Question

For the last 10 years you have been working in the health food business. You have talked to many customers who have suggested a new restaurant concept. The restaurant would feature a variety of low calorie meals (under 500) made from healthy ingredients (organic fruits and vegetables and steroid/hormone free meat). The restaurant would include a bar with an extensive organic wine list and trendy décor. There would be an emphasis on high quality, friendly service, and colorful meal presentation. Your customers suggest that they would be willing to pay around $50 to eat a meal and have a glass of wine at this type of restaurant. They lament the fact that their community has no upscale restaurants that offer this type of fare.

You have conducted a detailed financial analysis of this potential business opportunity. You believe that you have good information on the costs of starting and operating the restaurant. You project that with a $50 meal price and anticipated demand you would earn a high profit and an excellent rate of return on your investment. You have the equity capital to start the business.

Several friends with MBAs argue that you would be crazy to start this business. They claim that there are few entry barriers to the restaurant industry and that "every person with business training knows that you can't make profits in a competitive industry."

Should you drop the idea of opening a new restaurant based on this argument? Explain.

Answer 1

The argument to drop the idea of starting a restaurant business based on healthy food, is not correct as it is not a perfectly competitive industry, rather it is a market with monopolistic competition where the healthy food is offered as a differentiation factor. It helps to earn economic profit in the short run. So, the idea to start a restaurant business with healthy food, should be pursued. There are following rationale to do so.

A. The healthy food that is low on calories and high on quality, is always in demand and create a differentiation factor. It will attract people who want quality and healthy food.

B. There are very few restaurants who are based on organic foods only. Then the idea will get huge support among the audiences.

C. A good understanding of the restaurant business and management knowledge, will also aid me to succeed.

So, the idea should be pursued.