As he sat in his office and watched customers walk in on a busy Friday night in April 2016, Prashant Goel, the owner and founder of Yalla Momos restaurant, contemplated its future expansion. He had started the business in 2012 and, within four years, had taken it to great heights. With total sales of AED504,000 in 2015, it seemed he was right on track. While sales in 2015 were 5 per cent higher than in 2014, Goel was concerned with sales growth in 2016. As the Dubai market prepared for the much-awaited Expo 2020, competition was getting tough and it had become hard to maintain low prices because of escalating costs. What could he do to meet his 2016 profit target in the face of increased competition? As a successful businessman, he needed to carefully evaluate his options to identify a course of action that would sustain the profitably he had worked so hard to achieve.

A BUSINESS JOURNEY

Goel had always wanted to become an entrepreneur, but had no intention of joining the family tobacco business in India. In 2007, Goel defied his family’s expectations and went to Dubai to pursue an MBA, which he received in 2009. He began a job in corporate branding at a Dubai firm and worked there for three years while looking to start a business of his own. He eventually decided to pursue his lifelong dream of opening his own restaurant, and invited his younger brother to join him in this venture. After looking at various options in Dubai, he decided to open a momo restaurant. A Tibetan-Nepalese-Indian hybrid, a momo was a big dumpling filled with meat and/or vegetables and cheese, and served with chili or spicy sauce. Momos were originally intended to be filled with buffalo meat, but goat or chicken was also used, and vegetarian versions were available. In 2012, very few restaurants in Dubai offered momos, and they were usually served as side dishes. Given their popularity among North Indian expatriates and the relative scarcity of shops selling momos in Dubai, Goel decided to go into the momo business.

BUSINESS

Goel and his brother started Yalla Momos in 2012. Yalla was an Arabic word, meaning, “let us go.” The restaurant was strategically located in the residential district of Al Karama (Karama), which was a very popular market for Indian food. Karama was close to Dubai Creek and part of the bustling older part of the city. Karama was considered the ultimate place for shopping and eating on a shoestring budget and was home to approximately 135 restaurants. Goel and his brother knew that if their prices were right, they would attract customers. They collected the menus of other restaurants in the area and came up with a rough estimate of what they could charge for their momos. The basic version was priced at AED13, while other versions cost

between AED12 and AED15. These prices were estimated to yield a gross profit margin of 40 to 50 per cent. Goel and his brother deliberately kept the prices low to make their momos more attractive to buyers and thereby capture the market. They did not undertake any major marketing activities, except for posting on Facebook and other social media sites. Using Goel’s savings, they made a basic investment in utensils and other necessary equipment and opened a small space that sat 12 customers.

Given the great demand for momos, Goel was able to quit his corporate branding job within three months of starting the restaurant. His wife also joined the business, the sales of which continued to increase.

The restaurant’s two unique selling points were its low prices and the fact that momos could be consumed as a snack, at any time of day. Goel focused on providing authentic and tasty momos and ensuring customer satisfaction. The restaurant was designated “pocket friendly” on the Zomato website. Zomato, used daily by millions of diners in more than 10,000 cities across 23 countries, gave Yalla Momos four stars out of five and posted a number of positive reviews from customers, including the following:

[I] have always loved the concept of momos. This place serves [everything] from steamed to fried momos. [I] have tried their spinach, vegetable, shrimp, and chicken momos. All are equally good in taste. Conveniently located in the heart of the city, having multiple branches, for a quick and a tasty bite, this place is a must try. I often order their food home, and it never disappoints.

Simone Jham

No frills; nothing fancy here. It’s a cozy, little, humble joint that serves good momos. You can choose to have them fried or steamed. We recommend the latter. Two in-house sauces accompany your plate of momos, but we think you might be better off asking for some ketchup.

The Hungry Architects, Zomato the Expert in Al Karama

Yalla Momos had a number of competitors, the foremost being Momos Magic. Momos Magic had five outlets in Dubai and, while it charged higher prices than Yalla Momos did, its menu options were more limited. To capitalize on the huge demand Yalla Momos had created, Goel opened a second branch in Dubai International city, a flourishing residential district with over 22,000 residences. The third Yalla Momos restaurant was opened in a new kiosk inside Big Bazaar Supermarket in Bur Dubai. This was one of the most populated areas of Dubai and a hub for tourists visiting nearby museums and other attractions. Goel took out bank loans to open the second and third branches in Dubai International city and Bur Dubai.

With the opening of the new outlets, Goel moved the central kitchen from Karama to the Dubai International city site; the latter was a larger space with cheaper rent. From there, the momos were transported to the other branches, where they were steamed or fried.

THE RESTAURANT INDUSTRY IN DUBAI

Business Monitor International estimated that food consumption in Dubai would reach AED35 billion in 2016. In addition, the compounded annual growth rate of per capita consumption was expected to be 5.5 per cent in 2012–18. Hassan Al Hashemi, vice president, International Relations, at Dubai Chamber of Commerce and Industry, commented, “Restaurant chains, which in the UAE [United Arab Emirates] account for more than one third of total sales, or AED11 billion, are growing on the back of higher consumer spending.”

According to a survey conducted by Klynveld Peat Marwick Goerdeler (KPMG), supply would remain much higher than demand in 2015–16 for the United Arab Emirates. “With the increasing appetite for out-of-home dining and growing discretionary wealth in the Middle East, there is plenty of room for restaurant brands to expand their business,” said Gary Moore, regional vice president and general manager, Middle East and North Africa, of the casual restaurant chain, Applebee’s.

In 2015, U.A.E. diners spent, on average, AED51–100 per meal. U.A.E. consumers were prepared to pay a high price for decent service, and word-of-mouth was the most common factor in people’s restaurant choices: 70 per cent of consumers indicated that they were influenced by the views of friends and family. “Dining out is becoming a favorite activity for many U.A.E. residents, who spend an average of AED841 on restaurant meals per month, the highest in the Middle East market.” Based on a survey of small and medium-sized enterprises in Dubai, the restaurant and catering segment earned a gross profit margin of 50–60 per cent, with an operating profit margin of 12–18 per cent, and a net profit margin of 10–15 per cent.

After word-of-mouth, online reviews were the second most influential factor in people’s restaurant choices, with 40 per cent of diners referring to them before trying a new restaurant. The websites most frequently consulted were Zomato and Time Out. Interestingly, advertising was less persuasive.

Research by Euromonitor International indicated there were 6,021 food and beverage outlets in the United Arab Emirates, with another 19,000 expected to open by 2019. In addition, the demand for restaurant and street food was expected to increase substantially with the heavy inflow of visitors to Expo 2020. The U.A.E. government was expected to be liberal in granting licenses to all of these new restaurants, provided they met financial and legal requirements. The expected rate of inflation for 2016 was 2.4 per cent, while the price of food and non-alcoholic beverages was expected to rise by 0.05 per cent to 2.0 per cent in 2016.

FINANCIALS FOR 2015

Yalla Momos, which Goel had started with his small savings in 2012, generated AED504,000 in total sales and AED156,240 in revenue in 2015. The average meal was priced at AED20, including food and beverages; beverages accounted for approximately 20 per cent of revenue.

Goel was particular about the quality of the raw materials used, which included the white flour dough as well as the meat and/or vegetable and cheese fillings. No compromise was acceptable in terms of the quality of the food served. Apart from raw materials, other expenses included rent and utilities, administrative costs, and depreciation. The rent for all three locations was AED68,000 in 2015 and AED75,000 in 2016. Goel did not maintain very detailed financial records, but kept a rough estimate of overall expenses (see Exhibit 1). The owners did not pay themselves a salary, but shared in the profits of the business.

PROJECTIONS FOR 2016

Following expansion, Goel decided to use advertising to boost sales at the Dubai International city restaurant and the Bur Dubai kiosk. The cost of advertising would be AED8,000 for the three locations, and advertising was projected to increase overall sales by 10 per cent, from AED504,000 in 2015 to AED554,400 in 2016. Nevertheless, Goel had to keep strict control of expenses to stay competitive. He was keen to introduce new varieties of momos, but wanted to maintain the same quality and cost. Previously, he had sourced his raw materials from nearby supermarkets; he now planned to source his materials from special wholesale markets, from which he could obtain the same material at a lower price. Buying in bulk at wholesale prices would lower costs, but would require more storage facilities to keep the raw materials fresh.

FINANCIALS FOR 2016

Goel was thinking of opening one more outlet (the fourth) in Al Barsha. Al Barsha was a populated area with different nationalities and with lower rent than Karama or Bur Dubai. He thought he could capitalize on the growing demand for his product but knew that he would face stiff competition from the many cafés and quick-bite outlets already operating in Al Barsha. The central kitchen in Dubai International city was large enough to accommodate the additional cooking, but Goel would incur additional expenses if he decided to open a new kiosk (see Exhibit 2).

With four locations, Goel’s depreciation costs were estimated to be AED19,000 per year. Advertising costs, meanwhile, would increase to AED12,000 per year. Goel would continue using social media for marketing. Increased advertising could boost net revenues to AED727,200 per year. Goel had never engaged in aggressive marketing and was skeptical about its effectiveness. Worrying about both the competition and the costs associated with expansion, Goel nevertheless decided to give it his best shot.

THE DILEMMA

Four years after he started the business, Goel frankly admitted that he had not properly evaluated its financial performance. He was happy with the increase in customers and revenues, and considered himself well off, but he was not sure how to measure the performance of the company or interpret its success.

Goel wanted to set up one more branch, despite the fact that sales at the Bur Dubai kiosk and the Dubai International city branch were not as strong as those at the Karama branch. Goel was worried about net revenue and felt that he should take a more structured approach to expansion. Should he concentrate on the current business or should he open an additional restaurant? What if things did not turn out as expected? His competitors were engaged in aggressive marketing and Goel knew he had to make a quick decision. The Dubai market was expanding, but the volatile nature of growth and the sheer number of competitors might eat into his profits. With these fears in mind, he knew that his decision was going to be critical to the continued success of his business.

Required:

1. Elaborate on the relevant factors that need to be considered when deciding to expand.