Monthly Archives: March 2008
The restaurant business is tough. Everyone in it knows it. Everyone looking to get in it ignores it.
The cold fact of the matter is that opening up a restaurant may be one of the worst investments you could make with your money. That’s a horrible, sobering statement coming from someone like me who’s in the business of helping restaurants succeed, but it’s the truth. Most restaurant fail. Oh, the failure rate isn’t the “90%” you may have heard from friends and family, but according to Cornell University, and the National Restaurant Association, 60% of restaurants fail within the first three years of operation. After five years, the number might be as high as 75%.
Why the hell would anyone want to get into this business with a failure rate like that? Risk and reward my friend, risk and reward.
As with other high risk investments, opening the right kind of restaurant in the right kind of market can pay off very well financially. Some of the better chains can see average net profits approaching, and even exceeding 30% of sales. That’s a great return! While the risk of opening a restaurant is huge, the reward can also be huge. If you happen upon the right concept, and manage it well, you could see your investment paid off in 3 years or less, and have lots of residual cash flow to boot.
Certainly there has to be some sort of magic formula you can follow to make sure your restaurant gets these incredible returns, isn’t there?
Unfortunately….. no. There is no magic formula. Experienced operators have businesses go belly up every day, and just as often, novices open up with no clue of what they’re doing, and make a killing. While experience does give you a better chance of succeeding in the high risk world of restaurant ownership, I’m going to give you some points of consideration even more important than experience.
These are the top reasons why restaurants fail.
1) No unique selling point
Your customers need a reason to come to you instead of your competition. While I know you’d love to think that your food is so good that people will line up out the door to eat it, you’re mistaken, just as millions of mistaken restaurant owners before you who are now out of business.
Good/great food and/or service is NOT a unique selling point. “Isn’t that the reason people go to great restaurants?”, you ask? No, it’s not. Now, I don’t want to understate the importance of great food and service, but it isn’t the reason someone is going to try your restaurant. Having great food and/or service is not a UNIQUE selling point. While you may honestly believe that your food is better than your competition’s, I guarantee you your competition thinks the same thing, and they are telling everyone they know. This means that your profession that your food is better sounds just like the message of every one of your competition. THAT is not unique. If you don’t believe me, just step back and listen to all the other restaurants out there. They make a lot of the same claims, don’t they?
If you want to offer something truly unique, you need to move past food and service. Yes, you need to have great food and service, but by having great food and service, you are only meeting the minimum expectations of your customers. You are not giving them a reason to eat with you that your competition isn’t claiming as well. What you need is something original to sell. Something other than the best food or the best service. Your need a UNIQUE selling point.
Sonic offers “nostalgia” with their 50’s style drive-in and car hops.
Burger King offers “accomodation”. “Have it your way!” they tell you.
Applebees markets themselves as “Your favorite neighbor”. They put up local memorabilia when possible, and build in smaller towns. They use stained glass fixtures and tacky decor you might find at that old couple’s house next door.
Hooters sells “sex” with cute waitresses in tight tops and shorts.
A truly unique selling point isn’t the best food or service. It’s an emotion you offer to people, whether it be nostalgia, accomodation, sex or something else. People remember emotions long after they remember food and service. If you make a real, emotional connection with your customers, they will remember how you made them feel for decades to come, long after they forget what they ate and who waited on them. Food and service can support a unique selling point, they just can’t be a unique selling point.
This is a VERY common killer of independent restaurants. As an independent operator, you’ll get pressure from customers to have certain items on your menu. You’ll also have pressure to keep certain items when you make a menu change. You’ll get requests. You’ll get complaints when you change things.
You have to realize that this is all part of the process. YOU CAN NOT PLEASE EVERYONE. It’s a waste of time to even try because you’ll lose your own identity in the process.
Large menus create several problems within an operation:
Large menus lack focus. When you try and offer EVERYTHING your customers like, you aren’t giving them more choices and more reasons to come back, you are confusing them. They don’t know what your specialties are, what you supposedly do well, what they should order, and how to describe you to their friends. If your message is focused and easy to convey, more of your customers will convey your message.
Large menus take longer to order from. The more choices you have on your menu, the longer it takes each table to peruse that menu, and the longer it takes for them to order. For every minute they are NOT ordering, you are NOT making money for the seat they are occupying. Take this statement to heart if you want to be successful in the restaurant business: You will only ever be as successful as your peak period of service. 80% of revenue, and 100% of profit is made during peak periods. Anything that limits your ability to serve customers and collect money during your peak periods is limiting your potential for profit.
Large menus require more inventory items. The more items on your menu, the more ingredients you need to buy to make those items, and the more items you’ll have on your shelf. Every item on your shelf represents a possibility for loss. It can be stolen, it can be mishandled, mis-prepped or stored incorrectly and spoiled. The less inventory items you have, the less waste you’ll have. The less waste you have, the more profit you’ll have.
Large menus require more equipment and personnel to produce. The more items you have on your menu, the less opportunity your staff has to cook multiple orders at once. Less multiple orders means more burners, grill space, fryer grease, and hands are required to produce the same number of dishes. All these additional tools cost you money.
Large menus mean longer ticket times. When you have too many different dishes cooking at once, and less multiple orders in the same pans, it means more time to produce whatever is being ordered. Beyond the fact that Americans are no longer willing to wait 45 minutes to have their dinner prepared for them, you should be thinking about how long ticket times limit your ability to process people through your dining room. The longer it takes to serve each table, the less tables you can turn during peak periods.
It is inherent in people to assume that somehow offering people more will make you appealling to more people. It’s just not true. When you try to be all things to all people, you end up being very little to very few. People need to know what you’re about. Keep your menu focused.
3) All talent and no brains
So you can cook. Your food is fantastic, and everyone you cook for confirms it. You’re ready to open a restaurant then, aren’t you?
Not to burst your bubble, but a lot of people are excellent cooks. Many of them have original ideas and fantastic food that no one has ever offered in a restaurant before. That doesn’t make them, or you, a good candidate to open a restaurant.
Owning a restaurant isn’t about cooking. It’s not about having good food. While those things are components of a good restaurant, they are not the reason for it’s success.
Once you have the perfect menu for your market, knowledgable staff to serve your market, a trained line to reproduce your food, and plenty of booze to ply your guests with, you’re 1/3 of the way there. “WHAT?”, you say? “That’s it! I’ve got all the pieces in place! I’m ready to go!”. No, you’re 1/3 of the way there.
What most new restaurant owners don’t realize is that having good food and service is only 1/3 of the battle. The other 2/3rds include marketing their restaurant and managing their restaurant. We’ll talk about marketing after this, but managing is a very important piece to the puzzle that most new restaurant owners overlook. Beyond making good food and selling it to people, you need to know how to collect data and analyze your business to make sure you have the necessary information to run a profitable business.
You need to know:
How many people I’m feeding each day/shift/hour
What items they’re buying, and how many of each
What gross profit those items are contributing
What those items should have cost me to sell
What my actual cost of selling those items is
What my labor is compared to my budget
How many labor dollars I spend per sales dollar
How many labor hours I spend per sales dollar
What I purchase each day, and how to categorize each purchase for analysis
What my sales are compared to what they should have been
What my profit and loss is for EACH WEEK
That’s a lot of things to worry about, and that’s only the tip of the ice berg. There are many other managerial concerns. This is why I’m telling you that your great ideas for a menu, and incredible talent for cooking will only get you 1/3 of the way to operating a successful restaurant.
4) Poor pricing strategy
Strategy? Yes, strategy. You need to have a method for pricing your menu. You can’t just look at what everyone else is charging, and charge the same. The financial picture of your business is different than every other business out there, and you need to have a pricing strategy that takes your unique financial situation into account.
When considering pricing strategy, I first need to tell you what is being done out there now, in restaurants all over the country, even the world, because the point of this article is to tell you what mistakes everyone else is making.
The predominant method to pricing menus in the food service industry is to use a budgeted cost percentage to formulate prices that will yield that budgeted percentage when the sale of all your different items is taken into account. This method assumes that if you sell X dollars of food, and Y percentage of those dollars go to pay for the food, then you will get Z profit.
The major problem with this pricing method is that most operating expenses within a restaurant do not fluctuate as a percentage of sales. The rent of a restaurant is not always 5% of sales. If sales are down, the percentage goes up, if sales are up, the percentage goes down. Simply achieving a target food cost percentage does not guarantee that a restaurant will make the profit they priced for.
The common sense alternative to pricing by a target percentage is pricing according to the markup you need to cover the expense of doing business, leaving you with a profit you find acceptable. This method is called pricing by gross profit dollars. The basic principle of this method states that you can assume, through calculation, how much every person that walks through your door will cost you to serve, and that with this number you can price your menu to yield an average gross profit greater than the cost necessary to serve every person who walks through your door, in addition to your needed profit. Adjusting these prices according to market price points yields a gross profit that will cover your operating costs, your product costs, and the profit that you decide you need to make for this venture to be worth your time.
Pricing by gross profit is the only method of pricing that takes into account every cost of operating a business, including profit.
5) No marketing skill
This may be the biggest restaurant killer of them all. I’ve talked to hundreds of restaurant owners in my day. I have yet to meet ONE that didn’t underestimate the importance of marketing. As I stated earlier, marketing is 1/3 of the reason you succeed or fail. I may even have to give marketing the extra 1% of the 100% possible when splitting reasons for success into 1/3rds, and say that it is even more important than good food and service, or management skill.
If I have a catch phrase about marketing, it’s this:
“No matter how great your food is, if no one knows, it won’t sell.”
The worst fallacy I see new restaurant owners buy into, is that they can market their new restaurant through “word of mouth”.
Yes, word of mouth marketing is fantastic. New customers are more likely to act on the recommendation of a past customer than they are an ad by you. That much is true.
The problem with assuming word of mouth marketing is going to make throngs of people do the Tennessee Waltz through your door is that when you’re new, NO ONE KNOWS ABOUT YOU! You CAN’T depend on word of mouth marketing until you’re established!
For this reason, a marketing program driven by “word of mouth” marketing for a startup restaurant is a recipe for failure. You need a better plan.
While I won’t go into great detail as to what that plan should include in this post (you can certainly pay me to tell you though), I will tell you that the absolute best marketing tactic you can employ in any retail business or restaurant, is to gather contact information from EVERY person that comes through your door, and market to them. Marketing to existing customers represents an exponentially greater opportunity for increased sales than spending dollars trying to reach new customers. These existing customers are a better source for new customers than any marketing method out there targetting people who haven’t been in your restaurant and aren’t already familiar with your product.
6) Bad negotiation skills
Most new restaurant owners don’t know what they SHOULD be paying for the services necessary to successfully operate a restaurant. That’s a problem.
Every vendor out there, whether they be a food distribution company, point of sale software provider, chemical company, paper goods, linen, liquor, beer or wine distributor, or a credit card processor, has clients who get great deals, and clients who get taken advantage of.
Normally, the difference between a vendor giving you a good purchase rate, and taking advantage of you, is your knowledge of the goods your buying, and what other people are paying for them.
Two thing are a given in negotiating a purchase contract:
If you don’t know what other people are paying for the same goods you’re buying, you’re not getting the best price
If you aren’t making your purveyors COMPETE for your business, you aren’t getting the best price
While there are other negotiation tactics to consider when trying to get premium pricing from a vendor, these two are the most important to remember.
Know this. There is a sucker in every negotiation. If you don’t know who that sucker is, it’s you.
I realize there are other important factors to operating a successful restaurant. These are the six that immediately come to mind while writing this article. I see these six problems in most restaurants and food service ventures I see fail. Keep these six in mind, and maybe, just maybe, you won’t become one of the majority of restaurant owners that fail.
Make vendors compete for your business. If you chose a vendor without making them outbid other vendors, you didn’t get their best price. Competition is the most effective tool you have to keep your purchase costs down. When choosing a vendor, make a list of the top 20-50 items that make up the bulk of your dollar purchases. Send a list of these items to all the vendors in your area that deliver those items, along with a cover letter informing them that you are taking bids from all local vendors that provide these items. The cover letter should also let them know approximately how much dollar sales volume you do, and any issues pertaining to the supply of those products that you have. This bidding process needs to happen every year so whoever you choose to go with has to continue to compete on price to get your business. You should also require them to verify their prices on your inventory every 3-4 months.
Depreciate all build out costs at 30 years. Some capital purchases in your buildout, like wiring, finishes and equipment can be amoratized to depreciate at 5, 7 or 10 years. A faster depreciation schedule means better cash flow for your business.
Investigate buying groups. Through group purchasing organizations (GPO’s), a smaller chain or individual restaurant may be able to receive discounts on purchases of all types, such as food, paper goods, chemicals, linen, uniforms, equipment, maintenance supplies and more. Two of the larger buying groups out there are Avendra, Marriott’s buying group, and Foodbuy, the buying group for Compass. While a well negotiated individual purchasing contract can yield just as good, or better, prices than a buying group, many operators don’t have the experience to successfully negotiate such a contract.
Blame a particular advertising medium for the failure of an ad campaign. In most cases, advertising mediums don’t fail restaurants, restaurants fail their ad campaign. I’ll explain. The success of an ad campaign doesn’t depend on a particular marketing medium. Saying that “Radio/TV/billboards/direct mail/internet doesn’t work for us” is a cop out. Marketing mediums don’t fail. Marketing messages fail. While radio, for example, isn’t the ideal medium for every ad campaign, it does work for certain promotions if the message is formed right. All the advertising dollars in the world aren’t going to make a bad message effective on any medium. You can’t just pay to have your business’ name plastered on a TV ad every 10 minutes and expect it to bring people in. That’s not how advertising works.
Take a physical inventory weekly. Knowing your cost of goods sold on a weekly basis allows you to catch major problems sooner. It doesn’t do you any good to find out you had a cost control problem 4 weeks earlier. By then, there’s nothing you can do about it. The steps to figuring your cost of goods sold include; (1) create an inventory spreadsheet with all your current purchase prices for your inventory items, (2) count all your inventory items after the end of business on Sunday, and before the beginning of business on Monday, (3) enter your counts into your inventory spreadsheet to calculate how many dollars of each inventory item you have on hand, (4) add your purchases for the week in review to the beginning inventory for that week, which is the count you took the prior week, (5) subtract your ending inventory, which is the count you took this week, from this amount. The remaining number is your cost of goods sold.
Operate under the assumption that fired employees qualify for unemployment benefits. This is a common misnomer in every industry of business, perpetuated by uninformed employees and managers. If you keep accurate records of disciplinary actions taken against an employee, give that employee an opportunity to correct that action, then accurately record their failure to do so, you have enough evidence to avoid having your unemployment insurance being charged for that employee’s unemployment benefits. In most states, a terminated employee will not qualify for unemployment benefits, but the business has to show accurate records for this to happen.
Find some way to reward employees. Playing games with staff, and making them compete against each other is not only fun for the employees, but also profitable for your business. Have selling competitions with service staff. Have speed competitions with kitchen staff. Any issue your restaurant or food service is experience can be improved through the implementation of some sort of game or competition to improve that situation.
Underestimate the impact of a clean bathroom. Your bathroom in your business is a reflection of the overall cleanliness of your business. A clean bathroom will make your guests confident that your kitchen, and the rest of your restaurant, is also clean and sanitary.
Slow economies have traditionally been very good for quick service restaurants. Eating out is usually the last part of the budget that a family sacrifices on. They do however change where they are eating out. Restaurants that offer exceptional value benefit from the increased consideration of value in the decision making process of a family or individual.
More important to the potential success of a restaurant than the national economy, is your local economy. While the national news bombards us with doom and gloom messages of recession and job loss, some cities still have economies that are thriving. In our country, there is opportunity to make money out there in the restaurant business. The industry will grow this year, as it always does.
There are restaurants that won’t make it through the year. There always are. They will blame the economy, cheap customers, thieving employees, greedy vendors, gas prices, and everything else you can imagine, except themselves. You can’t base your opportunity on the experience of others. We all have our own individual challenges within our businesses. You have to evaluate your situation seperate from anyone else and determine if there is still opporunity there for you, and whether or not the risk is worth it.
Concentrate your marketing efforts and dollars on people who already know you.
Try to be all things to all people. Find your niche.
Incorporate a few “signature” items into your menu. Having items that your competitors don’t have gives your customers a reason to come to you instead of them.
Depend solely on word of mouth marketing. Word of mouth marketing only works AFTER a lot of people know who you are.
Update your prices at least 3 times per year. Small, incremental price increases are likely to go unseen by your customers. Wait too long, and you’ll have to significantly increase all your prices at once, which WILL be noticed. Those frequent small increases are better for cash flow than occasional big increases.
Know your target market. Your target market is not the people you WANT to buy your food, but rather the ones MOST LIKELY to buy your food. A big red flag in any marketing plan is an assumption that your concept appeals to everyone.Don’t:
Have a large menu. Large menus confuse your concept, increase ticket times, decrease table turns, increase waste, make server training harder, and overall just make you lose money. You can’t be all things to all people. If you try, you’ll be very little to very few.Do:
Have an exit strategy. Knowing how you’re getting out of this venture if things don’t go right is more important than knowing how to get into it. What happens with your lease if your concept fails? Do you have provisions that protect you in case of road construction, building construction, or other cicumstances beyond your control?
Think if you “build it they will come”. Every new restaurateur thinks their food and product is so interesting and unique that people will flock to their restaurant just because they opened it.
Have a marketing plan. Word of mouth marketing only works if a lot of people already know about your business. You can’t depend on word of mouth for a startup. Marketing a startup takes money and a plan on how best to utilize that money to get people in your door, so you can build relationships and earn their referrals to their friends.
Sign a contract without having it reviewed by legal counsel, whether it’s for a lease, a partnership, or a vendor.
Create a unique selling point. Form an emotional bond with your customers by promising to make them FEEL something, then delivering on that promise. The memory of how you made someone feel with your restaurant will last long after they forget who served them and what they ate. “Good/great food and service” are NOT unique selling points. Every restaurant claims to have these. The emotion that you promise and deliver to your customers IS a unique selling point. Other restaurants will not have this.
Will there be wine service at the party? I wouldn’t be comfortable having 1 server to serve and cocktail for more than 20 people in a four course dinner. Even then, I would want to make sure the first course was pre-set, in addition to bread, butter, coffee cups and saucers, water and iced teas for half the guests if the bar is a cash bar or if there wasn’t a bar. If it’s a free bar, I wouldn’t worry about the iced teas.
Even 20 people all at once for one server is stretching yourself thin, except that you have 1 busser for every 3 tables. That helps.
How is your service station set up for this party? How far will servers have to walk to fill and refill water pitchers and coffee pots? Where is your bus station in relation to the tables, or do you use large oval trays?
How you service this large a party will have a lot to do with how they view your prices. It will definately affect whether you get referrals.
In my opinion, it’s worth it to go above and beyond on service to make a name for yourself, and build value in your banquet prices so you can increase them when you need to. With that in mind, in my years running country clubs, served dinners with more than 2 courses and cocktail service, never got less than:
1 server per 15 guests
1 busser per 50 guests
1 bartender per 75-100 guests
1 manager/captain per 150 guests
1 buffet attendant per 75 guests
There are many restaurants and catering services out there that don’t offer anything beyond food and food table setup. They set things out, and people help themselves. This is all fine for a family reunion, and casual affairs with paper and plastic. If you’re plating and serving, provide the same level of service you would in a restaurant, and make a name for yourself.
In most cases, coupons are a path to disaster. Coupons undervalue your product, and getting customers to come in with coupons doesn’t give them a good idea of what type of value you really offer. You end up with customers that think your restaurant is a good value, “with a coupon”. Then, they wait til the next coupon to come out before they come back to your restaurant.
As far as chains that use coupons, they know something the average independent operator doesn’t. They have a sales history showing them how much of their sales are given away in the form of coupons. They track their discounts, and they price their coupon marketing strategy into their menu. If a pizza costs them $3.00 to make, and they need to make $7 gross profit for every pizza they sell, they know they have to make the regular price of that pizza $12 or $13 so they can send you a coupon and make you think you’re getting a good deal paying only $10.
How many people really pay $18.00 for a large pizza at Papa John’s? None. People wait until they have coupons. Sure Papa John’s makes money, but they know they’re not earning repeat, full price, customers by sending out coupons. They know how much money couponing is costing them, and they adjust their prices accordingly. They then use coupons as a “trick” to build value into their product.
Can coupons be used responsibly and still allow for a profit? Sure, if that is part of your marketing and pricing strategy from the get-go. Outside of that, coupons should only be used to promote items that earn you MORE gross profit than you need to make money AFTER the discount is applied. Even then, I suggest never offering a flat percentage discount, and only using coupons to promote package values, or to give freebies that are “extras” that won’t detract from the gross profit you’ll make by selling the rest of the meal at full price.