We’ve heard it again and again from so many people I’ve lost count. It’s been said so many different ways, too:
“The restaurant business is one of the toughest in the world.”
“You’d have to be nuts to get into the restaurant business.”
“It’s one of the best ways to lose your money.”
And so on and so on. So why do we keep doing it? How come so many people get into the foodservice business to begin with, and then seemingly continue to invest in the foodservice market? We see this in the franchise business maybe more than others, where first-time entrepreneurs are, without fail, naturally drawn to foodservice over other business segments—despite all of the negative rhetoric around opening a restaurant.
Why do so many go through this supposed pain and suffering only to lose money on an investment? Well, first off, the restaurant business is one where you have a significant case of the “haves” and the “have nots” where the group of foodservice entrepreneurs who know the business and are effective in running restaurants do make money, and in some cases, make a lot of money. The larger group is the dreamers, those who enjoy the idea of foodservice and get into the business without planning for it, leading to almost certain disaster. The large majority of failed foodservice businesses are gone in the first few years, culminating in what has been published as a 96 percent-plus failure rate within the first five years.
With that in mind, let’s look at the very start of a new restaurant and review what needs to be done to make it work.
Everything should start with planning before the restaurant even begins to take shape. You should develop pricing, marketing models, and also understand customer turnover is required for a profitable business. You will need a brand that means something and presents a value proposition that carries weight to a customer base that makes sense for your market. Do customer research to understand where your brand fits into the market and whether people would be willing to purchase from you. Look at competitors and verify that you offer something unique and valuable against what they have to offer. Investigate real estate with detail and intensity; don’t let your decision get emotional or rushed as real estate will play one of the biggest roles in whether you make it.
Research POS and technology needed to operate your restaurant efficiently and effectively, test before you invest and again, do research as to what the best platform is for your business. Once you have the bulk of your planning done, run the numbers. You don’t want to invest in a restaurant business that can’t show you a 100 percent return on investment at the latest of five years. Realistically, I wouldn’t invest in a restaurant that can’t show three or four years.
Be conservative with revenues and aggressive with expenses in your estimations and then verify numbers with others—a consultant, other restaurants in the area, and people in the restaurant business.
Look hard at the numbers in everything you do with a new restaurant startup. As the business is opening, manage expenses carefully. So many restaurant businesses I have seen overload the upfront costs of things beyond reason. Many restaurants exceed investment ranges and then get into a position of unmanageable debt loads, which produce difficult expenses to manage with higher overhead.
Be logical and always look at the numbers with each part of the investment made. When opening your space, you should be keen in understanding customer turnover and how many buyers can be in the location at any one time. You will have an average ticket (total price spent by each customer), total seating (how many customers you can fit into the restaurant in one sitting), average turnover (how many times each table will be seated during a lunch or dinner), which will all directly feed into your total revenue potential. On the expense side, the prime costs should never exceed 65 percent, which would be labor and food costs. You can avoid costly mistakes in opening a new restaurant many times by just crunching numbers.
Once the new restaurant is open, it’s time to focus on three things: driving customers into your business, staffing, and the bottom line. If you can’t get customers to come eat at your place, be aggressive with marketing and diligent in focusing on building awareness and customer traffic. I once worked with an incredible restaurateur who had success in a variety of brands. His strategy was to drive in families, as his model was a value-oriented seafood brand. He would hand out gift cards essentially for a free meal to teachers in every new market. He did this at the top by handing stacks of the cards to administrators who then could get them into the teacher’s hands. He went into the schools; he sent mailers and anything he could come up with to get teachers coming into the restaurant. Although he gave away the meal, they came with friends, family and others who paid for their meal.
There are many great marketing channels. Find what works and invest in the process to get customer traffic into the location. This also helps with the staffing part of the new restaurant. By getting traffic, even on gift cards, the staff will be busy and get tips sufficient to keep people who would otherwise be leaving. There is no silver bullet for staffing, certainly not when you first open, but you need to keep as many people as possible so that your team is constantly turning over. The better your staff, the better the customer experience and the higher the average ticket will go. For the initial 3–6 months, although bottom line is important, it should not be your key performance indicator as your expenses should be higher until you have consistent customer traffic, but know your numbers in detail so you can understand where the business is at all times.