I am planning a small restaurant . . .

The folly of buying or starting a small restaurant in today's economy.

It seems that every time I run a training workshop there are several people in the room who aspire to owning their own restaurant business. That in itself is not so strange, and their ambition is admirable, but what is odd is that a disturbing percentage of them dream of owning a small, 40 or 50 seat restaurant, on the assumption that this will be affordable and manageable.

A small restaurant of this size would have been a good business 25 years ago, yielding a healthy wage and a reasonable profit, but as our economics have changed and competition has increased they are more often than not the goldmine everybody seems to assume. Today many small restaurants are more of a prison than an investment with long, unsociable working hours, poor financial returns and no pot of gold when you sell.

Economic changes

The problem here is that the same economic factors that have led to the demise of the small milk bar, suburban butcher and greengrocer; and redirected their customers into supermarkets and convenience stores, is also affecting restaurants. The average size for restaurant viability is increasing steadily as time moves on.

There are, of course, exceptions to the rule. A small fine dining restaurant with a customer average spend of $130+ per head and a 

small restaurant
Small is often not viable. Be careful

steady customer flow might be viable, as would be a restaurant that had a much lower customer average spend but did three or four table turns a day (and in effect functioned as a 200 seat restaurant with the rent of a 50 seater). Examples of either are quite rare though, and the reality is that most small restaurants are doing it hard.

Selling prices relatively stagnant while costs increase steadily

Profit is down
Profits have been slowly declining over the last 25 years

The reasons behind this are quite complex, but to put it simply, selling prices have fallen way behind inflation over the last 20 years while costs have risen way above inflation — at a time when property developers are driving the establishment of many more businesses than the market can absorb profitably. In a nutshell, profit margins have declined alarmingly, and unless you are big enough to take advantage of the economy of scale that comes with a larger operation, you are unlikely to make a reasonable return for all your effort.

Unfortunately, I think the barrier to entry in a viable restaurant business is now around the $1.5+million mark, because of the requirement to operate at a viable size. This is quite unsettling to me, as this industry has traditionally been driven from the bottom by chefs and waiters who band together and go into business on the basis of family money of a mortgage on their houses. The necessity to stump up a million dollars puts entry in this manner largely out of reach. 25 years ago all they would have had to come up with would be $100,000.

The media have compounded current problems

To compound all this, the media have accelerated the speed of evolution of food, beverage and decor concepts. There are a whole generation of kids and young adults who are expecting to get cutting edge, contemporary food at their local restaurants because that’s what TV shows like MasterChef and My Kitchen Rules have educated them to anticipate. The problem is, if you’re stuck working most evenings in your small restaurant because you can’t afford staff, you don’t either watch TV or get out and about to keep up with the world, making the process of staying fresh and contemporary quite difficult.

Great entertainment, but provides the public with unreal expectations

You need to get out and about

I’ve noticed that the restaurateurs who are commercially successful mostly have the ability to get away from their businesses and sample the new, hot places or travel to culinary trendsetters like London, Paris or New York, while their staff run their restaurants. Have a look at the small restaurants around you that are now food and service museums with an elderly customer base;  there’s a reason why they have stagnated — the owner can’t get out.

You have to stay contemporary to charge a premium in the food business; the moment you fall behind fashion you have to discount or be cheap to keep customers coming. Neither will help the viability of a small restaurant.

Stay away from fine dining until you are quite experienced

Don’t do it until you are very experienced (and skilled)

Peoples’ egos drive part of the problem. Most of the people I talk to who want to get into their own restaurant want to do fine dining and get their name in the papers. If they would only temper their dream for a while and go downmarket to a cafe or a fast food business, where there is still a reasonable profit to be made, they would be a lot better off and gradually increase their assets and their skills until wisdom and experience made the move up market a lot less risky.

It frightens me that most of the people who express the desire for their own restaurant have no real appreciation for restaurant economics nor an understanding of the necessity for tight management in today’s environment, and seem to think that as long as you put good food on a plate and serve it with competence, you will be successful and make money, because that’s the way it has always been in the past.

Past generation

Alas, I fear that we have passed the last generation of hospitality staff who will be able to go into business with their own resources, and future ventures will have to be heavily financed. I hope all you aspiring restaurateurs have got rich families ’cause the banks won’t give you the money, now or in the foreseeable future. Most importantly, don’t fall into the trap of grabbing something cheap that you can afford or you might find yourself directing your life savings toward a virtual prison sentence with hard labour.

To learn more about the topics discussed in this article please consider the following courses,

For documentation to support the management systems discussed in this article, please visit our resources website.

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