An Investment Analysis of Opening a Vegetarian/vegan Restaurant in Danville, Virginia

An Investment Analysis of Opening a Vegetarian/Vegan

Restaurant in Danville, Virginia

Katharine I. Ransom

Southern New Hampshire University

ECO-520 Microeconomic Theory & Analysis

Professor Claire Starry

Sunday, November 29, 2015

An Investment Analysis of Opening a Vegetarian/Vegan Restaurant in Danville, Virginia

        In Danville, Virginia, the town in which I currently live, there are very few restaurant options for those with alternative diets.  There are a couple restaurants owned by local residents, that are not chain restaurants, and the quality of those menus is decent. But, there is no restaurant that caters to vegetarians, vegans, or those with dietary restrictions. I would base the restaurant off of Moosewood in Ithaca, New York. According to Moosewood (2015):

Meals are prepared with the freshest vegetables, herbs and fruits, whole grains, nuts, beans, high-quality oils, spices and seasonings, and fine imported and domestic cheeses. We make an effort to use organic ingredients whenever possible. Our commitment is to use the best natural ingredients to create an exciting, imaginative and healthful cuisine with a vegetarian emphasis. Taking inspiration from around the world, we love using the spices and seasonings typical of a region or ethnicity, and adapting traditional dishes and family favorites to be lighter, healthier and more plant-based. (p. 1). 

The significance of this opportunity is that it is the first of its kind, in the area, and that the restaurant is taking advantage of the healthy foods trend in America right now. After the past few decades of large food corporations selling and marketing unhealthy products, and Americans developing a myriad of health issues from these foods, they are ready to do something about the kinds of food they feed to their families and how the food affects their wellbeing. This trend will help to increase the demand for the restaurant.

Demand

        According to the Economic Times (2015), “the law of demand states that, ceteris paribus, price and quantity demanded of any good or service are inversely related to each other. When the price of a product increases the demand, for the same product, will decrease” (p. 1). Danville is one of the poorest cities in the State of Virginia; therefore, demand for this type of restaurant may be low. The median household income in 2013 was $31, 868 (City-Data, 2015, p. 1). Those making $10-15 thousand more than the median income may be interested in this type of restaurant. There are about 90,000 people in the area and approximately 40% of households have incomes that would put them in the target market. The River District Association of Danville, VA is actively reviving the downtown area and trying to increase the number of small businesses to move to the district. The association is involved in creating a hip, trendy, and artisan district to appeal to corporations, interested in relocating, which have employees who have refined tastes. The location of the restaurant may help to increase demand.

        Demand will be greatly affected by the interest of the Danville residents who are concerned with healthy eating. Those who are interested, but do not have the additional income can be accommodated with a quick or “to-go menu”. The biggest issue will be increasing demand, through marketing, if there are simply not enough residents to support the restaurant. There has been a rise in demand for vegetarian and vegan options as Americans decrease the consumption of meat and processed foods. According to Lanou (2007), “given the number of vegetarian restaurants popping up across America, this is a trend in dining that restaurateurs can depend on” (p.1).

Millions of Americans now suffer from obesity and other diet-related health problems, including heart disease, cancer, and type 2 Diabetes. Meanwhile, a growing body of scientific research demonstrates that low-fat meatless meals can help reduce the risk of these problems, and that knowledge is trickling down to consumers. The need to change the typical American diet may be spreading to Danville and increasing demand for these types of restaurants; however, the main factor of demand will be resident’s income.

Costs

Before one can start the process of opening a new business venture, it is important to evaluate the variables specific to the production and resource costs for the optimization of the future endeavor. The average price of start-up costs for a new restaurant is $451,000 (Restaurant Owners, 2015, p. 1). Of course, that is just an average amount and does not take into consideration any specific details such as size, location, and cuisine. For an organic/vegetarian restaurant the same variables apply; but, an additional 10% to 20% are necessary in start-up costs according to Sarma Melngailis (2014, p. 1). Melngailis (2014) cites big-ticket purchases like high quality water filtration systems and compostable takeaway materials as reasons for the jump in price (p. 1).

        Salaries, wages, utilities, and taxes are all costs that need to be accounted for and tabulated to find the optimal point of production, where marginal revenue equals marginal cost. There are, also, social and environmental costs to consider that are more difficult to assign a dollar amount. The restaurant will be environmentally friendly; but, scare resources such as food, water, and electricity will still be consumed by the customers and the costs will have to be, partially, passed on to them. According to the Economic Times (2015):

If the prices of goods and services do not include the cost of negative externalities or the cost of harmful effects they have on the environment, people might misuse them and use them in large quantities without thinking about their ill effects on the environment. Therefore, environmentalists support true cost economics to counter the impact of negative externalities (p. 1).

        Other operational costs, separate from the ones mentioned above, will need to be considered. Accounting, marketing, and licensing fees will all be part of the costs associated with opening and running a restaurant. These types of costs are considered secondary since they are not primary business functions but are still needed to ensure the smooth management of the business. In order to evaluate these costs, three financial statements will be utilized. The balance sheet represents the financial condition at a specific period in time. The statement of income represents a summary of operating activity over a period of time. The statement of cash flows is a summary of cash inflows and outflows for a period of time, such as one month.