What does Backward Integration Mean?
A form of vertical integration that involves the purchase of suppliers in order to reduce dependency.
In my words - A good example would be Restaurant business bought or start Poultry farm,Vegetables farm, Dairy farm, cattle farm and fish pond etc.. in 0rder to reduce the risks associated with the dependency on farm products.
It doesn't mean that we start all the dependent products required for restaurant business. We select few of them which has pricing and quality dependency.
What does dependency mean to a Restaurant Business?
Quality and pricing of the food dependents on the procurement of the raw materials. When we have control of dependency factors in our hands we will have the leverage to give a best product with best quality at affordable price.
Why Restaurant business is a good plan?
I understand that restaurant business is the most challenging business in the world as you need to satisfy the customers at the same time with consistently same quality every time we serve.
But if we see the statistics of the growth of this business in India it is tremendous. If i remember correct during my childhood days having lunch/dinner in a restaurant was a dream, which i used to fulfill once in a quarter with my parents. Now i eat 3times a day in a restaurant or take away at a very high price, which is not affordable for a common man. My idea is to bring food at an affordable price for a common man.
Definition of common man for my business - Income from Rs20,000 to 70,000/Month.
Food & We:
As per my understanding we don't love to eat Pizza, burger every day but it is fine once in a week. What we want is good meal which we can eat everyday, minimum dishes with high quality at a reasonable price.
Are we running Charity?
No, we are not running Charity by giving food at low price with high quality. If you see my above statement pizza and Burger we eat once in a week but the food we serve is eatable every day for every meal in a day.
The concept that we are trying to imply to our business is economies of scale.
External Economies - the cost per unit depends on the size of the industry, not the firm. Looking at the Indian population(120million) the food industry is much bigger than any industry in India. So we are fine with external economies for our business.
Internal Economies - the cost per unit depends on size of the individual firm. We are going to serve food to masses which is going to be a huge count.( which will be discussed in the later stage).
Business plan at a glance:
Sunday, June 27, 2010
Backward Integration In Restaurant Business
Plan is to have chain of take away centers across a city within a radius of 2kms each. Till date i have seen Hyderabad, Bangalore and Pune as potential cities for my business concept.
As per my survey till date the cost spent on raw materials like Milk,vegetables and meat is around 60% of the total cost of production so we would be targeting to reduce the cost of those items as those play a major role in quality aspect also.
We should lease land in the outskirts of the city where we are intending to start the business to start our own poultry,cattle and dairy farm. If my calculations are correct we would be reducing around 60% of the key raw material cost. We can pass 30% of the cost savings benefit to the customer.
As plan is to start take away points we will have a centralized kitchen at a radius of 10Kms each. This will reduce the cost of man power and facility cost per take way point, which is around 40% of the total cost in a restaurant business. We should be able to pass on 50% of the cost benefit to the customer.
Concept is no different from a sweet stall having shops in multiple locations with a centralized kitchen but the only difference is we don't eat sweets everyday but we eat food 3times a day.
Same as the concept of pizza hut or Domminos we will have delivery service with a SLA of 20mins per order. As we will have ready made food we will not have any preparation time involved so we should be able to meet the SLA.
When we consider investment per unit and the masses covered under one unit is considerably high rate of return per unit. Here the unit is refereed to take away point.
Varieties of dishes will be mix of andhra style Non-veg and Veg and traditional 2 veg dishes of that particular geography.
Having the centralized kitchen will allow us to give consistent taste and varieties across all the take away points.
Name of the take away points will be KUMBHAKARNA.
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