I love restaurants. I love a good dining experience. I love the communal idea of going to a restaurant and having a pleasant social evening. And yet, I would never open my own restaurant.
I have been involved in several businesses in my life, and every day I talk to owners of all sorts of companies. I am always curious to learn how businesses make money. I am fascinated by revenue models and how big margins are.
I am familiar with a few very successful restaurant owners who have built multiple restaurants. But I also meet people who dream of opening their own restaurant to realize after they open it that it was not what they expected.
I have thought a lot about the economics of a restaurant business and have concluded that I would never be comfortable running such a business.
Restaurants require a high startup cost.
You need a lot of money to open the doors for business. You will need to find space and lease it, preferably in an area where people will notice your restaurant. You will need to spend lots of money on renovating, decorating, and fitting out the place. You will also need to get all the necessary licenses. Opening a restaurant has quite a bit of paperwork involved, as you will need to adhere to local laws and regulations regarding food and safety.
You will need to hire staff for cooking, to serve, and to clean (unless you plan on doing this yourself) from day one.
So just by opening for business, you have already spent a significant amount, usually in the 5 or 6 figures. The first months in a new business tend to suffer substantial losses since no one knows your restaurant. Expect to go deeper into debt before you start turning a profit.
Restaurants have a capacity problem.
A restaurant has a limited number of tables it can serve. If your restaurant fits 15 tables, that’s the most you can sell at any given time. So even though you could probably serve 25 or 30 tables at a time on some days (like a Saturday night), you cannot take advantage of the excess demand.
Compare that with a bakery. If a bakery has certain busy mornings, they arrange to produce more on that morning and have an extra person or two manning the tills.
Now someone could argue against picking a larger location that fits more tables. But what do you do with the remaining five days of the week? Having five tables out of 30 filled on a Tuesday looks pretty dismal. Larger spaces mean larger rents and higher startup costs.
When I visited the United States a few years ago, I was left with a bad impression of how restaurants were getting you out the door as soon as possible so that they could seat more customers. Talk about the anti-climax of the hospitality experience! This is so different from the laid-back Meditteranean approach, where you are expected to spend several hours in the restaurant.
Restaurants are always competing with the next big thing
One of the biggest challenges restaurants face is staying competitive. This is especially common in big cities. A new hipper sushi restaurant opens down the block, and everyone flocks to that joint. A few months later, people are bored of the sushi joint, and they’ve moved to the new Vietnamese restaurant.
Often I will visit a new promising new restaurant, only to realize six months later that it has closed down. This problem is common among trendy and fashion restaurants. People get bored very quickly and move on to the next big thing.
Unless you figure out a way to build long-term returning customers, you will be stuck on a never-ending hamster wheel.
Achieving consistency is a real challenge.
I have a manufacturing background, so I understand all about the challenges of producing the same product of consistent quality every single time. A small change in your raw materials and customers complain that the product is not the same.
Restaurants have this problem multiplied by 10. We return to a restaurant because we loved the shrimps or the spaghetti sauce. But next time we visit, the taste is slightly off. Something has changed in the ingredients.
Maybe they had to change the supplier of the vegetables, or the usual chef had his night off. But minor differences in the product can turn off a returning customer.
This is why I have such massive admiration for businesses like McDonald’s, even though I never eat there anymore. They were the first restaurant business that managed to create a system and standardize the production of their foods. A lot of successful restaurant chains are based on the McDonald’s model.
Restaurants throw out a lot of stuff.
People who are not familiar with the restaurant business assume that restaurants make insane profits. Their reasoning goes something like this:
It cost four bucks for the ingredients to make this, and they charge 17 dollars a plate. They must be rolling in the money! Look how many people are here tonight.
Not quite: Restaurants need to have on stock fresh raw materials for all the foods on the menu. And if on any given night, the actual orders are less than the ingredients on stock, the raw material gets thrown out.
This is money that the business is never getting back. Tomorrow is a new day, and you need to get new raw materials. This problem is pervasive in high-end Michelin-rated fine-dining restaurants. Their reputation is far too valuable not to use fresh raw materials.
Restaurants require lots of staff.
Restaurants are labor-intensive businesses. You need to have waiters to serve tables, chefs to cook, and other staff to support.
All businesses require staff, but restaurants are far more labor-intensive than many other types of companies, such as an e-commerce company or a car rental business.
To give an example, in my manufacturing business, two people could produce 10.000 euros of product in one shift. For a restaurant to make the same amount of revenue, you would probably need at least ten members of staff.
I am not suggesting that the manufacturing business is more profitable, but as an entrepreneur, more staff often means more problems. The more staff, the more friction, and the more likely to get some drama among your employees. Chefs have big egos, waiters can be over-stressed, and cleaners are tired of being treated like crap.
If your chef calls in 2 hours before opening time and says he can’t make it, you could be in big trouble. In most businesses, if a staff member is gone for a few days, this person can be easily replaced.
Perhaps I am a bit weird, but managing people stresses me out. I am always drawn to businesses that require less staff than more.
Final Thoughts
I know people who have been very successful at running restaurants. Usually, these entrepreneurs are not the types that are about opening the next hip thing in town. They have built businesses based on systematizing their production so that if the chef calls in sick, the quality of the food will not be affected.
They also focus on producing dishes that do not require 16 rare ingredients with special flavoring. They are pragmatic, and they focus on how to keep costs low.
Most importantly, they focus on having a few signature dishes that are timeless. People keep on going back to these restaurants regardless of what’s trendy this month.
