Business models are continuously evolving and are becoming more innovative, as competition heats up and start-ups face more hassles getting their foundations established. One of the new ways to obtain money from its engaged customers was listed by The Economist in its piece – Hitting up the customer.
They mention a Mexican food chain in London, Chilango, which started selling bonds, or rather, mini-bonds, with their burritos. This may seem very weird initially, but the more I thought about it, the more appealing it seemed.
The rules of the game are pretty simple:
If I buy something at their store, I can buy a mini-bond as well. The conditions are that I have to invest at least GBP 500, the minimum amount of the mini-bond, for the minimum period of four years, returning an annual interest of 8 percent per annum.
I think it is a beneficial bet for both the investor and the company. Let’s look at it from each party’s perspective.
The customers, who pay for the bonds, lend cash to the company or the food chain, as in this case. In return, they get a good rate of return on their investment.
The disadvantage for me, as a customer, is that I will have locked GBP 500 for four years on a mini-bond rather than investing it on any other financial instrument that provides better returns. My opportunity cost could be significant. Secondly, I will invest in riskier assets as mini-bonds are not subject to tight regulations and paperwork like normal bonds. Thirdly, I cannot trade them, leaving me with little recourse if my investment fails.
But the advantages are many. First and foremost, I get a good annualised return on my investment (a return of 8% per annum is much higher than the UK’s inflation rate). If I have the money and I believe in the food chain, I should opt for such a scheme as it helps me associate myself with the brand. I not only become a lender for the brand but also become engaged with it, as my money is at stake. Secondly, the benefit is not limited to only financial returns. I also get a specific number of free burritos, which serves my purpose. Thirdly, I become a contributing factor in helping the company grow and expand operations and thus reduce the risk of liquidity. Finally, one of the most crucial aspects is that I might be willing to undertake the risk of locking up my money because I am not doing it for money. Of course, there are thousands of other financial instruments that can help me make money. I am doing this primarily because I believe in the brand; that is also why I would not want to trade my bonds anyway.
From the perspective of the company, it is a good deal too. They get money from the customers who are willing to forego their assets for the benefit of the company. The company now gets engaged customers who believe in it and act as brand ambassadors, creating a ripple effect, spreading the word. Secondly, the company is able to quickly scale up its operations without being “handled” by banks, dealing with whom is often a nightmare in most countries. Thirdly, they also raise more money through more people and make more business through the brand ambassadors who bring in more customers.
The business model developed by such companies is not only innovative, but also interdisciplinary. The concept of merging the food & beverage industry with the financial underpinnings of the crowdfunding industry makes this a lucrative investment. The day is not far when such deals become mainstream and investors and customers become more aligned with their aspirations and interests.
What do you think? Would you go in for such a deal with one of your favourite joints (I’m talking about food)?