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's (Fairfield) $500,000 Frank'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
