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ONE-ELEVEN RESTAURANT: PROFITABILITY CONCERN

FOLLOWING THE ESTABLISHMENT

It was around five months after One-eleven started operations, Arshad Syal, Manager and
Founder, One-eleven, was engrossed in evaluating that the restaurant had not been earning
profits since it had been in operations. The restaurant incurred losses for months following its
establishment. Arshad believed that this was because of low sales volume. He then
immediately spotted two extensive reasons for low sales volume. Firstly, he believed people
in Khairpur were accustomed to Karhai Trend. They did not consider fast food as daily-meal
substitute, and therefore were reluctant to visiting fast food restaurants. Secondly, he was of
the opinion that majority of the population belonged to low-income class and could not afford
to visit fast food restaurants. He called this a trend and sanguinely looked forward expecting
that it would change over time.

Quite the opposite, customers had completely different sets of standpoints. They ascribed
sales issue to space problem, inadequate promotion, shoddy layout, and so forth. These
viewpoints by customers put up a number of issues to be addressed by Arshad other than
those two initially believed by him to be the extensive causes. Rather than ‘wait and watch’,
his focal point then was to scrutinize operations management decisions he made at the outset.

THE BURGEONING NATURE OF FAST FOOD INDUSTRY

Decades ago, a meal outside the home was a sporadic event. A typical family ate at a
restaurant only a few times a year. Even lunches were usually prepared at home. Some people
did eat at local diners or coffee shops, but there was nothing like the ubiquitous fast food
chains we had in recent times. A new fast food restaurant opened every two hours, and people
with or without their families ate nearly one in three meals outside the home, and the figure in
terms of spending amounted to over billions. This was how the fast food industry was
mounting meteorically.

ONE-ELEVEN RESTAURANT

Way back on July 1, 2010, One-eleven restaurant was launched as a sole proprietorship with
an initial investment of Rs. 450,000. The restaurant dealt in fast food only. Its location had
strategic lead since it was sited in commercial area which was surrounded by the public and
private offices. The restaurant offered free home-delivery service while offering affordable
and reasonable prices, probably the exclusive point of One-eleven in Khairpur Mirs’. The

Authored by: Mansoor Ali Seelro

Bachelor of Business Administration
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management of the restaurant tried hard to deliver quality foods and claimed that there was
no compromise on taste and quality. However, like many large or small organizations, One-
eleven was faced with lots of challenges. Some of these problems like low-income level
seemed rather uncontrollable and could be ignored, while problems like controlling costs and
changing the public’s stance towards fast food could be resolved to a certain extent. When
all's said and done, these challenges united to aggravate a single major problem i.e. profitable
sales volume. That’s why when Arshad was asked if he was interested in expanding
operations in form of opening outlets in other cities including metropolises, he was short of
interest being thinking about to first well get better in city of source.

CHALLENGES FOLLOWING THE STARTUP

The launch of One-eleven was not a diminutive task; it accompanied reams of uphill jobs
instead. The first and foremost challenge was to change the people’s mindset encouragingly
towards fast food as daily-meal substitute. Since the market was unwelcoming, there were
hardly any players vying for fast food business in Khairpur. People were customary to
visiting table-served restaurants. Arshad took it agile and simply called this a trend and
looked ahead expecting that it would change with the passage of time. Moreover, Arshad
identified low income level to be the key sticking point playing a part in reluctance with
regard to visiting fast food restaurants. The factor of mindset looked somewhat handy, while
low income factor seemed rather uncontrollable, so after listening to customers’ views,
Arshad decided to neglect it. How would Arshad deal with such problems was in fact unclear.

Secondly, controlling fixed costs was the great challenge that Arshad had to grapple with.
Since sales problem was already there, it was further aggravated by huge fixed costs. Massive
investment in food preparation equipment, infrastructure, workers’ salaries and wages, and so
on were major ingredients of the fixed costs. These were to be recovered from profitable sales
volume. Consequently, Arshad had to increase sales while reducing or keeping stable the
fixed costs. He was of the opinion that he would incur variable costs in any case. The only
costs that he could control were some of the fixed costs. There was no way out but to control
the costs in order to be profitable, believed Arshad. The cost factor caused such a great
turmoil that Arshad made to think of terminating the business. But termination decision
would result in more losses than revival, Arshad realized subsequently.

Besides, a number of factors needed to be contemplated by Arshad that might affect both
sales volumes as well as costs and thereby profitability. The factors included pricing strategy,
location and layout strategy, job design and human resources, process and quality strategy,
internal environment, and the like. Arshad was ready to compromise on all factors except for
costs. He wanted to offload costs by any means. Because he knew that the only way for

Authored by: Mansoor Ali Seelro

Bachelor of Business Administration
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profitable survival was to control the costs. It was then imperative for Arshad to formulate a
practical and working cost-effective strategy, which was really a strenuous task.

THE COMPETITIVE PREMISE & THE PRODUCT RANGE

Before One-eleven’s startup, there were no any players dealing purely in fast food. Only two
players existed who were partly dealing in the business. Berry Plus, a sole proprietor, offered
some fast food items in addition to its retail menu. Same was true for Jan Bakers & Sweets.
After One-eleven started operations, few more players emerged as fast food entrepreneurs.
Some of them were pure fast food businesses, namely Khazana Pizza, while others were
secondarily dealing in it specifically Prime Restaurant and Red Palace – Hotel & Restaurant.
Regardless of whether they came out before or after One-eleven, whether they were purely or
partly dealing in fast food business, they brought about many more challenges and made
Arshad to reappraise his pricing strategy, service level, and quality control. In addition,
Arshad had to go for an appropriate strategy for customer value proposition that would enable
One-eleven to understand customers’ needs better than competitors.

Taken as a whole, the competitors in Khairpur that Arshad identified were:

o Prime Restaurant
o Khazana Pizza
o Berry Plus
o Jan Bakers & Sweets
o Red Palace

Arshad knew that he had an edge over competitors in that the menu he offered was lush and
better-off. At the time of its startup, One-eleven’s major products included:

o Club Sandwich
o Chicken Sandwich
o Chicken Broast
o Chicken Roll
o Chicken Burger
o Zinger Burger
o Vegetable Roll
o Chicken Fried Rice
o Thi Rice

Authored by: Mansoor Ali Seelro

Bachelor of Business Administration
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But the latter three items were dropped afterwards in September 2011, roughly a year
following its startup. At first, the restaurant charged cut-rate prices for these items. But after a
year following the startup, it raised prices, still reasonable and affordable relatively.

REVIVAL INITIATIVES

After bearing continuous losses for months following the startup, Arshad seemed totally
immersed in generating alternative ideas to overcome the flood of challenges. His ultimate
point was to generate profits by picking any of the alternatives – boosting up sales or
reducing costs. He started with first focusing on cost control followed by schemes to
encourage people to visit fast food and take-away restaurants instead of table-served
restaurants. The initiatives started out as follows:

Cost control

Salaries cut; Workforce downsized:

Arshad believed that investment in equipment, infrastructure, delivery bike, and the like were
all sunk costs since the decisions could not be undone plus the assets depreciated over time.
As of all fixed costs, Arshad considered workers’ remunerations to be controllable. As a
result, he set smaller, yet attractive, salary amounts for all staff relative to competitors. But in
spite of cutting salaries, costs were still uphill. He then minded that a handful of workers
seemed idle some or all the time, so he thought of downsizing the workforce. At the time
One-eleven took start, there was a workforce of seven people, of them two were professional
chefs taken from Karachi. After some time workforce was downsized to four so that added
salaries burden could be offloaded. Such moves by Arshad eventually helped him control a
mild fraction of total fixed costs and therefore a ray of hope glimpsed for carrying on the
business with profitable survival.

Three items crossed off:

In September 2011, Arshad decided to drop three items that were not making money so that
cost may further be controlled. The items namely vegetable roll, thi rice and chicken fried
rice were crossed off about a year following the startup. This step enabled Arshad to save
enough amounts in costs both fixed as well as variable. Even with divestiture, One-eleven
still was better-off in terms of menu lushness relative to competitors.

Authored by: Mansoor Ali Seelro

Bachelor of Business Administration
 5

Lunch Segment dropped:

In early days, One-eleven service hours started by 1:00 p.m. in order to serve lunch in the
afternoon. Arshad had one thing in mind that the restaurant’s geographical coverage was
commercial area, where white-collar as well as blue-collar employees from different sectors
availed lunch break around 2:00 p.m. But the segment of lunch could not garner the earnings
that Arshad had visualized. Therefore, retaining the segment was riskier given that it would
add to costs far more than adding to gains. Since Arshad was fanatical with regard to cost
control, he contentedly decided to drop the segment.

Spoilage controlled:

The moment the lunch segment was decided to drop, service hours decided to be narrowed
down as well. Arshad then decided outlet opening time as 5:00 p.m. In so doing Arshad had
twofold benefits. First this helped in dealing with uncertainty, and thereby reducing spoilage.
This was deemed as the critical factor by Arshad since fast food business concerned
perishable items. In case the market was inoperative due to expected or unexpected strike,
One-eleven would be immune to the effects because strike was typically over until evening.
This enabled Arshad to well plan the inventory needs, which in turn reduced waste. Another
benefit of narrowing down service hours by 4 (hours: 5-1) was control on some fixed as well
as variable costs.

Arshad took the above four initiatives all for cost control. Arshad really did
tricky job to come up with such alternatives that reduced overall cost, no matter whether sales
increased or remained stable. In general, Arshad’s point was to switch an about-to-bankrupt
business to a profitable one, which proved to be the case. With careful cost control, Arshad
notified that he could be able to cross break-even in January 2011, roughly seven months
following the startup. Arshad further improved his margin of safety by crossing three items
off the menu in September 2011.

Dealing with the people’s mindset

Arshad was well aware of the fact that changing people’s attitude was rather tougher job than
simply controlling costs. But he was determined and committed to the restaurant’s growth, so
he went on with the same vigor, passion and pursuit having harbored the following scheme in
mind:

To expand outlets within Khairpur at focal and expedient locations with some
added and enriched menu or the same one. In this way, Arshad believed that our
brand “One-eleven” would be positioned the better way. Further, by doing so the

Authored by: Mansoor Ali Seelro

Bachelor of Business Administration
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geographical coverage would also enlarge since people from different areas and
colonies would find it easy to visit the outlets located nearby their dwellings.
Apart from that Arshad had made up his mind that he would give people a setting
of table-served restaurant while serving the fast food. Once people got accustomed
to ingesting fast food, table-served restaurant would be transformed to take-away
restaurant. The transformation would be only in physical arrangement while the
food served would be same namely fast food. We would be one day pure take-
away and drive-thru restaurant, spoke out Arshad.

This scheme was yet to be practiced in near future because it involved a good
deal of time to be spent on, for example, location selection, negotiations with real estate
agents, arrangement of extra equipment and workforce for new outlets, managing workforce
and product line, and above all arrangement of financials. However, the former four schemes
to control the costs were put into practice and wonderful results were observed as
substantiated by the fact that break-even was crossed. Arshad was then hopeful, yet tentative,
about the successful outset of this scheme as well.

THE FUTURE

At the time One-eleven started, there were hardly any players in the market. Later on many
fast food businesses were setup in just 2 years leading to stiff competition in the fast food
industry. This proved to be a great threat for One-eleven since this coerced Arshad to
reappraise several policies in order to have edge over competitors and to stay up to date.
Well, for one thing, Arshad was not disappointed anymore because he now had knack of
managing the business cunningly. He discerned trends and patterns very carefully and gained
apt understanding of the market requirements.

With regard to business growth, Arshad got many prospects. When it came to expand outside
the city, he was of course short of interest, while he had harbored plans to expand on the
inside. It seemed a subtle game to lead the market in Khairpur, because entry into other cities
would have required Arshad doing everything from scratch – selecting location,
understanding market needs, managing workforce and communication mechanism, deciding
on menu and prices, service level and hours, et cetera. Why not to excel with on-hand set of
policies and resources in the city we were socialized in, felt Arshad. On one hand, Arshad
was fulfilled by implementing cost control initiatives effectively. On the other hand,
however, he was still occupied by the concern that whether his scheme to deal with the
people’s mindset would yield desired results.

Authored by: Mansoor Ali Seelro

Bachelor of Business Administration