Tuesday, July 15, 2008

Which Earns More? Kim Gary or Mixed Rice

Student's Question: I entered into an argument with my friend recently regarding which business model is more profit making? Kim Gary or mixed rice? Maybe you can help me clear the clout

I would love to. Before I address this question, few assumptions must be made:

(a) Both are operating in an outlet of equal size
(b) Both are operating at a hotspot, say Kim Gary in a famous shopping mall while mixed rice is operating nearby housing areas & office
(c) Both start operating from 9am-10pm
(d) It’s not a comparison of chain of restaurants, but 1 vs. 1

Why mixed rice is more profitable?

1. Pricing. There are certain dishes with elastic & inelastic demand (this however differs from one seller to another). Dishes with elastic demand e.g. vegetables will be priced lower while those with inelastic demand e.g. meat will be priced higher. These are done to maximise revenue (Unit 1). The ability to exploit this form of pricing is greatly enhanced due to the presence of imperfect information (Unit 2). Unlike Kim Gary, prices of food are stated at the menu. Therefore there is no way they can manipulate the prices as they wish

2. Necessity & luxury. Mixed rice is a ‘necessity’ while Kim Gary is viewed as more of a ‘luxury’. In times of difficulty, or when the economy is slowing down like now, people tend to eat lesser at such an expensive outlet. As such its business is subject to business cycle

3. Higher frequency of customers. Although mixed rice is far cheaper than Kim Gary, but its turnover is very high. People tend to leave once they finish their lunch or dinner. And not to forget, many people at the same time can pack & bring it home or back to their office. Unlike Kim Gary, people frequent the outlet for leisure & as such they will be there much longer, which means lower turnover of food & drinks served

4. High ability to pass on the increase in the costs of food. Certain places had started to increase the price of mixed rice by RM1 (including rice & dishes). This is because the demand for mixed rice is inelastic. However, if Kim Gary attempt to do so it will lose large portion of its customers given that it’s operating in a competitive environment say, MidValley

5. Lower operating costs. Mixed rice does not need to incur high costs of operation such as expensive rental of premise, paying high salary to its chef, wages to waiters & waitresses, more expensive electricity & water bill etc. In mixed rice business, most of the time the cook itself is the owner

In a nutshell Kim Gary earns a lot, but incur higher costs of production whereas mixed rice earns a lot but incur lower costs of production. I would vote for mixed rice.

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