What is a ‘Golden Location’, and what is a dog?

There’s a fine tradition in this industry of people who want to be business owners partnering with others who supply the capital for what they all believe is going to be the goose that lays the golden egg. Rarely does it seem to work out this way. More often than not it’s a case of the optimistic leading the hopeful.

Hot new restaurant

You’ll see them in all our cities — they open with a burst of glitzy PR and soon establish the position of ‘hot new restaurant’ — the place to be seen. The media, swayed by the sheer weight of money thrown at the project, the opulent surroundings and the rent-a-crowd functions that are the norm with new openings, proceed to write reports that seem to have more to do with politics than objectivity.

over the top

You don’t need to make an over the top statement

Did they spend too much?

Some time later I’ll wander in to check the place out as part of my eternal quest to stay current, and sit there like Alice in Wonderland, trying to make sense of the maths behind it all. Disturbingly, these places often fail to even remotely stack up when you crunch the numbers. If you spend several million dollars on the fitout of a restaurant, you’ve got to sell a huge amount of food and beverage at a very high margin to get your money back within a reasonable time.

It’s the old trap of overcapitalising your business, without understanding the basic economics that underpins your industry. The end result is that some time down the track your business will probably collapse after haemorrhaging money for some time and you are forced to sell the whole thing for the auction value of the fixtures and fittings, because there is no profit.

Overcapitalising is not the only issue with these new businesses. Often the lack of understanding of industry economics also extends to a blissful ignorance of wage and f&b cost control and the losses are amplified by an internal operation that would never have made any money even if the place had been set-up cheaply.

Opportunity

Could be a good pick-up. Near new fitout, six months rent free

Opportunity to pick-up a bargain

Those wise old heads among my readers may have spotted an opportunity here. Yes, you can often pick up a multi-million dollar fitout for a fraction of its cost by combing your newspapers and looking for these businesses as they go into administration or liquidation. You may get an excellent deal — or it may not, depending on circumstance. You have to be very careful.

This leads me to the mistake that the experienced operators often make in the quest for a bargain, following the demise of an overcapitalised business. Blinded by what seems to be a bargain pick-up, and forced to act quickly to secure the opportunity, the bargain hunter often acts without proper research and finds to their detriment that they’ve bought a dog.

Is the location suitable?

Location

Similar to residential where you pay more for a view, with restaurant sites you pay for pedestrian traffic and parking

The issue here is ‘Was this business located carefully in the first place?’ In the rush to pick-up a cheap fitout such issues as customer access, parking, lack of pedestrian traffic, lack of synergy with surrounding businesses, etc. are often ignored. In other words, the same ignorance that overcapitalised the original business and ran it unprofitably, possibly put it in the wrong place to begin with.

Consider your region, I’m sure if you think about it you’ll recognise instances where certain locations have had a steady turnover of operators like financial lemmings, one after the other. There are ‘dead spots’ in every city and town in our country.

The reason I am writing this is that I have been involved with a number of experienced clients who are on the lookout for expansion opportunities, and who have called me all excited about a site they have found that they would like me to assess for them. These sites are invariably the location for a recently deceased business and come with a swank and alluringly cheap fitout.

Seek dispassionate, expert advice

Having no financial or social interest in the proposed business, I can be coldly dispassionate in my assessment and usually talk them out of their intended course of action because there are major flaws in the site that render it a poor investment. Often this is the underlying reason for the demise of the previous business.

One of the key lessons I have learnt over 35 years in this industry is that there are very few ‘golden locations’ out there. A golden location is one that brings a huge natural customer base and good exposure with it; and requires minimal marketing expenditure, providing operating standards are reasonable. An example of golden location would be a restaurant situated between a free standing multiplex cinema and its main car park.

3 elements for success

All three elements have to be correct before you have a good chance for success

There are really three key elements in the success of a restaurant or similar business:

  1. The location has to be carefully chosen to provide a customer base at a reasonable rent.
  2. The business must be established within strict monetary limits that are carefully calculated after a proper feasibility study establishes the likely economics of that particular concept.
  3. The business must be run professionally, delivering above average product and service standards, within very strict cost constraints.

Just because you throw a bucket of money at a site, or the opposite — you pick up a slick location for a song — doesn’t mean you are in any way guaranteed of success. There are traps here for both the newbie operator and for the old hand. I’d love 10% of all the money that is squandered on ill-considered hospitality projects in Australia — I’d be up there with Warren Buffet in no time.