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The Ingredients of Restaurant Success

You love food, but it takes more than that to start a restaurant. Here's what you need to write your own recipe for success.
March 1, 2007
URL: http://www.entrepreneur.com/article/174770

For more information, see Entrepreneur magazine's step-by-step startup guide #1400, Restaurant and 5 Other Food Businesses, available atwww.smallbizbooks.com or by calling toll-free at (800) 421-2300.

From poultry to pirogi, steak to grits, Americans are hungry for good food and unique dining experiences. The National Restaurant Association says that in 2005 (the latest year for which statistics are available), the average household expenditure for restaurant food was $1,054 per person, or $2,634 per household. And considering the 300 millionth American was born in late 2006, it's clear there will be plenty of customers both today and in the future. That makes owning a restaurant a good business opportunity for aspiring food-service entrepreneurs, even during economic slowdowns and when consumer prices are rising.

"Food dollars spent outside the grocery store are higher now than ever," says former restaurant consultant Kenny Lao, 30, co-owner of Rickshaw Dumpling Bar in New York City, an eatery with 2006 sales of $1.3 million. "So if you have a strong concept and have your execution and operation strategies down pat, any time is a good time to open a restaurant--even now."

The Cornell University School of Hotel Administration confirms that the most successful restaurateurs have a clear concept and the ability to implement it consistently, as well as the determination to succeed and the flexibility to adapt to changing market conditions (including economic downturns). At stake is an estimated $537 billion in industry sales projected for 2007--and your chances of success are better than you might think. A survey commissioned by Restaurant Startup & Growth magazine suggests that the failure rate for independent restaurants is 23 percent--a far cry from the 90 percent that has been the conventional and largely unsubstantiated figure exchanged in business circles and famously emphasized on the reality show The Restaurant. That's significantly lower than the failure rate for all new businesses--only 50 percent remain operating after four years--so you have reason to be optimistic.

The key to success is service, says Randy Smith, president of Bottomline Hospitality Group in Scottsdale, Arizona, a restaurant corporation projecting $6.2 million in sales for 2007. "This is really a wonderful time to go into business," says Smith, 33. "One survey I saw said that more than 70 percent of respondents believed service was the number-one reason they frequent and return to a restaurant, even if the food isn't quite what it should be. If you can master the service and commit to selling good food, you have a good chance of success."

Here's how you can slice off a tasty piece of the restaurant profit pie.

Do Some Time
There's a lot more to running a restaurant than schmoozing with your clientele and testing new recipes. That's why industry experts advise working in a food-service environment first to learn the rhythm of the business and experience its inner workings. Any restaurant experience can be valuable, provided you spend enough time learning the ropes.

"It's imperative to have hands-on experience in the many departments that make up a restaurant," says Pete Hanning, 37, vice president and co-owner of The Red Door in Seattle, which had 2006 sales of just under $3 million. "I started in the restaurant industry at 15 as a dishwasher and learned by working fine dining, restaurant/bars and pizza places. You can't quantify the amount of overall experience you need to succeed, but it's hard to understand all the facets of the business unless you've worked them."

In addition to this hands-on experience, you should surround yourself with people who understand the industry, from seasoned servers to an experienced operations person. A restaurant consultant can also be very helpful--but expensive, too. So you may want to turn to your local SCORE office, which provides expert business counseling on small-business issues at no charge. If they don't have a former restaurant executive within their ranks, they may be able to refer you to someone who can answer your questions and dispense a little gratis advice.

Do Your Homework
Before you start planning menus, you also need to write a viable business plan. This recipe for success must outline your plans, goals and strategies in detail. It should include a detailed description of your concept (i.e., Indian, continental or sports-themed); a description of your proposed menu and pricing; a description of your target market and the marketing you'll do to reach it; a discussion of staffing and how you'll train and retain employees; and the pi�ce de r�sistance--an in-depth discussion of your financing, from startup funding and monthly cash flow to long-term income and expense forecasting.

"It's way more romantic to think you can open a restaurant by the seat of your pants, but in reality, planning goes a long way," says Michael Curcio, 29, owner of Pyrogrill in Jupiter, Florida, with projected 2007 sales of $2.2 million. "A business plan takes a ton of guesswork out of the startup process and is a good guide for getting your place off the ground. Make sure the plan is fluid and adaptable to market conditions and challenges."

Ray Sidhom, co-owner of Four Food Studio and Cocktail Salon in Long Island, New York, with 2007 sales projections of $5.7 million, is one savvy owner who reviews his plan frequently. "We have so many details to watch, from the food and liquor to staffing costs," says Sidhom, 41. "If they're not where they should be, the business suffers. So we look at the intricacies of the business plan often and use analysts who do projections and models."

A good business plan will also be useful when seeking financing, but it's more common for aspiring restaurateurs to rely on personal savings and funds from friends, relatives and outside investors rather than bank loans.

So how much do you need? "This is such a capital-intensive business that it's easy to underestimate the amount you need," Smith says. "Don't even think about starting with less than $100,000 in cash for a bargain-basement opening, or you won't get even remotely started on the right path."

The amount also depends on your location and the local cost of living. In pricey New York state, for instance, Sidhom says you'd better have $2 million for a restaurant with 200 seats if you hope to generate $1 million in sales.

"Steak" Out Your Spot

A good location is crucial to the success of a restaurant. Choose a building on a well-traveled street where it's possible to install highly visible signage, but beware of historic districts, where there are restrictions on every aspect related to a building's exterior. Check out the local pedestrian traffic, like Lao did. Because his restaurant is on a busy thoroughfare in the middle of New York City, he does a brisk carryout business during lunch hours--and attracts famous guests like Martha Stewart. Also, look for a building with a large, well-lit parking lot as close to your establishment as possible, and check out the other local businesses. If there are too many restaurants in the vicinity (especially if they serve the same type of cuisine), or if the other businesses don't generate a lot of regular traffic themselves, you could find yourself short on customers.

As for leasing a building formerly used as a restaurant, don't sign until you find out its history. There may be a very good reason why it failed--reason enough to make you invest your time and money elsewhere.

Finally, Hanning recommends buying used equipment when you start out, especially when it comes to big-ticket items like refrigerators. "In a few years, when your cash flow is better and you're duct-taping your appliances together, then you can buy new," he says. "Restaurant auctions often have good deals."

Study the Menu
Probably one of the most exciting aspects of establishing a restaurant is coming up with a winning food lineup that dazzles diners. Naturally, menu selections should reflect your establishment's theme consistently (i.e., no herbed couscous at a pizza parlor), and you should create signature menu items that set you apart from the competition. For instance, Lao built his dumpling empire on six varieties of dumplings (including a chocolate dessert dumpling) and simple add-ons like Asian salad, noodle soup and green-tea milkshakes. It takes approximately 2.5 minutes from order to delivery--and he sells about 1.4 million dumplings a year. "That's more dumplings than I ever imagined I'd see in my life," he says with a laugh.

At Four Food Studio, Sidhom and co-owner Jay Grossman, 34, avoid "menu fatigue" by rotating the offerings on a seasonal basis. They keep their loyal customers informed about the new selections through an e-mail blast sent just before the menu changes.

Anita Lo, chef and co-owner of both Rickshaw Dumpling Bar and Annisa, a contemporary American restaurant in New York City's West Village with 2006 sales of $1.5 million, features a five- to seven-course tasting menu in addition to the regular menu to keep clientele interested in her culinary offerings. "I tailor the tasting menu to each table and never bring back the same dishes," says Lo, 41. "I also keep a database of everything my regular customers have ever eaten, so they have a unique dining experience every time they come in."

Pricing menu items is an art unto itself. Your prices should reflect everything from food costs to labor (both prep staff and servers) and overhead (i.e., utilities). You should also build in a profit margin of at least 10 percent to 15 percent to make sure the business is on a firm footing for future growth.

Tell Them About It
Seasoned restaurateurs are the first to admit they don't spend much--if anything--on advertising. "In a fine-dining environment like New York, advertising makes you look desperate," says Lo. "It's better to make sure everyone who comes in leaves happy--that's your best advertising."

Curcio believes that if you have to spend more than 5 percent of your operating budget on advertising, then there's something wrong in your business plan. Others think that print advertising isn't particularly effective for drawing customers, TV and radio are way too expensive, and coupons don't build repeat business--just business from customers who come in only when they can get a discount.

Even so, it's important to get the word out to potential clientele when you are just starting out. Unless you are opening a linen-tablecloth restaurant, try announcing your presence in the neighborhood by distributing fliers (at 4 cents each or less) and by holding a grand opening. This is one event you'll actually want to advertise in the local newspaper and by sending out news releases to the local media. Host the event a few weeks after the doors actually open to make sure all your equipment, cuisine and staff are up and running smoothly. Offer specials, give balloons to the kids and hold fun activities to make a favorable impression on new customers. Have business cards and printed menus at the hostess stand or cash register that customers can pick up, and consider giving away promotional items like pens or keychains imprinted with your business name and phone number. And don't forget to invite the media. Free press from food critics, life-style writers, columnists and others is worth its weight in gold.

Word-of-mouth is another potent publicity resource. At Four Food Studio, the partners create their own buzz by holding special events, like Monday "Industry Night," which attracts up to 500 people who want to network with other professionals. They also held a brunch recently that featured horses, a petting zoo and blow-up slides in front of the restaurant to attract families.

"It's not the same old, same old," says Grossman, the restaurant's crea-tive marketer. "We try to create a place with a different feel, a different flavor every time someone visits."

Reach the Next Level

Business plans and menus are crucial--but there's one more essential ingredient needed for success as a restaurateur: passion for the business.

"This business is a highly competitive grind," Smith says. "So if you're not passionate about it down to your core, you won't make it. You also have to make others buy into your vision and make them want to be part of something great. Those things, coupled with integrity and a really strong work ethic, are the keys to success."

Where Everybody Knows Your Name
TV shows like Cheers have made bar ownership look easy and fun. But don't be fooled-bars entail many of the same business responsibilities as restaurants. On the plus side, you can operate out of a fairly Spartan space and you don't open until 4 or 5 p.m. You have far less perishable food on hand, and you need fewer cooks and servers. Profit margins on consumables are usually higher, too-for example, one bottle of spirits will yield a lot of shots, which can add up to a lot of money depending on the price point. For these reasons, it's possible for a new bar to be in the black in about six months.

On the flip side is the reality that you'll be working into the wee hours of the morning, which can take a toll on your personal life. You'll also have to deal with unruly patrons and spend a lot of time coaching your staff on how to handle troublemakers. Plus, the bar industry is far more scrutinized by regulating officials. "You have to understand the laws, ordinances and political climate associated with selling liquor," says Randy Smith, president of Bottomline Hospitality Group in Scottsdale, Arizona. "If we didn't share a full-time lobbyist with other local business owners, it would be nearly impossible to do business."

Selecting the right concept for your bar is crucial. Neighborhood bars are still the most popular type, although sports bars do very well in cities with professional sports teams. Other types of bars include specialty bars, like martini or cigar bars; brew pubs, which sell house microbrews; and nightclubs, which have entertainment on tap in addition to libations. Choose a location that has good traffic flow in the area and safe and convenient parking, and you're on the way to becoming a fixture in the neighborhood.

What Not To Do When Starting A Restaurant

  1. Don't sign a lease if your rent ratios aren't in order, or you'll be working for the landlord.
  2. Don't commit to the project financially if you're not already committed to it conceptually, culturally and logistically.
  3. Don't ever start a project that doesn't have a genuine sense of purpose and concept credibility. It won't stand the test of time.
  4. Don't lose sight of the fact that employees are the most important part of your business, and don't skimp on training and development. A happy employee equals satisfied guests.
  5. Don't start believing your own hype! You won't be able to make sound decisions.

Source: Randy Smith, president of Bottomline Hospitality Group

Eileen Figure Sandlin is an award-winning freelance writer and author who writes on business topics.