Profits, not Heartache: 10 Practical Restaurant Lessons
What every restaurant owner needs to know (and often doesn’t)
By the time I opened my restaurant in 2008, I’d been working for myself in one capacity or another since 1995. I figured thirteen years of entrepreneurship was enough to tackle the restaurant business.
I was so, so wrong.
Over the next five years we struggled to make a go of it. Not because we didn’t have customers, we did. We didn’t know how to make that revenue profitable. We didn’t understand who we were as a business and we lacked the restaurant education that leads to good decisions.
What followed was a long series of missteps and gyrations. The business equivalent of bull-riding. Painful, difficult, occasionally glorious. Continuously crawling towards a better understanding.
It doesn’t have to be this way. A practical restaurant education can happen before opening one (now I know!). It’s what I do with my consulting clients and the focus of a series of online tutorials I am creating to empower restaurant entrepreneurs to act on their ideas with confidence.
The structure and economics of a profitable restaurant are unique among small businesses, and a clear path is not intuitive. The sheer volume of moving parts (each one affecting the bottom line) makes this an especially challenging puzzle, one that requires a solid understanding of key ideas.
The insights below apply to any kind of restaurant or food business that sells directly to the public. If you have a friend working on opening their own place, or already in the business, be kind, and send them this.
- Kill your dream. Instead, begin with an idea and construct a business around it. A dream pigeonholes the concept. People tend to be in love with their dream and continue the romance by executing a vision that in hindsight could not make money (me). Trust me when I tell you that the romance comes to an abrupt end when you can’t make payroll. Having an idea that is malleable and pivots with the insight you gain over time is far more prudent. I’ve watched so many crestfallen faces as I explain to people the dream they pitched to me can’t possibly work. Best to hear it now, then engineer your own failure later.
- Marketing is not a fix to lagging sales, it’s the final step once all the fundamentals are in place. A concept that is well located with a profitable menu and tight execution does most of the heavy lifting to bring in revenue. Restaurants should use marketing to bring in additional revenue or give themselves a jump-start but it cannot save a poor location, concept or unprofitable structure. Failing restaurants often seek to employ marketing strategists when they would do better to first work with an operations expert. If a restaurant one or two years in business doesn’t have enough customers, marketing is not the fix.
- Location matters A LOT. I have a client who was told not to worry about location, customers would find them. After I picked my jaw off the floor, I explained that the right location can add tremendously to the bottom line. Restaurant owners should think about location as a partner to marketing. Corporate restaurants spend crazy amounts of money to secure locations ideal to their model while independents often opt for cheap rent and the hope people will think to eat there that day. Spoiler alert: some people will, probably not enough. Looked at another way, if 50% of a restaurant’s traffic comes from being in a high traffic/visibility area then a lesser location will bring in half that revenue. Considering that rent is a much smaller expense than labor and inventory, that’s quite a hair cut for 10–30% less rent.
- Don’t overspend on rent, either. Look for flow and synergy. Independents don’t have unlimited budgets for a team of analysts to identify optimal locations, or the pocketbooks to secure them. They can still avoid a big mistake. Look for areas where your customers either work (daytime business) or live and there is an ease to physically reach you. If, for example, you are on a busy street where no one can park and people don’t generally walk, all the car traffic isn’t terribly useful. Locate next to, or around other businesses your customers also patronize. Ideally, ones that see traffic around the same time of day as yours. If you are an urban business who wants to speculate on an up and coming location, fine. The rules of a good location still apply: ease of reaching you (parking/walking), good visibility, locating next to businesses from whose traffic you can benefit.
- Listen to your customers, and take none of their suggestions. Surely a person who is actually spending money in your business is a wellspring of great information about what people want? Nope. We all imagine if we like something then there is a strong demand for it. Sadly, also, no. That seems counterintuitive but in actuality they often suggests things they think they want to buy without regard to how that impacts the business. All revenue is good revenue, right? Nope. See #6. They mean well, they saw it on vacation, they had a craving, who knows? No matter the reason, nod your head, thank them, and then keep doing what works. Likely, what they really wanted is to be heard, and that is free. All I can tell you is that their suggestions are uniformly terrible, and they probably won’t buy the item with enough regularity to make it worthwhile, so ignore the suggestion and stick to what you do well. Exception: if so many customers ask for this item you can no longer ignore the requests, the item works with your existing production and is profitable unto itself, give it a go.
- There is good growth and there is additional revenue. One multiplies profitability by using your existing structure, the other creates work and some sales but adds nothing to the bottom line. In some cases, it even reduces profitability. The question of how and when to grow is one I have faced many times, and much of the work I do with clients. Entrepreneurs in particular can be prone to wild gyrations that add little to the bottom line. Here is an example we faced at kybecca: Off-site catering (which we were getting multiple requests for) or create a private events division where we host parties/dinners on-site (some, but not many inquiries)? We were looking for additional sales growth as a mature business and were considering both options. We chose the latter because it used all of our existing labor, infrastructure and resources to generate additional sales whereas off-site catering required purchasing supplies, transportation, and separate staffing. Not to mention managing prep with a small kitchen. Essentially the creation of an new enterprise versus using what we already had to better advantage. Today, private events is a significant portion of our revenue and bolsters us during slower times. It was seamlessly built on all of our current resources. Good growth.
- Pay attention to how customers use your business. That will tell you a lot about what they want, versus who you want to be. Case in point: I consult for a cold-pressed juice chain that also serves Açai bowls and specialty toasts. They were adamant on staying a predominantly retail operation but every time I went in for a visit it was clear customers wanted to use the limited seating to eat their products on-site. After some analysis we decided the next suburban (predominantly customers arriving by car) location would be café-style. My prediction is that will increase sales per square footage to have a place for people to enjoy their Açai bowls over forcing them to take them elsewhere, sit in their cars and eat it on their laps. Possibly not getting the sale again. Once you see how your customers are adapting your product or venue to better enjoy your products, make changes to help them. Customers’ behavior (more than words, see #5) is a great guide to improvements.
- Quit spending money trying to get people in when it’s slow. Instead, find ways to create more revenue when it’s busy. Time and time again, I see businesses focus their marketing ads on happy hour or some other off-night, discounted product. And I understand their thought process, it’s just wrong. It makes hugely more sense to figure out how to move a line quickly, turn tables more efficiently, or add one extra item to each order. The idea is to take advantage of the natural flow when people want to spend money with you. Over time a 10–15% bump in sales at full-price will have a much bigger impact on the bottom line then filling your restaurant with people looking for a discount. I’m not saying to eliminate all discounting (we do a kick-ass happy hour). Construct a great promotion and after a few Facebook and Instagram posts, let word of mouth do the heavy lifting to bring customers in.
- Sell fewer things to make more money. Independents think that more offerings will spur growth. It seems counterintuitive, but most often that doesn’t work. It muddies the concept and creates a burden on the kitchen. Often the first work I do with clients is to examine their offerings by cost of goods, ease of production (labor) and customer demand. From there we cull the menu down to the items that show the best intersection of all three benchmarks. The result is not just a better bottom line on existing sales, but a rise in sales overall. Why would that be? A focused concept that offers what the business is set up to provide and the majority of customers already want speaks directly to its audience. That translates into a brand and offerings that resonate with the customer. They get it, buy more, and more often.
- Know your customer. If you are opening a restaurant with the idea that everyone is your customer, put on the brakes. You are not the Cheesecake Factory. You are a small, independent food business which means you need to resonate with a particular demographic. Who are they? Where else do they shop? What attracts them to your product? What other kinds of food purchases do they make? The last one can help with location as well. The most successful concepts are finely tuned. The brand and offerings engage their customers in a dialog that speaks to them directly. That is the secret sauce that compels customers to your door.
Learning the restaurant business is a craft, not unlike the making of food. It’s absolutely worthwhile (in time and money) to pursue a practical education. What you learn now will save you years of time and money.