Why do people think restaurants are a good investment?

It’s time for a bit of a whinge. It never ceases to amaze me how many non-industry people consider themselves to be experts on restaurants and cafes. Sometimes it seems like everywhere I go, from dinner parties to professional meetings with accountants, lawyers and the like, I’m asked questions about the industry and then have to defend my answers against all kinds of ill-informed and sometimes just plain dumb arguments.

These arguments form common themes. Generally, I get challenged with the perception that restaurants make a great deal of money. This seems to stem from the fact that the people concerned only visit restaurants when they are busy — on Friday and Saturday nights, particularly. This is compounded by the belief, largely from men who don’t do the shopping or the cooking, that food is cheap and therefore restaurants are applying massive (unconscionable?) margins. The fact that they are waited-on hand and foot, in plush environments and that there are a myriad of other costs involved beyond the food seems completely lost on them.

Lemmings

Gastronomic lemmings follow each other over the financial cliff

If they aren’t profitable, why are there so many of them?

Then there is the argument that if restaurants weren’t highly profitable there wouldn’t be so many of them, because people aren’t stupid. Well, I’ve got news for them on this one — I’ve seen enough stupidity in my career to have come to the belief that stupidity is almost universal, rather than the exception. How else would you account for the many of people who have launched themselves into restaurants and cafes with minimal research, a second mortgage on their house and an irrational optimism about the future? I call them gastronomic lemmings.

Somewhat perversely, the reason why restaurants are not particularly profitable is because there are so many — way more than the market can stand in our major cities. The laws of supply and demand will always rule supreme.

Don’t wait till you’re in trouble before getting proper advice

Over the 27 years I have been a consultant I have had many people call me for help when they are in trouble and it’s too late to save them (or their house); but I can only recall 8 or 10 who have come for advice before taking the leap — and of those at least half of them paid my bill, ignored the advice I gave them and lost the lot. Go figure?

Then there are the dreamers who tell me they want a small restaurant, say 30 or 40 seats — because they’re easy to run? — and they expect to employ a manager and only go-in in the evenings to socialise with their guests. When you point-out that a restaurant of this size is highly unlikely to be profitable and they will have to work long hours themselves to have any chance of success, they glaze over.

Interestingly, apart from numerous members of the greater public, many of these dreamers have been staff or chefs already working in the industry who envisage being self-employed, but who have no understanding of business. Often, these people have had no exposure to the financial side of a restaurant.

Historic building

Cute restaurant site? It’s in the wrong location and would cost a fortune to restore and fit-out.

Don’t fall in love with a building or space till you’ve done the research

The ones who fall in love with a building are also problematic. They often see a place that they assume will make a good restaurant, but it completely escapes them that there is no convenient parking nearby or the location has a totally geriatric demographic or some other basic issue. The prevailing view seems to be that if you establish it, customers will come — and they often don’t.

There also seems to be a general ignorance about the levels of rent that are viable in restaurants and cafes. You would be surprised how often I have come across restaurants paying in excess of 15% of turnover in rent, despite healthy takings. I would go as far as to say that there are far more landlords making good money from hospitality than there are hospitality operators. I can’t see the sense in working yourself to the bone to subsidise your landlord’s lifestyle.

Beat the odds

You have to be very disciplined and expertly skilled to beat the odds

A small percentage do very well

Part of the bizarre perceptions people have stem from the fact that there are hospitality operators out there who are doing very well, but they are very much in the minority at present. I work with some highly skilled and very professional people who run successful multiple location hospitality businesses — but these people really know their stuff, and have usually been in the industry for a long time and built-up slowly to where they are now.

So, if you’re out there contemplating jumping out of your present job into the world of the self-employed hospitality operator, proceed with extreme caution. You might just find yourself in a prison from which there is no escape and lose all that you have worked hard for. The irony is that when hospitality businesses open, they are often accompanied with a fanfare and a blaze of publicity. When they go broke all you see is a ‘For Lease’ sign.