The Restaurant Cost That Seals its Fate

My Advice

It’s expensive to actually live your dream of owning a restaurant.  Don’t be skimpy on your business advisers:  professional and personal.  This is usually the most important part of the investment.

A Restaurant of Your Own

Americans love food, and dining out is a favorite pastime.  And those who are excellent critics and have great confidence frequently reach the conclusion that the American dream of owning a restaurant can be theirs!  It’s the perfect “glamour” business!  People know what constitutes good food, service and atmosphere and oftentimes they know they can make a better meal and presentation, provide better service, create a much more appealing dining room and even have a clean and attractive menu brought to each and every customer.

But, can they make a living doing it?  There’s a lot more to owning a restaurant than being the king and queen of quality.  It’s a unique and complex business.  Probably the most unique characteristic is that a restaurant both manufactures and retails its product at the same time.  Most product-oriented businesses do either one or the other; no one goes into a dress store, for example, looks at a selection of dresses, orders a size 6 without the ruffles, but with extra glitter on the hem and expects it in less than 10 minutes.

A restaurant is first and foremost a business and follows the basic rules of business. It’s often said that restaurants are “risky,” but, that’s not exactly true.  The “riskiest” businesses, as experienced business people and economics academics know, are the under capitalized ones, and it’s true that a restaurant can be opened without significant capital, due to its labor-intensive nature and relatively limited inventory.  The key is to know how to reduce these risk factors.

Before you jump head-on into opening your own restaurant, I suggest you heed a few cautionary words from someone with 30+ years of experience.  The first part of the equation for success is bringing in the revenues.  A great concept with a good location and exceptional marketing from point-of-sale, websites, group packaging, advertising, guerrilla marketing et.al. will bring the people in.  Excellent food, service, and ambiance will bring them and their friends back.  It is the understanding of the hidden risk factors that will balance the rest of the equation.

Manageable Cost of Success

The first thing to acknowledge is that there are a multitude of costs involved in operating a restaurant, but most of them are fixed or relatively stable.  You can massage them here and there for better profits or, heaven forbid, fewer losses.  These include such basic costs of operating a business:

  • utilities (3%)
  • legal and accounting (1%)
  • credit cards (1.5%)
  • maintenance and repair (2.5%)
  • marketing (5%)
  • etc.

Thus, it is the other costs of operation that the owner must control in order to make a living. Two are controlled after the front door is opened for business:  product and labor costs. Excellent organizational and management skills, smart buying, menu pricing, etc. will control these costs.

The Restaurant Cost that Seals A Restaurants Fate

Special attention must be paid to the most significant controllable cost, the one with the potential to create risk, which is fixed before you even open the restaurant,

THE RENT AND DEBT SERVICE THAT IS INITIALLY NEGOTIATED.

Once this restaurant cost is established, it is practically etched in stone.  In other words, before designing and building your visionary restaurant, before you hire personnel, before you buy food and liquor, before you open the front door and start living your dream, you must have negotiated a rent and loan that is not onerous.

Have you often wondered why those great restaurants that were always so busy suddenly closed?  It’s simple.  They probably never had a chance to succeed; the rent and/or debt service was so high that the owner could not afford to pay them no matter how much business could be squeezed into the space.  In other words, the fate was sealed when the owner signed the lease, before the front door ever opened!

If a business has cost control problems in the operations labor and/or product the problems can be resolved, although not necessarily without a good bit of angst and pain.  If a business has a revenue problem, this too can be resolved with good sound marketing, pliable owners, and management and usually an infusion of new capital – to grow the business.

But the rent and debt service cost, the one that is established before opening, is a completely different matter.  So often, operators, investors, landlords and/or lenders needing to evaluate struggling operations call me and I have to report that the rent and debt service needs to be restructured.  Hopefully the “fate controllers” (landlords and lenders) want the operator to make a living and be successful, so they can and will accede to the changes; otherwise, I get a hardy handshake and a “thanks anyway.”

My Advice Revisited

The moral of the story?  It’s expensive to actually live your dream of owning a restaurant.  Don’t be skimpy on your business advisers:  professional and personal.  This is usually the most important part of the investment because this will ensure that the costs you can control before you open are in the proper range for success.

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One Response to The Restaurant Cost That Seals its Fate

  1. Otto Eckstut July 19, 2014 at 3:50 pm #

    Even one of the best and busiest restaurants in America, The Union Square Cafe, is closing because the rent is getting too high. Recent New York Times articles:

    http://www.nytimes.com/2014/06/24/dining/union-square-cafe-joins-other-victims-of-new-york-citys-rising-rents.html?module=Search&mabReward=relbias%3Aw%2C{%221%22%3A%22RI%3A10%22}&_r=0

    http://www.nytimes.com/2014/07/03/opinion/danny-meyers-union-square-cafe-is-a-casualty-of-rising-rents.html?module=Search&mabReward=relbias%3Aw%2C{%221%22%3A%22RI%3A10%22}

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