Counting Coin (Literally)
I was reading this very interesting article about a current entrepreneurial craze, which involves selling gourmet cupcakes (if you are interested in business, the comments below the article are also very good because they really hone in on the issue of profits and costs and all of the things you have to pay attention to).
Essentially, the article and comments are all about the business of fast food and franchising. I was having a discussion with someone who used to work at McDonalds and they said the owner of that one franchise was bringing in about $300, 000 dollars a year in pure profit. Scale that up by owning 3 or 4 Mcdonalds and the income can quickly add up. It’s really a great business if you can get it because people flock to McDonalds (giving you volume) and the food is cheap (making it affordable for many).
Then of course, we both wondered why Kenya doesn’t have any McDonalds franchises and his argument was that, one, it is very expensive to get a McDonalds international franchise. I think he said you have to have a networth of between $5 and $10 million U.S. dollars. The second problem he said was that Kenya was still too poor. i.e. not enough people can afford to eat out, even at McDonalds, but then, look at the South African fast food chains like Steers. I wonder how much coin each store brings in? (In terms of pure profit).
Anyway, here is one of the more interesting comments left from the above article, which addresses the food retail business in general:
Food retail is widely known for extremely low profit margins, so most bank on volume (and large variety of products). A cupcake store is quite limited in what can offer, profit margin (how much can you really charge for a cupcake?) and the number of potential shoppers. Cupcakes might only appeal to women and kids, for instance, and again only to certain kinds of women and small kids. Again, these fancy shops might only appeal to people with a higher socioeconomic status, a minority. It is a formula for failure, except for the occasional shop with an outstanding product and location.
Some cupcake business owners might think that if Starbucks succeeded in building an empire, they too could make it, but it is a delusion. Starbucks is a totally different model. It appeals to a far larger demographic base and sells a very profitable product that is in demand every day (Americans do drink tons of coffee) without losses in spoilage, the need for semiskilled labor or bakery space.
A burger business is not a suitable comparison either; you might need to eat an inexpensive lunch or dinner each day but a cupcake is just a treat you might need only once a month or less. Even Dunkin donuts sells a variety of items besides donuts and has a greater demographic base, such as people who want to have a coffee and snack, breakfast and lunch. Sorry, cupcake owners, you just don’t have potential for volume and without the volume, it is a doomed business. The market can only support a few cupcake stores in certain upscale areas. I can see it might be a tempting business (selling a fancy product that does not need high skills to be made, low investment overhead compared to a larger bakery or restaurant, the idea that everyone will flock to buy cupcakes) but in reality, it is all a delusion. If these people looked hard they would have realized it is unsustainable.
With this piece, I want to start moving away from discussions where people end up talking about how to save Africa and all of that nonsense.
At the end of the day, if you want to make coin, you have to sell something and so please, don’t use this post to talk about public policy issues. This post is about revenue generation and literally counting your coins.
I want to hear about businesses you started (either abroad or in Kenya) and if they failed, tell us why and what you learned.
KE
What if you steal my idea?
I ain’t telling.
Thanks KE
I have been following your post for quite awhile. I am interested to go back home and invest and I have been kicking several ideas.
It funny how you mentioned Macd’s. Here in the UK we have a cheaper version of fast food restaurant which is based on the KFC model and there are everywhere. They sell a meal, which includes a burger chips and a drink for a mere £1.99 which is equivalent to 200 shilling.
Key thing in their business model is the availability of large number poultry farms who sell the chicken cheaply. Given that the overheads costs is alot higher in UK I can assure that cost of a meal can go down considerably lower for Kenyan market.
Key thing is to start from production source, by reducing the time it takes for chicken to grow using modern methods thus reducing the cost producing single chicken.
I heard also heard the export market is large for example selling chicken to Saudi Arabia. Currently Saudis buy chicken from Brazil among other places.
what do you think
Sadiq:
Is that chicken chain a franchise where you’d have to pay fee’s to get the franchise or how does it work?
“Food retail is widely known for extremely low profit margins” This is not the case in Kenya, food business, particularly restaurants can be very profitable. I run a fast food restaurant (chips, chicken, tea, mandazi etc etc) in the CBD and the profits are massive, the secret is the location. Unfortunately good locations don’t come cheap. It’s important to note that the cost of electricity is starting to bite into the profits.
Steers franchise is a total failure, their customer base is just too small, Kenyans are too poor and secondly they are selling the wrong foods. Kenyan just don’t eat hamburgers, its not part of our food culture. If you are thinking of getting into food business, forget about the franchise, even local ones like Kengeles and Kula Korner are failure, totally avoid them.
The chicken business is another tricky business, there is an over supply of chicken locally driving the prices down (one reason restaurants make a killing from selling kuku choma) and exporting to Saudi Arabia you need to invest in a state of the art chicken raising farm. Eg Saudi’s demand it must be Halal, precise weights (600gm+/- 20gm) which is extremely difficult to achieve plus many other requirements.
Karanja:
This is very good information that you have provided. It’s focused, it gets right to the point of the issue and it is very practical.
I have a question for you. In your second paragraph, you say that Kenyans are too poor to afford fast food. However, you also mention that your restaurant in the CBD is doing very well. So, which is it? It seems like people have money to spend in your restaurant so they can’t be that poor. What is your demographic target?
Also, if Steers is a total failure why are they still around?
Food business in Kenya has very large profit margins, combined with volume, the returns are very high. My customers are the people who you see queuing for matatus, who constitute 98% of the people in Nairobi. This category of people spends on average Ksh 150 per meal. From experience, any meal above Ksh 250 is beyond the reach of this target group. The fast foods offered by the franchises are not cheap, e.g a burger cost Ksh350, a small pizza Ksh 500, recently, these franchises (Steers) have significantly reduced their prices or buy one get two free but again Kenya food culture is working against them.
If you are thinking of starting a restaurant, steer clear of pizzas and hamburgers, they require specialized equipment and skill which are expensive. Offer Kenyans what they want; chapati, chips, tea, arrow roots etc. Depending from where you source the raw foods, the margins can be good. E.g a kilo of meat (ksh290) can bring in upto kshs2500, it only cost me Ksh to make a cup of tea which I sell for Ksh20. In a good location, Moi Avenue or Tom Mboya near matatu stages, a restaurant with a sitting capacity of 100 average gross takings for a day is Ksh 500,000.
Note that running a restaurant in downtown Nairobi has numerous challenges and its very hardwork, get some advice from someone who is already in the business. Also avoid the Kengeles and Kula Korners, those are just con games.
The Steers have changed hands quite a number of times, that should tell you a lot, nobody sells a profitable business, secondly, as I have mentioned, the profit margins are good, with their small customer base, they can make even, but will never see heaven!
Karanja:
So, let’s see:
Ksh. 500,000 a day gross = $7,000 dollars a day.
Multiply by 7 (are you open 7 days a week?) = $49,000 dollars a week (gross).
$49,000 x 4 = $196,000 dollars a month.
$196,000 x 12 = $2.4 million dollars.
Is this right? You are making almost $2.4million dollars a year selling tea and chapati’s in the CBD? Really?
What are the numerous challenges you’ve faced? maybe you can outline them for us.
Ksh.150 per meal is about $2 dollars. Most items on the McDonalds menu can be bought for about $1 dollar or Ksh.70, but like you said, the food may not appeal to a broad section of Kenyans. So, what fast food franchise can you see working there?
I suspect my name sake is running Kenchic inn that is one of the most profitable businesses around. Thats why there is no MacDs in Kenya.
I know for sure one Kenchic inn brings in 300,000 Kshs even on a bad day. But rents are high and power cuts are devastating
Keep it Kenyan Buy Kenyan.
See these business tips on a post on my blog
http://johnkaranja.com/2009/12.....drinks-uk/
KE,
Now that the kenya most us suspected that you never knew…where a regular Joe can gross usd 2.4m…year after year..more than some of your wall street gurus. Be open you may learn something!
Running a business in the CBD is not the principled or fainthearted. You have to contend with numerous licenses and you have to bribe to get them, KRA, City Inspectorate, NEMA, police and Mungiki.
Central and Kamkunji OCPDs must be in your payroll otherwise your staff will be harassed especially those that report to work early morning or leave late plus many other things they can do to you. Don’t forget the director of city inspectorate and public health, otherwise your staff cannot get a certificate of good health or you can never satisfy the council building requirements, today is fire equipment tomorrow is the door width. NEMA will pop in once in a while to find out how you dispose your used oil and KRA thugs will always come up with scams to rip both you and government. If you operate along Tom Mboya or below, you will have to pay “protection” money to Mungiki.
Other unnecessary expenses include the cost of cash transfer, G4S isn’t cheap. You or a very trusted person must always be in the business premises or the staff will rob to you to death, I loose approximately Ksh30,000 every hour I am out of the premises.
The rent in CBD are exorbitantly high, good locations are difficult to get, CBD landlords are a bunch of mafia; you have to pay a broker just to meet one.
If you are abroad and plan one time to start a business back home, remember Kenya is not a free economy, a business idea is not good enough, you need good connections, or bribe your way to get to the connections. For example, I know of a small company that produces cartons for packing fruits and flowers for export, despite that fact they produce better quality and cheaper products than competitor, for then to get orders from the flower companies in Naivasha, the have to bribe the managers….that’s Kenya for you.
KE, I read from your posts that you are big on producing goods, next time you are in the country, please visit Kariobangi Light Industries, you will observe a few young Kenyan producing goods against all odds, and not the Jua Kali things, very similar to cottage industries in China and India.
Nairobi Poa:
I’m still somewhat skeptical about the numbers and I’d like Karanja to clarify them especially now that he says he is paying Ksh. 30,000 every hour in bribes.
hmmmm…I’m sure your paying bribes, but I’m just wondering about your figures now.
John Karanja
I have just spoken to a Zimbabwean who is grossing US $5000 a week in Zimbabwe from 5 trucks. He is based in the UK and he started with 1 truck. He now has 5 and plans to expand.
Can you believe he is grossing US $20000 a month in the so called devastated economy of Zimbabwe?
It surprises that the roads are better in Zimbabwe in Kenya, the streets are cleaner, there is less crime etc.
Anyway, I wonder how the freight business is in Kenya. What are the margins?
Hi Annon there is a difference between Karanja and myself John Karanja.
The other Karanja is best placed to answer your query.
Karanjas wako wengi
KE,
I meant that my employees steal from me about Ksh 30,000 am away from the business.
Annon, I have a friend who is into freight business, the gross income about $12,000 per month per truck. On average a truck does 3 trips per month Mombasa – Kampala. Kenya and Uganda highways are bad but improving.
Karanja:
So, your figure of Ksh. 500,000 a day or $7,000 dollars is correct?
On this issue of theft: Why don’t you operate like a muhindi and not let any of the natives touch the money? i.e. you pay at the register only. Don’t give the money to a waiter.
I mean, you can’t keep losing Ksh. 30,000 a day. What’s your solution going to be?
Interesting gross figures in the trucking business ($12,000). Really? What kind of freight do those trucks carry. Now that being gross, how about the expenses; tires, diesel, TLB, wages/salaries to the driver etc. Would you happen to have this figures. I’m really interested.
A relative of mine was once involved in the trucking business, although that was 10yrs ago. I’m not sure how much has changed, but to say the least it was such an involving job and like Karanja’s problems, your driver and turn boy may use your truck to do their own “on the side” business. Mind you, at your expense (you paid for the diesel).
I’m not sure about karanja’s figures on that restaurant. Maybe he added an extra zero inadvertently?
I know someone who manages a restaurant in Manhattan and even with alcohol sales where a glass of wine can run up to $10 dollars, they don’t gross $7,000 dollars a day.
Before the recession, this manager told me that on a good weekend night (a friday or saturday) they’d gross $20,000 dollars per night, but not anymore with the recession and weeknights are always slower.
So, Ksh. 500,000 selling mandazi’s and tea doesn’t seem accurate.
I wonder how much Carnivoe grosses a night? does anyone know?
Come on chief.
180,000,000 million shillings per year in pure revenue from your local tea and mandazi eatery?
Give me a damn break.. For sanity purposes, I’ll shave half off the top and TRY believe you.. you need more people. Let’s not even get into net percentages… your telling me your REVENUE was close to half of Uchumis profit for 2009?
You need to sell just above 3300 meals @ your rate of 150shs PER DAY to meet this quota. From ONE SINGLE EATERY ALONG TOM MBOYA/MOI AVENUE?
What you find is that, high revenues for the most part equal low margins. If I have a decent month with my partners of 100,000 dollars cost of goods sold, 1/4 of that is profit, split it 3 ways before any reinvestment.. not so glorious anymore.(at least here in NY) But you say 500k a day on tea and mandazi?
I want to know your net.
I have an aunt who’s so rich that she develops housing using rental income. This is despite raising 7 kids and assisting extended famo. Together with my late uncle, they used to have a small ground floor shop that was near Ambassadeur hotel between Sabina Joy and Munyiri’s. It used to specialize in cheap ladies products, excluding food and clothes. It was so cheap that even mboches were customers. It had fab volumes though because of the low prices and the location. She still lives in a house on a 5 acre compound in Roselyn that she’s been living in since the late 70s.
i want to open a private school in kenya…pls advise.