Dr Polly McGee is our guest blogger this week.
I recently had a strategic advisory session with an aspiring business person – let’s call her ‘Ms X’. She had an opportunity to lease a small venue for her dream café. Ms X loved to bake and wanted to establish a venue with a community feeling, where mothers and locals gathered over beautiful cakes and coffee.
She was working for a large institution with good pay and flexible conditions, but was deeply unfulfilled. Her partner was fully occupied with his work and not keen on the café business, and Ms X was still the primary carer for two young kids. She had excellent marketing, communication and social media skills, and could mobilise her networks and friends to support her business, although most of them were not in her local jurisdiction. The rent on the space was about $5 000 a year. It was close to home and a blank canvas for her potential business. At first glance it sounded great and she was all fired up to sign the lease.
Many people make decisions based on the romance of starting their dream business, rather than sound market and risk analysis. My risk assessment of her café was broken into the three basic questions: what is the demand, what are the risks and what do the numbers say?
As the venue was empty, there was no established demand as a café, but the capacity to establish demand was quite achievable, with an investment in marketing. It was on a route to a bus stop, so foot traffic was good, as was the opportunity to establish a community-style brand and a following for her cakes and high teas. There was the usual competition with established venues in the area. More critically, the market would be limited by the size of the venue, about 30 seats, making a quick turnover and high-value spend per head essential for sufficient profit.
When calculated, the risks looked nasty. Ms X had no experience in commercial cooking or café management, no savings and no connections into the supplier and input side. The space was empty, so even a minimal second-hand fit out would nudge $20 000 by the time fridges, appliances and furniture were included, not to mention certifying the space for food production. The biggest sticking point was the actual running of the shop. It was too big for one person, but paying wages meant an immediate drain on income and another level of management and compliance. Then there was the opportunity cost of Ms X forgoing her actual income for the earnings of the café, and a significant risk as a ‘solo-preneur’ of how to keep things running if she or one of the kids got sick, etc.
As for the numbers, with the upfront borrowings, the establishment costs and the unknown period of turning a profit, the break-even point was a distant spot on the horizon. Whilst the margin on coffee is great and cakes can be a good money spinner, the margin on perishable food in niche quantities gets smaller and smaller, especially when anticipating uncertain demand at the outset. That super-cheap $5 000 of rent suddenly gets a lot more expensive when laid out in this way, and the dream café can turn into a nightmare.
Happily, Ms X is a smart and pragmatic gal. She could see the risks to her family and the rising stress levels if she went ahead. But she could also see a model forming, where this type of business would be achievable and that by biding her time, and focusing on the good things about her current job and security, she could build a skill, support and cash war chest to take on another opportunity with gusto.
We at Business Tasmania would like to thank Polly for her contribution. If you have any queries about starting a business please contact us.
Dr Polly McGee has worked as a digital strategist and business consultant, freelance writer in entrepreneurship and commercialisation and been published in Start-up Smart. She is regularly featured as an expert on Startups and women in entrepreneurship. Polly is the current Chair of Tasmanian literary magazine Island, occasional media commentator, wannabe novelist and sporadic food blogger. Now devoted full time to the executive team of freight rail company TasRail as their Corporate Relations Manager, Polly remains a keen observer of the business and startup environment in Tasmania.