# Question 9: Locate the average values of these ratios (from Q8) for the restaurant industry and comm

Question 9: Locate the average values of these ratios (from Q8) for the restaurant industry and comment on how well or poorly Frank’s All-American BarBeQue appears to be doing with respect to the industry. This is a research question. Just as would a small business operator should do, you were to demonstrate your ability to research, either using the many sources provided to you in the textbook or to use the internet which provides an abundance of information that needs to be carefully looked at before relying totally on it. Regardless the information is there and is available at no monetary cost.

Table 16.1 “Past Performance of Frank’s All-American BarBeQue” provides a summary of key financial figures for the last three years—2008 to 2010. Figure 16.1 “Past Performance Chart” illustrates these key numbers for that period of time.

Table 16.1 Past Performance of Frank’s All-American BarBeQue

Past Performance

2008

2009

2010

Sales

\$1,637,610

\$1,696,564

\$1,793,268

Gross margin

\$851,557

\$909,358

\$943,259

Gross margin %

52.00%

53.60%

52.60%

Operating expenses

\$542,080

\$577,315

\$600,408

Inventory turnover

13.20

12.10

12.90

Balance Sheet

2008

2009

2010

Current Assets

Cash

\$102,665

\$125,172

\$102,665

Inventory

\$391,238

\$331,045

\$345,678

Other current assets

\$278,372

\$230,074

\$278,372

Total current assets

\$772,275

\$686,291

\$726,715

Long-Term Assets

Long-term assets

\$504,580

\$388,820

\$423,675

Accumulated depreciation

\$180,856

\$135,739

\$145,765

Total long-term assets

\$323,724

\$253,081

\$277,910

Total assets

\$1,095,999

\$939,372

\$1,004,625

Current Liabilities

Accounts payable

\$155,534

\$132,206

\$145,321

Current borrowing

\$170,000

\$150,000

\$135,000

Other current liabilities (interest free)

\$81,888

\$63,972

\$74,329

Total current liabilities

\$407,422

\$346,178

\$354,650

Long-term liabilities

\$220,000

\$190,000

\$175,000

Total liabilities

\$627,422

\$536,178

\$529,650

Paid-in capital

\$75,000

\$75,000

\$75,000

Retained earnings

\$281,838

\$234,377

\$287,114

Earnings

\$111,739

\$93,817

\$112,861

Total capital

\$468,577

\$403,194

\$474,975

Total capital and liabilities

\$1,095,999

\$939,372

\$1,004,625

Other Inputs

Payment Days

30

30

30

Figure 16.1 Past Performance Chart

Market Analysis Summary

Since the 1930s, the American public has spent at least 5 percent of its disposable income on eating out. Even with annual fluctuations, this is a strong indicator of the viability of this industry. This can be best illustrated by reviewing industry results for the last few years.

Both 2009 and 2010 were difficult years for the restaurant industry. In 2008, sales increased by 3.8 percent. However, sales fell by nearly 0.75 percent in 2009. This was the first year in the history of the industry that sales actually declined. The restaurant industry’s sales in 2009 were \$566 billion, down from over \$570 billion. Prices rose by 2.2 percent in 2009. The increase in sales for 2010 was 0.5 percent, and price increases stabilized at 0.75 percent.

It is anticipated that there will be significant price competition in every segment of the restaurant industry. Some analysts argued that the poor performances for the restaurant industry in both 2009 and 2010 could be attributed to declines in both business and personal travel. Hotel occupancy rates in 2009 were down by nearly 10 percent. A study conducted by the National Restaurant Association argued that 20 percent of the sales in casual dining restaurants might be due to travelers and visitors. Frank’s All-American BarBeQue relies to a far lesser extent on travelers as customers. A rough estimate based on credit card receipts, for the period 2006–2010, indicated that travelers represented less than 2 percent of Frank’s sales. The pressure on the restaurant industry has been felt by many chain restaurants, which significantly curtailed their expansion plans.

Even though the recession was in full bloom in 2009, many food prices rose and rose significantly. Beef prices rose between 4 percent and 12 percent, while pork prices rose between 5 percent and 13 percent. Numerous studies have indicated that the increase in commodity prices will not be a transitory phenomenon.

With 925,000 food service locations in operation in the United States, this translates into 1 restaurant for every 330 Americans.

The health-care reform bill passed in 2010 should, in the near future, provide some relief for restaurants by creating a system that will assume greater responsibility by individuals to pay for their own health-care coverage.

Restaurants must also be much more cautious in the future about the possibility of hiring illegal aliens. As a whole, the National Restaurant Association supports immigration reform. However, it is concerned that any legislation should not limit a restaurant’s ability to hire workers. It is also concerned about the cost to assure worker eligibility.

The Mintel Group, a market research firm, found that consumers who are interested in quality opt for independent restaurants over chain outlets. An increasing consumer focus on health translates into an emphasis on natural ingredients. In the barbecue industry, this translates into naturally raised meats (i.e., the avoidance of artificial growth hormones in cattle), which are a hallmark of Frank’s All-American BarBeQue.

The National Restaurant Association estimated that sales in full-service restaurants in 2010 would exceed \$184 billion—an increase of 1.2 percent from 2009 sales.

Several macroeconomic factors make opening a restaurant in Darien attractive, including the following: Increases in the growth domestic product (GDP). The GDP is estimated to grow 1.7 percent in 2011 and 1.5 percent in 2012. The estimates for Fairfield County are significantly higher. Disposable personal income. The national level of personal income should rise nearly 4 percent in 2011, and there is an expectation of 3 percent growth in 2012. These numbers appear to be much stronger in the Fairfield County area.

Although 2010 was not a banner year for the restaurant industry—it was one where more restaurants closed than opened each month—there was one bright spot: Chain barbecue restaurants grew between 2 percent and 3 percent—an auspicious sign even for independent operators.

The home meal replacement market and the existing investment in restaurant equipment provide a nice growth opportunity for restaurants. It is been estimated that takeout sales in limited service chain restaurants might be as large as 60 percent of total sales. The same study found that takeout food has been growing twice as fast as the overall restaurant industry. Natural competitors in this market are supermarkets that offer prepackaged meals. However, we feel that few—if any—supermarkets provide the quality barbecue food that can be found at Frank’s.

Figure 16.2 “Market Analysis” illustrates the relative contributions.

Table 16.4 Market Analysis

Potential Customers

Growth

2011

2012

2013

2014

2015

Lunch

8%

17,000

18,275

19,646

21,119

22,703

Dinner

5%

40,000

42,000

44,100

46,305

48,620

Takeout

20%

10,000

12,000

14,400

17,280

20,736

Sauces

15%

12,000

13,800

15,870

18,251

20,989

Total

9.37%

79,000

86,075

94,016

102,955

113,048

Figure 16.4 “Five-Year Forecast of Sales for Two Restaurants and Sauces” illustrates the breakdown of sales for the next five years.

Table 16.5 Sales Forecast

Sales

2011

2012

2013

2014

2015

Frank’s (Fairfield)

\$1,907,183

\$1,954,863

\$2,003,734

\$2,053,827

\$2,105,173

Frank’s (Darien)

\$2,222,000

\$2,555,300

\$2,810,830

\$3,091,913

\$3,401,104

Sauces

\$62,500

\$75,000

\$90,000

\$108,000

\$130,000

Total sales

\$4,191,683

\$4,585,163

\$4,904,564

\$5,253,740

\$5,636,277

Direct Cost of Sales

2011

2012

2013

2014

2015

Frank’s (Fairfield)

\$953,594

\$977,430

\$1,001,867

\$1,026,914

\$1,052,587

Frank’s (Darien)

\$1,111,000

\$1,277,650

\$1,405,415

\$1,545,957

\$1,700,552

Sauces

\$31,250

\$37,500

\$45,000

\$54,000

\$64,800

Subtotal direct cost of sales

\$2,095,844

\$2,292,580

\$2,452,282

\$2,626,871

\$2,817,939

Figure 16.3 Monthly Sales for Two Restaurants and Sauces

Figure 16.4 Five-Year Forecast of Sales for Two Restaurants and Sauces

Key Financial Indicators

Figure 16.6 “Key Financial Indicators” provides historical (2008–2010) and forecasted (2011–2015) values for the key financial indicators.

Past Performance \$1800,000 \$1600,000 Sales Gross \$1400,000 Net \$1200,000 \$1000,000 \$800,000 \$600,000 \$400,000 \$200,000 \$0,000 2008 2009 2010 Monthly Sales \$700,000 \$600,000 Frank&#39;s (Fairfield) \$500,000 Frank&#39;s (Darien) Sauces \$400,000 \$300,000 \$200,000 \$100,000 \$0,000 May January February March April June July August September October Novenber December We were unable to transcribe this imageKey Financial Indicators \$6000,000 \$5000,000 \$4000,000 \$3000,000 \$2000,000 \$1000,000 \$0 Gross margin Sales Earnings 2008 2011 2014 2009 2012 2015 2010 2013