The Writing on the Wall, Part Three

If you’ve been following me on Twitter or Facebook, the reason for this jarring departure in blog content should be no secret by now. Just one last literary tidbit before I return home, and then I’ll have plenty of new stories to share- Involving food and recipes, yes! Thanks for bearing with me and providing such insightful comments all along. To complete this trio of essays, I’ll leave you with a general overview of the less romantic side of the hospitality industry… The expenses and the odds of survival.

Risky Business

It’s a dream shared by many office workers caught up in the drudgery of a thankless job: to leave their thankless positions, open up a restaurant, and share their favorite foods within the community sounds like a gig that’s too good to be true. Unfortunately, in most cases, it is. Restaurants can be the most difficult type of small business to start and become financially successful. It’s been estimated that within the first three years of operation, over 60% of all new restaurants in the US will have already failed and closed. There are many reasons that a restaurant may go under, but some of the most common culprits include the astronomical start up costs, a very competitive market place where big industry still rules, and profit margins that are very slim in the best of situations. It is certainly possible to run a profitable restaurant, as numerous small businesses throughout the country have proven, but that success is hard-won and well deserved. While any small business is a difficult endeavor, restaurants especially pose some of the greatest risks, and least promising returns.

There’s a good reason why restaurateurs frequently solicit investors to help get their concept off the ground, and it has to do with steep cost of turning their ideas into concrete reality. Rental fees for the space itself are just the start, but a prime location can quickly take a big bite out of the budget. A street-front store is more than just convenient; it’s almost like free advertising, since passersby are more likely to notice it and drop by on a whim. The financial hit may be hard to swallow, and other expenses can be taken on slowly, upgrading equipment as is possible, but a location can’t be changed without incurring even greater costs. The equipment, however, is no small expense either. Buying used can save a bit of money, but even the most basic set of tools such as ovens, refrigerators, and pans is liable to set one back between $100,000 – $300,000. That’s presuming that high-end specialty items aren’t needed, like fancy espresso machines or crystal-clear ice cube makers.

Banks are becoming increasingly reluctant to take a gamble and offer loans to newcomers in the restaurant business due to their high rate of failure. A rookie mistake would be to mortgage one’s home; it’s a move doomed to create further money woes in the future, or at the very least, put undue stress on anyone worried about losing it all. It’s important that one be financially stable before quitting one’s day job just so that they can break into the field. On top of the aforementioned start-up costs, don’t forget, there are expensive permits to cover, such as insurance, a liquor license, and food handlers permits for every employee hired. It can add up very quickly. After all that, there’s not even been a mention of the raw materials themselves- The food!

Food prices are at an all-time high all over the globe. Just in the past year, coffee and peanut-butter prices rose 19% and 27%, respectively. No one has been feeling that strain more acutely than those in the restaurant business. Although buying wholesale through specialty purveyors who deal only with restaurants will save money over buying food at retail prices, it’s a constant expense that will always need to be accounted for. Prices rise only higher for organic food, which can be a big selling point these days, but may or may not be worth the investment, depending on one’s customer base. Sometimes menus must be limited due to the costs of certain ingredients, which may spoil the original concepts of some owners. Luxury items like truffles or saffron can add up very quickly on their own, and most customers won’t be willing to make up the difference in the final bill. Immense pressure has been put on restaurateurs to keep costs down and offer affordable meals in this economic environment, so it can be incredibly challenging to formulate a menu that will strike potential consumers as a good deal, and still bring in a profit. On any given check for a full-service restaurant, after factoring in the costs of food, labor, and other incidentals, one can only expect to make between 1.8% to 3.5% profit in most cases. At that rate, it’s easy to see how it could truly take years to merely pay for the start-up costs and break even, let alone actually make a living wage.

Any additional competition added to the restaurant scene can cause strain on even established eateries, but that pressure is tenfold when national chains move in next door. In the race to offer the most affordable options, no one has the market cornered quite like restaurants franchises, and especially fast food establishments. Value menus are a boon to both indiscriminate eaters and the executives that think them up, because chains are able to buy very cheap food at incredible volumes so that each serving will cost them pennies, if that. Almost everything that the customer pays for is pure profit. Healthy food is more expensive, and that can be a deal breaker for some people, which in turn makes competition with these kings of cheap food near impossible for many new eateries, especially quick-serve establishments that fall in about the same category.

As romantic as the notion of opening up a restaurant from scratch may sound, the reality of the endeavor almost never matches up to the dream. The expenses that must be taken care of before the doors are even opened on a new restaurant typically are largely beyond what most newcomers would ever imagine, and are subsequently unprepared to take them on, even with the help of investors. Turning a profit is challenging on a good day, but when paired with the strain of making up those initial costs, most restaurateurs will never see a profits and losses report that is favorable. Add in the pressure of competing with the big boys of powerful, nation-wide chains that offer food at incredibly low prices to hungry consumers, and it’s no wonder that most restaurants can’t even survive their first year in business. It takes an enormous amount of determination, good planning, and a serious dose of luck for anyone to survive in such a hostile industry.