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Posted on Jun 25, 2024

CASE: MASALA KITCHEN Instructions: Read the Case Answer the questions SYNOPSIS On January 1 2022 at 11 pm, Devyani Kumar sat alone in her new

CASE: MASALA KITCHEN

Instructions:

Read the Case

Answer the questions

SYNOPSIS On January 1 2022 at 11 pm, Devyani Kumar sat alone in her new Start-up, Masala Kitchen. She had just completed her first year start-up Masala Kitchen (MK), her Indian fast food restaurant in Square One, the largest mall in Mississauga, Ontario. Starting her own restaurant has always been Devyani's dream. She has not run out of cash to pay her expenses, but she is not sure if she made money or not, or how best to finance future expansion. So she thought it would be best to draft an income statement and balance sheet using the principles she learnt in her accounting and finance courses at Humber College. One year in, she needs to take a closer look at her business financials and consider what she needs to do to build a profitable business model that she can hopefully franchise to other malls in Ontario and Canada. DEVYANI KUMAR Growing up in India, Devyani learned to cook at home where she was a constant companion to her mother in the kitchen. Her father operated a restaurant in Punjab, where Devyani helped on weekends with the cooking and cleaning. Devyani moved to Canada as an international student to study business at Humber College. While her parents paid for the tuition costs, Devyani worked at Tim Horton's to help pay for her monthly living expenses. She aimed for excellence during her years at Humber, which led to her being named to the Dean's Honours list. After graduating in 2017, Devyani worked at Tandoori Flame, one of the top Indian restaurants in Mississauga. However Devyani inherited her father's entrepreneurial drive and after 3 years at Tandoori Flame, she decided to start her own restaurant in Mississauga. On her weekend shopping trips, she would visit the food courts at the shopping malls, where she would find Mexican, Greek, Italian and Chinese fast food restaurants, but was disappointed to see there was not one successful chain of Indian fast food restaurants in the shopping malls in Ontario. She was determined to start her own fast food Indian restaurant, and hopefully evolve this into a chain of restaurants. LOCATION Mississauga is a major Ontario city outside of Toronto that had a large residential population of 721,000. Most of Mississauga is comprised of residential detached, semi-detached and townhouse dwellings. Mississauga has one of the highest immigrant populations in Canada with 57% of Mississauga's residents being visible minorities, of which 21% were South Asian residents. Square One is the largest shopping mall in Mississauga and one of the largest in Canada. Devyani was successful in her bid to secure a location in Square One's food court. She exchanged ideas with her family and friends and decided to name her restaurant Masala Kitchen. She felt this name was broad enough to appeal to both the large Indian population, and cross over to the even larger non-Indian population. Her menu included standard Indian fare such as butter chicken, tandoori chicken, lamb curry, dal (peas), chick peas, aloo (potatoes), biryani (rice), naan, pakoras and samosas, which she felt could meet the expectations of both South Asian and non-South Asian customers. Masala Kitchen was launched on January 1, 2021. THE FIRST YEAR Devyani's first year of business went like this: Financing Devyani managed to save $40,000 from her work at Tandoori Flame which she decided to invest in Masala Kitchen. She borrowed $20,000 in equipment from her family. Her family did not expect any interest, but expected to be paid back over the next 4 years. At the end of her first year in business, she remitted her first repayment of $5,000 to her father. She was able to secure a $20,000 line of credit from her bank at a 5% annual interest rate, which was enough for her to get started. Equipment Devyani sourced all the necessary cooking equipment from India, where her father was able to secure the equipment from his restaurant and suppliers at better prices than she could get in Canada. Her father packed and shipped all the restaurant equipment in a 20 ft container and shipped it to Canada: o Cooking and refrigeration equipment cost $10,000, which was to be depreciated at 20% per annum. o Furnishings and fittings cost $5,000 which was to be depreciated at 10% per year. o Cutlery, utensils, wares, pots, pans etc. for $5,000. These were expensed in the first year. She purchased signage locally which cost $5,000, to be depreciated at 10% per year. Finally, she committed her own car to transport materials and supplies to the business. Her car was valued at $15,000, and is to be depreciated at 20% per year. Staffing Devyani hired three employees, one for the kitchen, and two to serve customers and cash. Devyani filled in as required. She paid her employees $15 an hour, just above minimum wage. They worked 10 hours / day from 11 am - 9 pm, 6 days a week. She rotated her staff as Square One and the restaurant were open 7 days a week, 365 days / yr. Devyani decided to pay herself as the Restaurant Manager $2,000/mth until the business grew. Lease expenses Leasing a spot in the food court of one of the busiest malls in Ontario does not come cheap. Monthly lease expenses for the 200 sq ft space cost $75 / sq ft, or $15,000 per month, utility costs included. Sales Sales began slowly as can be expected in January, but picked up after April. Masala Kitchen's average meal sold for $10. For the year, sales averaged $30,000 per month. Cost of Goods Sold The cost of the food and beverage ingredients was not very high, averaging 20% of sales. Expenses Liability Insurance: $2,000 / yr. Your vehicle expenses for gas, maintenance and car insurance totalled $5,000 for the year. Due to the natural foot traffic in Square One mall, Devyani did not see the need to advertise outside the mall, set up a website or engage in any advertising. As such, marketing expenses were negligible. Any specials could be advertised on the electronic menu board. Taxes As a small business, your Federal Tax rate is 9% and your Provincial Tax rate is 3%. Outstanding balances Because your sales are all cash sales, you had no accounts receivable from your customers as of December 31 2021. You owed your food and beverage suppliers $5,000. All other expenses were fully paid up. Your inventory of food and beverage ingredients amounted to $2,500. DIVERSIFICATION After one year in business, Devyani was physically exhausted, but her mind was running over the growth opportunities before her. Assuming her Square One restaurant had a profitable first year, she was not sure which was the best opportunity for her to pursue at this early stage of her restaurant business: 1. Open a second location in Brampton. A great location has become available at the food court in Bramalea City Centre in Brampton. Brampton is another city about 30 minutes north of Mississauga where 57% of its population is South Asian. The mall traffic is less than Square One, but much more targeted towards the South Asian target market. The rent is 50% of what Devyani is paying in Square One. The owner of the restaurant is retiring and selling his Indian restaurant for $50,000. He is willing to be paid over 12 months. ROI estimate 20-30% with a low to medium risk level. 2. Start Franchising. Devyani always had big plans to franchise Masala Kitchen, but this was not an easy undertaking for her to do on her own. The opportunity was certainly there for Devyani to earn a Franchise Fee for each location of $100,000 as well as earn 5% on all sales. Processes, standards, structure, contracts, and marketing materials would all have to be developed. This is expected to take a year to develop and incur legal costs of about $10,000. The ROI could be negative or as high as 100% if successful. The risk factor is relatively high. 3. Delivery. Devyani was approached by several delivery companies during the year, including UberEats, DoorDash and GrubHub, to offer delivery services. This would require her to diversify her menu and source additional packaging for delivery. The ROI of 15-20% and risk factor is relatively low. 4. Catering. During the year, Devyani was often approached by customers who wanted to place orders to cater for special occasions, such as weddings. Devyani however did not have the capacity to manage such large orders as weekends were the busiest times in Square One Mall. Catering and delivery will require hiring additional staff on weekends. The ROI is estimated to be in the 15-28% range with a low risk factor. ORGANIZATION STRUCTURE Devyani found herself torn between her capacity to manage her existing restaurant in Square One and the expansion opportunities before her. She felt physically exhausted and knew she would have to make some organizational changes to avoid burning out trying to do so much on her own. To some extent, who she recruits to support her and the organization structure she puts into place will depend on which of the four growth opportunities she decides to pursue. CONCLUSION Devyani was excited but exhausted. She always dreamed of starting her own business. She figured that if she can survive post pandemic, she will have her business well poised for more success once the economy rebounds. Devyani knew she would have to assess the first year profitability of her business, decide soon on which of the growth opportunities she should pursue if any, and then how to structure Masala Kitchen for success.