Those are quantifiable costs though. If your restaurant is shut down or your reviews are bad, you can say how much it'll cost the owner. The owner can then make a more informed decision about how much to invest in cleaning.
> if your not making money you can close and not serve customers thus drastically reducing your costs.
The fixed costs of running a restaurant are $20-100k per month. That's why, once a restaurant has failed, you can literally buy it for nothing just by assuming the lease...
So like any business. Just because 90% of restaurants fail doesn't mean the cost of running a restaurant is 10x of what it actually takes to run a successful one.
By your own calculation there that's a really tall order for restaurants to afford, and the damages are also hard to tabulate. For flood or fire you can mitigate your risk and clearly value the damages - how exactly do you tabulate for shutting down a restaurant? Who decides what revenues would have been for a new restaurant?
That’s where I got the data. That article mentions higher costs, but the Harvard study they referenced links review stars to closures. Clearly costs are one of the main pressures on restaurants, but there are plenty of things that restaurants can do to improve diners’ experiences which don’t necessarily cost more.
Hypothetically, restaurant A and B are the same except A is better organized and your food gets to the customers table faster and at the right temperature. Or restaurant B’s staff doesn’t notice when your wine glass is almost empty and doesn’t sell that second or third glass. Little things can make a huge difference in revenue and ratings, and yet you can see restaurants making stupid mistakes all the time.
Yeah and you could have the manager at the restaurant inspect everyone's checks or you can just standardize price strategies for the location and auto-approve leases which meet established criteria.
Except even then there is no voodoo: the restaurant has costs far and away above the cost of good sold: labor, rent, furniture, dishwashing, etc. etc. etc. The actual profit margin even at retail is razor thin.
I think you're assuming that the restaurants intend to be selling below cost. Running a restaurant is one of those businesses that everyone seems to think they can do.
A somewhat common problem on Kitchen Nightmares was owners who didn't know how much they were spending on labor or food.
I worked in the restaurant and bar business for a long time as an employee. Not losing your shirt in a food business takes a LOT of experience. According to the National Restaurant Association, 60% of restaurants fail within the first year and 80% fail within five.
Most people realize they don't know enough to open a small lab or IT consulting firm, but drastically overestimate their knowledge of the food business. It makes sense-- these businesses must hide the mountains of back-breaking low-pay manual labor from customers lest they become uncomfortable and patronize somewhere that makes it all feel calm, relaxed and easy. And for all that, particularly successful restaurant owners get a margin of maybe 5% after a few years when you really nail down your expenses and processes, though the numbers for coffee shops are a bit different.
Particularly, white collar people who pride themselves on knowing about their local restaurant scenes are prone to this hubris. I bristle at their misguided confidence when discussing the business but will take the time to empathically but forcefully discourage any considering it professionally. A few years ago, an old friend contacted me in a panic because she'd invested her entire retirement in her brother's dream brew pub which was failing before it opened. I couldn't help them. Anybody with experience could immediately see how hare brained their ideas were, but they were just in too deep. Months later, they opened and quickly closed, and she'd lost everything. Tragic.
Not to mention that the rate of failure of restaurants implies the probability that any given restaurant is in some amount of financial strain and maybe pushing the limits on ingredient freshness & cleaning standards...
I'm not in the restaurant business, so take what I say with a grain of salt (heh), but from the people I know in that business there's a wide variance in the actual business knowledge they possess.
You need enough capital to actually open the doors - that means not leasing the space with knob and tube wiring, residential drainage and a leaky roof. If that's all that's out there, you could simply not open yet and keep looking. In the OP, it sounded like that money was burning a hole in the owner's pocket and he had to open now. Patience.
Then once the doors are open, you need detailed, ongoing knowledge of your costs. There is no $29 chicken if it costs out to $31. If no one is going to pay $35 so that you can make a profit, it doesn't go on the menu. But you don't, as the author put it, sell $40 in cost for $29 simply because no one would pay $40. Then you get into ordering and spoilage, where even me as a total outsider, could tell you there's often money rotting in the walk-in. Point is, you must know your real operating costs before you ever even stand a chance.
Then you have to go out there and not suck. For a chef opening a restaurant, this is probably the part they're focused on. Problem is, you could be sunk before you even get to this stage. The guys that are successful and worked under successful people for a long time probably learned quite a bit about running the business, and is why they have better odds.
tl;dr - Under-capitalization is a leading cause of failure for many businesses. You can't make up your operating losses in volume. Don't open any business if you aren't prepared to live and breathe the minutiae of your costs.
Expensive as they may be, restaurants have terrible margins. James Beard nominated, objectively successful places with >$1M gross are netting the annual income of someone who washes dishes [1]. They are operating on a fine line and I would imagine most of these places do not have the cash to weather through even a minor hitch in business.
This is pretty much the case in every country though. Tbf my dad has made a business of acquiring distressed restaurants and improving their profitability. In most cases, the suckers are first-time restaurant owners who viewed it as a side hustle rather than a full time job.
In most cases, it costs about 4x as much to open a restaurant than to acquire a distressed one. Anecdotally, a restaurant that was built with a cost of about a million bucks (local currency) in a 500 sq ft place (expensive city), was acquired by him for about 50k, and is now back to clocking about 1.5 million in revenue.
I find public health inspectors also make it more expensive to run a restaurant. Perhaps the solution to their tight margins would be to abolish health inspections.
If you're starting a business you need the resources and the financial fundamentals in place to keep the doors open. If you're renting a space you can't afford, or you're spending beyond your means for supplies, or your menu is too broad, or your opening hours don't make sense...you can only compensate by increasing costs for so long—people will go somewhere else.
"I really like the food, I like the space, but I can't keep buying a $15 bottle of juice and a $22 sandwich with a single slice of meat, and I don't know why I'm on the hook for all of these extra fees..."
One of our local eateries recently closed their doors because they just couldn't make it work. They ruined goodwill with customers by substantially increasing the cost of everything, every few weeks: sandwiches, drinks, small baked goods, small bags of chips, etc. On top of that, they added one service charge after the next, and it always came with a plea to help them stay open.
But they made a lot of bad decisions along the way, like opening up a fancy organic eatery in a part of town with no foot traffic and no parking, by taking on even more debt to expand their space and open up another pop-up store before they had got the basics rights with their first location. Fewer and fewer people came to visit and that was that.
Sure, if sufficient care, attention, and elbow grease made it a near certainty that even a halfway competent owner/manager could take out, say, $100k per year to live on, then you might have a reason to be a little indignant toward Thiel.
The restaurant market is notoriously fickle with considerable risk of ruin. Between opening a restaurant and building its clientele is a lot of uncertainty. It’s easy to look at the surviving restaurants and think that anyone could make a comfortable living at it. The economist must consider both the seen and the unseen — of which the latter in this case is all the restaurants that started and failed.
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