Why Do People Open Restaurants? (pt. 1)

A few years ago I purchased a textbook about the restaurant business. I’m a bit of a nerd, and I was curious. I’m in the middle of reading chapter one, and I’ve already come across an issue.

It’s the following quote: “The restaurant is a potential money factory.”

This is a statement one might expect to find in a textbook. It’s choice-supportive bias. A person is paying to take a class, that class makes you buy a textbook. Textbooks: “You have to buy a specific edition, we don’t offer it in softcover, and chances are you won’t read it all anyway!”

People do make money with restaurants. Some are successful at it. But that statement still seems disingenuous. It has always felt like the restaurant business was more unstable than profitable.

Then there is an American Express ad that claims the first year failure rate is 90%. I’ve seen figures that say  55-60% of restaurants fail in the first three years. Forbes cites a study that says only 17% fail in the first year.

Every piece I found on the matter has quoted the 90% and dismissed it as an exaggeration. The Forbes number seem light. More importantly, it appears that all restaurants aren’t playing the same game.

Forbes:

“Part of restaurants reputation may be due to smaller startups, which fail more often. Restaurants with 20 or fewer employees fail more often than other service business, but those with 21 or more employees have a median lifespan that is nine months longer than other businesses of the same size.”

I imagine the, “21 or more employees,” data point skews the data, with larger staffs at chain and franchise restaurants. But, if you open a single restaurant on your own,  with less than 21 people, the odds get longer.

The study quoted in Forbes seems to back this up (see below). If you run any style of restaurant with less than 20 employees, there’s about a 50% chance it will close in three to four years.

Restaurant chains feel like different beasts.

When I worked at The Hard Rock Cafe, a manager once informed me that 60% of profit came from F&B and 40% from retail. Then I was told that the goal was to flip those percentages.

The Hard Rock Cafe aspires to be a souvenir stand, not a restaurant.

McDonald’s sells food, but they are successful because they own land. They make the most money off of franchising their brand, not running stores. For McDonald’s, the most successful way to run a restaurant is to own land.

McDonald’s is a real estate company that sells hamburgers on its property.

Perhaps I’m not addressing the textbook’s statement correctly.  Maybe what I’m objecting to is my false interpretation that the textbook is saying it’s somehow simple to make money with a restaurant. Maybe.

Back to Forbes:

“…It’s important to note that while I use “failure” and “closure” interchangeably here, a closing restaurant is not necessarily an unsuccessful one. It could be the case that the restaurant was doing well, but family or health problems forced a closure.”

You cannot gloss over the above when calculating a restaurant’s success. Sometimes those health problems are the result of a successful restaurant.

If that’s the case is the restaurant a success?

Then there’s “A Restaurant Ruined My Life” by Robert Maxwell. In Maxwell’s case, the restaurant is still open. It “failed,” but it didn’t close.

I guess restaurants can make money, but with the less than even chance that a restaurant will close in four years, they seem to be as much of a gamble as a moneymaker.

It’s interesting that “21” is a magic number in both Blackjack and restaurants.

 Restaurants may have better odds,  but in the restaurant business, you’re always the one paying for the free drinks.


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