Ray Camillo – Founder & CEO, Blue Orbit Restaurant Consulting
Restaurants are fun, sexy, thrilling and everybody wants one. So much so that opinions about how hard it is to open and run one are everywhere with nary a fact checker to contest them. I’d like to step up and be that fact checker. I’m going a bit off-the-cuff, but my cuff is pretty legit considering we’ve opened, operated, fixed and grown so many restaurants that our opinions serve as the facts. However, I won’t be offended if you call this an opinion piece – this isn’t the New York Times.
Here are the 14 most common misconceptions about opening a restaurant that I’ve found through my experience:
- 90% of All Restaurants Fail within the First Year – FALSE. According to Forbes, only 17% of restaurants close in the first year. Big difference. The article also finds that real estate and real estate brokerage offices fail 21% of the time within the first year and landscapers and automotive repair shops fail 19% of the time during the first year. Insurance agencies and insurance brokerages have the same failure rate as restaurants. What gives restaurants a bad rap, in my opinion, is that anyone can open a restaurant. We help a lot of career changers who have always dreamed about opening a restaurant. For every aspiring restaurateur we help there are probably a few dozen that don’t seek professional help. Instead they seek advice from friends that worked in the business but perhaps never quite achieved the level that is capable of creating a functioning business and bringing it to market. Being able to cook a recipe does not qualify one to create a recipe any more than being a restaurant manager qualifies one to develop a successful restaurant concept. Those entrepreneurs often struggle mightily and learn the hard way, spending significantly more than they budgeted and significantly more than they needed to. I was at a conference on Boston last year where Mario Batali recited to a room of over 5,000 a fact-based piece of lore: “The number one reason restaurants fail is because they’re under-capitalized.” I let out a yelp that made the audience chuckle. Pay a professional to help you figure out how much you need to borrow FIRST…then write a business plan to help you go get that money from a bank or investors. That’s the safest and sanest way to start.
- Opening a Restaurant Requires Years of Experience in the Restaurant Business – FALSE. Restaurant operations should be taken seriously and can be complex to manage considering they are both production facilities and retail facilities under one roof. Just because someone worked in a restaurant doesn’t qualify them to open one. A better indicator of success is an open mind, demonstrated business savvy and a willingness to roll up one’s sleeves to understand the relationships between labor, cost of goods and sales. It’s also vital to have a good sense for what people want and how people decide what they want. Much can be gleaned from books, like Why We Buy by Paco Underhill, 22 Immutable Laws of Branding by Al and Laura Ries, and Why She Buys by Bridgett Brennan. Another good book is Restaurant Success by the Numbers by Roger Fields. I’m not suggesting that you can read a couple of books and be all set – no. You should definitely hire someone qualified to help you create the operating model and concept. Once it has been created and launched, your role will be to inspect and maintain the systems your consultant installed, and you stand a good chance of being wildly successful.
- I Need to Hire a Chef to Create My Recipes and Run My Kitchen – FALSE. You need a great operator…someone who will follow a play book that someone else writes, to the letter, without deviation, without going off the island. That individual is usually not as creative as a chef. but they’re wired to be consistent and sticklers for following the rules. Outsource your creative needs to a creative consulting chef who is paired with a business consultant who can engineer a menu for profit, throughput, ingredient cross use, station load, equipment support, and efficiency. Creative chefs are expensive, they get bored easily and they generally (speaking from experience) don’t like to document and cost recipes. Some even use their lack of documentation to secure their jobs (“…Fire me and your menu will never be the same!”). Dixon Ticonderoga Company knows how much their pencils cost to make…and so they know how much to charge to get the profit they want. How can a restaurant be successful if it doesn’t know how much its products cost? The answer is “with luck” or “intuition” …but for my money, I’d bet on solid numbers and menu engineering vs. overpaying for a chef who won’t mind the store as tightly as I need them to.
- It’s More Expensive to Cook from Scratch Using Real Ingredients – FALSE (usually). Maintaining food cost is vital and it usually represents 22% to 35% of all of the restaurants costs. It’s a balancing act between labor and product costs. Raw ingredients almost always cost less than pre-packaged, pre-cooked, ready to serve or heat and serve items, however, you’ll spend less on labor to open the package and nuke the item or boil it in the bag. Similarly, you’ll spend more on skilled labor to turn raw vegetables and meat into products for sale. Generally speaking the combination of higher paid wages and low cost fresh ingredients wins the day for a couple of reasons: 1) the food will taste better (provided the recipe is right) and 2) you’ll pay only marginally more per hour for qualified labor that can do it right. The added benefit is your becoming the employer of choice in your community because you pay better. Where people go wrong is they try to cook from scratch with low skill labor….so the food is simply not good.
- Great Service Trumps Great Food – FALSE (usually). Our motto is “the food must be the hero.” With so many restaurant concepts tinkering with fast casual / quick serve / pay-first models, service is more about cleanliness and delivering expectations. For full service restaurants, a rude server has a good chance of making a Yelp review, but we find that even the most vocal customers will return to a restaurant if the food is fantastic…even if the service remains surly or incompetent. They may frequent the restaurant less but they will return. Serving bad food (bad tasting, bad smelling, inconsistent, low quality, etc.) is the kiss of death for a restaurant whereas a restaurant perpetually in a category of “service could be better” is just annoying.
- Opening a Small Restaurant Will Increase My Chances of Success – FALSE. If you regard the kitchen as the engine, a restaurant’s engine can only get so small before it is uninhabitable or incapable of producing any food at all. That “smallest engine” can usually support about 75 seats…which translates to about 2,300 square feet. That’s most municipalities. Some exceptions certainly exist in big cities with premium prices for real estate or where walk-up / take out business dominates. But for a fast casual or sit-down restaurant, going smaller than 2,300 square feet means that your engine is strong enough to support 75 seats but you’re seating far fewer. You’re shooting yourself in the foot. We find the sweet spot for profitability to be around 3,500 to 6,000 square feet. There are a lot of variables to consider but moderate sized restaurants tend to throw off more cash and keep the owner from becoming an employee than the smaller restaurant which was opened on the “smaller is safer” premise.
- It’s Better to Hire Experienced Servers so You can Cut Down on Training Cost – FALSE. You want to hire for attitude and personality. Your service staff is your front line and in direct contact with your customers. The most important quality is their likability. They should have a friendly demeanor and your customers should not become ill when they look at those employees (bull rings in noses are oh-so-trendy but I don’t want to think about the booger build-up on that ring while I’m contemplating my menu selection). Also, if a server comes from the Ritz Carlton or Hillstone, they may arrive with a great service pedigree but then their training may supersede your training goals. It’s nice to think you want that in your operation but those servers are not going to be qualified or capable of turning your entire service model into the Ritz or R+D Kitchen so they’ll just become a burden to manage as you compete with their former training to enforce best practices. Hire for intelligence, eagerness to please, personality, pace, and likeability. You can train them how to cut lemons, manicure tables, refill a drink without pandering for applause, or mark a table with a steak knife…and those systems will be yours.
- Kitchen Employees are a Dime a Dozen, and Therefore Inexpensive – FALSE. Your kitchen employees run your production facility, preparing items to order…often under extreme pressure and sometimes in extreme heat. Your kitchen staff should be respected, cared for and treated like gold. Nothing hurts a restaurant more than a revolving door in the kitchen. Pay beyond livable wages to attract the best talent. You need a kitchen staff that cares…that will treat your ingredients with respect…who will be polite with your service staff (who are often stuck between tough customers and tough cooks), and who will show up to work on time every day. It’s hard to find those employees but with the right wage and benefits package you can create those employees. I worked for one company where we purchased Rolex watches for line cooks after 10 years of service and we paid cooks up to $35/hr. because they understood how to work a particular wood burning grill. This takes planning on the front end before you open the doors as your Profit Model must deliver projected profitability to withstand higher kitchen wages. The investment will pay off in the form of sales beyond expectation, longevity, and community status as a great company…which begets more business and ultimately funds growth.
- Restaurants are More Successful When Created and Run by Chefs – IT DEPENDS. As I mentioned above, the food must be the hero. However, if a chef has a poor understanding of systems and business operating structure, their food will shine, but the business may struggle. Methods for monitoring and controlling costs may be a mystery. Forecasting, planning and budgeting may be foreign to them. And the chef owner of a chef driven concept needs to be in the kitchen. The moment they try to move outside of the kitchen to behave like an owner, the customers may get wind of it and ding the restaurant’s reputation. The next-in-charge chef will have a hard time in the shadow of the chef owner, which doesn’t provide them some of what they may want for their career (it becomes a dead-end job for the replacement chef). It’s ok to push the chef to the front as a figure head or even as the owner…so long as it is created on a solid operational and financial foundation with systems that deliver the brand every day. Sometimes the food is so darn good that the restaurant thrives in spite of its poor operational controls. Those cases are exceptions, not rules to follow.
- Location is Everything – FALSE. Not if the food is great and the vibe is right. Sometimes the best location is a horrible location on the sketchy side of town. Timing for a location is more important than the actual location itself. What makes this possible is today’s social media and instant information through technology. With a few pokes on a smartphone screen, the would-be-customer knows a lot about the restaurant – or at lease what the general population thinks about the restaurant which is really what matters. This makes your “online footprint” more important than ever. A healthy Public Relations or Social Media Marketing budget is important – not to develop flyers for under windshield wipers or ads for Sky Magazine but to create strategies to reach people on their phones. A good social media campaign that doesn’t look like a campaign (I hear the Russians do good work) can make almost any location a good location.
- The Small Business Administration will Give me Enough Money to Open my Restaurant – FALSE (usually). The SBA is run through banks…and banks, in general, won’t loan money on things they can’t take away and sell if you fail. Training, menu development, architects, designers, pre-opening inventory, opening parties, and operating reserve are generally not included. We find that 40% of all the money you need to open your restaurant cannot be gotten from a bank. Some choose to ignore this and say, “eh… I have enough for construction…that’s good enough!” The best way to fund a restaurant is use personal savings only for developing materials that will get money from someone else. That means a Profit Model, a Business Plan and often a Concept Book or Pitch Book. The better your presentation the better chance you’ll have of getting the most money possible – whether from a bank or from an equity partner or a combination of both. For starters, ditch your mega bank and start building a relationship with a small local bank where loan decisions include a judgement call from your bank manager instead of mega-bank algorithms.
- Once I get my Certificate of Occupancy, I should be Able to Open the Following Week – FALSE (usually). Timelines during development are rarely met. Usually it’s because of construction overruns or seasonal oversights or permitting delays. The piece of the puzzle that always seems to take it on the chin is training. For months, if not more than a year, the opening process has drained the owner’s wallet so thoroughly that they are obsessed with getting open so they can start making money. As a result so many new restaurant owners try to keep their same target opening date despite the calendar slides along the way. The result is a stilted, abbreviated, and rushed training calendar. From C of O to opening day takes about six weeks. This is for tooling the restaurant, installing and burning the equipment, finalizing recipes on the actual equipment in the actual facility, installing the point of sale system, orienting and training the staff, and running mocks. Anything less is playing with fire. Owners create a eautiful, brand new restaurants and they open with a half-trained staff that is confused and incapable of delivering an enjoyable guest experience. Not a smart business decision. If construction delays the C of O, be sure to move opening day commensurately.
- I Just Need an Architect and General Contractor to Design and Build my Restaurant – FALSE. You will also need a kitchen designer and, if your architect is not also an interior designer, you’ll need one of those too. Architects are skilled at developing plans for the contractor and for submission to the municipality for approval to build. For kitchen and bar design there are many codes and requirements that regulate work space flow, equipment adjacencies, fire code requirements, drain requirements, and power needs. Kitchen equipment varieties are also not generally known by architects, yet kitchen designers are often fluent with many varieties. If you let an architect design your kitchen and specify your equipment, you may end up with a refrigerator door that opens the wrong direction, an under or over powered oven or hoods over things that don’t need hoods. An interior designer makes the guest experience work. Sight lines, lighting, textures, touch points fabrics, furniture durability and aesthetic. Remember, everything looks great in a rendering or layout. Interior designers make your restaurant something for your customers to enjoy beyond the food and drink.
- I Just Need One Manager to Run my Business – IT DEPENDS. You should have one manager per “shift” (Lunch is considered a shift… Dinner is a shift… Breakfast and Lunch can usually be considered one shift too). To be competitive as an employer vying for quality managers, you should schedule no more than 5 shifts per manager per week. Also as a rule of thumb you should schedule no more than 10 hours per shift. If you’re open Lunch and Dinner, 7 days a week, that’s 14 shifts. That means you need 3 managers. Sure you can rig your restaurant to open and/or close with supervisors, so your managers work just the “meat” of the shift (say 10am to 9pm) and trusted hourly employees open and close (65% of all theft and “shrink” occurs at the hands of your most trusted employees… that’s a statistic from all three of the “shrink” seminars I’ve attended over the years…so caveat emptor). But that still means you need another manager to cover the other 2 shifts that your one manager runs. To afford your management labor you need sales enough to cover it. Management labor should land around 9% of all overall labor. So… if your sales are $2M per year, you can afford $180k in manager salaries…including kitchen management. Above I discuss “sweet spots” for restaurants. Being able to afford enough management to run your restaurant effectively is yet another reason you need to be big enough to throw off enough profit to afford those managers. If you decide to ignore this, beware. Restaurants fail in sinister ways…like a slow terminal illness. You won’t always realize that you’re failing until it’s too late and your customers have slowly voted against you by choosing to eat at other restaurants. Invest in good signage, buy nice bathroom soap, procure quality ingredients, pay the right people competitively to cook them…and make sure you have enough smart management to run the machine. Otherwise you’ll just cheap yourself out of business… your structure will have given your restaurant a terminal illness before it even opens.
To open most businesses, the one opening the business must usually have some expertise in that business. To open a cabinet shop, the owner should probably be a cabinet maker. To open a dental office, the owner should probably be a dentist. Opening a restaurant, however, attracts all kinds of entrepreneurs unlike any other business startup. As I stated above, this isn’t necessarily a problem in itself. The problem is that the complexity of opening a restaurant is underestimated and entrepreneurs try to wing it based on assumptions about how they run and what is needed. Outsource the help you need to help you develop something special that you’re proud of.