to do a Marketing Case Analysis and PPT

9B13A046

RWANDA BACKPACKERS

Dan Hernden and Annika Wang wrote this case under the supervision of Professor Nicole Haggerty solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.

Copyright © 2013, Richard Ivey School of Business Foundation Version: 2014-11-12

It was a warm summer day in 2012 when Kayi Davie and Abdallah Bawazir sat overlooking their lakeside property in eastern Rwanda. The young entrepreneurs were planning to create a campsite using the plot of land Bawazir had inherited from his family several years before. Although they had very few financial resources between them, they realized that a hospitality business would be cheap to operate and would fulfill their dreams of bringing low-cost tourism back to Rwanda.

After conducting thorough research, they realized an opportunity existed to target the international budget tourists commonly referred to as “backpackers.” Only one European-style backpacker hostel currently existed in the capital city of Kigali, and the low-budget tourism industry remained significantly underdeveloped. The partners had seen how successful this type of tourism had become in neighbouring countries and desired to replicate this business in Rwanda. Their priorities now were to raise $19,0001 within the next six months in order to start construction as well as to design a successful marketing plan to attract customers once the business opened. Davie and Bawazir were excited about the opportunity but needed to act quickly to turn their idea into reality.

COUNTRY PROFILE

Rwanda is a landlocked country in East Africa, bordering on Tanzania, Uganda, the Democratic Republic of Congo and Burundi. In 1994, a prolonged civil war motivated by ethnic tensions escalated into a genocide in2 which approximately one million Rwandans were killed (10 per cent of the country’s population). The country has since recovered economically, under a stable government, but is still experiencing the lingering social consequences.

Ninety per cent of Rwanda’s population is reliant on subsistence agriculture. The country’s largest exports are tourism (23 per cent), coffee (11 per cent) and tea (8 per cent).3 Rwanda’s government is eager to

1 All currency in US$ unless otherwise indicated.
2 www.cia.gov/library/publications/the-world-factbook/geos/rw.html#top, accessed May 20, 2013.
3 web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/0,contentMDK:22551638~pagePK:146736~piPK: 146830~theSitePK:258644,00.html, accessed February 10, 2013.

Page 2 9B13A046

pursue market-based policies, such as increasing international trade and attracting foreign direct investment.4 At the same time, it prioritizes poverty reduction by providing education, infrastructure and other services for its population.

TOURISM IN RWANDA

Rwanda’s tourism industry has expanded rapidly over the past decade. Since 2000, industry revenues have grown from $50 million5 to $250 million in 2011.6 Tourism ranks above coffee and tea as Rwanda’s top export. The country is attractive for tourists because of its image as safe and stable.7 It also has many tourist attractions, including dormant volcanoes, rainforests, savannah, lakes and a large variety of animals and birds. It is most famous for the mountain gorillas in Volcanoes National Park as well as for having Africa’s largest rainforest, Nyungwe National Park. The government’s national tourism strategy is currently focused on high-end, low-traffic eco-tourism aimed at attracting wealthy international tourists from Africa, North America and Europe.8

GLOBAL BACKPACKING INDUSTRY

Backpacking is a low-cost form of international travel practiced by young adults between the ages of 18 and 35. The name comes from the common use of a backpack to carry a traveler’s clothes and supplies for long periods of time and over long distances. To reduce costs, backpackers often rely on public transportation and inexpensive accommodations such as campsites or youth hostels (a type of low-price hotel with shared rooms). The industry has grown considerably since the 1990s thanks to the growth of low-cost airlines and low-cost urban accommodation options. During this time, many regional backpacking communities have developed across Europe, Asia and Africa to fulfill the needs of budget travelers on their journeys.

The backpacking industry in Rwanda is still underdeveloped and has not yet recovered from the 1994 genocide; it has experienced very little investment activity. Only one youth hostel currently exists in the capital of Kigali, and very few backpacker accommodation options exist near tourist destinations outside of the capital. Public and private investment in backpacking tourism remains low as the industry has not been included in the government’s strategic development plan. However, in public statements government officials have encouraged the private development of backpacking tourism.

OPPORTUNITY

The four-acre plot of empty land Abdallah had inherited from his family was located in a quiet nature area along the shores of Lake Muhazi in eastern Rwanda. Although the property was not accessible by public transportation, it was within a five-minute drive from the nearest bus terminal in Rwamagana. This terminal was located along the main transportation route from Tanzania and was also served by regular bus traffic from Kigali.

4 www.cia.gov/library/publications/the-world-factbook/geos/rw.html#top, accessed February 10, 2013.
5 rnanews.com/economy/4117-is-it-time-for-tourism-dollars-to-stay-in-rwanda-special-report-.
6 allafrica.com/stories/201211191402.html?viewall=1, accessed March 30, 2013.
7 www.newtimes.co.rw/news/index.php?i=15073&a=56680&icon=Results&id=2, accessed March 30, 2013. 8 www.iipt.org/africa2007/PDFs/JoanMazimhaka.pdf, accessed March 30, 2013.

Page 3 9B13A046

Although the partners had initially considered opening a full-service hotel on the property, they realized an outdoor campsite would be less expensive to operate and would require a lower upfront investment. A campsite would also fulfill their dream of bringing the backpacking industry to Rwanda. They decided to create a campsite that would hold up to 30 visitors per night in 15 shared two-person tents. The site would operate for six months per year during peak tourism season and would provide full-service entertainment including food, drinks, laundry services and water activities such as canoeing. The completed site would include four buildings: a covered bar and restaurant, toilet and shower facilities, a staff residence building and a small storage shed for staff use (see Exhibit 1).

Davie and Bawazir expected their business would require an initial investment of $15,000 to build the covered bar, toilets and staff housing as well as to purchase 15 tents, a refrigerator, a barbeque, a television and a diesel generator for electricity (see Exhibit 2). The partners also believed they would need to raise $4,000 to cover working capital requirements during the first 18 months.

Once built, the campsite would be able to operate on a very low budget. To reduce operating costs, the partners were considering opening the campsite only on weekends (Friday afternoon to Sunday afternoon). Under this scenario, they expected they would need to hire two part-time employees to wash laundry, clean the facilities and maintain the gardens. They would also need two part-time employees to serve drinks, operate the check-in desk and cook meals for visitors. In addition, they would have to pay for cleaning supplies, electricity, telephone access and insurance. These costs were expected to change with demand, so the partners created a monthly budget based on high demand (15 to 30 guests per weekend) and low demand (0 to 14 guests per weekend). The expected monthly operating costs are listed in Exhibit 3.

Projected Demand

In order to estimate the viability of their business, the partners created some demand projections. Since guests may stay either one or two nights, these projections were based on the number of guest nights instead of the number of guests. See Exhibit 4 for their demand projections. The partners wondered if these demand figures would be enough to cover their costs.

MARKETING OPTIONS

The partners realized their campsite needed to attract a steady flow of customers in order to make a profit. However, they were having trouble determining the number of guests required to break even on their investment. They planned to charge $12 per night per bed and expected the average guest to spend per day an additional $15 on food, $10 on beverages and $2 on hygiene products such as soap, toothpaste or laundry detergent. Profit margins were anticipated to be 30 per cent for food, 50 per cent for beverages and 50 per cent for hygiene products. These figures excluded Rwandan sales tax of 18 per cent. Other variable costs included Internet access cards at $3 per guest per day.

With an initial capacity of 30 beds, the partners were considering several options to establish a reliable customer base.

Page 4 9B13A046 Option 1: Local Partnerships

Their first strategy was to create relationships with businesses that actively promoted Rwanda’s backpacking culture. These included hotels, campsites, youth hostels and budget tourism companies operating in Rwanda as well as in popular backpacking cities such as Kampala, Nairobi and Dar es Salaam. Their plan was to distribute brochures and posters at all of these locations in exchange for advertising space at the Lake Muhazi campsite. The partners hoped that these relationships would help create word-of- mouth discussion and lead to greater sales, although they weren’t sure how many businesses would cooperate with them. The cost of distributing these materials would be $50 per month and was expected to generate one or two additional guests per night.

The partners were also considering offering commission fees to any participating businesses based on how many customers they sent to the Lake Muhazi campsite. Such businesses would be paid 5 to 10 per cent of revenue for every booking they completed. The partners expected this would generate more sales than their brochure strategy and would lead to higher participation rates among local businesses. The cost of this program would be $100 per month and was expected to result in two to four additional guests per night.

Option 2: Tourism Websites

The partners also noticed an opportunity to generate sales by listing their campsite on international booking websites such as HostelWorld.com and Hostels.com. By opening accounts with these sites, travelers from around the world would be able to make reservations and pay online in real time. Guests would also be able to rate the quality of the campsite based on a variety of factors such as location and cleanliness. The higher the ranking, the more reputable the campsite would appear to potential customers. The partners believed this would be critical to establishing a regular client base. The cost of opening an account was usually free, although the partners would be charged a commission of 5 to 10 per cent per booking on most sites. This sales channel was expected to cost $1 per booking but was expected to result in five to eight additional guests per night.

Being listed on international backpacking tourism websites also provided an opportunity to generate free awareness of the campsite. The most popular backpacking websites at the time were TripAdvisor.com, LonelyPlanet.com and BradtGuides.com. Similar to booking websites, the partners would need to create an account and encourage customers to write reviews after their visit. They were considering offering a free gift to any customer that filled out a site review. This promotion would cost $50 per month and would generate awareness of the campsite online. However, it was unclear how many additional guests would come as a result.

Option 3: Shuttle Services

The partners were concerned that visitors would have a difficult time accessing the campsite by public transportation. To address this, they were considering offering a private shuttle bus between Kigali and the campsite every weekend. The bus would be free of charge to all customers booking a full weekend visit to the campsite.

The partners were unsure whether they should go with a private operator or purchase their own vehicle. Private operators usually charged a fixed fee of $50 per one-way trip along this route for buses with a capacity of 26 passengers. Although this option would provide significant flexibility, the partners were

Page 5 9B13A046

worried about losing money on lower capacity trips. Alternatively, they were considering purchasing a used vehicle to transport visitors from Kigali as well as between partner hotels and campsites. A used vehicle would likely cost $5,000 to buy, plus $70 per month to cover the cost of gasoline and maintenance. This was expected to result in eight to 12 additional customers per night. Whichever option they chose, the partners expected that the bus would have to operate twice per night in order to meet the needs of their guests.

FINANCING OPTIONS

Davie and Bawazir knew they had several options for financing the construction of their campsite. They were considering taking out a loan, approaching private investors, using their own personal savings or securing short-term financing from a loan shark. Each option had its pros and cons, and they wondered which combination would best suit their needs.

Bank Loan

The partners believed that they would be able to get a loan from a bank. Banks were focused on generating profit and typically required collateral before lending money. The partners were considering approaching BCR, a large bank in Rwanda that provided an investment loan for start-ups and a construction loan for the building of commercial or residential properties. These loans required complete financial statements and a business plan before approval.9 The partners were currently in the process of developing these documents, but they were not completed yet.

If the partners could get a loan with BCR, they would be able to finance the entire $19,000 and begin the project immediately. The bank had an annual interest rate of 16.49 per cent,10 implying that the cost of interest would be $3,133 during the first year of operations. The bank also offered an extended repayment period, meaning that the partners could take six or more years to pay back the loan if necessary. They thought that they would be able to offer Bawazir’s land as collateral for the bank, as well as any equipment and appliances they purchased to start the business.

Microfinance

The partners were also interested in getting a loan from a microfinance institution, which provided loans for low-income clients who wanted to start their own business but couldn’t find typical institutional funding. Rwanda currently had over 22 microfinance banks.11 However, the sizes of these loans tended to be small. Most microfinance banks lent an average of $300 to $400 per borrower.

The partners were particularly interested in COOPEDU-Kigali, the largest microfinance institution in Rwanda. Unlike most other microfinance institutions, its maximum loan size was $50,000, with an average loan of $3,915.12 The organization conducted credit checks and required collateral such as land or a house. Although the partners had enough collateral, they didn’t have a credit history and realized this could be an obstacle.

9 www.bcr.co.rw/index.php/business-banking/investment-loan, accessed February 10, 2013. 10 www.bnr.rw/index.php?id=170&no_cache=1, accessed February 10, 2013.
11 www.mixmarket.org/mfi/country/Rwanda, accessed March 30, 2013.
12 www.mixmarket.org/mfi/coopedu-kigali, accessed March 15, 2013.

Page 6 9B13A046

The partners thought they might be able to finance the full $19,000 with this option. If they did, the annual interest rate of 21.6 per cent would cost them $4,100 in the first year of operations. They could choose to borrow a smaller amount instead. COOPEDU-Kigali had a repayment period of five years.

Private Investors

Davie and Bawazir had developed several connections in the Rwandan tourism industry as a result of past work experience. In particular, they were considering partnering with a local tourism operator in Kigali who had expressed interest in expanding into budget tourism. The tourism operator was willing to pay $6,000 for a 30 per cent equity stake in the business and would need to be repaid within three years. Although partnering with a tourism operator would be very beneficial, Davie and Bawazir were uncomfortable sharing their profits with another investor if they didn’t have to.

Family and Personal Savings

The partners had been able to save a total of $4,000 from past jobs to invest in their business. Bawazir was also considering asking his family for a loan. His father had a good career and might be willing to support the business by offering a two-year loan of $4,000 with no interest charges. Bawazir had a good relationship with his father and was very thankful for his support. However, he didn’t want to disappoint his family and knew there would be negative consequences if the business was unsuccessful.

Loan Sharks

The partners also considered borrowing money from a loan shark. Loan sharks lent money at very high interest rates, typically to people who couldn’t find funding elsewhere because they were poor or didn’t have collateral. The partners thought that they could find a loan shark to lend them the money at an interest rate of 240 per cent annually (20 per cent monthly). They wouldn’t need any documents or collateral for this option. However, most loan sharks were illegal and would use violence to force people to repay their loans. The partners were also concerned that they wouldn’t be able to pay back the high interest. If the partners borrowed the full $19,000 from a loan shark, the interest would likely cost them $46,600 in the first year. The loan shark would also need to be repaid within the first two to three years.

OTHER CONSIDERATIONS

To ensure their business would be successful, Davie and Bawazir knew they had to address a number of challenges beyond the financing and marketing of the campsite. As most backpackers entered Rwanda by bus from neighbouring countries, the partners were concerned about the reliability of existing bus networks. In the event that bus traffic along any of these routes was blocked due to political instability, financial problems or regional violence, the partners realized they would lose a lot of potential business. Somehow this risk had to be factored into their final decision.

Finally, the partners were concerned about how government policies might impact their business prospects. Given the Rwandan government’s focus on high-end tourism, very little public spending was being dedicated to developing the budget tourism industry. Foreign entry visas were also expensive and required a lengthy approval process. Although the government was highly supportive of private enterprise, the

Page 7 9B13A046

partners believed it would be difficult for the budget tourism industry to grow without greater government support.

MAKING A DECISION

As Davie and Bawazir sat overlooking the property at Lake Muhazi, they realized they had many decisions to make regarding their future. How should they finance the construction of the campsite, and how should they address the risks associated with each option? What marketing options should they choose in order to attract a regular customer base? Should international backpackers be their target customers, or should they also enter the growing domestic tourism market by targeting Rwandan citizens looking for an affordable weekend getaway? In any case, with only six months until peak tourism season began in Rwanda, the partners knew they had to figure out how to make their business idea work.

Page 8

9B13A046

EXHIBIT 1: CAMPSITE LAYOUT

Source: Original reproduction based on entrepreneurs’ estimates.

EXHIBIT 2: INITIAL INVESTMENT REQUIREMENTS

EXHIBIT 3: MONTHLY FIXED COSTS