Starting, Owning and Marketing A Restaurant Blog|Starting and Owning a Restaurant - Construction, Planning, Marketing, Opening and Managing a New Restaurant

As the new year begins and a new decade is born, the question about the costs to start a restaurant will survive and be repeated another million times in the next ten years. In hundreds of emails, countless meetings and numerous uninformed writers querying me, I know I’ll hear it. And yet, it’s difficult to explain to the questioner why it’s the wrong question to be asking.

Obviously, each restaurant is different. The size, type, location, demographic and owner choices cannot be factored in a brief encounter. What can be determined are the things that cause financial pain and hardship for most restaurants who’s new owners don’t ask the important question -  ”What are the costs to start a restaurant that I won’t be able calculate without experience?” That is the question. It is easy to calculate and add up equipment costs, food inventory, salaries and fixed costs, but what about the things you didn’t think of?

Below is just a partial list of costs generally forgotten or not factored into those starting restaurant budgets;

• Deposits - While these may not be carried on your financial statement as a cost (or expense), they are a cash outlay that be in many thousands of dollars. There are lease security deposits, utility deposits, bank deposits for starting cash and even possible retainer deposits for professionals like attorneys and accountants. Collectively, these could total $5000 to well over $10,000.
• Licenses - The cost to start a restaurant has grown significantly in the last few years as local, state and federal agencies have turned licenses into a method of taxation. Examples include licenses for occupancy (from $200 to $1000), cafe permits for operating on sidewalks or streets, liquor license fees for inspections, forms and filing fees, franchise fees for registering your business, fees for state and identification numbers and fees for federal filings and tax ID numbers. These fees can total thousands of dollars depending on your location.
• Professional Fees - No one should start a business today without competent advice from both an attorney and an accountant. While their fees can total as much as $250 per hour, they can save you tens of thousands of dollars in taxes and problems as your business grows.
• Impact Fees - Many communities now charge start-up “impact Fees” that are supposed to be the cost of your usage of community services such as gas lines, water lines, streets and infrastructure built by the local government. In the last restaurant we opened, I had a $10,000 surprise during construction!
• Cash Flow Requirements - Of all the cash needs, this one can put you out of business in a hurry. Without getting into a whole accounting class on cash flow, let it suffice to state that a profitable restaurant can go bankrupt profitably (with negative cash flow) just as easy as a slow to develop restaurant can run out of cash. If you do not have the cash to survive for six months in a worst case scenario you and your accountant calculate, don’t open a new restaurant until you can.

These are the things that are commonly missed on restaurant business plans. These items can turn a great concept into locked doors very quickly. Food and service are still the biggest factors in buiding your restaurant, but cash needs can bring you to your knees no matter how great the food is.

When the Tampa Bay Buccaneers hosted the Green Bay Packers for many years, one of our restaurants always had a banner welcoming the Green Bay fans for the game. Many of them stayed nearby at hotels also advertising their welcoming hospitality to the traveling Packer fans. Over the years the game became a friendly rivalry that brought annual guests that enjoyed the verbal exchange about who would win the game.

If major event promoters get their way, this form of so called “ambush” marketing will be prohibited in any form of advertising - unless they pay for the rights. Sound crazy? Do a little research online and you will find that by 2010 the NBA, NCAA and Olympic games are starting to negotiate with the host cities to require a ban on using the event name within a preset distance from the event. That means if you have a bar, restaurant or any other business, you could be fined for using the event name in your advertising!

Besides the fact that the expression of hospitality is warming to visitors, our tax dollars are used to provide support in many different ways for these events. Some tax dollars even build the venues where the events are played. Now you may have to pay for the right to advertise your support for the event - what’s missing in this picture? The “hoopla” and excitement that keeps fans coming back would be gone.

Ambush marketing is a term probably created by promoters who want a bigger slice of revenues generated from taxpayers support. Could these sporting events be done without the support and investment of tax dollars? If not, then the public, including businesses should have the right to advertise and encourage visitors to utilize there service or product as part of the event attendee’s experience.

The independent restaurateur has been at the point of a big economic shotgun for almost a year and a half. One wrong move and the deadly blast of pellets pummels the body and soul of the restaurant. Food costs, labor costs, lower consumer spending, increased industry regulation and changing guest eating habits have faced the independent restaurants across the country.

While there are signs of an improving economy, restaurants cannot plan on the consumer returning to pre-recession habits for a long time to come. Many diners have changed their eating habits and others continue to face an uncertain jobless recovery that will keep restaurants at the tail end of the recessionary curve.

What should the independent be doing? Here is a list that may help your planning for 2010:

• Don’t wait for the economy to rebound and bring customers crashing to your doors. Long term marketing efforts shouldn’t be ignored, but short term results need to be your focus.
• If you are struggling now, it isn’t going to get better tomorrow by doing the same old thing. Change is difficult, but failure is worse. You may have to do things you have never done. Coupons, discounting and lower prices may be the difference between saving jobs and generating enough cash flow to pay bills. Most “experts” think discounting may hurt your brand, but not as much as closed doors.
• Stop any impulse you have to listen to restaurant marketing gurus who have the answer to sales results overnight. It ain’t gonna happen. Mobile marketing, social marketing and other tools are aguably useful over a long period of time, but for the average restaurant they don’t deserve the long hours and cost to implement when the battle for survival is imminent.
• You must become mentally in tune with your guests. Who are they? Where are they? What do they want? How have they changed? What drives them to your door or your competitor’s door? Will they increase their restaurant visits if you …..? You finish the line!
• Even if you could afford the cost of big newspaper and TV advertising, don’t be so sure it will produce for you. Consumers are turning to the Internet for news and entertainment. Newspaper sales are declining. TV audiences are declining. Grass roots, personal marketing may be the least costly and most productive form of getting your message out.

There are no quick fixes, but there are ways to build your business the way it has been done for decades. Provide a consistent product at a value to the guest. Get that message out and capture new guests one at a time.

If you are starting a restaurant now, there are big potholes in a long road. In a “normal” year like 2007, there were about 72,000 restaurants that opened and 60,000 that closed. While statistics for subsequent periods are difficult to produce, everyone agrees that there are more closings than openings. In fact, bankruptcy records may give some idea of the numbers. There were 43,500 business bankruptcies in 2008. Through June of 2009, there have been over 30,000 cases filed already.

Is it all doom and gloom? Absolutely not. If you are paying your bills, seeing some head count growth year over year and finding ways to keep costs going down, you can easily survive with a smart reaction to ongoing economic woes. Even a few new restaurants will make the grade if they have done their homework, planned properly and have sufficient resources to withstand any planning mistakes.

2010 will be just as challenging as 2009, but at least we know what to expect and how to react to the recession imposed environment.

One of the hiring strategies at our restaurants over the years is to avoid employing people from the hotel industry. Before I have a dozen nasty emails, read on! Generalizations are never good. The exceptions are quickly and easily pointed out. However, hotel trained staff do not think like independent restaurant entrepreneurs.

It’s not their fault! Hospitality and lodging personnel are forced to live within budgets, percentages, rules and performances based solely from numbers dictated by corporate managed food and beverage operations.

Are they successful at what they do? Most are until the situation requires thinking and acting outside the lines. Many hotels and travel based food operations have found in a recession they no longer had captive restaurant visitors where service was sometimes an afterthought.

The difference between hotels and large upscale chains and independent restaurants is the ability to operate and adapt quickly through a clear path directly to the restaurant guest. As the recession closed in on the consumer and restaurants across the world, independents had to find new ways to keep butts in the seats of our restaurants. All restaurants had to change quickly and menu strategies had to be re-thought. Hotels, white table cloth chains and high end corporate dining facilities have been hit the hardest with some major names seeing sales declines exceeding 25%.

One reason for the hotel and high end restaurant revenue declines was their inability to move away from just numbers and connect with customers. One thing is for certain. Guests want value. That means they need to perceive that every dollar spent can be justified as reasonable in these hard times. Hotels and the big ticket chains thought, at first, they were just going to lower that prime New York Strip from $49 to $39 ala carte and the problem would be solved. It didn’t happen. Justifying $39 for a 12 ounce piece of meat and little else won’t work anytime soon.

Menus had to be re-designed to give the customer more for less. The numbers game became less about margins and more about plate cost versus selling price in real dollars not percentages. For instance, a surf and turf with filet and lobster may have a price tag $50 on a menu. The cost to produce that plate may be $25. Not bad if you can get it. But people quit spending $50 or $40 - they wanted to avoid being extravagant while the financial world crashed and burned.

Recession Restaurant Menu Lesson One- High priced anything won’t work! Even the wealthy downscaled their eating regimens. Price points become critical. When the consumer defines the term “value”, they mean a well rounded bargain for their buck. It could be just food. It could be the combination of food and service. It could be food, service and entertainment or ambiance, or convenience, or almost any combination of attractions.

A positive example would be the restaurants that focused on improving service, increasing customer loyalty programs and re-thinking their menu by being creative. Instead of serving that $15 per pound fillet, they moved to chicken, pork and lower priced proteins, but served them in new ways. That big plate of chicken Marsala on a large bed of fettuccine noodles became attractive particularly with a price tag of well under $20 for a complete dinner. It sure looked better to the consumer than the lonely 10 ounce fillet at $30 dollars or more. Even the QSR chains quickly discovered that offering those 99 cent specials while raising drink prices by 30 or 40 percent didn’t fool the consumer very long. They just quit buying the drinks!

Recession Restaurant Menu Lesson Number Two- Forget trying to lure the consumer with low priced offerings that require expensive add-ons to complete a reasonable meal. Plate cost versus selling price must become part of your restaurant menu planning strategy. Creativity will survive, but ruthless discounting may hurt brands for years to come.

Forget trying to price based on margins. What does it cost to produce a dinner entree before adding center of the plate proteins? If you offer a salad, potato (or other side) and bread, what is the cost? Let’s assume it’s $3. If you add to that a lobster tail at $6, the old mentality may have been to triple or quadruple the combined cost for a total of $27 to $36. The recession has forced us to look at minimums for plate production and work from there, while having a price target in mind.

For instance, if you want to keep entrees below $18, and you need a $12 production minimum, $3 plate cost before the feature item, that leaves $3 maximum for the center of the plate.

Now you can adjust prices and menu items using this philosophy. Impossible, you say! If you can’t buy into  that theory,  you are probably struggling in this economy or are just plain lucky with a perfect location that has lots of captive business. If you think $3 (or other number you calculate) is too little of an amount to allocate for the center of the plate, that is where creativity and self bargaining come into play. Creativity begins with knowing your food costs. An 8 oz. chicken breast probably costs you around $1. A bone in 8 oz. pork chop will cost you about $1.90. Pollock, tilapia and catfish will all fit into that range. All of these leave room for a creative sauce and presentation.A reasonable portion of shrimp, mussels, clams and much more will also work.

Self bargaining is another creative tool. Hypothetically, you could be shooting for an AVERAGE production profit of $12 per plate, that $17 shrimp scampi won’t make it. Then create another dish that makes up the difference by using much lower proteins like pasta, rice, sausages, ground meats. A Tuscan sausage fettuccine may make up the extra dollar you spent on a seafood grill that went over your target. The goal is to balance your menu to keep prices down and seats full, while keeping positive cash flow. An empty restaurant that insists on the status quo won’t make payroll, pay supplier bills and cover fixed costs.

Recession Restaurant Menu Lesson Number Three - Margins won’t work. Know your costs. How many covers do you need to break even? What is the average per plate production cost you will need to break even? What is your per plate production cost? What proteins can be offered to give value and profit an equal share of the menu item? It’s amazing how many restaurants report they are running the same number of covers, but at average tabs of 10-15% less in sales. That means you have to put profit back into the picture on a per cover basis.

If you don’t know your costs, menu pricing in a recession will be dangerous. Many of the casual chains are running big promotions the franchisees pay the price for.  They may drive traffic, but profits at the corporate level are based on sales, at the expense of the franchisee’s profit. Trying to duplicate this pricing tactic as an independent may be tempting, but your costs and ability to survive are immediate. Driving traffic through loss leaders will leave you looking for real dollars to make payroll.

Keep an eye on commodities. What is coming down? What is going up? Focus on proteins that have a sustainable pricing outlook. Work with your suppliers closer than ever before. Get advice about what items and menu ideas may fall into your price points.

When will the recession end? Whoever has the crystal ball to foresee that could be very rich - but they won’t be in the restaurant business. It is very likely our industry will feel the effects of the economy for several years to come. Even as economic health returns, people have changed their habits. Returning to the free spending consumers that used a great deal of their disposable income on dining out, may be a long time off.