Ray Camillo – Founder & CEO, Blue Orbit Restaurant Consulting
There isn’t much better than a big fat pastrami sandwich. I’m talking about the 16 ouncers…you know…the 7th Avenue crowd in New York…Carnegie or Stage or Katz? Far too often, especially in chains like Jason’s or Schlotzky’s or Wall St., you get the sense that someone is putting the meat on a scale. There’s no “Look at THAT! I DARE you to try to finish it!” like at the places that have a reputation. If you’re a Deli and you don’t serve an enormous Pastrami sandwich, are you really a Deli? (that’s rhetorical).
A few years ago I used to watch a show on TLC called “Junkyard Wars”… a little geeky, but I learned a valuable “rule of thumb” from it (it has since been pulled but you might be able to catch some in BBC syndication…it wasn’t that great of a show so don’t sweat it). In the show, two teams were asked to build motorized vehicles to perform some task defined at the beginning of the show using whatever junk they could find from around a junkyard. The vehicles could be boats, planes, motorcycles, ATV’s, or trucks. Regardless, the game was the same: “You build yours, I build mine, then we race”. The show went off the air, I believe, because the story line was too predictable: Whomever had the best power to weight ratio ALWAYS won. A Honda CR 125 dirt bike generates probably 25 horsepower. A 1967 Mustang GT (Eleanor from “Gone in 60 Seconds”…sorry…had free Direct TV preview from Starz this weekend) has, probably, 400 horsepower. In a 1/4 mile sprint the dirt bike will smoke the Mustang every time. The significantly lower horsepower in the bike is more than offset by the significantly higher weight of the Mustang (250lbs vs 4000lbs). For a restaurant, determining the right “power to weight” ratio is not always easy. A hot dog stand is akin to a motorcycle…low overhead (weight), high profit margin percent…but not much in gross profit dollars (power). A large Market & Bakery generates incredible retail sales (often over $1000 per square foot) but it is labor intensive and the profit margin is lower, so the trick is to generate enough revenue. Would you rather have 5% of $15M or 20% of $3M?
It isn’t so easy to identify which combination of seating capacity, through-put, profit margin, and production complexity will win the race but you can level the field in a big hurry if you stick with one altruism: Rent should be about 6% of your estimated sales.
This one is probably my favorite “rules of thumb” because the startup process generally leads with an idea for a concept followed by an emotional site selection process. “I’ve always wanted to put a restaurant here!” or “Look at the traffic! It’s a sure hit.” Hey look…you can find out the cost per square foot pretty easily. Brokers and Landlords don’t keep it a secret. Bake in the CAM (common area maintenance), multiply it by the number of square feet and voila!…there’s your annual Occupancy Cost. Divide it by 6% and you had better be able to meet or exceed those sales numbers or you have the wrong place. Don’t violate this or you’ll be in for trouble. Pizza place, sandwich shop, steak house, dinner-only fine dining, bagel shop…don’t care. If you can’t do the sales, look elsewhere.
Here’s an example. The Landlord is offering a 5000 sq ft end cap unit for $28 sq. ft. with $4 CAM. Occupancy Costs = $160,000. You had better be able to deliver $2,666,667 in top line sales or you’re at a disadvantage. Why? Because that bit above about “it’s hard to get the right power to weight ratio” is not hard when you’ve opened enough restaurants and wept through enough closings to know. It gives you breathing room. It allows you some room to fiddle with your consumer value proposition so your guests don’t feel pinched every time avocados or tomatoes or lettuce or beef prices get jiggy and you feel compelled to goose prices or pull an ounce of meat off your sandwiches. Screw around with the value proposition and you’ll lift your head from your computer one day to find that Fred (the bar regular who likes Makers Mark Manhattans, perfect, up) and Julie (the lady who always takes two cannoli’s home for her daughters) and Richard (the guy who thinks “medium rare” is “warm pink center”) and that-cute-little-old-couple (that come every Tuesday at 5:15 and request table 42 with the Ocean View) have stopped coming in. Too late. Get the rent right on the front end, because the back end isn’t pretty.
I’m always amused when I hear of would-be-restaurateurs looking for locations but they can hardly articulate their concept. “It’s gonna be great! I’ve got a great recipe for ribs and BBQ pork butt that will knock your socks off!…seats? prime costs? direct expenses? debt repayment? operating capital? construction contingencies? tenant improvements? FF&E? I’ll figure it out after I get the location”. Are they mad? They skip the financial profit structure…the part where the ‘power to weight ratio’ is defined through knowing what kind of check averages the market will voluntarily bear and what kind of costs are associated with hanging that shingle on the door.
If you’re a restaurant broker or are in commercial real estate and you have a potential buyer on the hook that never calculates their rent as a percentage of expected sales, then you have a future failure on your hands. They haven’t a clue. They’re the restaurateurs who make menu choices based on something their mother-in-law saw on TV or they choose equipment without having a menu defined (um…you bought a 72 inch griddle but use it only for toasting hamburger buns?..oh! but you got a great deal on it…I see). If you’re a landlord, you don’t want to talk to this guy because you’ll only get your rent through litigation which hangs on the strength of your pre-nup. Move on. Decline future meetings. Run! If you’re selling the property, double the price…you might get it.
If you want to open a restaurant, define your geography “box” (the 25 square mile area where you hope to find a location), then develop your concept FULLY …including financials…no, ESPECIALLY financials. THEN look for the space. As the variables pour in while on your search for the perfect location, you’ll amend your model to suit the area and amend your area to suit your model. It’s an organic process that begins with knowing your profit structure. Rule of Thumb: Rent should be <= 6% of Net Sales. When you’re not under pressure to hit a 28% Food Cost, you can make better decisions for your customers…decisions that increase guest count not ones that focus on squeezing profitability through marginalizing quality. When a restaurant gives me 16 oz of Pastrami on my sandwich for the same price that the guy down the street gets for half the meat, I’m thrilled…because I know the owner is in control of their overhead and is making decisions to keep me coming back.