Discussion of feasibility studies
Analysis of feasibility of a newly opened business has always been a critical aspect of business studies as the process of such evaluation may include considerations of lots of factors, both internal and external to the business. This report presents a feasibility study for the setup and launch of ABC family dine-in restaurant and café at Morley, a suburban location at Perth, Western Australia.
At the very outset of the study, the general discussion about the feasibility study has been made focussing on the key aspects of considerations for the instant report. Subsequently, the researcher provides a general overview about the market which the proposed business operates in. such discussion is followed by the site evaluation for the operation. In this context, it may be noted that locational factor is crucial for the success of a newly opened business and the researcher attempts to analyse the pros and cons of the locational advantages and disadvantages for the instant case. In the latter part of the report, the demand and supply landscape has been assessed in order to substantiate the potential market reach of the business in terms of customer base, product positioning and pricing. Finally, the feasibility study provides a critical and detailed financial analysis for the business for the purpose of establishing the financial viability of the restaurant. The researcher, at the end, wraps up the discussion by way of concluding note.
The main importance of the feasibility study is to determine whether the future venture of ABC family dine-in restaurant and cafe will be financially profitable or not. In the words of E Jarrett (2016), a feasibility study is an approach to evaluate the strength and weakness of a project or new business venture.
It is themed to provide a homely environment for the customers, with healthy home cooked food and quick deliveries. The restaurant is owned by a local family of Morley having experience in catering service and a good reputation among the locality. Chul Jae (2014) said that the restaurant and café business in Australia is a booming sector and is expected to grow significantly in the next 5 years due to the increase in income among the mass. The study also presents a financial forecast and other aspects for the owners to proceed with the plan (Albadvi & Hosseini, 2011).
As a part of the feasibility study, online market research needs to be conducted by the business owners (Jiang & Dalbor, 2017). The strength of the business is the prior experience in the catering services since the past eight years. Additionally, the lower barrier to entry into the restaurant and cafe business would also be beneficial for the current organisation (Krishna, 2014). However, the chosen location, overall budget and product lines and making brand awareness through potential advertisement and promotions are also found strong enough to successfully attract customers and run the business (Hellman, 2005). As the location is near the shopping centre, footfall would be higher and it can bring greater opportunity to earn revenues. However, Shead (2018) stated that the feasibility study also desires financial and operational planning. Thus, the present company needs to make a financial projection as a part of assessing the overall business feasibility.
General market characteristics
Since it is a family run business, and the owners have decided to invest 60% from own savings and rest 40% would be taken as a bank loan, the equity to debt ratio is good. Thus, no significant risk is found in the context of loan repayment (Woerd & Brink, 2014). The overall financial portfolio is mixed and diverse and the debt-to-equity ratio is nullified. On the contrary, the major weakness is the own investment in this business, as any future operational failure would result in total loss of own funding in the business. The limited number of employee is another weakness, as the absence of any member would fail to meet daily operations and meeting customer request in a potential manner. Although a few weaknesses are found in this case, the overall analysis indicates that the proposed business venture is highly feasible in the chosen market.
The dine-in restaurant and café industry has grown significantly over the past five years in Australia. The statistical report also reveals the fact that the restaurant and café industry is expecting more than 5-6% growth in the upcoming three years (Ibisworld.com.au. 2018). In this context, Zhang et al. (2013) stated that growing income and GDP per capita has boosted the positive consumer sentiment, which has driven the growth of this industry. The average national income is AUD 40,000- 65,000, which is another driving factor for increased spending habits in the restaurants and café with the families (Herrington & Bosworth 2016). Overall, the café industry has become more profitable as this industry is expected to increase by 3% within FY 2018-2019 and the expected growth would be AUD 10 Billion (Davis et al., 2016). Thus, the business idea can be considered feasible to open a new restaurant nearby Morley Shopping Centre.
On the other hand, Apps (2008) argued that despite the strong performance and consumer positive attitudes, the market competition is becoming significantly higher, which has pushed down the overall profitability of this industry. Low barriers to entry and low industry concentration have made the overall industry highly competitive in the Australian market (Ha et al., 2016). However, offering premium food and services can become another crucial agenda for the present restaurant owners while operating near Morley Shopping Centre, Australia (Eater.com, 2018). The higher demand for coffee and combo with healthy and tasty food would dominate the revenue growth of the ABC family dine-in restaurant and cafe. Since the primary aim of the company is to offer healthy and tasty home like cooked food, the overall business can attract a large set of customers and significant profitability can be obtained.
In this context, a reference to Porter’s Five Forces Model may be worth to make for the purpose of assessing the market forces relevant for the chosen business. The theoretical framework of the given model is briefly described as below:
Bargaining Power of Buyers: High – Since the number of market players is high in numbers, the switching cost is substantially low for the buyers. In other words, the customers may change their restaurants for better foods or lower price with number of options available to them.
Bargaining Power of Suppliers: High – This is also high because the suppliers have number of businesses houses as their customers and hence, the stiff competition in the market has reduced the suppliers’ switching cost at a considerably lower level.
Threat of New Entry: High – The entry to the market is not restricted and hence, the start-ups and entrepreneurs are making the industry a level playing field for all. However, the requirement of substantial amount of capital is needed in order to establish a full-fledged full course family restaurant offering almost standard food service in line with industry benchmark.
Threat of Substitution: High – Since the food and restaurant industry has always been competitive, the market players have always been in the process of offering quality and differentiated foods and services in order to attract consumers and build a solid customer base. The offering, thus, may be construed to be differentiated either by way of cost leadership or attributes, in the firm of additional service part (like fine-dine, pet services, family ambience etc.).
Competitive Rivalry: High – Since the market is competitive with lower switching cost for both buyers and suppliers, the competitors are in stiff and cut-throat competition which may take the form of price war. Besides, the innovative dining services coupled with tweaked and twisted offering may make the food unique resulting in differentiated product. In nutshell, the rivalry among the market players has been considerably high.
The site for the ABC dine-in restaurant was previously used by an Italian restaurant. The area has a sitting capacity of approximately 60 people at a time, though the place would require to undergo some major renovations in the sitting area and the kitchen (Dongshik Shin, 2011). It is located near the Morley Shopping Centre, which is a busy commercial area with shops and offices nearby. Peppou et al. (2016) said that a prime and easily accessible location is expected to have a large footfall every day with customers visiting the shopping centre. There are residential places nearby which add up to the advantage. Also, it may be noted that the family has spent AUD 55,000 to purchase the site.
In this context, it may be noted that the locational factor carries some advantage as well as disadvantage at times. In the given case, the location has been chosen considering the market forces and projected growth prospect of the business as well as locality. Since the sitting capacity is moderate and the area is in prime location, it may be construed to be wise decision for the management. However, the business has to invest sizeable amount towards purchase of the land and the same is to be treated as long-term investment with no immediate cash inflow. Since the working capital plays an important factor in businesses like restaurant where the regular operation requires substantial financial resources, the investment in land may seem to be a temporary impediment in terms of cash position and operational liquidity.
However, apart from the financial implication, the business factors behind selecting the given location may hold well with sufficient assurance that the foot-traffic will be generated in this populated locality with much ease, which is surely a plus point for the business from the view put of locational factor.
There are already a number of fine dining restaurants around the shopping centre at Morley. So, ABC dine-in is going to face substantial competition to establish the restaurant. However, as the location is a commercial area, the expected footfall is quite high. The owners expect about 300 to 500 people for eat-in at the restaurant along with 200 delivery orders on weekly basis (Openforbusiness.opentable.com.au, 2018). As there are offices around the place, it is expected that almost 150 to 200 customers on average might arrive for coffee and snack daily. Hannun (2009) stated that the low priced offering must be a catch point for the owners to establish their business at the location.
As far as supply side is concerned, the restaurant has sitting capacity of approximately 60 people at a time. Such capacity may be construed to be moderate considering the 300 to 500 people visiting per day for full course dining purpose. It may also be noted that the proposed business may witness a balanced demand and supply equation for the operation as the potential growth in demand side may well be contributed by expansion of capacity and hence, the accumulation of earnings and surplus.
Since the business will be financed by both own capital and loan capital, the approach may be considered to be suitable for a start up. This is because the inherent drawback of both types of financing, if conducted on individual basis. Debt financing, for example, may impact the operating profit by way of fixed interest payment; whereas, the equity financing may raise the cost of capital which affects the expansion and growth.
The proposed business will require 100,000 AUD out of which 60% will be contributed by the owner and balance 40% will be procured from bank. Since, the initial days of business will not be able to see any profit but break-even, keeping lower debt component in the capital structure may be termed to be a prudent approach in terms of liquidity and profitability. However, the growth potential of 5 to 6 percent on a yearly basis will surely be a contributory factor towards the surplus generation as the financing cost is fixed and rate if inflation may also be considered to be at much lower level. Therefore, the excess accumulation of profit will be kept for satisfying the equity financing providers.
Another crucial aspect is depreciation. Since the restaurant business requires fixed assets in terms of kitchen equipments, furniture and fittings, office machineries and other investments, the depreciation plays a major role in determining the profit or loss of the operation (Lassala et al. 2016). Since the target is fine-dining set-up with facilities for take-away counters of fast foods, the investment in fixed capital will be substantially huge and hence, the depreciation will also significantly lower the profit.
Another financial consideration is break-even which is important for a newly set up business. It is expected that the proposed business will attain its break-even in 2 to 3 years considering the fact that the potential customer base is very high and the business offers both full course dining facilities as well as delivery counters services for fast foods. While calculating the break-even point (BEP), fixed cost incurred towards the purchase of fixed assets, equipments and machineries may be divided by the per unit contribution in order to identify the number of units which may break-even for the business. In this context, it may be noted that restaurant business generally offers a wide range of food products with varied degree of price range. It is, therefore, advisable to compute an average cost of procurement as well as production so that per unit contribution may be derived accordingly.
Conclusion:
Based on the discussion and analysis performed in the preceding sections of the report, it may be construed that the feasibility study attempts to conclude that the venture of ABC family dine-in restaurant can reap success if the owners can take advantage of the location fully. With a positive equity to debt ratio, the owners have a lesser risk at the venture’s initiation. In general, the overall growth of diner as the business sector in Australia is expected to grow in near future adding up to the advantage. With unique dining experience, great food at affordable prices, and the previous experience in the catering business, the family can readily accomplish the restaurant at Morley and prosper with time. Finally, it may be concluded that the well structured business plan followed by the comprehensive and long-term business vision with corresponding supporting marketing and promotional strategies may significantly contribute towards the attainment of corporate goals and objectives in most cost effective manner which paves the way of sustainability of the brand in the market in the long-run.
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