Thinking of starting your own restaurant? Read on to avoid early pitfalls and get your establishment off the ground. By Andrew Mckenzie
The first weeks of a new restaurant are often when the biggest mistakes are made, according to Nino Zoccali of Red Hot Pears Consulting. Unfortunately, this is also when owners can least afford it.
Zoccali has been involved in numerous restaurant start-ups, including as executive chef for Otto in Woolloomooloo, and says that the early period is usually when a restaurant’s reputation is established and its staff are under the most stress. “When you’re opening a restaurant, customers don’t give you a second chance,” he says. “The first few weeks are when you are under the most scrutiny and can be when you are busiest, as it’s a honeymoon period when people are checking you out. You need to minimise the bugs in the system before you even open.”
So what are the classic mistakes and how do you go about avoiding them?
1 Too little experience
Tony Eldred, restaurant consultant and principal of Eldred Hospitality Consulting, is fighting an endless battle to discourage inexperienced operators from joining the industry.
He describes many of the naive and optimistic restaurateur hopefuls who come to him for advice as “lemmings,” who have little idea how difficult and complex running a hospitality business can be.
“The thorough ones have usually talked to industry professionals, can be realistic, objective and often quite disciplined in their approach, and we like dealing with them,” he says. “The greater majority come with quite unrealistic expectations, and despite warnings they often go ahead and buy or open a business that is doomed to failure right from the start.”
Eldred says this group can also include those who have worked in the industry for many years, but who don’t appreciate how big a step-up being a proprietor will be. He recommends starting out with a suburban café or takeaway to learn the parts of the business you have not been exposed to before moving on to something more glamorous.
2 Emphasising turnover rather than costs
Many restaurateurs don’t get their costs under control quickly enough, according to Zoccali. Once behind, catching up can be a struggle. “Everyone tends to focus too much on turnover at the beginning,” he says. “Don’t get me wrong, if you don’t have a decent turnover you don’t have a business, but you also have to look at your costs and get them under control quickly. Things like per plate costings need to be calculated as quickly as possible.”
Ken Burgin of Profitable Hospitality says that many of those who are new to the industry are shocked to discover the typical cost breakdown of running a restaurant. “In order to run a business profitably, it is essential to understand the break-even concept, and it needs to be a clear weekly business objective,” he says. “It might be tempting to think you are making a profit on the very first coffee you sell on Monday morning, but you don’t start to make a profit until your sales total reaches your break-even point—which might be on Thursday.”
“The right spot can make your life easy,” Eldred says. “The wrong spot can drain your bank account quicker than you can say insolvent.”
Burgin says inexperienced restaurateurs sometimes become attached to a location with poor visibility, little passing traffic and difficult access, but a fabulous outlook. He says these factors might be overcome with a lot of promotion and luck, but it is a far greater challenge and will require a larger investment.
4 Setting the wrong prices for your market
John Pye was head chef with the famed Hugo’s on Bondi Beach and managed the Mean Fiddler at Rouse Hill in Sydney. He has also just opened his own restaurant at Manly in NSW, Café Chill. Pye says it is very important to understand and research your local market. “We recognised that Manly is a very tourist-oriented market, but there are also a lot of locals here, and we created a menu that wouldn’t exclude tourists but which would be directed at locals.”
Burgin says that researching a market, and more importantly knowing what prices the market will bear, can be difficult in a start-up restaurant. “Restaurateurs are often a bit scared about pricing,” he says. “Underpricing tends to be a more common problem than overpricing, and again it comes down to knowing the market, knowing your own costs and knowing how to react if you’ve got it wrong.”
Burgin says you should not change the menu and prices lightly, but it is easier to move prices down than up, and you should consider this when you create your first menu.
5 Inappropriate fit-out
“I always try to tell people that when you open a restaurant you are actually going into manufacturing,” Burgin says. “It’s not about cooking for friends—it’s about a consistent quality product at a price that the market will bear. You have to be able to deliver fast and under pressure.”
He says that some inexperienced restaurateurs get locked into an inappropriate fit-out they can’t afford to change. “Again, it’s about knowing your market enough to know the cooking equipment and restaurant fit-out you will need.”
Pye says it is essential to have a clear budget that you don’t exceed. “Being a smaller café, we have launched on quite a small budget, but what is important is sticking to it,” he says. “Time frames are so often blown out when you are setting up, you’ve really got to take that into account. If you set an opening date of July, you should make September.”
6 Wrong staff
Finding and managing staff is often the biggest single challenge a new restaurant faces, according to Burgin.
“It’s a minefield in so many ways. You have to have your workplace agreements worked out and recognise that the market substantially determines pay rates, which can be quite different depending on where your business is,” he says. “I actually recommend using a recruitment agency for key staff, particularly if you are inexperienced. Potential staff know when you’re new to the industry, and while some will simply not work for ‘amateurs’, others can use your ignorance unscrupulously.”
Zoccali says that key staff need to be brought into the planning for a new establishment as early as possible. “This can be a bit of a balancing act as you don’t want to burn through your cash, but the more you plan the better the impression when you open,” he says. “Getting the staffing right for the opening can be very difficult, but you don’t want to understaff because this is when you will make an impression or not.”
“If you spend a million dollars on the fit-out of a restaurant, you’ve got to sell a huge amount of food and beverage at a very high margin to get your money back in a reasonable time frame,” says Eldred. “Without understanding the basic economics, the end result is your business will probably collapse after haemorrhaging money for some time, and you are forced to sell the whole thing for the auction value of the fixtures and fittings because there is no profit.”
8 Poor promotion and marketing
Some start-up restaurants put too little marketing investment in their budgets, and don’t even start on PR until they have been open for weeks.
Pye says that getting articles in the local papers and The Sydney Morning Herald really helped with the launch of Café Chill, but networking, marketing, even sometimes advertising can also be important. “Hugo’s was very successful with PR, and I’ve really tried to imitate that,” he says.
Burgin says that online marketing can be a cost-effective way to promote a new restaurant. “Before you open, have your website visible in the window,” he says. “Nearly everyone Googles a restaurant before they go to it these days, and you need a strategy ready for this.”
9 Paying too much rent
Excessive rent is one of the consistent complaints from all restaurateurs, but Burgin says it’s not just whingeing because high rent costs kill many restaurant start-ups. “It’s very difficult in Australia with landlords often having the upper hand in negotiations and putting a very tight squeeze on restaurants.
“I would recommend having an experienced negotiator assisting, because there can be huge difference in the type of deals that can be done. You have to convince the landlord you are bringing something to their property beyond a simple tenancy. You need to make them want you.”
Eldred says at the extreme end of the scale, he has seen percentage turnover leases as high as 18 per cent, which he believes is impossible to sustain.
However, at the other end of the scale, he knows of one restaurant in Port Phillip Bay foreshore that managed to lock in a flat rate, 21-year rent based on the returns of an underperforming predecessor. The restaurateur then succeeded in building the business to over 10 times its previous level, reducing rent costs to insignificance.
10 Legal issues and health requirements
Many new restaurants get into trouble with the mass of local, state and federal regulations associated with small business—particularly food.
Burgin recommends you involve your solicitor from the first inspection visit to a potential site. “For the sake of $200, too many people starting up a restaurant discover the small print in the lease can kill them,” he says. “You also need to have employee contracts ready to go and advice about your responsibilities as an employer. I can almost understand why some businesses are tempted to pay cash wages under the table, but it can create big problems later selling the business or if you want a bank loan.”