Yalla Momos

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 201218. 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 MarwickGoerdeler (KPMG), supply would remain much higher than demand in 201516 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, Applebees.

In 2015, U.A.E. diners spent, on average, AED51100 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 peoples 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 5060 per cent, with an operating profit margin of 1218 per cent, and a net profit margin of 1015 per cent.

After word-of-mouth, online reviews were the second most influential factor in peoples 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 cafs 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, Goels 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 itseffectiveness. 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. Goelwas 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 Goelknew 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.

EXHIBIT 1: YALLA MOMOS INCOME STATEMENT FOR THE YEAR ENDING 2015 (IN AED)
	Net Revenue	504,000
	Expenses
	Cost of food sales	151,200
	Rent	68,000
	Salaries	54,000
	Administrative costs	23,000
	Depreciation	30,200
	Utilities	13,000
	Miscellaneous expenses	15,800
	Advertising costs	0
	Interest	13,000
	Net Profit	135,800

EXHIBIT 2: YALLA MOMOS PROJECTIONS FOR THE YEAR 2016 (IN AED)
	Without expansion	With expansion
Rent	75,000	88,000
Salaries	61,400	75,000
Administrative costs	26,000	34,000
Depreciation	34,720	38,360
Utilities	14,000	19,000
Miscellaneous expenses	17,060	19,180
Advertising costs	8,000	12,000
Interest	13,000	16,000

Source: Company documents, Ivey publications

Q: Evaluate the current financial performance of Yalla Momosand compare his performance to the industry ratios. (200 words)????????????? Pleasee