Fast-Food Restaurant: Leasing, Buying, Franchising

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Table of Contents

Introduction
Identification and Analysis of Issues/Alternatives
Recommendation
Action Plan

Introduction

The key issue, in this case, relates to an urgent decision to acquire a fast-food restaurant. The decision-maker, Kelly, has three options, namely, leasing, buying, or franchising. Each of the three alternatives has some pros and cons. An ideal option is the one that requires a smaller budget but promises a higher return on investment (ROI). The decision criteria involve quantitative and qualitative factors.

Quantitative criteria include Kingston’s demographics, restaurant spending, operating expenses, cost of goods sold, outlet size, and bank lending rates. Qualitative criteria include strategic location, family dining habits, and legal structure of the business. A franchise contract is the best approach for launching the restaurant as it involves less initial capital and promises better returns than the other two options.

Identification and Analysis of Issues/Alternatives

Issues

The main issue in the case is deciding on a cost-effective method for launching the restaurant. The quantitative data indicate that the operating expenses (staff salaries) and cost of goods sold (supplies) of a restaurant located in Kingston amount to 35% and 50% of gross sales respectively. Thus, Kelly should select an option that requires less capital so that the restaurant does not fail due to under-capitalisation. This decision is not only urgent, but it also has a high strategic value to the business.

The second issue relates to the decision to purchase, lease, or enter into a franchise contract to secure the restaurant’s location. In making this decision, the benefits and limitations of each alternative deserve careful consideration. Purchasing a location is a long-term investment that requires enough funds. In this case, Kelly has $20,000 as the start-up capital, and therefore, a good option should require a small budget. This consideration, though not urgent, holds high strategic importance to the restaurant.

Kelly must also make a decision to resign her current position so that she can operate the restaurant full-time. The start-up will require great time investment in the initial stages. Her husband is a teacher and thus, cannot run the restaurant full-time. The decision to leave her position to run the restaurant is significant and urgently needed. Another consideration relates to the plan to remortgage the family house to supplement the start-up capital. This will raise the issue of legal ownership of the restaurant. Although funds are urgently required, the legal structure of the restaurant can be agreed on later.

One conceptual issue pertinent to this case includes the selection of a location that is closer home to allow flexible work hours. Kelly wants a work schedule that is flexible so that she can find time to spend with her family. Additionally, both Kelly (a department manager) and her husband (a teacher) do not have sufficient experience in restaurant management. Thus, the restaurant needs support in terms of skills to be successful.

Analysis

The root causes of the problem presented in the case fall into three categories, namely, methods, people, and materials. The method of choosing a restaurant location can influence the success of the enterprise. The key quantitative factors to consider when selecting a site include population (95,000 residents), the number of restaurants (110 outlets), and outlet size (1,500 sq. ft.). The materials required are contained in the cost of sales (supplies), which stand at a quantitative value of 50% of gross sales. The business also lacks the right skills to thrive (qualitative).

One constraint that Kelly must deal with in her decision-making is the start-up capital. She must source for enough initial capital to finance the business. The $20,000 (savings) may not be sufficient to acquire a restaurant site, purchase furniture/equipment, and recruit staff. Other constraints relate to operating expenses and cost of goods sold, which are estimated to be 35% and 50% of gross sales respectively. The high costs will constrain Kelly’s decisions.

In the case, a number of opportunities exist that one can capitalise on to launch the business. The lending rate is 10%, which is relatively low. Thus, an affordable bank loan can be acquired to finance the business. A strategic location will also give the business an opportunity to increase its visibility and attract the target clients (families). Franchise contracts can give the start-up an opportunity to grow because the parent restaurant provides support and brand equity.

From the quantitative data, a large proportion of a restaurant’s profits go to the operating expenses and cost of goods sold (85%), leaving 15% of the sales as the net profit. Thus, the new restaurant must minimise its expenses and cost of supplies. The target market segment of 20,000 families, which is served by 110 restaurants, constitutes a considerable proportion of the population. Additionally, family monthly restaurant spending is modest ($80).

The average lending rate is relatively low at 10%, which means that the restaurant can be financed through a cheap loan. The restaurant outlets are spacious (an average of 1,500 square feet) and thus, provide sufficient space for expansion. Qualitative analysis of the case reveals that Kelly is passionate about the restaurant business. She has some experience in this business, having worked at a fast-food franchise during her teenage years. Additionally, the husband has been supportive of her.

Alternatives

Leasing a location – it cuts down start-up capital, as a small budget is needed to start the business.
Franchise contract – this will reduce costs associated with marketing due to brand recognition. The restaurant will also receive support from the parent organisation. However, royalties and lack of independence can affect growth.
Buying – it requires a huge amount of capital (start-up costs). However, buying protects the business from rental price fluctuations.

Decision Criteria

To choose the alternative that offers the best market entry strategy, the writer will use criteria consisting of quantitative and qualitative variables. These include:

Cost – the amount that will be spent on leasing, purchasing, or franchising a restaurant site (30%).
Market share – the approach that provides the best opportunity to grow the market (25%).
ROI – the alternative that promises the highest returns (25%).
Competitive advantage – the approach that will enhance the restaurant’s competitiveness (10%).
Customer satisfaction – this will help in brand development (10%).

Assessing the Alternatives

The first alternative (leasing) involves fewer costs (less budget), but has less ROI (due to rent payment). It also does not provide the owner with an opportunity to expand the restaurant’s market share. Thus, based on the criteria one, this option is worth 30%.

The second alternative (franchise contract) has a less budget, enhances competitiveness and market share due to brand recognition, and increases customer satisfaction. It satisfies the first, second, third, and fourth criteria (75%).

The third alternative (buying) is expensive and does not guarantee short-term ROI and customer satisfaction. However, buying a restaurant site can give a firm a competitive advantage associated with location (10%).

Recommendation

The second alternative (franchising) fits Kelly’s budget of $20,000. It also promises better returns than leasing or buying a restaurant site. Thus, the writer recommends a restaurant franchise as the best option of launching the business.

Action Plan

To launch the restaurant successfully, Kelly should make an urgent decision to enter into a franchise contract with a national fast-food restaurant that has plans to set a branch in Kingston. Under the contract, she will pay $20,000 (her start-up capital) and finance the rest ($50,000) using a bank loan.

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