MumpreneursWednesday, 28 March 2012 08:33
Hospitality Industry, Starting a Café, Key Risks: Mumpreneur Blog, Polly McGee
Risking it all
I recently had a strategic advisory session with a mumpreneur in the making – let’s call her Rachel.
She had seen an opportunity to lease a small venue for her dream café, at very reasonable rents. Rachel loved to bake, and wanted to establish a “community” feel, with beautiful cakes and coffee, where mothers and locals came together.
She was working for a large institution and while her pay was good and the conditions flexible for her young family, she was deeply unfulfilled and underwhelmed by the values displayed by senior management in her workplace. She felt very strongly that “opportunity was passing her by” and that she needed to grab this one.
Her partner was occupied with his work and not keen on the café business, and Rachel was still the primary carer to her two young kids. She did have excellent marketing, communication and social media skills, and was in a position to mobilise her networks and friends to support and promote her business – most of whom, however, were not in her local jurisdiction.
The rent on the space she was looking at was about $5,000 a year. It was close to home and a “blank canvas” for her potential business – at first glance it sounded great and she was all fired up to sign the lease.
Rachel’s situation is typical of many decisions made on the romance of getting their dream scenario business, whatever that may be, with a focus on the rose coloured opportunities, rather than creating a business based on sound market-driven building blocks and risk analysis.
My risk assessment of her café was broken into the three basic questions I always ask: what is the demand, what are the risks, what do the number say.
As the venue was empty, there was no established demand. As a café, however, using a pretty traditional formula, the capacity to establish demand and a niche following was quite achievable – with an investment of time and money in marketing.
It was on a route to a train station, so foot traffic at peak morning times was good, as was the opportunity to establish a community brand and following for her cakes and high teas. There was the usual competition with established brands and venues in the area.
More critically, the market was going to be limited by the size of the venue, which could only seat about 30 – cute and niche – but there would also have to be quick turnover on seats and high value spend per head to make sufficient profit.
The risks when calculated looked nasty: for Rachel there was no experience in commercial cooking, no café management experience, no savings and no connections into the supplier and input side.
The space was empty, so even the most minimal, second-hand fit-out would quickly nudge $20,000 once fridges, coffee machines, appliances and furniture were calculated, not to mention the requirements for having the space certified for food production.
The bigger sticking point was the actual running of the shop – it was too big for one person, but as soon as wages came into the mix there was an immediate drain on her fledgling income and another level of management and compliance.
Then the opportunity cost of her forgoing her actual income for the earnings of the café, and the significant risk as a ‘solo-preneur’ of how to keep the business running if she or one of the kids got sick, managing school holidays, etc.
With the upfront borrowings, the establishment costs and the unknown period of turning a profit, the break-even point looked a distant spot on the horizon. Whilst the margin on coffee is great as a commodity item - and cakes are also a good money-spinner when the margin is right - the margin on perishable food, especially in niche quantities, gets smaller and smaller, especially when anticipating the demand at the outset is hit or miss.
That super cheap $5,000 of rent suddenly gets a lot more expensive when laid out in this way, and the dream café quickly can turn into a nightmare sinkhole of one-way expenses.
A number of factors could have significantly mitigated the risk in this scenario and shifted the opportunity into go mode: savings at bank to cover the first six months; strong experience in managing small food businesses, calculating margins and an existing supply chain of inputs; and partners who were prepared to share the risk and the rewards and work in the business.
Rachel, happily, is a smart and pragmatic gal. She could see the risks to her family and her own happiness and stress levels if she went ahead.
She could, however, also see a model forming where this type of business would be achievable. Biding her time and focusing on the good things about her current job and security would allow her to build a skill, support and cash war chest to be able to take on the next opportunity – or the one after that – with gusto.
Dr Polly McGee a co-founder of Startup Tasmania, which aids fast-growth start-ups in the state. She’s behind the MumpreneurIDEAS program, a one day workshop that assists women to start-up and is also a senior lecturer in Commercialisation and Entrepreneurship at the University of Tasmania in their MBA and undergraduate program.
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