Analysis of a Proposed New Business: A High School-Area Food Truck
General Overview and Costs
A high school located on a busy intersection and with a business parking lot across the street provides the perfect opportunity for a food service venture operated from a food truck. With substantially lower overhead than a traditional restaurant and a typical focus on quick, volume-oriented service of a limited product selection, catering primarily to the high-school lunch crowd would be ideal for a food truck business (Lagorio, 2010; Mealey, 2012). Offering standard “American diner” fare such as hamburgers, French fries, other hot and cold sandwiches, and salads, both food preparation and customer service can be streamlined in order to reduce costs and increase profitability. Startup costs will also be minimal, making a food truck business much easier to get off the ground and bring into the black (Lagorio, 2010).
A decent used food truck can be obtained for approximately $30,000 (Mealey, 2012). Permitting and licensing costs will not be substantial, with an estimate of $1,000 likely far higher than needed, but leaving some wiggle room in the budget. These will be the only fixed costs of operation. Variable costs will be based entirely on the amount of food prepared and sold, and economies of scale will definitely apply (i.e. ordering more raw food materials from suppliers will yield cheaper per-unit prices). An initial purchase of $3,000 worth of food should be adequate for the first few days of operation; because most items will be perishable, ordering larger quantities and warehousing is not feasible. Other supplies and maintenance will add another $5,000 in the first few months of operation, making $40,000 an adequate amount of startup capital.
Revenue, Profit Maximization, and Marginal Cost/Revenue
The location and business type were selected in tandem, with a specific eye towards immediate and ongoing revenue increases due to the availability of a large and relatively untapped market. This strategy will not be enough in and of itself to guarantee profitability and success for the venture, but it will definitely contribute to revenue increases and help to ensure an effective use of resources and potentials (Freed, 2005; Mankiw, 2011). Other plans for increasing revenue, which necessitates the increase of sales, is the offering of certain discount schemes and engaging in promotional events to build initial market share, brand recognition, and general knowledge and popularity. Advertising in local newspapers and in other media will be used to attract non-core customers, as well.
Profit-maximization will be achieved in numerous ways, including by careful control of marginal costs and revenues as discussed below (Mankiw, 2011). Other methods for profit-maximization include the constant improvement of efficiency of operations, reducing the waste of food supplies through careful preparation procedures, reducing energy consumption by scheduled cooking plans based on previous demand, and the reduction of labor costs by fine-tuning operations to require a minimum of ownership assistance. All of these elements will necessarily take some time of real operations to become truly meaningful in terms of profit-maximization, however with careful attention and control it will be quite easy to improve efficiency and reduce costs, maximizing profits without out-pricing customers.
Marginal costs and revenues will also be an essential part of profit-maximization, as they are with any scalable business (Mankiw, 2011). Though there is both an operational and a market limit to the business potential of a food truck enterprise, it is doubtful that these limits will be reached within the first year of operation, and thus ongoing production to meet demand will remain a favorable decision for the business for the foreseeable future (Mankiw, 2011). That is, the business will not reach market saturation to the point that marginal revenue decreases through a needed price drop, and because almost all variable costs decrease on a marginal level, marginal revenue will continue to increase the more units are sold (Mankiw, 2011). It will still be important to maintain a recognition of marginal costs and revenues to incentivize certain menu items, possibly eliminate other items, and generally provide a product mix that provides maximum profitability.
Pricing strategy will be relatively straightforward, as the identified market does not have an affordable food alternative within walking distance other than the school cafeteria. Keeping prices low enough to remain attractive will be an immense part of the revenue model and overall strategy for the business, yet will still allow for a comfortable profit margin to be maintained for the food products sold — a burger that costs approximately $2.50 in labor and ingredients can be sold for $5 without out pricing customers. Non-pricing strategies include location, promotional events, and prominent signage at the location itself.
Other non-pricing strategies, such as attempting to create or reinforce barriers to entry and so protect market share, are less possible and less reliable for the proposed business venture. A significant barrier will be put in place simply through the establishment of the proposed business, however; as local ordinance mandates that food truck can only operate in off-street locations such as parking lots and only with the express permission of the lot owner, direct competition will be all but impossible during the first year of the food truck’s operation. Signing a contract with the lot owner that prevents other food trucks from occupying the lot will cement this barrier still further, but as this location is the only viable location for such a business without the land purchase and construction of a physical restaurant, simply starting the business will present a major entry barrier for this particular market.
Product Differentiation and Cost Minimization
Product differentiation is not a major concern for this business in its initial and possible its ongoing phases of operation. Again, the key success factor for this business is the relatively untapped market available, and in fact product familiarity could be a major selling point for many of the products offered. Pricing strategy is seen as much more important in this type of situation (Freed, 2005; Mankiw, 2011). At the same time, product quality will be a significant and ongoing concern for the business, and this can be seen as at least partially related to product differentiation (Mankiw, 2011). While the menu items will be fairly standard fare primarily incentivized by price, the health and taste of the products will also be important.
Minimizing costs would initially seem to run counter to these principles, and indeed it cannot be denied that especially in the food world lower quality products can be obtained at cheaper — sometimes drastically cheaper — prices. The costs of low cost food can be enormous in terms of customer loss, however, and so this route will not be followed. Instead, cost minimization will be achieved through the above-mentioned methods of increasing efficiency and operating at higher volumes with lower marginal costs (Mankiw, 2011). By increasing the volume of business and streamlining the operations necessary to serve customers at this level, the per-unit (i.e. marginal) costs of each product sold can be reduced, which will in turn help to maximize profits. Energy costs are unfortunately not directly scalable, and these will present another major variable cost, however cost efficiency and thus cost minimization is still achieved through increasing volume — it takes pretty much the same amount of propane to cook one patty on a grill as it does to cook ten patties on the same grill, for example. Volume is thus of essential importance to this business.
There is no way to truly and certainly guarantee the success of a business venture. Through proper planning and ongoing awareness and control of relevant factors, however, it is easy to minimize risks and make sure that business plans are realistic. Based on the considerations and discussions above, there is every reason to have confidence in the proposed food truck venture.
Lagorio, C. (2010). How to open a successful food truck. Accessed 14 April 2012. http://www.msnbc.msn.com/id/37400996/ns/business-small_business/t/how-open-successful-food-truck/#.T4pB5ZqXTtg
Mankiw, N. (2011). Principles of Economics. Mason, OH: Cengage.
Mealey, L. (2012). How to start a food truck business Accessed 14 April 2012. http://restaurants.about.com/od/openingarestaurant/ht/RestaurantFoodTruck.htm
Freed, R. (2005). Marketing: Market selection. Accessed 14 April 2012. http://www.advantagem-a.com/pdf/MarketSelection.pdf
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