?

It is this trend that is driving the increase in Ugandan coffee shops such as Cafe pap, Good African Coffee, Javas, Endiro, Ban Café, 1000 cups coffee house and others.

COFFEE TRENDS IN OTHER COUNTRIES

Assessing growth of trends in leading consumer nations helps to assess where the future of this industry might lie and where the Ugandan industry might be in a few years.

The US is the world’s leading consumer of coffee worldwide. In 2013, according to the US National Coffee Association Annual Drinking Trends Survey, 83% of all American adults drink coffee in one form or the other, up 5% from 78% the previous year.

Brazil the world’s leading coffee producer, and second consumer of coffee has a strong coffee culture and according to a report from the country’s coffee association, internal coffee consumption increased 3% from 2011 to 2012 and increased 350% from 2004! This increase was attributed to the trend of preparation of coffee in single servings – for a single cup combined with a demand for gourmet coffee (premium coffee), even for the lowest social classes.

In the UK, according to one December 2012 report, coffee shops grew 7 times faster than the UK economy with a growth of 4% from the previous year and 1 in 5(20%) consumers visiting coffee shops daily compared to 1 in 9 (11%) consumers in 2009. This represents a 9% increase in just 3 years.

WHAT IS THE FUTURE FOR THE UGANDAN COFFEE BUSINESS?

The franchise business

Ugandans are transitioning into the coffee franchise business where most of the investors are now buying the franchises of some of the popular cafés in other countries take for example Café Java’s this is bringing them ahead of the competitive curve as most of the expatriates who are already accustomed to the coffee culture and are familiar with those brand names are frequenting their outing places.

The coffee franchise industry is very diverse. Depending on how much capital a person has to invest, a prospective business person can operate one of a wide range of coffee businesses. A coffee drive thru franchise can be owned and operated for less than a standalone coffee house.

For example in the US Cuppy’s Coffee and More Inc. offers franchises for a Cart Unit, Mobile Unit, Kiosk Unit, Drive-up, and Full Service Unit. The initial franchise fee can vary from $2,500 for a Cart Unit up to $25,000 for the Full Service Unit.

This makes it possible for someone with low capital to start up and run a successful coffee business. The estimated initial investment for a Cart Unit is between $27,700 and $56,900 which includes the purchase of the actual cart. You can access franchises of different coffee cafes from http://www.franchiseopportunities.com

With the expected increase in the coffee franchises, particularly if big name brands (like Starbucks, Costa, Java etc) were to enter the Uganda market, then the smaller independent shops need to find a means of differentiating themselves even further by being more artisan or niche in order to retain their customers.

Coffee Shops and Wireless Technology

Successful coffee shop owners have moved past just selling coffee to creating environments that encourage longer visits: surfing the Internet, working from their laptops, or communicating with friends, family, and colleagues. Wireless technology is changing the way people live.

Hotspots (internet access areas that deploy wireless technology) can be found in airports, hotels, and coffee shops. Some offer free access while others require paid subscriptions. Offering free wireless Internet in a coffee shop is one sure way to boost the chances of success. People are now given the option to make a connection over a cup of coffee and over the internet.

So with the above in mind, how do you set up a coffee shop?

FIRST THE CONS (WHAT MIGHT HOLD YOU BACK)

Negative public mindset

Many Ugandans look at drinking coffee as if it is a "Muzungu” (white man) thing. According to some reports, many of the Ugandans who drink coffee just drink it because they want to be seen drinking it since they think it is “cool” but not for the benefits that it has to offer.

To counter this, the advanced thinking business man would start a coffee testing campaign where people come and observe the tastes and aromas of brewed coffee at the coffee café at the same time, Ugandans usually love trying out new and free things with that being said you could offer free coffee samples at the supermarkets and malls in Kampala and give people brochures with information about the benefits of drinking coffee.

Occasionally slow business

There is a time during the day when business is slow in the coffee shop especially during the time period of 1:00 pm -2:00 pm because people are having lunch usually during that time people are hardly having any coffee.

To counter this, advanced thinking business man would create specials for the slow hours of the day. If the slowest time for your coffee shop is between 1:00 and 2:00 pm in the afternoon then create a happy hour with a 2 for 1 special. You can market this hour to the employees in the surrounding business offices and learning institutions.

Alternatively, give people a reason to stop in during the slow hours like giving people free wi-fi.

Another advanced thinking tip would be for the businessman to take a look at the slow times and see how many employees are on shift. Reduce the number of employees during these times, saving money and providing the employees on shift with more work to do.

Similarly related to this is the Ugandan weather where temperatures can be pretty high hence detracting from drinking a hot cup of tea.My recent travels to Cyprus indicated an “advanced thinking” tip. Perhaps during these hot days, it helps the advanced thinking business man to promote an iced coffee drink like the Frappe.

Competition

With the growing number of coffee shops in Uganda, the business is starting to realize stiff competition and unless you are innovative you will be left behind the competitive curve.

The solution for the advanced thinking businessman involved in the coffee business would be to create innovative marketing. Develop a marketing campaign that advertises the qualities of the coffee you serve. Market special offers such as giving customers a free snack for every cappuccino that they buy. I know this may be hard for Ugandan businessmen but being different is what makes you stand out of the crowd.

As an example of smart marketing, Global coffee company La Colombe Torrefaction has turned marketing coffee into an art. The CEO goes to the world’s most dangerous countries in search of the best coffee. And he films it hence allowing coffee drinkers to travel on the journey with him.  This “show and tell” philosophy seems to have paid off and in 2012 its sales topped $35m.

Another advanced thinking tip would be for the businessman to create an online presence. Add your coffee shop information to as many online business listing sites as you can. Ugandans are transitioning into a web based generation as highlighted in the introduction. People have started looking for places to hangout (similar to tripadvisor) with an Internet search and you want your company to appear in the local listing results. The major location-based search engines include Google Maps, Yahoo Local, Bing Local and AOL Local among others you can try those listed for a start.

THE PROS

Availability of customers

As highlighted in the introduction, with the increase in the middle class, there is an emerging coffee-drinking culture among Ugandans.  

This will continue to grow and therefore this is a strong incentive for investing, not only in Kampala where the bulk of the urban growth is but to consider expanding the franchise to up market towns (like say Jinja, Mbale, Mbarara and Gulu) where whilst the market might be smaller, the brand recognition would drive sales over all, especially for tourists, expatriates and other travelers within Uganda.

Good return on investments

In this article, we estimate that the Return on Investment for a Coffee shop will be developed as follows:

  • Startup capital of Shs. 81m
  • Revenue of about Shs. 121.5 million
  • Net profit of about Shs. 26 million
  • Return on investment of 3.1 years.

In our model, we assume that the return on investment will be achieved on the following basis

  • That the investor will establish the café in Kampala where there is a big number of elite people who are adopting the coffee culture.
  • That the investor will have a MENU similar to that of his competitors say café Java’s ref  http://cafejavas.co.ug/index.php

Our model is below:

Coffee Shop return on investment 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.

My Guest writer weighs in.

When my brother told me he had gotten me a job at a coffee shop I thought to myself that this was one think I would do effortlessly. Then he mentioned that I had to go and study I wouldn’t imagine spending money to go and study how to make tea sorry coffee any way all in all I ended up going to study at Barista pro coffee company and after that course am now making coffee. It’s a good business and I like it and if am to say it’s profitable as well or we wouldn’t still be in business.

Now the basics you must get right

Being organized

Stay organized and keep your coffee shop running as smoothly as possible. Organization is imperative for the success of any business, so make sure you stay on top of things like inventory, billing, employee scheduling, taxes and overall budget. A barista training course is a start. In addition to the Barista Pro Coffee Company (Roberts Mbabazi: gatesi.rm@gmail.com), you can tak a training offered by the Uganda Coffee Development Authority.

Quality coffee products

Use only high quality coffee products in your shop. In order to build a solid customer base, it's crucial to stand out from the competition and carry top-notch coffee blends. This can be accomplished by sampling numerous types of coffee from a variety of wholesalers. You should also be aware of trends within the coffee industry to stay ahead of your competitors.

In more advanced countries, there is trend towards gourmet and soluble coffee, it is therefore worth making yourself well conversant with global trends.

Customer service

The typical coffee drinker is like a “crack addict”. They must have their coffee fix daily and so you can expect that most of your business is going to come from repeat customers. You therefore MUST develop a scheme of recognizing these customers and rewarding them.  Larger franchises have loyalty cards and similar schemes.

Connected to this, train your employees properly so that they can provide excellent customer service. All employees should be knowledgeable on your shop's products and provide friendly customer service to the public. It's also important for employees to be able to handle stress during rushes in peak hours.

We have written an advanced thinking article on customer care. Find out more here

Marketing

The sector is highly competitive and so marketing is the key to driving customers into your coffee shop. You must do research on the area and determine who your customers are, what other coffee shops and stores are offering customers and what the other businesses are not doing that you want to do.

Having the right marketing ideas for your coffee shop will help get customers in the door, get customers to buy more coffee and other products, and get them to return to your business.

There are over 20 marketing strategies we believe can use to double your customers.  

Final word

The coffee culture is exploding in Uganda. We expect that there will be an increase in the number of coffee shops, not counting the possibility of global franchises entering the market.  

With such a competitive market, it's important to rise above the competition. In order to establish a successful independent coffee shop, it's crucial to have superb management skills (including books of accounts as the margins can be tight).

As a consumer industry, your marketing and customer service are crucial to success, if all fails, just sell to your customers the good ol black coffee, no sugar, no cream….

Otherwise, best of luck and of course if you need some help, do not hesitate to speak to us to get the ball rolling, Inachee after all represents Home Grown Energy in Motion.

END

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Join advanced thinking. Would you like more regular support or information? The easiest means of keeping up to date with new articles on this page and the website is via email.

In addition we regularly provide tips on marketing, corporate governance; accounting, entrepreneurship and best practice to help you successfully start, run and grow your investment/business. Please click here to join the email subscription list.

And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not solely rely on the information given here to base your investment decisions.

You should seek business advice from a professional knowledgeable of your specific circumstances. I (or Inachee) shall therefore not be held responsible for any loss you may incur when acting on this information.

What’s the deal with money lending?

 

About my guest writer:

Ssaabwe Ronald is a money lender in Kampala operating in Wandegeya and having an office opposite the Law development centre he has been in the money lending business for over five years being the source of financing to Makerere university students and the business men in wandegeya. Ronald has a bachelor’s degree in Business communication and his experience in the business has kept him above the curve. Speak to us if you would like his contacts.

About the writer

For over 9 years I have worked with several clients in Uganda, The Bahamas and the United Kingdom in providing audit, tax, accounting and advisory services. My sector experience with clients in various sectors including banks and other financial services entities enables me have good understanding of this sector. To see the full depth of my experience, please see my profile

Article summary

The archaic money lenders law is a minefield to navigate if you are to succeed in this sector. In addition you need to grapple with the ever increasing competitive field comprised of not only banks and alternatives like SACCOs and MFIs but also now more advanced options like mobile money platforms and online lending (including peer to peer lending/crowd funding models).

Despite this, is the sector profitable?

Background

I have generally steered away from money lending. I must have been scared when as a child, one of the first books I read being Shakespeare’s “Merchant of Venice” where Shylock a Jewish  money lender demanded as security for money lent: “a pound of flesh, the one closest to the heart”.

When I asked my colleagues though about their  experiences, I got the following from one associate:

“Personally I have had a good experience with borrowing money from money lenders  as it has been a great breakthrough in my times of need when am most desperate and in need for financial assistance. The system is friendly because I sign an agreement with the lender and put security and in just a few minutes I get the money I want and the business goes on. It is cheap for me to obtain a loan from a money lender who is a friend of mine. It only takes me a phone call and the money is availed to me. However, not all clients of money lenders are happy as for example SSebunya Lawrence a close friend of mine, a resident of Namasuba a Kampala suburb, lost his piece of land in Wakiso valued at Shs 6 million to money lenders.

 He told me he was in desperate need of Shs 4 million to recapitalize his then failing poultry business. He could not turn to his bankers because he owed the bank an outstanding balance of Shs 3 million. He found himself at the door step of a money lender, and he was fascinated at how quick and easy it was for him to obtain the loan. The money lenders just told him to complete a form and then attach his passport size photographs, then hand in his piece of land as collateral. Within two days, money was at his disposal. Lawrence was given two months within which to pay the loan. He was optimistic that he would be able to pay the loan since he had "ready orders" from some of his customers in hotels and restaurants. But, this was not so. The two months elapsed without him raising sufficient money to pay the loan, and before he knew it; his piece of land was up for auction. Many Ugandans have lost their personal property as a result of dealing with money lenders and as a result they have lost interest and are exhausted about the system but because of the economic situation in the country, borrowing money has become inevitable if you want to succeed in the business world.”

Foreword

The rise of money lenders in Uganda has probably arisen owing to the desire for Ugandans to “cut corners”. As a number of them are borrowing for business, I believe many of them would be eligible for bank or MFI loans but in these instances they would need to present accounting and other records. As there is no compliance culture in Uganda, they therefore take the easy way out: The Shylocks of this world.

The above argument of course is partially simplistic as there is the other side of the coin that banks are overly inefficient and Uganda has not developed a credit rating system which would enable lenders to very quickly and efficiently assess client risk.

The Credit Reference Bureau set up by Bank of Uganda will hopefully in a few years go a long way towards solving this problem, particularly if they (together with Bank of Uganda) are able to advance and be able to allow various lenders (if regulated in some form) to access this information.

What is in the future for the sector?

In addition to the existing players waking up to the opportunity and streamlining their operations to offer loans  and say overdrafts faster, there are two other trends worth noting.

Mobile money lending

The mobile money revolution has been sweeping Uganda. In Kenya it has however become advanced even further. One company, M- pepea for example provides automated loans 24/7 using the mobile money platform.  They provide loans to employees/members of organisations (such as SACCOs or companies) registered to them.

Online lending and crowd funding (or peer to peer lending)

Online lending. We are still some years (perhaps decades) away from advanced money lenders such as in the UK where you can get a loan in 15 minutes, using an online application. This is done by companies such wonga.com.

Crowd funding or Peer to Peer lending on the other hand is spearheaded by companies like kickstarter and kiva.org. The peer to peer lending model, for example the one done by Kiva.org is that a business say in Uganda is “fronted” by a local Micro Finance Institution (MFI) (such as BRAC) and highlights entrepreneurs who need loans. Say a loan of $1,000. The information on the borrower is put on the internet (Kiva for example is US based). Different lenders like you and I contribute small amounts each ($25 in Kiva’s case) until the $1,000 is raised. The money is transferred to the lender and then they repay this regularly. The MFI does the collection and monitoring of loan repayment.

The above model is already working so it is not technically in the future, but the future we mean is that soon this model of lending is going to become main stream and legislation has to be made to govern the sector as for example has been done by the SEC in the US and the Ontario Securities Commission in Canada.

Perhaps in a few years, Bank of Uganda will also legislate this sector as part of its overhaul of the Money Lenders Act 1952 which is a pretty outdated act that has not kept up to date with the financial sector in Uganda and the role of money lenders. That said:

Why open up a money lending company in Uganda?

Money lending is one of the fastest growing financial industries being operated by the formal sector (banks, credit and microfinance institutions) and the informal sector (individuals known as loan sharks, village savings and loans schemes).

The 2010 FinScope report on Uganda concludes that 70% of Ugandans are financially served, a good growth over 2006 where the level of financial inclusion stood at 57 percent for the 18+ years population.  Of the 70% served:

  • 20% use formal financial services (e.g banks) loan.
  • 50% Rely in the informal financial services channels (e.g SACCOs)

30% of Ugandans are completely financially excluded and rely primarily on family and friends for their borrowings, and on their ‘secret hiding places’ for their savings.

With the growth of the economy, we are seeing an increase in investment in the money lending sector. In Kikuubo, the busy business trading lane in downtown Kampala, the money lending business has attracted foreigners, including Chinese and Indians, who lend big money.

Usually they use local front men (Ugandans) to get customers for a commission. They can even lend Shs 500 million to a client as long as collateral that almost doubles the money being lent is staked.  They usually charge 15% percent interest per month which is many times higher than the official rate but they often negotiate in case of defaulters.

So with the above in mind, how do you start to set up a company?

FIRST THE CONS

Outdated legislation

The sector is regulated by the Money Lenders Act, 1952. This is a fairly outdated law that for example makes interest above 24% a year to be “harsh”. It also places restrictions on advertising.

The reason it is outdated is because, for example:

Whilst the official commercial bank rate at June 2013 is 22.58%, if you include arrangement and other fees, then these fees would exceed 24% . The whole sector is therefore “harsh” and dare we say, illegal as per the act.

Money lenders charge an average interest of 20% a month which works out at 240% a year.

MFIs as per a DFID study on the money lending sector charge interest in the range of 100%.

This is nevertheless not as bad as in the UK for example where online lender Wonga.com charges interest equivalent to 350% per year!

The law is further outdated in the various restrictions it places on advertising. It for example says:

No person shall knowingly send or deliver or cause to be sent or delivered to any person except in response to his or her written request any circular or other document advertising the name, address or telephone number of a moneylender, or containing an invitation—

to borrow money from a moneylender;

to enter into any transaction involving the borrowing of money from a moneylender;

to apply to any place with a view to obtaining information or advice as to borrowing any money from a moneylender.

In order to succeed in the start up, therefore it is worth getting legal counsel to ensure that you can navigate this minefield of an archaic law, including registering the business with a magistrate and getting a license certificate. Before one gets a money lender's license, one has to first get a certificate from a Magistrate having jurisdiction in the place in which the money lender's business is to be carried out. This certificate expires every 31st day of December.

Late payments

Not all borrowers are able to pay up their loans on the agreed period of time and some even go as far as a week after the dead line of payment has passed which means that the money lender will not be able to reinvest the money if the potential client needs it. A big number of Ugandan moneylenders do not like to seize borrowers’ collateral, particularly due to the costs of administration and eventual auction. They are often tolerant of a borrower who explains anticipated delays in good faith.

In these cases, the advanced thinking businessman (lender) may waive the interest for the period extended or request that the interest due be rolled forward into a new contract. Alternatively the lender may assist the borrower by purchasing the collateral at a more or less fair price to cover the debt. This is common among moneylenders who are also car dealers.

A third “advanced thinking” alternative is for the money lender to enter into partnership with a professional services firm such as an accountancy firm to provide services such as business turnaround services or business reviews or even discounted bookkeeping/tax services.

The reason this is a good idea is because since many borrowers borrow for business purposes, a discounted service fronted by a lender might help them not only to get information on these services but to also ultimately be able to repay loans and continue borrowing from a lender, who operates in some ways akin to a bank (through providing some advisory).

Defaulters

Like the law of gravity, one constant about the money lending business is dealing with defaulters. When a loan falls in arrears, the lender tries to collect through phone calls, messengers or visits. Afterwards, the lender will turn to debt collectors or lawyers.

The solution for the advanced thinking businessman (lender) would be to partner with the borrower and sell off the collateral, deducts the amounts owed and gives any balance to the borrower. This way the borrower will leave as a satisfied customer and bring in more business as opposed to confiscating the collateral selling it and owning all the profits as some of the unscrupulous lenders do in Uganda.

Competition

As mentioned in the introduction, the sector has stiff competition from both traditional and alternative lending sources, including those coming in the future.

In order to counter this, we would recommend that the advanced thinking businessman (lender) considers the M-pepea concept which is to sign up organisations (such as SACCOs, NGOs, Companies) and offering discounted rates. These will encourage regular customers and make administration easy as for example if it’s a company, the money can be deducted direct from payroll.

High fixed costs

In the model we explain later on, there will be fixed costs incurred like rent, salary and so such costs coupled with restrictions on advertising mean that the business person faces a huge challenge of ensuring the income is regular through an advanced marketing strategy.

Infact the DFID study on the sector  seems to indicate that the streets of money lending are not paved with gold and there are some high costs to contend with. As a result some “advanced thinking” lenders, share an office and hence share rent and other fixed costs like legal charges for collection of debt. This is something worth extending by the lender choosing to deliberately seek out other lenders and enter into a Memorandum of Understanding (MOU) such that rather than competing, they can share costs.

THE PROS

Higher interest rates

Assuming the business person gets reasonable legal advice on the “harsh and unconscionable” clause of the Money Lenders Act in respect of interest above 24% per annum, then there is sufficient return to be made.

In our model we assume an interest of 15% a month. This is not far off from an industry  study as per a DFID report where interest was estimated at an average of 20% (with rates ranging from 8% to 30%). We believe there is a legal argument for this “harsh” rate considering the cost of doing business in the sector necessitates higher interest than the outdated act provides for.

The link to the model is below:

Money lending ROI 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.

As seen from our analysis, we estimate the Return on Investment (ROI) from this sector as follows:

  • Startup capital (A) : Shs. 45,432,420
  • Profit (B): 18, 493, 578
  • Return on Investment (C= A/B): 2.457 years

My Guest writer weighs in.

I have been in the money lending business since 2009 serving the market of University students and business men in wandegeya and from the years of experience in this business I can say it’s a worthy and profitable business if the borrowers are paying.

I have had my trying moments here and there with some borrowers showing up innocent when they want to get money and opening a fist fight when you come to collect your money and there collateral is at stake. One thing I can advise people looking to invest in this business is to have enough money on them because we use money to make money.

Now the basics you must get right before entering in the sector

Legal requirements

Starting a money lending business is rife with various laws and regulations, in addition to the outdated, albeit applicable Money Lenders Act that you need to be fully understood before you can officially open your doors for business.  Consult with a lawyer to inquire about legal requirements and procedures for the company. He will guide you in the necessary steps to attain approval for your lending company and will handle the application processes as well as legal issues.

Strategy

In Uganda a big number of money lenders are not registered and therefore they are illegal which means they can charge any interest rates that they please and therefore to compete with them you will need a great strategic plan and consider how you will market and hence navigate the advertising restrictions.  The M-Pepea strategy on using mobile money is for example brilliant.

Another consideration is partnering with other lenders to share costs. There is sufficient demand in the sector and so viewing them as partners, not competitors often helps.

As part of that strategy, you want to for example focus on larger loans to fewer clients where the cost of administration can be made much lower.  Our guest writer alludes to this in that he is speaking about having enough capital. This can allow you to spread your fixed costs and to target larger individual borrowers.

FINAL WORD

Don’t be discouraged if you believe the competition and regulation is not for you, there is always a solution. If you cannot charge high interest, how about becoming smarter than Shylock the Jew and “charging a pound of flesh, and one pint of blood.” [This last comment is made in jest, to appreciate its full context, go get yourself a free copy of the “Merchant of Venice”]

Otherwise, best of luck and of course if you need some help, do not hesitate to speak to us to get the ball rolling, Inachee after all represents Home Grown Energy in Motion.

Share the article! Did you like this article and know someone else who might benefit from it? Please share it, simply click the link of the article, copy and paste it to an email and send!

Join advanced thinking. Would you like more regular support or information? The easiest means of keeping up to date with new articles on this page and the website is via email. In addition we regularly provide tips on marketing, corporate governance; accounting, entrepreneurship and best practice to help you successfully start, run and grow your investment/business. Please click here to join the email subscription list.

And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not solely rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I (or Inachee) shall therefore not be held responsible for any loss you may incur when acting on this information.