Diversification of your brand and services is a real option for expanding your business—but there’s both positives and negatives to consider. By Rob Johnson
For a restaurant or café owner, diversifying into a related field such as catering or retail can be a great way to increase cash flow and get your brand in front of more potential customers. But the first time Tony Percuoco of Ristorante Fellini gave it a go—about 13 years ago after moving to the Gold Coast—it wasn’t a happy experience.
“Having come up here, looking at the region, there was a strong need for a continental deli,” he says. “We did some background work and had a look at what was needed. We had a restaurant as well, and all our customers were screaming for it. So we opened up a deli. Unfortunately, what the region needed and what it wanted were two different things.”
The deli ran for two years and cost him $300,000 all up, before he accepted that folks on the Gold Coast go elsewhere to get their deli goods.
“Given the demographics, easy parking and so on, it should have worked,” he says. “I’d come from Sydney, where it would work well. But even today, 13 years later, there are only a couple of delicatessens up here and the ones that are here have had to diversify to stay in business.”
Needless to say, the idea of diversifying didn’t appeal greatly to Percuoco after that experience. A few years later, however, he found himself opening Ristorante Fellini at Marina Mirage along with four other directors—his brother Carlo Percuoco, sister Anna Cacace, Richard Burt and Raffaele Di Benedetto.
“I was looking for a way to wear the cost of those five directors,” he says. “In an Italian restaurant we sell a lot of pasta, so I set up a small section of the restaurant to sell our own pasta, bread and pastries—and doing that took care of one of the director’s wages. From that we grew, got retail space in the back of the restaurant, and started finding wholesalers. We labelled our own pasta and sauces.”
Pastificio Fellini, Percuoco’s branded pasta, is sold out of a shop behind the restaurant now, and also retails in Sydney and Melbourne. He succeeded with diversification this time around because demand for the service was driven by customers, and he built things up slowly.
It was a similar situation for Liz Long, who has grown her East Hawthorn café, Luscious Affairs, into two cafés, a catering business and cooking school, in Hawthorn and Toorak. “The café services a lot of medium-sized corporates and it’s also in a highly residential area,” she explains. “The catering grew from doing sandwiches for local board lunches and for private clients. It happened organically. The food we do here is good, and through that came the demand for the catering.”
Catering began within 12 months of the café starting, and it really took off over a two-and-a-half-year period. “In the last 18 months it’s gone to a much higher level,” she adds. “We’re now up there with the top five caterers in Melbourne.”
When it works, it can work very well says Daniel Vaughan, co-owner of Melbourne’s The Pantry, part of the Hugo’s Group of companies. He had set up a homewares store in the shop beside the restaurant that sold soft furnishings and bathroom stuff, but with a lot of kitchenware. Although recently closed when they renovated the restaurant, they have now also opened a deli next door.
“When it came to opening the deli, we wanted to expand The Pantry brand,” he says. “The retail experience the homeware shop gave us, and the restaurant, meant we’ve got a good background for doing both. It’s amazing how well the restaurant helps the other business. Having that hole in the wall [between the two businesses] increases traffic flow. I’m sure it flows the other way, too. I know there have been people in the deli who hadn’t gone to The Pantry.”
It was a similar high traffic flow in a US restaurant that helped convince Richard Cavill of Cav’s Steakhouse in Queensland to branch out into retail. “I was holidaying there in 1990,” he recalls, “and I went into a place in Boston which had a butchery in a restaurant. What I couldn’t work out was why there was more people in the butchery than in the restaurant.”
But more than anything else, says Cavill, his desire to branch into retail came from wanting to control his own destiny. “I found I was being let down by suppliers and/or quality and/or price,” he says. “Being a steakhouse, we had to have better steak than anyone else. Having a lot of suppliers, if one of them let me down another could cover it, but I was constantly working to keep on top of the meat operation. That was my day-to-day issue—it wasn’t staff, not producers, not customers, not profits. It was just trying to get product.”
He got approval to open a small butchery in the back of the restaurant, and all the off-cuts went into sausages or meat pies. “People wanted to buy a pie or have a sausage and take one home with them, and they’d do that then tell ten friends. So it was a pretty scary growth rate.”
But it’s not always a smooth road to success. The differences between running two businesses can be both positive and negative, and having two fast growing businesses challenges anyone’s administrative abilities.
“One of the differences for us was location,” says Liz Long of Luscious Affairs. “With catering you’re working in different environments and kitchens. So the diversity of clients’ homes presented challenges, and you need flexibility to be able to set up a kitchen anywhere.
“Growth also means hiring more staff, and the biggest problem is being able to put on staff and maintain the growth without having problems with cash flow. With opening the second store we’re doubling our staff, so we’re now in the situation where we’re looking to employ someone full time just to look after the catering. It’s a challenge to find the right person. You need to have someone who knows how to sell a product like this.”
In Richard Cavill’s case, he found offering a similar product—meat—in a different environment was strikingly different. “The breakdown of the cost of goods sold are completely opposite to the restaurant,” he says. “In the butchery you’ve got smaller margins but lower staff costs. In some cases I have to watch things much more closely than I have to with the restaurant—we have over $150,000 worth of stock in the butchery.”
Tony Percuoco found the same thing. “Learning about the cost of goods was totally different to the restaurant,” he says. “Because it was an artisan style of pasta, the labour costs were quite high. The main killer for both businesses is costs—occupancy costs, labour costs, fixed costs— and I had to relearn all of those things. The marketing of the shop is totally different to the restaurant, too—especially the presentation of the product. I did a number of courses in this. The single most important thing is the way you present it.”
But the biggest difference, Cavill says, is health. “The Department of Primary Industries are very strict on health, and rightly so. I agree with them completely. In fact, we’re transferring the HACCP (Hazard Analysis Critical Control Point) system into the restaurant.”
“It does take away time and effort focussing on a couple of things at once,” says Tony Percuoco. “I would never own two restaurants at the same time because one of them would take time from the other. Where I’m lucky is we have five directors and three of them are family, so if one of us takes time off to do something, I’ve got family there to take care of the existing businesses. The only thing I’m trying to do here is create a tiny bit more cash flow. But if I had to do everything I would go broke in two years.”
The upside, though, is very attractive. Marketing becomes much easier, says Daniel Vaughan. “All our catering jobs came from our own customers. We never advertised it. It was all word of mouth. And the restaurant’s brand helps the deli. As a trusted brand, it gives the customer comfort to know they’re buying something of quality.”
Another advantage with catering, he says, is it gave the staff some variety: “It taught them how to think outside the square, as opposed to working in a restaurant kitchen where you’ve got everything you need right in front of you.”
Tony Percuoco agrees: “When you go into catering it is hard,” he says. “You should think about it twice. The costs can be astronomical.” That’s not to say he’s not planning other projects diversifying the Fellini brand. He’s writing a cookbook, and in a few months he’ll open ACETVM, a museum for balsamic vinegar, which will also sell Modena by Fellini balsamic vinegar and condiments. “We’ve had the pasta factory for four or five years. The museum will open in the next six months. Two years ago, when we looked at catering seriously, we were getting a lot of requests for weddings, functions and so on. So we bought a five-acre property (Ecostudio Fellini, in Mudgeeraba, QLD) and put some lodges on it, where we do mainly weddings, but other functions as well.”
Richard Cavill also found growth took care of itself for both the butchery and Cav’s Steakhouse: “We don’t do a lot of marketing and any we do is as one entity. We rely on word of mouth. It’s very simple, really. When you’ve got six customers in the butchery taking home restaurant quality meat for a barbie with 20 of their friends, and their friends eat it and say, “Where did you get this?”—well, you can see what happens.”
“Our goal is to run both at 10 per cent net profit,” he says. “The butchery has definitely saved the restaurant money because of our buying power. There’s a massive amount of savings in buying in bulk. That transfers to the restaurant. The two businesses complement each other. In fact, it often amazes me how well they complement each other.”