There Is Blood On The Streets

No one is really sure who coined the phrase but some say it was Baron Rothschild, the scion of the Rothschild banking family. What it means is that when fear is at its highest, one must toss aside the bearish feeling and turn bullish. Excellent when you have a couple of billion in the bank or are using someone else’s money!

Everyday my in-box is filled with letters from desperate restaurant owners trying to save their businesses, inside information on franchise units that are closing down around the country and equally surprising the number of BIG NUMBER stores opening up. Don’t believe me?

Rumour has it that the set up costs of five restaurants situated at the new Melrose Arch range between R2 million and R12 million. In other words a staggering R29 million was spent on the set up of FIVE restaurants. Using a simple formula of assuming they would like to achieve a payback in 36 months, they would need to generate a combined profit of R805 000 a month for the next 3 years. Given that most restaurants are not achieving anything more than a 15% net profit, that is a staggering R5 366 000 turnover EVERY month between them. Want to drill those numbers down a little further? Looking at the varied mix of the restaurants involved, let’s give them the benefit of the doubt and assume that their customers are spending an average of R200 each.

Great news! They only need 26830 customers EVERY MONTH to achieve this… This is not rocket science, and if I have erred on the low side when it comes to net profit or spend per head this only makes the scenario fractionally less frightening. I called my mate Nick the other day from Melrose Arch and told him that these people have “more BUCKS, more BRAINS and certainly more BALLS” than me! I used to think I understood the restaurant industry, CLEARLY NOT!

If there are casualties (and I have a prediction list that I will not share) who is to blame? We need to remember that these leases were signed when things were good and there was “Cash on the Streets” but somebody, somewhere didn’t do the math. Landlords, Franchisors, Letting Agents, Consultants, Naive Operators? Take your pick, the blame lies somewhere there. An industry insider told me the other day that every restaurant landlord should have a pimp for a brother because even restaurant landlords need someone they can look up to.

So why are new and existing restaurants closing?

Well besides rising input costs that re stripping profits and lease commitments that are growing out of control as turnovers stagnate, here are a couple of basic errors being made…

1. It’s A Business Stupid – No other business turns raw material into finished goods as fast as restaurants, and just o add to your woes, the consumer than tries and comments on the product in front of you. No wonder emotions run a little high. Like any other business it is about selling the right product, to a targeted market, at a price that meets their value/cost perception but still allows you to be profitable.
2. Underestimating capital needs – Listen carefully “You cannot pay capital expenses out of future profits” It is as simple as that, either you have sufficient capital or you don’t and if you don’t then DON’T.
3. Believing you’ll start making money on opening day – “If you build it they will come” great line from a great movie, leave it there. Consumers are spoiled for choice and starved of cash; you better bank on a few months of breaking even at best.
4. Lack of a clear vision and purpose – “I am great with people and my wife can really cook” Yeah right, that will have them streaming in the door. Do the research, hone the concepts and ensure there is space in the market.
5. Lack of documented systems, procedures and training manuals – Why would you need those in a restaurant? See point 1
6. Owner fails to function like an owner – While building the restaurants, owners become project managers, spending more time at the hardware store negotiating a great price for 6 wood screws than in the kitchen learning the basics or with their front of house staff training. After opening day they strut around the restaurant like Rick from Casablanca signing chits and comping drinks for their deadbeat friends who told them what a wonderful idea this was.
7. Having the grand opening on opening day – In fact more planning goes into the opening party than the entire restaurant. Hold a party on day one and that is about as full as you will ever see the restaurant. Give things time to settle down, make sure the extraction is blowing the lights (and the same applies to the waitresses and the managers) make sure your staff have a handle on things and do a soft opening!
8. Focusing too much on what you like – I don’t care if you enjoy heaps of chili on your toasted cheese, it is not about what you like, it is about what your customers like… Remember that.
9. Deciding on a concept, then finding a location – Check out the location, check out the potential customers and give them what they want. Fish were the fish are and use the right bait or the only thing you will catch is a cold and a very big fright.
10. Accepting a secondary location to save on rent – Well I am not a great fan of restaurant landlords and what they charge but it is supply and demand. As long as some schmuck is prepared to pay what they ask for “prime” locations, why shouldn’t they charge that? Rather than take a poor location at a reduced (affordable) rental, do your homework and look around.

In a nutshell people… Do Your Friggin Homework! And if you are too lazy or too blinded then call in an independent professional to assist you. The money it will cost pails into insignificance compared to what it might just save you.

“When there is blood on the streets… Do your homework!”