It is only natural for business owners to want to build spaces they can be proud of. But during this dreaming process, it is easy to get carried away and forget about the budget. Here in the Philippines, we see many beautiful restaurants, large commissaries, and fantastic retail stores that look amazing, but in many cases also cost a bucket load. Consequently, within two to three years, many of these establishments no longer exist. Sometimes they do not even get to open their doors, as the owners did not budget for all the costs and variables. Looking at your return on investment (ROI) is one of the most important processes any new establishment must calculate.
What is ROI?
It is the time it will take for the owners to generate enough profit to recover all the costs they incurred in creating, conceptualizing, and building the business. This includes the money reserve put in place for the business to develop over the first 12 months. In the old days, we would look at ROIs of three to four years as being a great time frame. Today’s local industry, however, is more aggressive and competitive than ever before. If you cannot get an ROI within six to 18 months, then you need to seriously consider if your concept is worth executing.
If you cannot get an ROI within six to 18 months, then you need to seriously consider if your concept is worth executing.
So, if you have a great business idea or want to expand your business but find that the startup or expansion costs are too big for your budget, it does not mean that you need to give up. The beauty is that things can still be repaired during the planning stage. If you calculate your potential ROI and find out that you will take too long to recoup what you’re putting in, then think outside the box and look at areas where you can save. One of the fastest and easiest ways is on your fit-out costs.
Remember that not all dining establishments in the Philippines will survive past 24 months. Therefore, there must be a lot of opportunities to get your hands on some of their materials. When investigating the market and looking at the costs of equipment and furnishings, we found that you can save almost 50 percent on most goods and up to 80 percent on some construction materials. Considering that the materials and equipment constitute anywhere between 50 to 80 percent of the costs in your initial investment, these types of savings are paramount to your success. So here are a few tips and things to look out for when buying secondhand versus brand new equipment and materials:
- Do your market research so you know the value of items. If you are buying stainless steel equipment, make sure you visit and get quotes from some fabricators. Visit stainless junk shops in Caloocan and learn how they calculate the value of items (by weight). This will hold you in good stead for when you are ready to source and buy items.
- Inspect the equipment you are interested in. Do not allow just anyone to go and view the items and take their word for it. Ensure that the person who goes to inspect the equipment knows exactly what they are looking for; know the current new market price; and most importantly, know how to do a physical check of the items so there won’t be any surprises after a purchase is made.
- Be prepared to take calculated risks when buying secondhand equipment. For example, if you can get your hands on a four-door standing refrigerator, which is in good physical condition but has a broken compressor for under P25,000, take it. The worst case scenario is that you will need to replace the compressor for P12,000. You will then have a perfectly working unit for P37,000 compared with a brand new four-door refrigerator, which will set you back P65,000 or more. It is not practical to buy a new piece of equipment for back of the house at double the price of a good working secondhand one.
- Use the benefits that living in the Philippines gives you. Almost anything and everything can be repaired, refurbished, or fixed here at minimal expense.
- Caloocan, Valenzuela, and Divisoria should become second homes. These are the areas where you can find parts, warehouses, importers, distributors, and fixtures at the best prices. Bear in mind, all the stores around you need to buy their supplies from somewhere and they add a margin and then sell in their stores. Cut out the middlemen and go directly to the source. It takes time, determination, and a willingness to ask around, but the rewards and savings will be worth it. Most construction material can also be found in these locations.
- Again, close to 50 percent of businesses will fail in the first two years. Therefore, there is a lot of equipment out there that is as new or barely used. It is important to note how the previous owner worked the machine. Was he hands on? Did the establishment maintain cleaning records or maintenance records? How can you know these things? Easy, just look at the equipment and check the freezer and refrigerator seals if they are clean and still intact. Check under the stainless steel benches and see if the previous owner cleaned the underside of the equipment. Check the pipes, grease trap, wiring, etc. of the other items. If they are clean and seem to be well maintained, then you know that you can pay a little more. But if the equipment was neglected or broken in areas, then bargain hard and get the prices down so that you can spend a little to restore them. Remember that most of the time equipment just needs a little elbow grease to make it look beautiful again, so do not be fooled by dirty items.
- Do not expect to get a Ferrari when the price is that of a Toyota. Understand that you are buying secondhand and it will be priced as such. Too many owners go in expecting to get a piece of equipment in perfect condition for peanuts. Remember that the person selling was a buyer at one stage. Therefore, they also know the value of these items. Be realistic and always find a way for a win/win situation, as you never know if the person you are buying from may just have some other items for you in the future.
- Take note that the worst thing about buying new is that the moment you take it out of the box, store, or warehouse, its value in the open market drops by a minimum of 25 percent. Used equipment will not depreciate as quickly as brand-new equipment. The original owner will suffer the initial depreciation hit of buying brand new. Equipment and building materials are also like cars. The moment you drive them out of the lot, the value begins to depreciate.
- Do not expect a warranty. That is the risk you take with secondhand equipment, and that is why you need to be prepared to factor in the added costs of repairs, refurbishments, or updates.
There are five places where you can get secondhand equipment: designated stores, online sites, auctions, direct from the source, or junk shops.
The two most common places to buy secondhand equipment online are OLX and Buy & Sell Philippines. However, there are many groups on Facebook for buying and selling. Manila Expat, Manila Buy and Sell, Construction Materials Suppliers, and Construction Services Hub are some examples.
Auctions are far and few between. But for larger delivery trucks, generators, and heavy machinery, look in Subic, as there are a number of auction places in the area that import secondhand machinery and vehicles from overseas and resell them here at bargain prices.
For restaurant, commissary, and catering equipment, one of the best places to keep an eye on is ASTOCA (Assets to Cash), which runs an auction page called Asia Bid Company. This company specializes in closed restaurants and sells all the equipment, materials, and fixtures for the owners. They usually have a three-day viewing period where you can go to the site and inspect all the items. (Please note the items are sold “as is where is,” meaning that you may not be able to test them.)
After the three-day viewing period, all items go live for an online auction where anyone in the world can bid for the items live online. Their site will highlight the item once it has reached the minimum reserve. This means that you will know that the item is 100 percent sold to the highest bidder. Usually, there is an auction every two weeks in the Philippines, with many well-known establishments offering their items for sale when they close their branches.
When investigating the market and looking at the costs of equipment and furnishings, we found that you can save almost 50 percent on most goods and up to 80 percent on some construction materials. Considering that the materials and equipment constitute anywhere between 50 to 80 percent of the costs in your initial investment, these types of savings are paramount to your success.
HMR is also a well-known source of secondhand items. We find the prices to be quite high and bargaining is difficult, but at least you can test the items and you know what you will get as they have their own maintenance crew, which inspects most items in the store.
For other buy and sell stores, there are hundreds in Caloocan, Valenzuela, and even Angeles City. We advise driving around these areas and keeping your eyes open, as once you see one equipment shop, you are almost guaranteed to find a few more in the same area. These stores tend to gravitate to each other; you just need to find one and then ask around.
There are a lot of savings to be had if you can buy secondhand or buy directly from the source. Tempered glass is usually one of the most expensive items in construction and in new restaurants with show kitchens. If you can find old buildings, malls that are undergoing renovation, or buildings that are going to be upgraded, a lot of the time you will be able to take the old tempered glass out for a fraction of the price. You can save over P500,000 if you just use five panels of used tempered glass versus fabricating new ones.
Remember that you need to make a decision on the risk versus reward. New equipment will come with warranty and service periods. New items will look shiny and enable you to keep them in top condition for the long term. There are a lot of pros to buying all brand-new equipment, and it will save you a lot of hard work in the process but all that luxury comes at a cost. Can you afford the added ROI timeframe?
Ask yourself, “Can I afford to spend on the Ferrari if it will potentially lose me the house? Or is it better to go with a used Toyota that you have serviced, managed, and nurtured to last 10 years at 50 percent of the overall cost?”
If you have any questions or would like to comment on any of the views expressed in this column, please e-mail us at [email protected]. We would like to help you and also use your experiences as examples to help others, so feel free to engage with us to build a stronger F&B community in the Philippines.
Originally published in F&B Report Vol. 15 No. 3