Industry Sector: Cafe - The Guardian

[Pages:13]Industry Sector: Cafe

Introduction

You have decided that you want to run a caf? or restaurant - now decide how you will achieve this. Will you:

buy an existing business start up a new business from scratch purchase a franchise

The course of action you choose may affect the costs you will incur and may also affect how soon you start to receive income from your business venture.

This Business Guide will help you to complete your cash flow. The topics listed under Income and Expenditure relate to fields in the cash flow section of the Business Plan.

Cash sales

'Cash sales' means all income from your main business activity which is received at the time of sale. Although many customers may pay you in cash, remember that Cash sales can also include:

cheques debit and credit card payments vouchers payments for take-away food orders that you receive through an online ordering

service like Just-Eat

To prepare your cash flow, you will need to estimate how much income you will receive over the next 12 months, including VAT. To do this you will have to estimate how many meals, snacks and drinks you are likely to sell, and at what price.

There are a number of things to consider when you make your estimates, depending on the type of business you are planning:

Type of business

who will your customers be? Will you target a particular category of customer or will you aim to appeal to a broad cross-section

how many seats will your cafe or restaurant have will you offer a take-away service, for example at lunch-times will you sign up to an online take-away ordering service such as Just-Eat will you cater for private functions

 what will your opening hours be - some cafes don't open at night, some restaurants don't open for lunch

how many days of the week will you open where will your premises be will you apply for a licence to sell alcohol will you offer a waiter service or self-service

Your menu

what type of cuisine will you offer who will plan your menus, decide on portion sizes and draw up recipes will you make everything from scratch, or will you buy-in ready made dishes from

specialist catering suppliers and specialist delivered wholesalers will you have daily 'specials' will your menu change to take advantage of seasonal produce will you target 'ethical consumers' by offering locally sourced organic foods, and

perhaps Fairtrade products such as tea, coffee and basic ingredients will you offer a range of healthy menu options such as low fat and low salt dishes how will you monitor which are popular/unpopular meals how will you control and monitor wastage will you have seasonal surges, for example at Christmas time what range of alcoholic drinks will you stock (if you decide to do so)

Pricing

what will your pricing policy be - will you target the cheaper end of the market or will you charge a higher price for your meals and aim to attract a less price-sensitive clientele

what gross profit margin will you aim to achieve on food and drinks will you charge extra for vegetables and accompaniments or will these be included in

the price of a main course will you offer any discounts, free meals or drinks to any customers will your prices include a service charge will you have a minimum charge, say between 12.00am and 2.00pm how often will you review your prices what will your policy be on staff tips - for example, will tips be put into a central

pool, or tronc, and distributed to staff by a troncmaster? It's against the law to use tips and service charges to make up your employees' wages to the National Minimum Wage level

Competition

Competition for caf?s and restaurants is intense and in recent years has led to pressure on margins as consumers have demanded high quality food at good value for money. Your competitors will include:

 other caf?s and restaurants in your area which offer the same type of food all other catering and leisure outlets, including coffee shops, fast food take-aways

and home delivery firms pubs and wine bars

You also face competition from the extensive and growing range of home ready meals which are widely available from supermarkets.

This probably makes it essential that your proposed caf? or restaurant has a 'unique selling point' (USP) - in other words something special that will attract customers to your establishment rather than to your competitors. For example, perhaps no other cafe or restaurant in your area offers a range of innovative vegan dishes.

To help with your decisions, click on the checkpoints for guidance. Once you have worked out a Cash sales figure add it to the relevant field in your cash flow forecast.

Buy an existing business

You might decide to buy an existing caf? or restaurant rather than start your own venture from scratch. This is quite a popular way of acquiring a catering business. Buying a going concern can mean that:

the premises, fittings and equipment are already in place there may be established customers the business can generate income immediately suppliers have been identified and relationships established with them the business has a reputation and a track record, which can help if you are looking

for finance staff may already be in place

However, look critically at any business that you are interested in to make sure that the price you negotiate with the seller is a fair one. Try to establish why the business is for sale for example, is the owner keen to retire or is there another personal reason for selling up.

Your market research into the catering sector as a whole - and the locality in particular - will help you to establish whether or not the owner is selling because he or she can no longer generate enough income from the business. Be careful when buying an existing business, or indeed a fully-equipped vacant food premises. It's a fact of life that large numbers of cafe and restaurant businesses don't survive for very long, so you may well be buying a business or premises that has already proved to be less than 100% successful. This may not necessarily deter you - many business people are confident that they can turn a failing business around. The important thing is to have established the current position so that the price you pay for the business is not too high.

Other matters to consider include:

 the state of the premises, equipment and so on. Will you have to spend money refurbishing or replacing assets. You might decide on a complete refit

how to retain key personnel once you've taken over does the business owe money that you will be responsible for if you are paying for goodwill, to what extent does this depend on the skills and

personality of the seller

Try to find out as much as possible about the business's reputation. Has it recently failed any food hygiene inspections? Are there any actions or enforcement orders still outstanding?

Ask your accountant to look critically at the business accounts for the past three years and discuss with him or her the selling price in the light of what the accounts reveal. Make sure you budget for other professional fees such as legal fees and valuation and survey costs.

Franchises

Franchising can be a good 'halfway house' between starting out from scratch and buying an existing business. If you purchase a franchise you'll still be setting up your own business, but you could benefit from the experience, resources and brand name of a business that is already successful.

There are various different franchises available in the catering industry - particularly fast food and take-away. Some are national and some are more locally based. Although different schemes vary in detail, most feature the following key points:

as a franchise holder, you will remain self-employed but will use the identity (corporate colours, logos, trade name and so on) of the franchisor

in return, you will pay the franchisor a fee - this might be a one-off investment, a monthly charge, or a combination of both

both you and your franchisor will have to fulfil certain obligations and maintain certain minimum standards

Many franchisors will provide you with any specialist training you require, help with advertising and marketing, and advice and support on a range of business and technical matters.

Details of the above points are set out in the franchise agreement or contract, which both you and your franchisor will sign. The agreement will also deal with other matters, for example any territorial exclusivity due to you and the minimum period for which the franchise will run.

Before entering into a franchise agreement, it is advisable to compare the terms of different franchisors to be sure that you are getting a good deal. Go through the contract with your solicitor before signing anything. More information about franchising is available on the

Franchise Info website. Information is also available from the British Franchise Association (BFA).

Market research

Estimating demand

It's very important to find out whether there is going to be room for your caf? or restaurant in your area. First of all, check out the competition. Count how many existing eating places there are already in the locality and see how many different types of cuisine are offered. Bear in mind that most pubs now serve food. Sample the food on different days and nights of the week in different establishments to get a feel for how busy you are likely to be. It can be a good idea to locate in an area which has become known as the place to go out for a meal, but you will probably have to offer something a bit different to win customers.

Local area

Note down the different types of potential customer living and working in the area. For example, if you plan to attract business-people for the lunch time trade are there plenty of workplaces locally. Although you are likely to have many customers who will arrive on foot, you may also hope to attract people from a distance. You should consider:

is the area well served by public transport is there ample parking nearby is the area considered safe in which to leave a vehicle

Why will customers choose your caf? or restaurant

You'll want to make sure that enough customers will choose your establishment rather than other eating places. Check out your competitors to see:

what type of food and drink they offer what prices they charge whether they offer a take-away service what are their opening hours what type of customer they are attracting how the premises are decorated what ambience is achieved whether service is quick and professional

This might immediately show you that there is a gap in the market for a certain type of eating place - for example, specialising in vegetarian meals or providing an alternative to a sandwich bar at lunch-times. Be wary about competing mainly on price - it's difficult to offer the high quality service demanded by customers today if you are operating on very low margins.

Find out what people want

It can be a good idea to talk to people in your area about your proposals. Ask them:

what sort of dishes they would like you to offer whether they would support a take-away service what opening hours would suit them best whether they would prefer you to have a licence to serve alcoholic drinks what, if anything, don't they like about existing cafes and restaurants in the area

Don't forget that market research can be ongoing. Once your caf? or restaurant is open, talk to your customers. Find out what are their likes and dislikes and ask if there's anything they would like you to serve that isn't currently on your menu. Note down which dishes are popular and which ones don't sell well.

Sector trends

What has been happening in the catering sector

In recent years the popularity of eating out has grown enormously. As a result there are now thousands of eating places in Britain offering a wide range of different types of cuisine at prices to suit all pockets. People have become much more adventurous and cuisine from many different countries is widely available.

A trend towards healthy eating has led many restaurants to add healthy options, such as low fat and low salt dishes, to their menus. There's growing pressure from the government to do this too.

Concerns about the origin of foods and the impact of carbon emissions caused by 'food miles' have led more and more people to consider how their food purchases effect the environment. This has increased demand for locally sourced and organic foods, and led to a rise in the popularity of traditional British dishes. Demand has also increased for Fairtrade products and many restaurants have added Fairtrade foods and drinks to their menus.

The industry is very competitive as barriers to entry are relatively low. When demand is strong, many new cafes and restaurants open up. Recent years have seen the huge expansion of restaurant chains (such as pizza and pasta outlets) and these have intensified competition for the independent restaurant. Competition has also increased as a result of the enormous range of 'ready meals' now offered by the major supermarkets.

Although the popularity of eating out is forecast to continue to rise in the long term, diners increasingly want high quality food that is good value for money. This is likely to put prices under pressure. During the late 2000s food prices started going up sharply, but the economy weakened. Many cafes and restaurants found it very hard to increase their menu prices, but needed to do something to safeguard their profit margins. Some were forced to cut their

portion sizes, while others sought out less expensive ingredients. The economy remained very weak during the early 2010s, making it difficult for businesses like restaurants that rely on people having enough money to spend on non-essentials. Food prices continued to rise steeply.

In 2009 the government introduced laws to make it illegal to use tips and service charges to make up staff wages to the level of the National Minimum Wage. The Department for Business, Innovation & Skills (BIS) has produced a code of best practice on tips for the catering industry. You can download this from the BIS website.

During the 2000s the Food Standards Agency introduced the food hygiene rating scheme for food businesses like restaurants. Food businesses are given a hygiene rating from zero to five stars when they're inspected by a participating local authority. Under the scheme, businesses are encouraged to display the results of their latest food hygiene inspection at their premises. You can find out more on the Food Standards Agency website.

Keeping up to date with developments

Joining a trade association is an excellent way of staying up to date with developments in your sector.

The catering industry is well represented by different associations, including the British Hospitality Association (BHA). You can contact the BHA at Queen's House, 55-56 Lincoln's Inn Fields, London WC2A 3BH and the Institute of Hospitality (IoH), Trinity Court, 34 West Street, Sutton, Surrey SM1 1SH - or visit their website.

The weekly journal Caterer and Hotelkeeper contains a wealth of articles and features of interest to those working in the food industry. There's more information on the Reed Business Information website.

Trade shows

You can get a lot of useful information by visiting a trade show or exhibition for the catering industry. Visit the Exhibitions website for details of trade shows that may be of interest to you.

What to sell

Your menu and wine list

A number of different factors will probably influence the choice of dishes you'll offer your customers, and the range of alcoholic drinks that you'll stock. For example:

 the sector of the market you will target. For example, will you be opening a basic caf?, a restaurant aimed at the middle market, or an exclusive restaurant. You might decide to target ethical consumers by offering a range of Fairtrade food and drinks

your opening hours. Will you open early enough to offer breakfasts to people on their way to work, or will you open at lunch time to offer workers and shoppers a lunch menu and perhaps take-away food. Maybe you'll target the evening trade and not open at all during the day

the theme of your caf? or restaurant. For example if you plan to have a Spanish theme most of your dishes and wines will be Spanish, although for variety you might include dishes from other countries and French or New World wines

the size of your premises. For example if you have a spacious bar area you will be able to stock a wide range of alcoholic and non-alcoholic drinks

the expertise of your chefs and their ability to produce new dishes to attract customers

Because the catering sector is so competitive it is important that you keep up with changes in consumer preferences and introduce new menu choices at regular intervals. You could consider showing the amount of calories in each dish on your menus.

Give careful thought to your menu pricing. Ideally you will cost each dish and price it on the menu accordingly, allowing yourself a reasonable profit margin. Consider whether you will add a bit of extra profit onto very popular dishes. Decide how much mark-up you will add to the cost price of wine and other alcoholic drinks too.

Customer profile

Your customer base will depend to a certain extent on:

the sector of the market you are targetting your location the time of day

Some cafes and restaurants build up a core of regular customers, which may change depending on the time of day and day of the week. For example, during the working week you might cater for local business people, but on Sundays local families might take advantage of promotions on Sunday lunch.

Some cafes and restaurants - for example in busy city centres or in holiday areas - may rarely see the same customer twice.

How customers will pay

Your customers may pay you in cash, by cheque or by debit or credit card. Many eating places find that the majority of diners pay with a card. However, some will pay in cash and

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