I’m sure you’re like me and you often wonder if the restaurant you’re dining at is making $ or having a hard time surviving. Often times, I’ve noticed that people overestimate the success of a business (omg, look how packed it is! They must be killing it!) — the grass always seems greener on the other side.
The reality though is that for a restaurant to survive, the management must watch over their margins like hawks. And to really thrive, the place also needs to be packed all the time — that room you saw full when you were there with your girl needs to be refilled 2.5 times a night at least 3 nights a week. Besides you, that’s 1.5 more people that need to have your seat over the course of an evening. So chop chop! Finish your tartare and get the F out! lol
Here are some scary realities about the Food & Beverage industry:
- The margins are tough. The Canadian average net profit for a sit-down restaurant (anything other than a fast food) is 1.7%. That’s less than inflation or a government bond.
- There is a ton of competition and it’s an easy market to enter — everyone wants to open their own spot and with a few hundred grand you can easily setup shop. There is a higher rate of restaurants per capita in Montreal than New York City (Almost 27 restaurants per 10,000 people in MTL versus 19 restaurants per 10,000 people in NYC).
- Your odds of surviving are stacked against you. Close to 60% of restaurants close within the first year, and of those remaining, 80% will close within 5 years.
Now that we’ve established opening a restaurant is not the safest bet, let’s balance out the grim outlook you may have with some motivating hard facts:
- A restaurant is a variable cost business. Aside from the rent which is one of your few fixed costs, the rest of the business is variable, meaning that it can be scaled up and down depending on volume. This means that you can make profit regardless of volume (above the base minimum to offer good service).
- A restaurant is a poor man’s business — anyone can enter the market but if you nail it, you’re making crazy return on your money. Similar to retail, you don’t need much to get started. Tables, chairs, kitchen equipment, bar fridges, decoration… yet if your place catchs on, the upside is huge. In fact, NYU Stern’s latest (Jan ’17) US Return on Equity per Sector shows that Restaurant Dining is at 39% which places it in 2nd place amongst 50+ industries.
There are very few businesses that you can get up and running for $500k and hope to profit close to your investment every year, for as long as you can manage to keep it alive. It may be 50:1 odds — but it’s still there.
Of course, I’m purely looking at this from a financial basis because I don’t want you to base your decision on opening your bar or restaurant simply on the perks. Things like being your own boss, being able to control your destiny and product, free dinners and drinks, inviting your friends and family, having fun shouldn’t be easily compared to your time and hard earned capital ($). Why? Because they are attractive emotional cherries that will blur your mind into making a decision that may not be worthwhile. And because your number one priority should always be to protect your capital (your money $).
Let me know if you find this interesting :) Hopefully yes, and if so, I’ll continue and dive more into How A Restaurant Makes Money in upcoming articles.
Also, I’d love to hear if there’s a subject you would be interested in reading more about (I’m super interested in marketing, F&B, entertainment, branding, entrepreneurship, consumer trends, traveling, hustles, etc). Give a heart if you liked it :)
Cheers! -PJ
