Service sector is different from manufacturing sector. Service sector involves a wide variety of services including restaurant services. This study focuses on the factors to be considered while opening a new restaurant.
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Service is main aspect of business transaction to meet the satisfaction of customers. Service industry should evaluate the taste and preferences of the customers. Environment survey and observation is proved to be an effective way to meet the needs of the customers. There are several methods to know the preferences of different types of customers. Service is defined by Philip Kotler as “any act or performance that one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product”. There are usually three methods of service delivery. They are direct visit by customers, visiting customers by service providers and by receiving telephone or e-mail orders etc. Service industry is defined as “The branch of manufacture and trade based on performing work for others as an occupation or business. This includes hotel, repair, computer, legal, advertising, food, entertainment, health, and education services.” (Service Industry. 1996).
Feasibility study is essential to know if the business option selected is feasible or not. It helps to chose the best option by analyzing whether the business will be profitable or not. It is essential to do feasibility study before introduction of the actual project. Actual project work can start if the feasibility study is positive. There are several factors to be considered while starting a new restaurant. First step is to see the financial, administration and legal aspects of the business. After solving these aspects, next step is site selection and planning for building design and construction, purchasing equipments etc. There are several factors that increase the chances of new restaurant’s success. Some of the factors that contribute success are location, operating system, variety of menu, employees, market situation, and so on.
Requisites for restaurant business
After introduction of the actual project, next step is to ensure the following factors:
- The building must be made more attractive to the clients.
- Appealing furniture and fixtures to ensure comfort.
- Ensure fresh air supply with proper ventilation or air conditioning system.
- Wide range of menu options which is essential to meet the various tastes of customers.
- Pleasing customer services and adequate suppliers.
- Marketing and promotional activities.
Challenges of Restaurants
Restaurant is a service industry which is difficult to mange as it involves direct deal with people and food. Different people will have their own different tastes and preferences on their food. Evaluating food choices and keeping that menu is essential.
“Consolidation, increased competition, higher business costs, a tight labour market and demanding consumers are the latest hurdles restaurant owners must meet in order to succeed.” (Restaurant Industry Research States Challenges. 2000).
Most of the people are very sensitive about their food. Employees of the restaurants will be diverse and will create problems in making food items especially local menu. Marketing activities of service industry must look into traditional marketing mix as well as additional elements such as people, physical evidence and process. (Additional Three P’s of Bernard & Mary Bitner).
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Restaurants face several competitions from business environment.
“Restaurants compete with companies that serve meals, or prepared foods, including grocery stores, warehouse clubs, delis and convience stores. In addition, restaurants compete with home cooking.” (Industry Overview Restaurants: Competitive Language. 2008).
Waste disposal procedure is important otherwise restaurant will lose business as well as create legal implications.
“Restaurants, fast food establishments, and cafeterias face many challenges in managing their increasingly expensive waste streams. Owners and managers can do a lot to minimize or reduce potential cost increases by incorporating simple waste prevention and recycling programs.” (Best References: Food Service (Restaurants). 2008).
Time is important factor in service industry. In restaurant there will be peak time at morning and night and service should be available to meet the needs of customers during the peak time. There will be more business on weekends and at these times additional staff must be on duty. Usually, Friday and Saturday will have more sales compared to other days of the week.
“Customers are willing to pay a higher competitive rate based on the timing of when they need the service.” (Pricing Menus Like Airline Tickets. 2007).
Innovation strategy cannot be adopted without adequate support of the employees. In the service sector industries, it is very essential to gain the support of their employees.
“The three key aspects of service innovation identified in the roundtable are customer-focused issues, process-focused issues, and the need for continuous improvement.” (Examination of Key Challenges in Service innovation Kicks off Cornell Round Table Series. 2008).
Human resource challenges
HR challenges involve, workforce demographics, accommodations and food, wages, employee turnover, management turnover and dispersed operations. Diversity management is a challenge for restaurant. Accommodations are required to be provided to workers and most of them are young which creates more challenge. Employee turnover is also high due to competition and parallel sectors. Management turnover is also a big challenge which creates several problems such as hindrance for development, training delays, and further turnover. Dispersed operations are also creating high turnover among employees. “Some restaurant operations, particularly franchised operations have multiple locations and depend upon managers travelling between locations.” (Moore 2008).
The new service development process is intended to focus on business strategy development, new service strategy development, idea generation, all of which are important in new restaurant. Strategy adopted should meet the requirement of customers such as delicious food in a good environment with good customer service.
Quality of service strategy is more important than price reduction strategy. Price reduction will not create profits in the long run. Quality of the service must be ensured with adequate employees. Pricing strategy should be transparent to the customers as it will result in credibility of service.
“The Food Service industry according to Business experts is the most difficult industry to achieve success. Its failure rate is one of the highest in the world. An integral relationship must coexist between all facets of Operations and Accounting to achieve longevity and maximize profitability. This relationship must be maintained throughout its existence.” (Profit Strategies and Solutions).
It is now necessary to consider the demand patterns and capacity constraints that may be encountered, while setting up a new restaurant. It could be in terms of ascertaining the correct demand for food and beverages, on a day-to-day basis.
It is envisaged that the following four scenarios may emerge, regarding demand-supply equations that could impinge on a new restaurant business:
- Initially there may be high demand for food, etc, provided by the newly opened restaurant, due to public curiosity, advertisement, and publicity hype created by the media, and this, in no way, should reflect upon the general trend of sales that may follow in ensuing weeks, or months.
- There may be a demand-supply mismatch, resulting in a higher demand for food products than anticipated, which needs to be adequately taken care of.
- If the demand exceeds output, it could lead to dissatisfied customers who do not receive their required goods, which initially could create trouble for the startup restaurant.
- There could also be a case where demand and supply are exactly matched, due to robust market surveys being conducted, which have estimated the demand for food products at the initial stages.
- If proper surveys and appraisals have not been made, it is also possible that supply may outstrip demand. There may be food and other items that have been readied, but for which there are no buyers. This could lead to great deal of wastages and losses, which a new restaurant could ill afford to.
Strategic factors impinging new restaurant business
The main aspects that need to be first considered are the location of the restaurant, its locality, who are the prospective customers and their spending capacities, and what special features or characteristics are present in this new restaurant that are not available in the competing restaurants, or eateries.
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“According to the marketing concept, an organisation should try to satisfy the needs of customer or client through a co-coordinated set of activities that, at the same time, allow the organisation to achieve its goals.” (Woods and Zemke et al. (eds.) 1998, p.4).
Strategic marketing in New Landwood Restaurant
The performance of business rivals and competitors are also important, and how their businesses are faring are key factors to be taken into consideration. Since this New Landwood Restaurant would need to compete with the ompetitors in future, it is necessary to study and understand their marketing strategies, business operations, and what possible threats and challenges could emanate from these sources. It is also necessary to consider the best marketing mix, which could be used for the novel business. Traditionally, the marketing mix was considered to be in terms of price, place, promotion and product. But in the contemporary context, aspects such as “people”, “physical evidence” and “process” are also included. (What is Marketing Mix: Physical Evidence. 2008).
For a new restaurant business the main aspects besides price, place, promotion and product (quality), would be the physical evidence and process.
Physical evidence is the environment in which the service is delivered and where the firm and the customer interact, and any tangible commodities that facilitate performance or communication of the service.
It could be the quality of air and ventilation in the restaurant, ambience, staff uniforms, ID cards, attractive business cards, restaurant logo and front office décor. Process would be in terms of the ways by which food and drinks are produced and supplied, in conformity with accepted national and international laws and regulatory measures and directives issued by local governments and food regulatory bodies.
How New Landwood Restaurant: would fund its incipient operations
The most important aspect regarding a new restaurant would be in terms of the sources and deployment of funds. The sources of funds could be:
- The owners’ own funds, deposits and investments used for new business.
- Borrowings from banks, financial institutions and private borrowings.
- Equity from open markets through public issue, or private placement of shares.
A lot would depend upon the quantum of risks that the proprietor of the restaurant business would be willing to take during start up operations. The highest risks would be in terms of using one’s one funds because if the business does not succeed, the proprietor would become financially bankrupt if he had invested all his private and personal funds into the business.
Borrowings from banks and financial institutions would be a safer option, but the question of payment of interests and repayment of principal need to be considered. Moreover, banks would need collaterals and guarantee of repayment for protecting their interests and to be in a position to control the business if the loan repayments are not carried out on time and as per agreement.
In case the proprietor wishes to start on a large scale basis, he would need to request public participation, through Initial public offerings (IPO’s). When public funds are involved, the aspect of risks and performance adopts key factors, since regular dividends and returns to shareholders have to be made.
By far, the best option of starting a medium sized restaurant would be to borrow from known circles, friends, near relatives, etc., who would also be able to participate in the control and management of the business. Interest and repayment options would also be more flexible and accommodating and as per informal arrangements.
Risk factors that may impinge upon business
It is very important to know what would be the forecasted turnover of the restaurant during the first year of operation. It is also necessary to have a good, well designed Business Plan in order to streamline the business. The first aspect of demand forecasting needs to focus on the main goals and objectives of the forecast. Since profitability and business growth are key objectives, the demand forecasting of restaurant should be in alignment with these goals. Demand forecasting has to consider aspects of competitive business and what extra features are available in the new business that could attract and retain customers. It could be in terms of restaurant décor, attitude of staff and stewards, excellent service, clean uniforms, identity cards of employees, etc. It could also be excellent quality food served with care and interest.
One of the crucial areas in restaurant management would be the control of stocks. This assumes greater importance since the business deals mainly with perishables. The main areas would be:
- Food and consumables stocks.
- Crockery, cutlery and silverware.
- Food generating equipments and their purchase and servicing, including coffee making machines, food processors, etc.
- Stock of canned and packaged items.
For a new restaurant, it is necessary to initially keep the lowest inventories, since, to a large extent, demand forecasting and client servicing need to be correctly determined. For this, correct estimation needs to be done regarding:
- Quantum of daily turnover: Type of items that are likely to be fast moving, slower moving, etc. For fast foods, it is necessary to keep adequate stocks in order to serve the customers well.
- Procurement policies: The sources from where raw materials and consumable stocks could be procured on regular, economical, and long term basis needs to be decided. These are important aspects, since only by economical procurement policies and inventory management could a viable and profitable restaurant business be established and well managed.
- Customer servicing: For this the location, table layout, lighting and décor, air conditioning units, coolers and freezers are very important. Strategies need to be developed regarding the maximum number of clients the restaurant can accommodate. This has relevance with total space area for customers and staff work areas. It is necessary that the ambience should be light and lively, with channel music to create the mood. The clients should enjoy not only the food but also total atmosphere of the restaurant.
- Whether the restaurant would be keen on internet selling also. In this case, a website needs to be hosted, include the menu, rates terms and conditions governing restaurant internet selling, etc. “The objectives of using the Internet in marketing communications include: Creating consumer awareness and building interest, Providing information, Stimulating product trial, Enabling customers to place orders. “ (Introduction to Services Marketing: Marketing Communication Strategies: The Internet Marketing Communication Strategies. (provided by customer).
- Also, whether the restaurant is interested in door delivery, in which case, it is necessary to install and maintain a fleet of delivery boys with motor vehicles, to cater for home delivery business.
For a new restaurant business, the aspect of location, “easy to find” and high service orientation is very important. (Franks 2008).
This could be seen in terms of locating in an upcountry, upper class locality with people having high, disposable incomes. Moreover, it is necessary to conduct a good market research survey which could entail a good idea about the socio- economic status of residents, their food habits, and the viability of a restaurant being successful in this locality.
This is important, since research has found that although restaurant business is quite profitable, it is subject to market risks like consumer tastes, income and spending levels and predisposition for service and the ability to cater to different cuisines.
All service oriented industries are governed by customer tastes, inclination and demand for quality products and service. Servicing could be at two levels – desired levels and adequate levels. Desired levels are optimum levels that the customers seek and for which they would be most satisfied. Adequate levels are the minimum standards that must be met. It would be right to state that levels of service should lie between desired and adequate levels, and could be defined as the “zone of tolerance. “ (Chapter 3 Customer Expectations of Service: The Zone of Tolerance, p.58).
Complaints are a major threat in any area of business, and service industries are no exceptions. For a new restaurant, it is necessary that the level and regularity of complaints are kept negligible low, or are absent.
Loyal customers are intrinsic and important for any industry, and restaurant industry is no exception. However, customer loyalty needs to be built up by taking cognizance of complaint and improvement schemes and implementing them vigorously.
From the above Table it is seen that over the years of operations, a business enterprise, or even a fast growing restaurant could achieve profits in terms of reduced costs and increased business revenues.
It is seen that “economic benefits of customer loyalty” would create situations by which one firm becomes more profitable than another, or its rival, since loyalty could be translated to singular business dealings over a long period of time. (Lovelock and Lovelock, Christopher 2001, p.361).
Thus, it is very important that this new restaurant builds and retains customer loyalty over the period of its useful existence.
This could be achieved by reducing number of complaints and enhancing quality of service.
Customer complaints could give rise
- The customers may shift to better serviced restaurants.
- The complaint being suitably handled, the customers may still do business, sometimes at even enhanced levels.
- As a result of complaints, it is possible that the restaurant has to take necessary steps for improving its services radically, or face extinction from the market.
In a service industry, the concept of customer value is very important. In a typical business setting it could be calculated as follows:
- Total revenue generated from a customer on each visit to restaurant – £500.
- Average visits per week – 4 visits.
- Average visits per year – 52 week X 4 = 208.
- Therefore, estimated turnover or business value for one customer per year is equal to ; £500 X 208 = £104,000, with margin of 20%, this is £20,800.
- It is seen that satisfied customers could recommend this restaurant to others. Assuming this to be 25% of turnover, per year, this is equal to £26,000, profit on this works out to 20% of £26,000 = £5200.
Thus it could be estimated that on a conservative basis the estimated value of each customer in the restaurant would be total of serials 4. & 5. or £26,000.
The restaurant needs to build up business based on customer values and thereby increase the scope of business activities, as well as build up business prospects for future.
It is seen that a host of challenges could beset new restaurant in terms of good location, clientele, competitive factors, quality of raw materials and vendor management, need for training staff for enhanced performance and food servicing etc.
However, despite the onslaught of technology it is seen that “People-processing services” such as restaurants need to be carry the personal touch and build cordial relations with clients, customers, competing firms and the neighbourhood. (Introduction to Services Marketing: Strategy and the Internet: p.50 (provided by customer).
It is necessary that in order to capture and retain customers, there need to be special attractions that could make it more appealing and induce higher sales. This could be in terms of free delivery, gift schemes, special table offers and special rates in week-ends.
However, the critical concerns of restaurants business are Standards of Service and Standard Quality. It needs to be maintained and improved over a period of time. If either of them is lowered, it would not be long before the business is overtaken by competitors or new restaurants.
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