Conditions for a Successful Hospitality Business

There seems to be an attitude out there among property developers that if they build anything substantial they will need a café or restaurant to provide synergy with their project, and as a result  the customers will come. This kind of thinking has led to an explosion in the number of hospitality businesses, to the point that the market is getting seriously overcrowded in our major cities and surrounds.

My home town of Melbourne is a prime example of this. In my office we joke that if things keep going the way they are headed, we will all end up selling lattes and burgers to our next door neighbors. There are a huge number of cafes and basic eateries being established everywhere there are new building projects. The quest for increased population density has led to the erection of many new apartment blocks that all seem to have at least one hospitality business on the ground floor street frontage.

The reality is that you would have to have several thousand residents in an apartment block to supply a café with consistent trade, so most of these businesses need to attract customers from the trading radius around them. This invariably means that they are directly competing with many other similar businesses for a sustainable share of the available customer base.

An available customer base is a relatively finite thing, because in any given area there are a limited number of people wanting food and beverage on any given day. Every time a new business is established in a trading radius it dilutes the customer base of competing businesses, sometimes to the point where trade declines to the point where there is no profit left.

It’s not just in our cities. Out in the regional surrounds there seem to be an unsustainable number of fine dining venues being established in wineries and boutique hotels. Having been engaged to consult of quite a few of these businesses — unfortunately mostly after they were established without a proper feasibility study — the further up-market you go in a regional area the more problematic management becomes. Skilled staff are almost impossible to find and the locals won’t pay the prices being asked for during the week. The result is that these businesses tend to make money from the weekend tourist trade, only to pour it back into the business in order to keep trading during the quiet times of the week.

This attitude of: ‘Build it and they will come’ seems to be a common misconception among all but seasoned hospitality professionals.  If you are a skilled enough operator and can create a business that is consistently delivering above average product and service, at a price level that is perceived to be value for money, you might get away with it by stealing customers from all the businesses around you. Most operators do not have this skill, and they run average businesses that do not give customers an incentive to switch loyalty.

The further up market you attempt to go, the higher the population needs to be around you in order for viability — for example, I believe you need a population of 1,500,000+ within 50km for a three hat restaurant to be viable. Our major cities can support a few of them, but it’s very wishful thinking to put one out in the sticks and expect it to make money. Normally the operators who try run at a loss for some years, until they can build sufficient accommodation to offset the hemorrhage the restaurant is sustaining.

If you aspire to your own hospitality business, do not assume that you have a limited chance for success. I do feel that there are opportunities for new hospitality businesses in many of our larger regional cities, which tend to be under serviced with modern eateries, provided you don’t try to go beyond the mid-market level, or get too fancy with your offering. The old adage: ‘Feed the rich, go home poor; feed the poor, go home rich’ is still a valid mantra in this industry.

The message here is to be aware and do your homework. Just because the new building down the road is offering you an attractive lease, doesn’t mean it’s a good deal. I would map out all the competing business within a couple of kilometers and go and visit them. If you don’t think you can exceed their standards at a similar price to them, you should probably think twice.

Likewise if you are an experienced operation who is approached to run the fine dining restaurant in a winery of boutique hotel, be very, very careful. All that glitters is not gold.