Impact of new businesses & competition

Discussion in 'The Think Tank' started by pizzaboi, Dec 17, 2017.

  1. pizzaboi

    pizzaboi Member

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    I am reviewing a sandwich shop in a big university that has been operating there for 10+ years. This business, along with other food outlets (Chinese, Japanese, donairs) is located in a block (lets call it "food block") that is popular lunch destination, but is a 5 min walk from the campus core. This block is home to franchises like Mc Donalds etc.

    Through my research, I just found out that there are 10+ new food outlets opening right around the campus core, of which atleast 4 will be directly competing for the lunch crowd, with food Pizza, Sushi, middle eastern, tacos/mexican, Asian fusion.

    There are other pizza, sushi places at the "food block" too.

    My question is how will this development impact sale at the sandwich shop, considering the following concerns...

    1. Will people quit walking to the food block when they can get lunch in campus core ?
    2. Will people quit coming to sandwich shop having got bored of it after all these years and start going to the new food outlets?
    3. Will my sales be impacted by all the 5 new competitors, or just the ones which are unique and new middle eastern, tacos/mexican, asian fusion) ? Eg: Will my sales be affected by pizza shop in the campus core? I am guessing not, because if people wanted pizza they would have gone to pizza shop in the food block. So I am technically not losing that customer, cause they were never mine.
    Any thoughts? What is the best way to figure out the potential impact of these new businesses.

    The sandwich shop currently makes 750k in sales. 720k walk-ins and 50k catering.
    There are close to 100,000 people at this campus daily.
     
  2. d9phoenix

    d9phoenix Well-Known Member

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    Quick answer is, Yes. It will effect your sales and lunch crowd. How much depends on people. It is nearly impossible to predict how much business you will lose. But it will happen.

    The real question is HOW MUCH business are you going to lose with 10+ new food destinations coming in. There are strategies to help mitigate it, and some to even increase sales (but at a cost of profit). But if i were looking to buy a business in this situation i would take the current value and decrease it.

    Worse case, drop sales by 100k. Can you still make it with that sales volume ? if yes, then still pursue it. If no, then find where your cutoff would be.

    I would not walk into this situation unless i was absolutely sure i could still make money under a worst case scenario. Otherwise you are just setting yourself up for failure.
     
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  3. pizzaboi

    pizzaboi Member

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    Great points!
    Thank you for contributing.

    I think 100k less in sales will still keep me in business but as a owner operator making about 80k. I don't see the seller valuing their asking price commensurate to that though.

    Also out of curiosity what are some tactics used to increase sales when new businesses/competition open up.
     
    Last edited: Dec 18, 2017
  4. URNUTS

    URNUTS Active Member

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    I would not walk into this situation unless i was absolutely sure i could still make money under a worst case scenario. Otherwise you are just setting yourself up for failure.

    Words to live by.
     
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  5. bodegahwy

    bodegahwy Well-Known Member

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    I'll take the other side... you are over-thinking this. In a market that size there is a ton of business to had and it is not a zero-sum game. New businesses do not take evenly from all other businesses.

    The most important thing to remember is that in a race with a bear I don't have to be faster than the bear.... I just have to be faster than you!

    With a market that size a well run operation will do fine. Concentrate on what YOU are doing, not what the other guys are doing or how many there are. Somebody else will take the hit.
     
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  6. URNUTS

    URNUTS Active Member

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    As some point- no matter the situation, you will have to make the jump.
    You want to eliminate as many pitfalls as possible, but there is no sure thing.

    "Concentrate on what YOU are doing, not what the other guys are doing"

    Tom Monaghan was famous for saying that!
     
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  7. Mondo

    Mondo Active Member

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    I would say without a doubt other new businesses will impact your business. I would even suspect that the new businesses opening up might even be the reason the business is for sale in the first place. With that being said, I would say most businesses that are being sold have some sort of negative working against them, whether it's new competition coming to town or the business that is struggling to make a profit. Otherwise, why would they sell? You just have to choose what kind of battle you want to fight. When I was searching for a pizza business, I really didn't care about the actual business much at all. I was really just searching for a good deal on equipment where I wouldn't have to pay for a build out because I had 11 years in the pizza biz under my belt and I felt I could turn a struggling operation around.
     
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  8. bodegahwy

    bodegahwy Well-Known Member

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    1. Whether a new business will impact you is far from a sure thing. We have 100 restaurants in a town of 12,000 people (resort). Several new restaurants open every year and several go under. Most of the time the process is completely invisible to us. When Pizza closed at the end of 2008 our sales went down... the economy was a bigger factor! When Papa Murphy's opened we did drop about 3% but is that why? In the end if the market is large enough (which this sounds like it is) your success or failure will be based on what YOU do. Not on competitors.

    2. While you are correct that many businesses for sale have some negative, good businesses are for sale often and there are many reasons for selling that should not concern a buyer. Why would they sell? Retirement? Tired of it? Better opportunity? Spouse got a big promotion and now they don't need the extra income? Illness or other issue in the family that makes running a business less desirable? Just don't like it any more?
     
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  9. pizzaboi

    pizzaboi Member

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    Thanks for the various perspectives guys.

    I went to the location today and here is what I found.

    They have restaurants "on campus" in a building there. The food however is not considered to be good, so students would walk 8 mins to get to the "food block" where other restaurants operate. Today I see there are 4 new restaurants that have opened up right next to the campus and are barely 3 min walk away from campus and super convenient.

    I am thinking, if each of these businesses take 2 people away from me per hour during lunch hours, i would lose 6 people because of 1 business in the 3 hour lunch time (BTW 11 to 2) = 24 people I would lose during lunch hours because of the 4 businesses.

    With average ticket price of $10, that would equate to $240/day = $7200/month = 86400/year, just during lunch. Add in another 25% for dinner, would equate to 100,000 in lost sales.

    D9phoenix was pretty accurate with this guess there.

    Also this sandwich shop is in the farthest corner of the food block on a backroad with limited visibility. I spoke to about 5 students in the food block and none of them were even aware of this sandwich shop, which was literally 2 mins away from where we were standing.

    However I saw that the subway in the "food block" had lineup of 15 people at 3 PM.
     
    Last edited: Dec 19, 2017
  10. pizzaboi

    pizzaboi Member

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    @bodegahwy @URNUTS @Mondo @d9phoenix

    So I found out that these restaurants have been operating since Sept 2017.

    Would a monthly comparison of sales (Sept 2016 vs Sept 2017, Oct 2016 vs Oct 2017..) help us extrapolate the impact these new businesses will have on the sandwich shop, in the near future.

    What do you guys think?
     
  11. bodegahwy

    bodegahwy Well-Known Member

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    Possibly but not reliably. Weather, local economy, special events, change in promotional activity, whether a local team was or was not in the world series or some other event, changes in menu or pricing, street construction/access issues, etc etc could all change sales for better or worse. A two month "trend" is not a trend.

    Short answer, if the sales were down for those two months it is worth taking into consideration but it is not definitive. Also, new places tend to have the most impact right when they open and things bounce back to a pattern based on customer preference and experience, convenience and habit.

    I stand by my opinion that in a market where there is a lot of business available the future results will have FAR more to do with what YOU do than what other options in the market are up to. If you have a winning mix of the big three for your market and a convenient location you will do well.

    What are the big three? Quality, Price & Service. Pick any two.
     
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  12. URNUTS

    URNUTS Active Member

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    I'm a numbers guy but.... I'm also a "vibe" guy.
    What is your vibe?
    Stand there- see where people are going.... make the walk they would have to make.... see what they would have to see to find you, etc.
    I wanted to put a Domino's in a certain spot years ago- I convinced and cajoled myself that the spot would work.
    I parked out front on three nights and realized it would not work.
    The place I am opening now...... I walked by 50 times.... looked around.... walked around the block and said "I can make this work" 5 months later (way longer than I thought!) I'm pretty close.
    My point is that you will simply have to get a vibe. The numbers are important, but what does your gut say?
     
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  13. pizzaboi

    pizzaboi Member

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    Actually it would be 4 months (Sept, Oct, Nov, Dec)... Do you think 4 would give better insight.I am inclined to believe it would, but I am looking for other thoughts too.

    I agree with you in principle, that at the end of the day it boils down to how I run the business, but there are a few nuances that I find here that need to be further investigated.

    I was at the location today and spent the afternoon lunch hours there...

    1) The new restaurants are at the intersection where 80% of the traffic/activity occurs . This intersection behaves like a gateway through which almost every student passes through back and forth. so it is lot more convenient for students to get lunch here than walking 8 more mins further to get to my sandwich shop.
    2) 95% of people in the university are walking and not driving. So unlike driving where an extra 8 min drive may not look like much effort, I think needing to walking an extra 8 mins would severely impact the decision making

    On another note, I sat there counting footfalls for the lunch hour (12:20 - 1:20) and I noticed 131 walk past the shop, 70 vehicles drive past and 18 people enter the shop. I wonder if there are any conversion benchmarks between foot traffic around the store and converting to become customers and enter the store.

    One of the reasons I m investigating so much, is cause I need to factor it into the valuation. If I need to do WHOLE bunch of work to make up for the change in the competitive landscape, then the old SDE cant be my benchmark for valuation and the valuation would be substantially lower. The worst thing would be to pay premium cause of the historical success of the store, and then needing to work extra hard to adjust to the new competition.

    I also found out that there is another new building coming up right next to the current "new" one and there will be 3 new restaurants there again. Now if I can get to move the shop there, I think it will be goldmine, cause it is in the heart of all the action. But there is 4 years left on the current lease at the current location, the new building is still 18 months away from being done, I will have to pay the seller now to purchase the shop and then will have to spend 300k - 400k to rebuild the shop at the new building... it might all get too expensive. :(
     
    Last edited: Dec 20, 2017
  14. pizzaboi

    pizzaboi Member

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    I hear you on the vibe. I was there at the shop trying to get a feel for it and counting traffic walking past.

    One of the reasons I m investigating so much, is cause I need to factor it into the valuation. If I need to do WHOLE bunch of work to make up for the change in the competitive landscape, then the old SDE cant be my benchmark for valuation and the valuation would be substantially lower. The worst thing would be to pay premium cause of the historical success of the store, and then needing to work extra hard to adjust to the new competition.
     
  15. Mondo

    Mondo Active Member

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    If you feel like the new location would be a gold mine, have you thought about starting a new business there rather than purchasing an existing business and moving it in 4 years?
     
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  16. pizzaboi

    pizzaboi Member

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    I breify thought of opening another franchise there, but the building wont ready for another 2 years. They are still in the initial stages of construction. So that would leave me in a limbo for short term with nothing to do.
     
  17. bodegahwy

    bodegahwy Well-Known Member

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    There are two ways to approach that issue. Be careful you don't do both at the same time. There is considerable discussion in the business valuation world about whether to use trailing or forward earnings for a market data based valuation. Here is what makes sense to me:

    1. The market data is comprised of trailing earnings.
    2. The data set, in all likelihood, contains examples where forward prospects looked good and others where they were not so attractive and in some measure that accounts for the values achieved by the transactions in the data set.
    3. Since this is built into the data set it would be doubling the impact of forward looking conclusions to use forward looking assumptions and then also grant a premium or discount to the multiple chosen for those assumptions.

    In a valuation based on Seller's Discretionary Earnings I first determine a likely range of values based on the SDE achieved by the examples in the data set. Let's say that range is from 1.2X to 2.8X with a median of 2.0X. This says that a business which has SDE of 100K is likely to sell in a range between 120K and 280K (Plus inventory and pre-paid items). Where it likely falls inside that range depends on a dozen or so variables of differing levels of importance. The issue you bring up (Anticipated competitive pressure) is certainly one of them but it is only one of them.

    For the sake of argument, let's say that, absent this factor, you valued the business at the median and would be prepared to pay 200K. If you believed that the changes around the business were going to create a new but stable reality, inserting this concern into your model you might decide that rather than 2.0X that you would be more comfortable with 1.6X and offer 160K or.... you might forecast that SDE would drop to 80K and still base your valuation (all the other factors stayed the same right?) at 2.0X and offer ....... 160K

    BUT, valuation models suggest that you should not do both. That would produce an improbably high discount. (80K X 1.6 = 128K) For this same reason, looking at a business which has a strong story for future growth such as a competitor closing down across the street one does not use both a projected SDE increase AND pop the multiple to arrive at a value. To take an example from my own experience, when Pizza Hut closed after 30 years in our town one might have expected that the business they did would be divided up among the other pizza restaurants and we would all see an increase. I guess they probably did about 300K in delivery so... was that 300K spread out to the other half dozen places that deliver pizza in this town of 12K? No. They closed in the Fall of 2008 and the other factors far outweighed the closing and ALL our businesses were down.

    All of this competitive landscape stuff is pretty nebulous and in the end comes down to what a willing buyer will offer and what a willing seller will accept. Valuation is not hard science. It simply uses the past behavior of presumably rational participants to predict the behavior of future, presumably rational, participants! Yes, there are examples out there where the retail geography appears to have killed off businesses. On the other hand there also many examples where a business thrives despite being in what should be a bad location because they simply do a really great job.

    In general, based on a lot of years of owning businesses and paying attention to others, I am more convinced than ever that at least 90% of the success enjoyed or missed by businesses is a result of what they do or do not achieve themselves and not what the "other guys" are doing down the street.
     
    Last edited: Dec 21, 2017
  18. bodegahwy

    bodegahwy Well-Known Member

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    Clearly 4 months is better than 2. I would also want to look at three or four years not just two. You can not flatly assume that whatever change you happen to see in that period can be ascribed to the factor you are paying attention to. I would want to look at weather (you stated this is a foot traffic area and bad weather impacts that). I would want to compare marketing done not only during the four months but in the six months prior to see if there had been any change. Any change in hours of operation? Menu or price changes? Was there any noticeable change during the period between last year and the year before? A drop this year could simply be a return to normal if there was a bump last year due to the election or some other factor for example?

    Certainly you should look at this issue and consider it. Just be cautious of assuming that whatever change you see is caused by this single factor. You may be getting tunnel vision.
     
    Last edited: Dec 21, 2017
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  19. pizzaboi

    pizzaboi Member

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    Very valid points.

    I also agree with you that it is about how you run the business the defines its success.

    However since I am in position to pick a business, I want to ensure that I pick the one that will deliver the best results for my efforts. Eg: if I bring in factor of 1000 (hardwork, business acumen etc) and the business can be rated at 10, then the collective result would be 10000 (1000 X 10). But if the business I purchase can be rated at 100, then the collective result will be 100,000.

    I am just trying to ensure that I maximize my returns by ensuring that I buy a business that has great chance of success, on which I can build on further.
     
  20. pizzaboi

    pizzaboi Member

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    You are right about the other factors, although I suspect they haven't changed much.

    This business has been decreasing 5% year on year for the last 3 years. The reason I was given for that was that the owners dont spend any time at the store. I also found that they started closing sooner - from 3 AM close they went to 2 AM, then to 1 AM and are now closing at 12 AM, which might have something to do with the drop. But despite the drop they still made 724k in walk ins and 50k from catering in 2016. I figured if I operate it as a hands on owner I would be able to increase the revenues even further.

    I later found out about the 12 new food businesses opening super close to university. So wanted to investigate its impact too. There is always a concern that you dont want to buy someone else's problems.

    I was there yesterday and saw that there were only 18 customers in the hour between 12:30 to 1:30. Which disappointed me. However I later found out that the final exams were just over and lot of students are not on campus.