Marked by intense competition between local and international brands, the restaurant and coffee shop sector is a competitive sector that requires a comprehensive feasibility study. It’s a sector that attracts many entrepreneurs. Accordingly, a well-thought-out feasibility study is critical before embarking on a restaurant, coffee shop, or chain project.
A restaurant feasibility study involves detailed planning that covers all operational, financial, and legal aspects. It serves as a thorough analytical tool to evaluate the viability of a project and its potential returns. It also helps minimize risks, identify market gaps, and uncover potential challenges.
By developing a well-structured feasibility study for your restaurant or café, you can make informed strategic decisions about whether to continue, modify, expand, or abandon the project.
Additionally, Generative Artificial Intelligence (GenAI) serves as a strategic tool that aids in the planning process by creating a roadmap based on global standards and local trends. It assists in analyzing market data to forecast customer and competitor behavior, as well as generating specialized reports for each section of the study, ultimately saving time and effort.
In this article, we will explore how to prepare a comprehensive feasibility study for your restaurant to ensure the success of your project. We will also discuss how to leverage GenAI at every step to streamline the preparation of the study.
Step 1: Define the business concept
To set your restaurant on the right path and outline its potential for success, you’ll first need to determine the type of restaurant you will operate and the services you will offer.
Consider the following factors:
- Restaurant type and service: Decide on the style of your restaurant. Will it be a fast-food or quick service restaurant (QSR) with limited staff and simple seating?
A family restaurant providing a comfortable dining experience at moderate prices, complete with table service and a diverse menu? Or perhaps a fine-dining venue that offers an upscale experience with luxurious décor, a distinctive menu, and exceptional service?
Choosing the right type of restaurant will guide your marketing strategy, interior design, and the services you provide.
- Cuisine and food type: Consider the types of food and beverages you will offer on your menu. Your restaurant’s success is largely tied to its culinary identity. Decide whether your cuisine will be Italian, Japanese, Indian, Middle Eastern, vegan, or a fusion of various styles.
Make sure your menu features a selection of dishes that convey uniqueness, while aligning with current market trends and consumer preferences. Additionally, focus on quality and nutritional balance in your offerings.
- Target audience: Identify the specific segment your restaurant will target. This could include young people, families, employees, tourists, or vegetarians.
How GenAI can help
Use Generative Artificial intelligence (GenAI) to generate innovative restaurant concepts and validate whether your menu meets customer tastes and expectations. You can also use GenAI to brainstorm and create customer personas to better understand customer needs.
Further reading: 8 Innovative Menu Ideas to Increase Sales
Step 2: Conduct your market research
Conducting thorough market research is the core of your restaurant’s feasibility study. It involves understanding your target market and their behavior, analyzing competitors, and identifying their strengths and weaknesses.
This step is also crucial for facilitating strategic decisions based on realistic data.
Analyze industry trends and customer preferences
Tracking changes in the restaurant industry and understanding what appeals to customers is vital. This includes evaluating recent trends, such as healthy meals, vegetarian or vegan cuisine, and unique dining experiences.
It is important to understand the needs and preferences of your target audience through surveys and by analyzing online reviews on platforms like Google Reviews and Tripadvisor. This information helps in designing menus that align with customer preferences.
Conduct a competitor analysis
Closely examine your direct competitors as part of your restaurant’s feasibility study. This includes assessing their pricing strategies (whether economical or luxury) and analyzing the area in terms of restaurant density and customer traffic.
Identify competitors’ strengths, such as excellent service, good reputation, and attractive décor, as well as weaknesses such as lack of parking, noise, and limited food options.
Put yourself in the consumer’s shoes. Visit your competitors’ venues to experience their service firsthand.
Monitor their ratings on Google and TripAdvisor, and review ratings from delivery apps, like Talabat and HungerStation if you’re in Saudi Arabia, to gain a comprehensive understanding of the competitive landscape.
Estimate demand in the target area
Estimate demand by analyzing population density and the nature of economic activities in the target area, such as business districts, university zones, or tourist attractions. Research the average incomes of your target market to determine the appropriate price range for the area and your customers.
You can assess the level of traffic or footfall using Google Maps or customer density studies. Consider the impact of local events and activities. You can source accurate data from government agencies like the General Authority for Statistics, alongside tools like Google Trends, which can help monitor online restaurant search trends.
The role of GenAI in conducting your competitor analysis
Use AI to gather data on your competitors, conduct deep research, monitor customer reviews, and identify their strengths and weaknesses. AI can also suggest unique differentiation strategies for your business.
Step 3: Choose the right location for your restaurant
Selecting the right location is crucial for a restaurant’s success, as it directly affects foot traffic and revenue. Review studies and analyze traffic patterns, demographics, visibility, and local regulations before you decide on the location.
Here are key aspects to consider in your restaurant’s feasibility study and choice of location.
Criteria for selecting a successful restaurant location
Population density in the target area plays a major role in your restaurant’s success. The higher the number of people passing by daily increases the likelihood of them visiting your venue.
Ideal locations are those situated near universities, business districts, shopping centers, or public transportation hubs.
Ease of access and the availability of parking are also critical factors. Ample nearby or designated parking spaces enhance customer comfort and encourage repeat visits.
A prominent location, especially on a main street or a well-lit alleyway with an attractive façade, can also draw in customers.
Additionally, studying the demographics of the chosen area is essential. This analysis helps identify the characteristics of your target audience, which influences your food quality, pricing, and marketing strategies.
Legal, municipal, and zoning considerations
Before finalizing any location, ensure it complies with local laws and regulations, and obtain the necessary licenses and permits. Ensure the location is authorized for commercial use and restaurant activities. Pay attention to any restrictions related to noise and operating hours.
How GenAI helps you choose a location
AI can analyze data on population movement, business activity, and demographic characteristics. It can also compare the performance of similar projects, helping to reduce risks associated with your location choice.
Step 4: Estimating restaurant opening and operating costs
Understanding costs is a critical step in planning to open a restaurant business. It helps you gauge the required budget and avoid unexpected expenses.
Costs can be divided into 3 main categories:
- Startup costs: These are one-time expenses incurred at the beginning of your project. They include the costs for necessary licenses and permits, as well as real estate costs like advance rent and insurance. Startup costs also encompass equipment and renovations. This includes modifications to the interior, flooring, bathroom furnishings, decoration, lighting, and outdoor signage. Kitchen and service equipment, such as ovens, refrigerators, food processors, tables, and chairs, also fall under this category. These initial costs also include the restaurant management system, point-of-sale (POS) system, and any supporting equipment.
- Monthly operating costs: These are monthly recurring expenses. They usually include employee salaries, such as chefs, assistant chefs, wait staff, cashiers, branch managers, and cleaning personnel.
They also cover raw materials for food and beverages, utilities (like electricity, water, gas, and internet subscriptions), marketing and advertising expenses, and daily operational necessities like napkins, cleaning products, and serving utensils.
- Emergency fund: It is wise to set aside an emergency fund that covers 3 to 6 months of fixed expenses. This should account for unexpected costs, such as sudden equipment repairs, fluctuations in material and tax prices, and expenses related to employee termination or replacement.
Having an emergency fund protects you from many risks associated with opening a restaurant and helps you manage unforeseen challenges, such as the global pandemic that occurred in 2020. It can also help you account for hurdles like inflation.
Establishing this fund is crucial for ensuring business continuity.
The role of GenAI in cost management
AI can support your cost management efforts by creating customized cost models, forecasting expenses, and comparing a restaurant’s financial performance to industry averages. It can also simulate pricing models and provide accurate sales forecasts.
Explore our Guide on How to Create a Restaurant Budget.
Step 5: Revenue forecasting and pricing strategy
Revenue forecasting and developing effective pricing strategies are fundamental to the success of any F&B business, be it a restaurant or café. These processes help you get an idea about expected revenues and adjust prices to ensure profitability. Additionally, this stage aids in determining the break-even point and when you can expect to turn a profit.
This step involves reviewing key metrics to evaluate restaurant performance and menu pricing.
Estimate average bill size and visitor counts
The average bill size indicates the amount a customer spends per visit, which can vary based on the menu items chosen. For restaurants in Saudi Arabia, the average bill may range from SAR 60 to SAR 110 riyals. For coffee shops, bills range from SAR 30 to SAR 50. Estimates for the daily number of customers varies. Factors include the size and location of the establishment, customer traffic, and marketing efforts.
To accurately determine customer flow, divide the day into segments (ex: morning and evening). This allows you to calculate total sales by multiplying the average bill by the number of customers.
Pricing products and the food/beverage cost ratio
When setting prices for menu items or beverages, it is crucial to balance customer attraction with an appropriate profit margin. We recommend that the cost of raw materials does not exceed 30-35% of the selling price.
This ensures sustained profitability without compromising quality. Assess the purchasing power of the target demographic and compare prices with competitors in the area.
Forecast sales for the first year
Sales forecasting is a vital step in developing a realistic, data-driven financial plan. This forecast not only estimates potential revenue but also provides a solid foundation for making strategic decisions related to hiring, purchasing, and marketing.
The role of GenAI
AI streamlines pricing model development using simulations based on regional market data and trend analysis. By analyzing factors like average invoices and number of customers, it generates accurate sales forecasts and explores various scenarios. This helps inform pricing decisions, enhance revenue plans, reduce risk, and increase the chances of long-term financial success.
Step 6: Building a marketing Plan
A restaurant feasibility study should include a marketing plan. This plan serves as the link between the quality of your restaurant and its visibility to customers. A unique menu or décor isn’t enough for success. You need an effective communication and marketing strategy to reach your target audience.
The pre-opening phase offers a valuable opportunity to attract customers. Use social media and billboard campaigns to share behind-the-scenes glimpses of the restaurant. Consider organizing a soft opening to invite influencers. If you are opening a new branch of your restaurant, you can invite your loyal customers from other locations to experience the food.
Create a simple landing page to gather customer information, such as their email or mobile phone number. Log the data into your restaurant CRM so you can use it in your restaurant marketing campaigns, retargeting ads, and other promotions when opening a new venue.
Enhancing your digital presence is another part of the success equation.
This includes designing an appealing restaurant website with professional photos, a fully integrated reservations section, and a blog highlighting the stories behind your dishes. Your digital presence also includes optimizing your website for search engines (SEO) using appropriate keywords can significantly boost your visibility and building a mobile app for your restaurant.
Maintain active accounts on social media platforms like Instagram, TikTok, and Facebook to publish interactive content such as polls and contests. Make sure your restaurant is listed across local directories like Google My Business and TripAdvisor. You can also use AI, such as ChatGPT to create marketing content and analyze competitors’ marketing strategies.
Part of your restaurant’s feasibility study is incorporating loyalty programs and promotions into your marketing plan. These programs foster sustainable relationships between your restaurant and your customers, especially after their first visit. The benefits of loyalty programs include attracting customers, understanding their behaviors, and ultimately increasing sales.
Further reading: Restaurant Online Reputation Marketing: Key Tips & Practices
The role of GenAI in marketing
AI acts as your intelligent content writer. It can help you build comprehensive marketing plans, generate innovative campaign ideas, and create personalized content. It can also help you craft content for advertising campaigns, email marketing, and text messages.
Step 7: Financial analysis and the break-even point
Conducting a financial analysis and determining your restaurant’s break-even point helps you understand your project’s financial structure. It allows you to distinguish between fixed and variable costs so you can identify the sales level needed to cover operating expenses without incurring a loss or making a profit.
To begin, calculate your total monthly costs and then estimate the number of customer visits or sales required to reach the break-even point.
The formula for the break-even point is:
Break-even point = Fixed costs ÷ (average selling price – average unit cost)
Establishing clear targets for profit margin and return on investment (ROI) is crucial for assessing the effectiveness of your financial strategy. Doing so, also helps you determine your restaurant’s long-term viability.
ROI calculation equation:
ROI = (Annual net profit ÷ total investment) x 100
With various financing options available, including self-financing, attracting external investors, or obtaining bank loans, consider the most suitable option for your situation.
How to use GenAI in financial modelling
AI can improve financial planning by developing interactive financial models and creating multiple scenarios, such as price increases or cost reductions.
AI can generate graphs that illustrate the break-even point and the effects of changes in price and customer count. It allows for “what-if” scenarios to estimate how factors like rising raw material prices or lower customer numbers impact the business.
Step 8: Preparing an operational plan
Creating a restaurant feasibility study involves creating an operational plan. It involves identifying staff requirements, establishing a management structure, and selecting a specialized team of chefs, waitstaff, and administrators. It also covers assigning clear responsibilities.
This plan also focuses on building strong relationships with suppliers and managing inventory using modern POS systems. This ensures a consistent supply of high-quality raw materials and regular replenishment.
Use integrated solutions to monitor customer experience, from the moment they enter the reception area to tracking feedback. The aim is to continuously improve service and build a positive reputation for the restaurant.
Further reading: How to Manage Front-of-House & Back-of-House in Your Restaurant
The role of GenAI
AI can help develop interactive financial models and “what-if” scenarios to assess potential impacts. It also aids in creating standard operating procedures (SOPs), inventory management, and employee scheduling.
Step 9: Compile and evaluate the restaurant feasibility study
The role of your restaurant feasibility study doesn’t stop at the above steps. It’s important to gather data pertaining to your local market and the area where you plan to open your restaurant.
Your feasibility study includes a financial analysis, competitor evaluation, and risk assessment, all compiled in a comprehensive report. Additionally, the study identifies warning signs, such as rising operating costs, declining demand, and supply chain issues.
This information allows for data-driven decisions. You can choose to proceed if the results are favorable, adjust your plan to address potential challenges, or abandon the project if the risks outweigh the benefits.
Using GenAI in the final stage
Lastly, you can use GenAI to compile the various sections of your restaurant’s feasibility study into a professional report. AI can also help highlight risks and suggest decision paths based on different potential scenarios.
Read more: ChatGPT and Restaurant Management: The Perfect Duo!
Wrapping it up
A feasibility study is essential for turning your dream of starting a restaurant into a viable business. It goes beyond just analyzing numbers; it provides a clear roadmap that helps you understand the financial, market, and operational aspects of your project.
This understanding helps you make objective and strategic decisions. By investing time and effort into preparing a comprehensive feasibility study for your restaurant or coffee shop, you increase your ability to tackle challenges and identify strengths before launching. Accordingly, you can reduce long-term risks and increase your chances of success.
Finally, you can use GenAI technologies to develop various sections of the feasibility study, including market analysis, cost forecasting, and operational planning. These advanced tools can even help design unique marketing models and promotional plans tailored to your target market. They provide accurate and flexible insights that assist business owners in making informed and confident decisions, ultimately enhancing the project’s likelihood of success and helping achieve its vision more effectively.
Therefore, committing to a thorough feasibility assessment is an investment in your future, ensuring that your vision becomes a profitable reality.
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