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Thinking of opening a restaurant?

Phil Mott, an assistant professor at the Les Roches School of Hospitality Management at Chicago’s Kendall College, has some advice for you.

Q. When someone comes up to you and says, “I love food, I love people, I want to get into the restaurant business,” why try to talk them out of it?

A. I had somebody approach me who had a very good job with a major company and an MBA from a prestigious university. I looked at him and asked, “Is your career in danger?” He said, “No, but I’ve always loved food. I love to cook. I love to have parties.” I told him to invite 20 friends over, throw a great dinner party, and then take a stack of $100 bills and burn them one by one. It will be fun -- and cheaper than opening a restaurant.

Full interview here. I have trouble getting over the fact that restaurants have a 60 percent fail rate in the first three years. Particularly given the establishments that seem able to endure on the market. Whatever is being weeded out, it's not necessarily bad food.

(Via Eater.)

By Ezra Klein  |  October 19, 2009; 10:01 AM ET
Categories:  Food  
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Comments

Restaurants have a high failure rate because the reason for opening a restaurant people give is, as mentioned above, “I love food, I love people" rather than, "I want to run a business." Would-be restaurant owners don't price their menu with an eye towards covering cost. They didn't get their start in the business by working in the kitchen and understanding the economics of it, so they don't even _know_ how to price their menus. And, most of all, they have a view of being a "gentleman restauranteur" rather than a business owner working day and night, night and day trying to cover expenses.

I have few family members in the restaurant business, and so far, our family's fail rate is 0%. Why? They are in low-overhead businesses that don't encounter deep drop-offs in customers because of recessions, and they were able to leverage their family to work staff positions during the early startup days. It's not glamorous: reality TV features "America's Top Chef," not, "America's Top Greasy Spoon Line Cook," but it makes money.

Another phenomenon I've seen to explain failure rates-- even successful restaurants that are started as collaborative partnership between a married couple will close and/or get sold because those marriages are just as vulnerable to divorce as everyone else's marriage. When the marriage gets dissolved, so does the restaurant.

Posted by: constans | October 19, 2009 10:20 AM | Report abuse

I'll second constans' comments and add that many restaurant owners and staff don't manage the grinding discipline required to (1) keep food cost to a manageable number,(2) to paraphrase David Mamet, Always Be Marketing.

Our family has owned a restaurant for a few decades now. One of the things that surprised me was how much of a plus it was, when hiring kitchen staff, to find people who had worked in chain restaurants. Not because they could bring good recipes (good grief, no) but because they were usually drilled on how to order food and avoiding waste. Chefs from mom and pop restaurants might be inspired by a recipe and decide to order 30 pounds of oysters. Great fun, no doubt, and a very tasty dish, but half of those would be going into the trash. Ruin.

Posted by: Sophomore | October 19, 2009 10:29 AM | Report abuse

i wonder once restaurant owners are required to offer benefits to their employees (depending on whatever healthcare reform plan ends up happening) what that would do to the failure rate? I'd think it'd be going up.

Posted by: visionbrkr | October 19, 2009 10:59 AM | Report abuse

I would guess too that lots of new restauranteurs don't have either the capitalization or another source of income to tide them over until the new venture becomes profitable. I'm acquainted with a couple that has opened a rib place nearby. For the time being the wife is continuing to work days and spending evenings at the restaurant, while the husband is working full time on the ribs. They'll be able to keep going until they get to positive cash flow.

Posted by: donkensler | October 19, 2009 11:14 AM | Report abuse

Isn't that lower than the failure rate for new businesses in general? But duh, as people have pointed out. Your typical restaurant is an opportunity to work long hours for low-to-mediocre pay, and the reward for success is to keep doing it until you find someone to buy the place from you.

Also note that even the top-end restaurants don't all last that long. They rebrand, rename, the star finds something else to do, etc.

Posted by: paul314 | October 19, 2009 11:26 AM | Report abuse

Please, can someone come to Chicago and open up a decent BBQ place?

We've got a couple but their number is diminishing.

Posted by: leoklein | October 19, 2009 11:31 AM | Report abuse

I'm surprised no one has mentioned customers as a factor. How many times a week or month do customers eat out? How many times do they eat at a sit-down restaurant vs. fast-food or the standard chain fare? How many times do they choose where to eat based on the type of food they're in the mood for that evening? Does your restaurant outcompete all their other choices? How many new, hot, trendy places have opened since the last time they matched all your criteria?

I think restaurant customers are much more likely to bounce around to different places to try new things -- except perhaps for a few entrenched favorites, which lowers the number of opportunities even further. That makes it much harder to have a consistent, regular clientele.

Customers' taste and appetite are fickle, and there's little downside to experimenting.

Posted by: dpurp | October 19, 2009 11:51 AM | Report abuse

Dinner party cook is to restaurateur as blogger is to policymaker.

Posted by: tomtildrum | October 19, 2009 12:14 PM | Report abuse

Ezra,

If you think this is crazy, consider that the success rate of Broadway shows is 1-in-5. Yep. *80% of Broadway shows fail to make their money back*. In non-profit theatre, the maximum amount of revenue that comes from ticket sales is generally 66%. It's a business that makes restauranteuring look positively sane by comparison!

Posted by: parabasis | October 19, 2009 12:18 PM | Report abuse

parabasis, Broadway shows, fancy restaurants, and coffee shops are all businesses that investors put there money into because they get a psychic benefit from doing so. Because of this, they are both less apt to evaluate the financial return of the investment as well as find themselves in competition with a larger number of other investors who are willing to keep shoveling money into competing ventures with little concern for financial success, making competition much fiercer than it would otherwise be.

Posted by: constans | October 19, 2009 12:53 PM | Report abuse

"i wonder once restaurant owners are required to offer benefits to their employees (depending on whatever healthcare reform plan ends up happening) what that would do to the failure rate? "

I wonder once restaurant workers have access to healthcare what that would do to the rate of Hep C outbreaks.

Have to say, one thing that makes a night out at a restaurant extra-special is seeing the collection jar up front for the line cook who had his burns treated in the ER, or the bar manager who tripped on the cellar steps and broke her ankle. And the idea of someone with untreated H1N1 coughing into my food is the cherry on the cake.

Posted by: pseudonymousinnc | October 19, 2009 1:23 PM | Report abuse

"I would guess too that lots of new restauranteurs don't have either the capitalization or another source of income to tide them over until the new venture becomes profitable."

It's not just capital. Fine (or just semi-upscale) dining usually depends upon a good location, and a good location usually puts you at the mercy of your landlord.

One thing about Ramsay's original BBC 'Kitchen Nightmares' that didn't really cross to the FOX version was some of the hard-bitten restaurateur advice on assessing location, competition, pricing and margins. If your chummy front-of-house act means that you're not turning over tables mid-way through a Saturday night, you're breaking your own back. If you're filling up your customers with appetizers, then you don't get to rake in the traditionally high margins on the desserts. The price of the top and bottom main course influences what the median choice will be. And so on.

Posted by: pseudonymousinnc | October 19, 2009 1:33 PM | Report abuse

I've always used restaurants as an example of the inadequacy of efficient market theories - the factors that lead to a restaurant succeeding or failing are only tangentially related to issues that concern the customers ("the market," if you will). Does your town have any Ethiopian places? No? Then will an Ethiopian place succeed? Who knows? Even if all the pieces mentioned above work out - startup capital, location, business plan - all it takes is the owner's father back home getting sick (or whatever) to basically torpedo things - and there's no guarantee that the restaurant will be replaced, or that its replacement will be as well-run. Meanwhile, the 80th-best Italian restaurant in town could well be a perennial moneymaker because of regulars who don't care that the gnocchi is gummy and the marinara sugary (so why are they regulars? we'll never know).

Restaurants are simply too particular to meet the standards of a functioning market as defined by Econ 101 (the closest it probably comes - ease of entry - is a mirage: if you're entering the market at the bottom, you're incredibly likely to wash out). Chain restaurants are a big exception to this, for a variety of reasons, one of which is the commodification of the product - it's much more feasible for diners to compare among the offerings out at the mall than the unique snowflakes arrayed in an urban restaurant row.

Posted by: JRoth_ | October 19, 2009 2:18 PM | Report abuse

I wonder once restaurant workers have access to healthcare what that would do to the rate of Hep C outbreaks.


Posted by: pseudonymousinnc | October 19, 2009 1:23 PM | Report abuse


I actually wonder once they have access what percentage will actually GET HEALTHCARE. What percentage will pay a penalty to stay in the status quo (guess it depends on how WEAK the penalty is).

I also wonder what percentage will get a plan on the exchange (be it public or private) and then IF that person will go to the doctor instead of coughing on your food. My guess is that giving them access doesn't mean that all or even many of them will actually USE IT. Some of it can be attributed to cost (ie copays deductibles etc) and some can be to the cost of not working (ie no paycheck) and some can be left to the inherent laziness in some people. That being said you're still likely to get a cook sweating into your food although now he can say he has healthcare and access. Gee isn't that grand!

Posted by: visionbrkr | October 19, 2009 2:32 PM | Report abuse

*It's not just capital. Fine (or just semi-upscale) dining usually depends upon a good location, and a good location usually puts you at the mercy of your landlord.*

Successful restaurateurs who are in it for the long term, I've noticed, buy their own commercial space as soon as the opportunity becomes available.

I don't think that people who say "I love to cook and I love people" expect to find themselves being an accountant, a manager, a real estate investor, an expert in supply-chain management, and someone knowledgeable about the psychology of pricing.

Also, visionbrkr is obviously not well aware of what's going on with health care reform bills. It looks like small businesses with less than around $500k in payrolls will be exempted.

*My guess is that giving them access doesn't mean that all or even many of them will actually USE IT*

What's funny is that your constant complaints about the reforms is that you fear that too many people will be getting health care.

Posted by: constans | October 19, 2009 2:41 PM | Report abuse

At least part of the issue with restaurants not mentioned here is the low margins. A good mom-and-pop restaurant with decent management can make a 10 percent margin. That's actually pretty high when you consider that health insurers usually run around 5-6 percent and supermarkets run around 1-3 percent.

But that 10 percent margin depends on volume to grow into a decent return for the owner. If your place has 200 seats, great. An owner can probably get enough of a return to make it worth it for a couple of decades without breaking a sweat. But if you've only got 50 or 60 seats, you've got to be an extraordinary manager of people and product to control costs, or be so highbrow and leading-edge that you can command $35 and up for every entree and $10 per glass for wine.

I delivered pizzas just after college to make ends meet, and got to be pretty good friends with the owner. His store where I worked was a franchise of a regional chain, and was the most popular place around, with good product and good management. But he also owned two other locations because he said that as busy and successful as he was, one store did not bring him enough return to feed his family (metaphorically -- not talking about the mistake pizzas we all took home). He needed three just to live a fairly middle class lifestyle.

This is where the quick-casual chain restaurants have it over the local joints.

Posted by: Rick00 | October 19, 2009 2:56 PM | Report abuse

constans,

haha. actually I am aware of it and restaurants are at risk depending on their size or better yet their popularity. If they're larger then theoretically they're doing better, making more, having more employees (ie dishwashers, cooks, busboys, etc) so they'll get over the threshold of employee as well as income. $500k doesn't go nearly as far as it used to and depending where in the country you are $500k goes almost nowhere. So maybe you're corner dive doesn't take in receipts of $500k but many other restaurants do, espeically the good ones that do well. So we're punishing people for doing well again are we? I could go on with that but I'll leave that to msoja.


I love it to that you ASSume you know what my fear is and that its people will have access to care.

Actually my real fear is that we'll spend TRILLIONS of dollars on this and not many more will be covered. Kind of like that wonderful stimulus money that's costing about $500k a job that Ezra's NOT talking about. I wonder why that is, hmmmm.

I've said before wouldn't it be sad and ironic if we had a public plan SO STRONG that no doctors participated so that no one wanted any part of it???

Posted by: visionbrkr | October 19, 2009 3:11 PM | Report abuse

*I've said before wouldn't it be sad and ironic if we had a public plan SO STRONG that no doctors participated so that no one wanted any part of it???*

You know, doctors like money, and they're not going to turn away patients *who for the first time can pay*. If there's one thing that irritates doctors, it's the fact that there are so many uninsured people who come into the emergency room and get treated but can't provide money for services. And doctors complain about medicare compensation, but if it weren't for medicare, they wouldn't have patients to treat, because those patients would be dead.

And any business that has a $500k payroll should be helping to make health insurance available to their employees. And not only that, but health care reform will make it easier for individuals to leave their jobs on which they depend for health insurance to start their own businesses. Which is better than wasting one's life as an insurance broker.

Posted by: constans | October 19, 2009 3:19 PM | Report abuse

A local restaurant with pretty decent turnover decided to launch a merchandising operation where all the profits from t-shirts and suchlike would go into a healthcare fund for their non-casual employees. Once it hit some number (around $50k, if I remember rightly) it would pay for the employer's portion of the proposed HMO plan.

That's really pretty sad. But then again, the restaurant business in the US is much closer to indentured service than in the rest of the developed world, with its tacitly subsidized menus proffered by $2.95/hr wait staff reliant upon tips.

Posted by: pseudonymousinnc | October 19, 2009 4:14 PM | Report abuse

haha. constans acts like i CARE what he or she thinks of me by that slap at insurance brokers. Exactly what is it you do? Liberal blogger??? ok whatever, who cares.

Whatever it is you do I hope it has nothing to do with mathematics.

small restaurant employs 25 employees averaging $20k per year per employee.

OOPS 500k.

Not to mention the owner, his wife, his kids if they're over 18 and on the payroll. You really have no concept of how businesses are run do you???

Restaurants are exactly the type of businesses that don't offer benefits now on average because as an above poster wrote of low profit margins as well as large business failure rate.

I actually liked what I read once that a restaurant in SF is doing. They add on a small percentage to everyone's bill as a "healthcare fund" to fund premiums for their local city sponsored plan. It amounts to a couple of dollars per bill and I'd gladly pay it to make sure they were taken care of. Kind of a roundabout way of what pseudo is talking about.

Posted by: visionbrkr | October 19, 2009 6:26 PM | Report abuse

If there's one thing that irritates doctors, it's the fact that there are so many uninsured people who come into the emergency room

Exactly why do businessmen and women that are doctors care about the uninsured in ER's. Only ER doctors are seeing them. Oh so you mean the 5% of doctors that are ER doctors, not the 95% that are NOT ER doctors? Oh, OK, I get that.

Posted by: visionbrkr | October 19, 2009 6:29 PM | Report abuse

"Restaurants are exactly the type of businesses that don't offer benefits now on average because as an above poster wrote of low profit margins as well as large business failure rate."

Amazing that restaurants in the developed world (as opposed to the US) manage to exist at all, isn't it?

The "healthcare fund" percentage is really just the bake-sale or charity tin model in a different guise: it's a well-meaning but futile attempt to paper over the cracks of an institutional wreck.

Posted by: pseudonymousinnc | October 19, 2009 10:22 PM | Report abuse

pseudo,

you see your argument isn't with me or insurers. Insurers don't determine cost. THey simply pay claims. Its doctors, hospitals, pharma, medical devices etc that are the reason that cost is what it is in the US as compared to other countries. Its pharma's unwillingness to spread the cost of their product to other countries and leave a bulk of the cost here in the US. If they raised for example premiums across the world 5% they could I expect lower prescription costs about 20% in the US without reducing their already bulging profit margins. For some reason they don't want to do that and for that they get no blame.

You need to get your bogeymen straight.

Posted by: visionbrkr | October 20, 2009 10:35 AM | Report abuse

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