So You Want To Open A Restaurant — Are You Crazy? Part 1/10

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This is the first installment in a 10-part series on “How To Open and Run a Restaurant“. In part 1 we’ll discuss general business considerations and market research.

Of course you’re crazy. People with courage and fortitude against all odds are always considered crazy until they become a success. Starting a new business can be one of the most rewarding experiences in a person’s life — beginning a new business venture can also turn into an unmitigated disaster for both you and your family, especially during a prolonged recession. That said, once you establish yourself as a “captain of industry” — even if it’s just your own neighborhood — there is no turning back. Once you drink from the goblet of freedom you’ll never want to be an employee working for someone else again. But with that freedom comes an awesome responsibility — a personal pledge of unwavering and enduring commitment that may mean working twelve hour days, seven days a week. With refined guerrilla tactics, I believe success is possible even in today’s economy.

Location

In the restaurant business, three words should be your initial mantra: Location, location, location. Other than good food and good service, your restaurant’s location is one of the prime ingredients for success. But there are exceptions; one of the most successful after hour breakfast spots in Los Angeles is located in the heart of the city’s downtown district; well-known for its high crime rate after dark. And of course if you plan on opening a three Michelin starred restaurant with Heston Blumenthal as your chef, I doubt location matters.

Cuisine Type

As with any new business start-up, in the beginning, the most important time you spend is on market research. But even before beginning your research you must make a few critical decisions: what type of food will you serve? Will you serve Italian, Mexican, Chinese, French, Indian, Japanese, Korean? What dining setting or motif will you choose — fast food, casual dining, family dining, or fine dining? And what age group will you be targeting — in other words demographics. Your specific choice of food type and restaurant setting may dictate your target age group.

Market Research

Nevertheless, during the course of your market analysis you should be exploring food trends, the dynamics of your competition, niche marketing, and potential customer volume. Staying abreast of developing food trends will give you a superior advantage in formulating a successful business strategy.

Consider this recent Bloomberg piece written by Courtney Dentch:

U.S. restaurants are four times more likely to fail than they were a year ago and as many as 40 percent may face a “severe” cash shortage within the next 12 months, restructuring firm AlixPartners LLP said.

The increased risk may spur liquidations, restructuring, bankruptcies and buyouts, according to a survey of 110 restaurant chains. Debt-to-equity ratios have more than doubled in the past two years, hurt by falling asset and share values.

Casual and fine dining restaurants, which have seen fewer visits from consumers who are trimming spending amid the financial crisis, are more vulnerable than fast-food chains, said Andy Eversbusch, managing director and chief of the restaurant practice at Southfield, Michigan-based AlixPartners.

“Consumers are resetting their habits and reducing their casual dining outings overall,” Eversbusch said in a May 1 interview.

Among the 1,000 consumers surveyed, 48 percent plan to eat out less often this year, and 51 percent expect to spend an average of $10 or less when they do. Eversbusch declined to name specific companies that are among the most vulnerable.

Fast-food chains and eateries that bridge the gap between counter-service fast food and sit-down service are more likely to survive the decline, as eaters seek cheaper foods on par with casual dining locations, he said.

Tighter lending restrictions have made it harder for restaurant owners to refinance debt.

Debt-to-equity ratios among restaurant companies have climbed to 1.38, from 0.68 in 2006, while cash levels have declined an average of 6.5 percent in the past five years, the report found.

Aggressive cost-cutting, including renegotiating food and commodity costs with suppliers as prices fall, may give restaurants some breathing room, Eversbusch said. In addition, wrangling lower lease rates with landlords and trimming kitchen staff may help, he said.

Restaurants should “squeeze costs out everywhere so they don’t end up with their backs against the wall,” he said. “I don’t think there’s any recovery in this industry coming soon.”

As you can see research is vital in maximizing your chances of success. The information in this Bloomberg article is invaluable, didn’t cost a dime, and has given us many options to explore. If the information in the article is correct, we now know the chances of success are greater in the fast-food sector of the industry. We also know that we have greater latitude in negotiating a more favorable lease price for a restaurant location. We even have a specific price range that consumers expect to spend when dining out — ten dollars or less. Additionally, since the risks of bankruptcies and buyouts have risen, along with debt-to-equity ratios, forming a partnership may be an interesting alternative to opening up a new restaurant. But despite the prevailing economic conditions, I still believe this could be the best time to open a restaurant. I’ll tell you why are part 2.

So You Want To Open A Restaurant — Are you crazy? Part 2

So You Want To Open A Restaurant – Are You Crazy? Part 3

So You Want To Open A Restaurant – Are You Crazy? Part 4

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Spence Cooper
Inquisitive foodie with a professional investigative background and strong belief in the organic farm to table movement. Author of Bad Seeds: A FriendsEAT Guide to GMO's. Buy Now!
Spence Cooper

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