Risks and Key Issues in Relation to Starting up a New Restaurant - Example

Critically explore the risks and key issues in relation to starting up a new restaurant in the centre of the of Cardiff in light of the current economic climate in the UK. Current scenario of world economy According to Wall Street Journal (2014), after the slow economic growth in 2013, developed economies are expected to strengthen in terms of their Gross Domestic Product, while that of the emerging economies has slowed down. According to Global Economic Outlook (2014), global growth of inflation adjusted GDP will ascend from 2.9 percent to 3.3 percent in 2014. The main reason for this uptick, according to the release, is improvement in the economic growth of euro-zone countries (The Conference Board, 2014). On the other hand, slow economic development in China will be primarily responsible for slow growth trend in emerging economies. Along with it, other emerging markets such as, Brazil, Russia and South East Europe, are expected to witness slow progress; whereas India and certain parts of Asia are likely to experience better growth performance (IMF, 2014). Current economic scenario of United Kingdom As a part of the Euro zone, the UK economy is expected to observe growth from the previous year. As per Wall Street Journal (2014), economic growth of the UK will increase from 1.4% in 2013 to 1.9% in 2014. The IMF (2014) suggested that a higher growth will be witnessed in 2014 because consumer’s purchasing power will rise owing to substantial decline in inflation. Further, strong financial position of the UK firms is expected to support the business environment of the country. In addition, the hospitality industry has appeared to grow considerably from 2012 to 2014 in the country. Cardiff, Wales Cardiff is the capital and largest city of Wales, besides being one of the largest in the United Kingdom. In the UK, Cardiff is one of the important commerce centres, acting as a key driver of Welsh economy. The important businesses of the city include retail, tourism, media and financial sector. The employment rate of the city is higher than average of the country and includes important sectors such as, public administration, education and health as primary contributors. The business scope in the city is quite high keeping in view its growth (Hooper and Punter, 2006). Importance of Small and Medium Enterprises on the economy SMEs have become crucial part of every economy in the world as they help in mitigating various challenges, including problems related to income distribution and employment. Akin to other components of an economy, importance and size of a SME sector differs from one country to another. It includes activities associated with agriculture, industrial and manufacturing. It has been observed that in all developed economies, SMEs have an essential role in creating employment and generating major share of national output. As per an OECD survey, the relative productivity of manufacturing SMEs of Wales is high with respect to average of the UK. In addition, the proportion of output and employment of Welsh SMEs is also greater than that of the UK (Foreman-Peck, Makepeace and Morgan, 2006). Hospitality and catering industry in UK The hospitality and catering industry of the UK employs around 1.7 million people and over years, has exhibited well-established growth. Under the hospitality industry, the commercial sector encompasses hotel, restaurants, bars, pubs and clubs, while the service sector constitutes hospitals, schools and colleges. The hospitality industry in the UK can primarily be classified as SMEs, pubic limited companies and private companies (Pearson, n.d.). The paper focuses on analysis of risk and other key factors such as, financial support, business planning, growth and competitive strategies, suppliers, location, networking and exit planning, associated with opening restaurant in Cardiff area. The restaurant business can be mainly classified as fine dining specialities, fast food outlets, canteens and food courts. The paper will concentrate upon a low cost fast-food eating outlet (Cardiff metropolitan university, 2012). In the current paper, important aspects such as, market research, business planning, competitive strategy, financial planning, growth strategy and exit planning, will be discussed elaborately, while highlighting moderately important factors such as, location, networking, suppliers, human resource and social capital. Market Research Every business is initiated with a market research, which helps in determining one of the important contributors to business success or the target market. In addition, market research enables an organisation to judge its existing and potential competitors. In hospitality industry, market research is very necessary to understand quality of services being delivered by the competitors (Malhotra, et al., 2000). One of the important market research techniques is the SLEPT analysis, which represents Socio-cultural, Legal, Economic, Political and Technological aspects of the market. It is a method of analysing external environment of the business. The socio-cultural aspects of Cardiff’s business include different languages, multiple cultures, demographic factors, social class, gender and their impact on consumption. The legal aspects include laws and regulations that the restaurant need to abide by in its activities. For instance, environmental factors, waste disposal, water usage and hygiene factors. Economic aspect involves studying growth and prosperity of hospitality industry in Cardiff city. It is seen that Cardiff, being one of the important cities in the UK, has a wide variety of restaurants spreading across the area. Moreover, due to rapid development of the tourism sector, the hospitality industry has also grown considerably in Cardiff. As a part of economic environment, there are fiscal measures such as, various direct and indirect taxes, which influence the firm’s activities. The political environment consists of government, political parties and governing policies and their impact on business. In the UK, apart from local and central governments, businesses are also affected by the EU regulations. Being a well-developed and growing city, technological innovation is commonly observed in different business sectors of Cardiff (Corbin and Strauss, 2008). Business planning To plan a business, the founder or entrepreneur needs to form outline of the business and its associated resources. In a business plan, the owner needs to decide physical resources such as, location, raw materials, labour force, suppliers and consumers. Alongside, the owner also need to plan about company’s marketing strategies, resource planning and financial planning and forecasting. These three activities are core elements of a business (Delmar and Shane, 2003). Business planning is done to facilitate a blueprint of the company’s activities, which are to be undertaken in recent future. The business plan includes mission and objectives of the company as well as its SWOT analysis, product description, marketing strategies and financial structure (Ramírez, Selsky and Van der Heijden, 2010). For opening a restaurant in Cardiff, the various decisions related to business planning have been discussed as follows: Location and facilities The location of the company (restaurant) should be spacious and located centrally. It should be adequately wide for merchandise display and other brand creating attributes. The location decision includes area of the restaurant (in square meter), design of the restaurant and initial investment in furniture (number of guests to be served at a time initially must be decided). The space and location decision should be based on factors such as, population size (especially share of youth population) in surrounding areas, closest tourist destinations and accessibility (Matouschek and Robert-Nicoud, 2005). Product and services The company should have a well-defined menu with products that it would serve. In addition, it should also consider inclusion of beverages such as, hot, cold, alcoholic and non-alcoholic, in its product list. As a part of the business plan, the company should take into consideration the cost related to product and services. The services can be dine-in, take away and home delivery. The company needs to innovative in its products and services so as to gain more market share (Krishnan and Ulrich, 2001). Technology and networking Technology and Management Information System are integral parts of any business. MIS helps in managing all business related information in soft form, reducing the paperwork. However, this decision depends on the management whether they would prefer to incorporate MIS in their activities. Technologies include computer and internet based networking system. Apart from telephones, this is one of the essential communication techniques. The company can have an official website whereby consumers can place order for take away as well as home delivery. Furthermore, registered consumers can give their feedback online (Katz, 2004). Human resource Human resource is one of the most important resources of the business. In business planning, the business owner needs to define human resource structure and management of the organisation. Initially, a restaurant may require fewer employees to serve guests. For example, the business may need two chefs, four waiters, one cleaner, an accountant with knowledge of computer and one employee to look after home delivery activities. The business owner must clearly define everyone’s job responsibilities and company policies regarding HRM (Price, 2011). Suppliers A restaurant needs a series of suppliers or an integrated supply chain management for cost reduction purpose. Since a wide variety of food and beverages will be served in the restaurant, it is necessary to have sufficient suppliers of the raw materials such as, flour, vegetables, meat, egg and beverage related supplies. Integrated supply chain ensures that the restaurant store has raw materials on time and services are not delayed in any manner. Moreover, with proper supply chain management, quality of product and services is also maintained (Mentzer, et al., 2001). Social capital Every entrepreneur need to pursue certain social responsibilities towards the society. Social capital refers to organisations and their values that help in shaping and enhancing quality of social interaction. As a part of social capital activities, the restaurant can distribute spare food to the poor and underprivileged. They can also conduct food distribution activities at orphanages (Peredo and McLean, 2006). Marketing strategies In addition to all these components, the company must determine the marketing strategies regarding its product. The strategy can be related to pricing, packaging, and innovation in food variety and service delivery. In addition, in order to attract consumers, the company can apply strategies such as, happy hours and happy meal. The company can also employ print media such as, small bill boards and flyers, for promoting the restaurant. The other important aspects of business planning have been assessed thoroughly in the following sections (Cravens and Piercy, 2008). Competitive strategies To develop competitive strategies, it is important for the firm to determine its competitors as well as internal strengths. For this purpose, the firm can undertake SWOT analysis. SWOT analysis is defined as strength, weakness, opportunities and threat analysis. The strength of the restaurant can be its local owner, employees and knowledge of local tradition and culture. Furthermore, presence of tourism industry in Cardiff will be an added advantage for the management so as to understand foreign culture and attract foreign consumers. The central location of the company will also serve as an advantage. The weaknesses can be slow activities during the initial days as the company will need some time to adjust in the industry. Additionally, the company will gradually be able to build relationship with its consumers and suppliers. Given that the hospitality industry in Wales and the United Kingdom is growing continuously on an average, ample opportunities are available in Cardiff for the company. The company will have the advantage of accessing new technologies and location advantage for being centrally present in the city. The threats mainly involve major competitors that are already established in the city. Increasing labour cost may also prove to be a challenge for the company. Another technique to determine competitive strategies of the company is Porter’s five force model. Figure 1 (Source: Author’s creation) The management should be able to balance the bargaining power of its consumers as well as suppliers, so that profit can be maximised. In addition, the company should place its products to consumers in such a way that substitutes do not affect its sales. The company’s competitive strategies should be such that it can match the internal rivalry as well as that from new entrants. The competitive strategies can be involvement of innovation and creativity in the food and beverage items and services. The company can serve those foods and beverages that are generally not served in near-by eateries. The company can include certain dishes in its menu, which are available at fine-dining restaurants for higher price. Apart from that, the company can go into long-term agreement with the suppliers so as to have cost advantage (Barney and Hesterly, 2009). Financial planning Finance is generally known as life blood of a business and it is impossible for a firm to survive in absence of financing sources. The firm’s financial sources can be long-term as well as short-term in nature. The main short-term sources of finance are bank overdraft, trade credit, commercial paper and short-term commercial loans. The short-term loans and credits are payable within a period of 12 months. Trade credits are provided by supplier and the quantity highly depends on credibility of the company. Bank overdraft is also credit availed by commercial consumers from banks for a certain period of time. The company can purchase commercial papers, which give a fixed return at maturity and are considered highly secured (Ross, Westerfield and Jordan, 2008). The long-term financing sources include capital market, special financial institutions, long-term loans, foreign sources and retained earnings. The capital market further includes equity market and bond market. However, to raise fund from capital market, it is important for a company to be publicly listed in national or international stock exchange. For SMEs and private firms, the external sources of income are long-term loans for a period of 10-15 years, medium-term loans for 5 years or less and retained earnings, which is a certain share of profit reinvested in the business. Another source of funding can be foreign investment, but at the initial stage of business, it is difficult to access foreign investment. For start-up capital, many owners invest money from their own savings (Keown, 2003). Growth strategies To discuss growth strategies of the firm, it is necessary to consider the Ansoff product/market matrix. Figure 2 (Source: Author’s creation) In order to enter the restaurant industry with products that are similar to that of its competitors, the best strategy will be market penetration, where the company can set the price of its products and services similar or lower than that of competitors. However, if products of the firm are innovative in nature, then it should proceed with product development strategy. Since the firm has no current plan for entering new markets, it should not consider market development and diversification strategy for the time being. Diversification strategy is highly useful when competition is high with considerable scope for innovation (Rodrik, 2005). Contingency and exit planning There are certain major risks associated with starting up a new business: market risk, financial risk, legal risk, strategic risk and operational and management risk (Slovic, 2000). Market risk involves impact of various industrial changes on performance of a business. A company can mitigate market risk by undertaking a thorough market analysis, which includes analysis of past trends and future scope. Financial risks can be internal as well as external in nature. Lack of start-up capital is one of the major financial risks that the company can face. In addition, if suppliers refuse to provide trade credit, then the company will be in a critical position to meet the costs. Legal risk involves non-compliance of government norms regarding safety, maintenance of hygiene at work place and environment law. Strategic and management risk are associated with internal crisis that a firm can come across, such as, employee turnover, employee retirement, technological failure and so on and so forth. Considering these risks, the firm must have a risk management system as a part of contingency planning so that excessive cost can be avoided (McNeil, Frey and Embrechts, 2010). The company should have an exit strategy in case the business fails to achieve success. The measures should be such that the company owners and other members suffer minimum damage. The company can sale the merchandise and equipments to pay outstanding liabilities and payment of remaining is the owner’s responsibility (Nemethy, 2011). Conclusion The paper has elaborately discussed every important aspect of a business, along with analysis of its internal and external environment. A number of important theories and models have been used in this paper for explaining viability of different components of a business. 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