Restaurant Economics: Should you start a restaurant?
Ever thought about starting your own restaurant?
How about that ‘chill vibes’ coffee place you and a friend tossed ideas about? Or that creme brûlée cupcake shop? Well, you are not alone. 34% of Canadians reported that they have thought about it as well.
Dreams of turning that family recipe into a franchise, the romance of serving happy people great food, meeting new faces, being your own boss, and becoming that neighbourhood celebrity; these are all great motivators to get you started.
However, there is one obstacle that stops most people in their tracks. This is the preconceived notion that the restaurant business has one of the highest failure rates around.
I am not here to convince you otherwise, only to share some of my research findings. Most of these statistics I found in the last few hours.
“90% of restaurants fail in the 1st year.”
- Some ding dong
How many times have you heard this statement above? How many people are actually able to connect it to a reliable source?
What does the research say?
Two economists from the U.S Department of Labour and the University of California, Berkeley, have debunked this with a study surveying 81,000 restaurants in the United States over the course of 20 years. The result was that only 17% of restaurants failed financially within the first year. This is much smaller failure rate than other industries, and most startup ventures!
The average life span of a restaurant is approximately 4.25 years, and typically these restaurants close down due to many other circumstances than financial failures, such as owners selling the business, owners moving, retirement, etc.
There have been other studies (Cornell University) which indicated that some failure rates can go up to 30% depending on location, but this is still vastly different than the commonly touted 90% failure rate.
It seems that the majority of business articles concerning the restaurant business use this statistic without providing any citation as to where this number originates. Overwhelmingly, these articles seem to cyclically cite one another, without ever actually being able to point to an original academic source for support.
The notion that restaurants are a quick-to-fail business is incorrect. In fact, the opposite may even be true. Restaurants are opening up faster than ever; and the ones that do survive are in business longer than those of previous generations. Social factors, like increased gender equality and increasing wages have caused surges in family incomes, consequentially leading to a growing demand in eating out.
Let’s look at some numbers
In the last 25 years, we have witnessed solid growth in the restaurant industry, leading to nearly tripling sales revenue since 1991. Restaurants have done more than resisted the dearth of retail locations; they’ve also served as a primary gateway for young people to enter the workforce, for entrepreneurs to experience multiple aspects of running a business, and as a conduit for cultural exchange. Employment and social opportunities are ripe, showing no evident sign of slowing.
This wouldn’t be a fair article if we didn’t discuss some setbacks, however. One clear change has been the rate of growth in profit margins. A few things we might be able to attribute this to:
- The increase in competition in certain food niches has caused price wars;
- Increased need for marketing and branding in a saturated market balloons operational costs;
- Growing populations continue to stress supply chains of highly demanded food materials and ingredients;
- Continually increasing minimum wages make it difficult to employ more employees.
However, these issues are not unique to restaurant industry. Most sellers of any product are finding that competition increases, particularly as the ease of selling increases with the availability of marketplaces and online selling. Digital marketing is a new and expensive field in which few people have mastered the art. Similarly, population issues compounded with a higher standard of living increase costs worldwide. The key is that this is not a fault of the industry itself; rather, these are circumstances that all industries are subject to.
Why is the restaurant business growing?
Social factors, such as increases in the costs of living and housing, are inevitable, and seem to pose a threat to restaurant profitability. There are other encouraging trends though. One of these is the rise of the double-income family. Advances in workplace gender equality, wage parity, and parent-family work environments have made it easier for women to enter the workforce, stay there, and earn high incomes. This is possible even if they choose to have children and take parental leave. While this has obvious social and large-scale economic benefits, it also means that familial units have overall higher disposable income.
I don’t know about you, but after work, I usually find myself exhausted. I want to buy food or order in. The last thing I want to think about is cooking for myself, yet alone cooking for 2–3 other people. Restaurants easily fulfill this need, especially due to the rise of take-out apps.
Another Trend: Instagram & the Dawn of the Foodie
Other encouraging trends involve technology. We’ve all heard millions of times just how attached millennials and Gen Z are to their phones and social media. But I’m sure not many people consider how this attachment leads to amazing business incomes.
The popularity of taking picturesque food, a common habit amongst young people, leads millennials to actively choose to work in locations where new and trendy restaurants are readily available. In addition, the millennial generation currently makes up the largest percentage of the US-Canadian workforce — their habits, even their social media ones, have real effects on businesses, and should no longer be treated with indifference. Working millennials with disposable incomes, an appetite for beautiful food, and a love of photo-taking, spell a winning recipe for restaurants.
As a side effect, social media sharing also acts as its own form of marketing, with many millennials choosing to go to restaurants based on the ones their friends have shared on social media. Win-win!
Millennials have far more profound effects on the food and beverage industry than just posting to Instagram — but we’ll have to explore that another day.
So…is it a good idea to start a restaurant?
Well… maybe, it kind of depends.
I’ll let you all know my experience as I continue to grow my own business in the next couple of months.
If you aspire to start your own restaurant thinking it will be a solid financial investment, I can tell you firsthand, your going to have a ‘feels bad man’ moment.
You can demand a much higher ROI at lower levels of risk if you throw your capital into a standard index fund. Trying to get a comfortable ROI in the food business can be challenging, and is not a challenge for the faint of heart.
I say this, not as a current practitioner, but as the son of a restaurateur who has been in the industry for 20 years.
If you are not a hands on and disciplined investor, this will not be a highly profitable venture for you.
However, if still want to open a restaurant business for other reasons, such as to serve as a marketing platform for your other ventures, or as an opportunity to network or experiment in business, or even if just because it’s been a pipe dream your whole life — then as a fellow restaurateur, I’m behind you. It’s not the most profitable industry, but it doesn’t have to be a financial death sentence either.
Besides, there are plenty other benefits to running a restaurant, from fulfillment to learning new skills. It’s just up to you to find them.
One more thing …
If you enjoyed this article, you will also like my ‘FROM KEYBOARD TO SPATULA’ newsletter, where every month I teach you all the lessons I learned about what’s it like to leave the comforts of a 9–5 career and take up entrepreneurship. I will also point out all the mistakes that I have done so you don’t make them yourself.
If you want to follow my restaurant’s progress or learn more about business, food, culture, technology and music, we’ll be posting on our Medium publication regularly, as well as contributing to a variety of media content in the coming months.
SUBSCRIBE and Join our Family!
