How to setup a restaurant loyalty services company?

How to setup a restaurant loyalty services company?

The Case:

Vivek Chakravarthy wants to set up a loyalty card programme and services company for standalone restaurants across cities. Through his venture, he hopes that while customers are rewarded for loyalty, standalone restaurants will see increased footfall and thus, both parties can benefit from his services. He is backed by eight years of experience in the hospitality and consumer services industry that has honed his talent and experience, and built his network. Based in New Delhi, he has set aside Rs. 15 lakh to fund his venture, which he hopes to scale up to other cities as well in due course.

The Expert:

Nikhil Bhandare has over seven years of management consulting experience in India, U.S. and China. He is currently a principal at Booz & Company’s Mumbai office and is the lead for payments and loyalty within the broader financial services practice. Bhandare advises Indian and global clients in the payments, banking, asset management and capital markets areas around large scale transformation on various strategic, operational and organisational issues. He has also worked with clients in consumer, media and pharmaceutical sectors.

Prior to Booz & Company, Bhandare spent several years on Wall Street, in New York, doing investment banking (mergers and acquisition advisory and debt/equity underwriting) with Merrill Lynch and later Berenson & Company. Bhandare has a B.A. from Yale University and an MBA from The Wharton School, University of Pennsylvania.

Expert Talk:

Given the small budget, Chakravarthy should conduct a survey amongst both customers and restaurateurs to see how they would react to his new venture. A survey would be cost effective and would inform him as to how he could potentially structure his program and what demographics of customers would be interested in such a program. He should also interview industry experts via his network and assess whether there is a gap in the market. The key take away from this survey should be whether there is a clear gap for a loyalty programme for restaurants and whether restaurants would be willing to invest to set up such a programme. More importantly, he needs to know the type of restaurants that would be receptive to loyalty programmes – independent, high-end (e.g. Shiro), chain restaurants (e.g. Mainland China), five star hotel restaurants, QSR (quick service restaurants e.g. McDonalds).

If cost is an issue, Chakravarthy could start with an online survey on SurveyMonkey (a relatively low cost option – in fact, free of charge if the number of respondents is less than a specified number) and distribute this to his industry contacts, friends on Facebook etc. – targeting at least 500+ consumers and perhaps 50 restaurants. His programme should have a clear value propositions to both restaurateurs and to customers. Restaurateurs will benefit from incremental revenues due to a ‘lift’ (increase in spend by same customers), ‘shift’ (new customer spend) and increase in visit frequency due to a loyal customer base. Customers will benefit by receiving exciting rewards/discounts for eating at their favourite restaurants.

To seek capital in setting up his venture, he should first estimate the total capital required to set it up. Depending on the total amount required, he could tap angel investors or venture capital funds (if he chooses the latter, based on the size of investment required, he should seek those who understand loyalty and may have invested in similar company/sector in the past as they could offer additional value other than just funds).

The programme

Chakravarthy’s first step would be to approach restaurants. He should expect restaurants to show resistance if he were to sign up other restaurants that are in the same cuisine segment as they would be viewed as competition. A separate approach to signing up partners is possible and it entails a separate business model. Instead of having individual loyalty programmes at each restaurant, he could create a ‘coalition loyalty programme’, which has a portfolio of restaurants/cuisines where customers can both ‘earn’ points and ‘burn’ points. It creates a more exciting value proposition for the customer. In this case, it is critical to get the ‘anchor’ restaurant on board after which sales to additional restaurants may be easier as they see value in joining a programme that has an anchor, since they believe that they can get a new customer base.

Ideally, the loyalty programme offers should be based on spend (e.g. Rs. 100 off for every bill more than Rs. 1000 spent). There should be a minimum amount to be eligible for the loyalty programme. For the type of offers, potential options include instant discounts, coupons for future use and experiences (e.g. sample new menu items ahead of the pack, sweepstake to free trip to foreign country, film screenings) etc. The level of rewards could be linked to a tiered system – customers who are more loyal will be rewarded with higher value rewards and experiences.

While offering discounts, each restaurant that participates in the programme will have to absorb the cost of discounts as well as that of running the loyalty programme (i.e. software, backend technology, account maintenance, plastic card cost etc.). The restaurant needs to believe that the return on investment (ROI) of the loyalty programme will be high – i.e., running a loyalty program that offers discounts will result in incremental revenues vs. status quo due to lift, shift in revenues and retention of customers. He also needs to factor in changes that would happen to the programme. If some restaurants convert their existing loyalty programmes into the new coalition loyalty offering, then the programme needs to ensure that the loyalty rewards are at least commensurate, if not higher the value than the original loyalty programme. Also, customers of the former programme need to be communicated of the change in a timely and positive manner, enabling them to clearly see benefits of a new and improved loyalty programme.

Revenue model

Chakravarthy should have two monetisation channels – (i) core revenues – fees for running the loyalty programme (loyalty software development, backend technology, cards, maintaining database, points calculation – if any) and (ii) ancillary revenues – fees for data mining of customer database, which can help restaurants better understand their customers and develop smarter, better target marketing campaigns. One can measure the ROI of a loyalty programme for a restaurant by the following formula: Programme ROI = Incremental sales from loyalty programme / (Loyalty program management costs + cost of rewards + cost of incremental sales – food and labour etc.)

In terms of core revenues for running the programme – there are several pricing options – flat fee, percentage of sales (say 2 per cent). Typically, large loyalty programmes cost a company 1 – 3 per cent of sales. Chakravarthy does not have a track record in loyalty yet, so obtaining ‘rich’ pricing may be challenging. Alternatively, he could charge a flat fee, with a kicker if revenues for the client exceed a certain mutually agreed upon target. Data mining/analytics could be charged per report on fixed fee basis. He can target such ancillary revenues to be 15 – 20 per cent of his total revenues. EBITDA (earnings before interest, taxes, depreciation and amortisation) margins of global loyalty programme providers have typically ranged from 15 – 30 per cent (e.g. Payback, Groupe Aeroplan). His EBITDA target should be more than 30 per cent but he should expect to make low/no profits in first year due to large set up costs (IT, marketing etc.).

Implementation

  • Loyalty programmes usually have seven components/processes:
  • Programme development and management
  • Customer acquisition and fulfilment
  • Loyalty technology platform, including account management and points/rewards management
  • Data analytics and customer insight engine
  • Campaign management
  • Customer service
  • POS (point of sale) devices

Must-have systems are the core loyalty technology platform and the POS device, which will read the card.

Hiring

To develop a successful loyalty solutions company, Chakravarthy will need to have strong capabilities in loyalty software development, and in sales and marketing to reach out to new customers. These should be his focus areas in the near term.

Marketing strategy

Signing on the first customer is the most challenging. He should go about signing up customers via first leveraging his network to set up meetings with target restaurants, leveraging SEO (search engine optimisation)/SEM (search engine marketing) to drive people to his website and placing advertisements in restaurant trade magazines. It also helps to partner with restaurant listings and event businesses. Once he has a track record, it will be easier to sign on others because he can demonstrate operational experience and hopefully point to success stories from other clients. A way to sign up more customers is through the coalition loyalty programme that strings together several restaurants / restaurant chains. This will take more time to convince several parties to enter a common programme but can help create critical mass quickly.

Scaling up

The key challenges Chakravarthy will face are inability to sign up adequate partners, finding the right talent for his team, significant losses in early years due to marketing and high cost of IT, and no renewal of contracts from clients at the end of the contract term. To prepare for these, he should develop a clear value proposition as to how his company can help restaurants increase their sales, and why they should choose his company; invest his time in finding people with the relevant experience to join his team and develop a financial plan and budget, and regularly track/measure it.

His expansion strategy should be based on cities that have high concentration of restaurants that fall in his target segment. Thus, after New Delhi, starting in Mumbai makes most sense, followed by Bengaluru. And cities where his New Delhi-based clients may have operations can be targeted as well. Chakravarthy can look at eventually taking his services to other verticals as the capabilities of running a loyalty programme can be transferrable across industry verticals.

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