Don’t Buy a Dream if You Can’t Afford a Nightmare
New Restaurant Owner Almost Gives Up
A guest at a table wanted to say hello. I visited the customer just before the lunch hour at one of our restaurants. My instincts immediately told me he wanted more than a casual greeting. He wanted to talk. The customer was no stranger. He visits regularly and owns a casual franchise restaurant in the same market.
For the purposes of this story, we will call the restaurant owner Joe. His restaurant background began about 18 months ago when he bought an operating franchisee of a small chain serving casual food similar to a Friday’s or Chili’s. After retiring a couple of years ago, Joe fulfilled his life-long dream of owning a restaurant. He wanted to be primarily an investor while his family ran the operations. His purchase was reviewed by accountants and lawyers and the deal was done. Let the dream begin!
Not an unusual story, so far as I knew he was surviving well. Joe’s estimated annual sales were about 1.7 million and, to my knowledge, the chain was handling the economic pressures of the past year as well as others.
Joe began our conversation asking about how we were doing and we exchanged pleasantries for a few moments until he asked about margins in the business. Giving him my normal answer of saying the restaurant business is like buying a new car that states you will get 25 miles per gallon - if you are driving on flat highway, at the speed limit, with no load, your engine is maintained properly and you have a nice tail wind. Otherwise you will get 20 miles per gallon like everyone else. A chain casual restaurant in his category should return about 10% of sales under optimum conditions.
Joe seemed to ignore my answer and extended the conversation by saying the restaurant business open his eyes. He said he has worked harder in the last few months than he has ever worked in his life. So much for the aristocratic role of an investor.
As a new restaurant owner, Joe and his daughter, the GM of the newly acquired establishment, along with his wife realized quickly that the numbers on financial statements, contracts, disclosures, daily receipts and all the standard due diligence he performed, never told the real story of his operation. As I listened, the story became more common. The restaurant business cannot be pigeon holed like other businesses. You cannot do the “standard” pre-acquisition inquiries and base your decision to buy on what you get in return.
To convert Joe’s struggles into a few lines, here is a list of his almost disastrous challenges as he took over the operations:
- Equipment that had been in operation for 5 years or more began to fail from day one. The life expectancy had run its course, hastened by some poor maintenance.
- Employees were out of control. Many had known the restaurant was for sale and let their attitude reflect their uncertain future.
- The POS system was outdated and had many loopholes, which exasperated efforts to control costs and discover waste and theft.
- Until Joe took over, sales had been relatively stable, but took a nose dive as the recession kicked in and the new restaurant owner’s lack of experience required a long learning curve to handle the declining trends.
- As part of a chain, he could rely on the restaurant franchisor to offer a good menu and supplier relations were good, but execution was solely on his shoulders and that of his family. Another “learning experience” he hadn’t anticipated.
- He quickly learned that the price of the business would include additional expenses for equipment, computer systems, training, changing much of the staff and refurbishing some of the interior that needed to match the customer’s expectations.
- Finally, the attempt to equate marketing with advertising was an expensive lesson.
Joe’s eyes’ told as much of his story as his words. The feeling of a captain on a sinking ship starting to list must be similar. There are few things worse than deciding whether you will survive or face the mental anguish of failing. Joe and his family had one advantage over most new restaurant owners. They had the financial ability to weather the storm. Even deep pockets didn’t keep thoughts of shuttering the doors from entering his mind in the early stages.
The story may have a happy ending. The restaurant seems to have turned around according to Joe. Sales are doing comparatively better. He can feel the new enthusiasm of his staff and his food product is meeting the customer’s expectations on a consistent basis. The family may feel like they have lived a nightmare, but there are signs of emerging from a terrible emotional and physical test of stamina. The thought of ever only being an investor is elusive and long forgotten by Joe.
The story is still not unusual. Nothing was strange, unique or complicated. In fact, four out of five new restaurant owners face these same nightmares and close their doors. The odds may be slightly better for franchisees, but only slightly.
You can start a restaurant, buy a restaurant or become a franchisee; the struggles may have a few twists and turns, but are generally the same. If you can’t pay for the unforeseen nightmare, don’t buy the dream. Joe hopes to recover his investment someday, but it won’t be anytime soon – unless there is another Joe who is too quick to spend his life savings on a dream.
Restaurant Lessons from a Recession (Part Two) – Marketing
Perhaps marketing is the most challenging task a restaurateur faces with or without the impact of a recession. Recognizing that there is a recession is always in hindsight and pinpointing the day it started is impossible. You don’t wake up one morning and the newspaper headlines tell you your business is down, people are losing their jobs, there are fewer dollars for dining out available and prices are going up. Those things occur over a period of time. Recognizing the trends and realizing the impact it is going to have on your restaurant is the key to keeping the damage to a minimum.
If your restaurant had a marketing budget and programs in place, you at least know the importance and value of planning. The challenge is knowing how you must change as the consumer changes in a financial downturn spread across literally all parts of your demographic.
Restaurant visits is one of the first things to be curtailed when your guests have less discretionary dollars to spend. When they do go out to eat they are looking for value. There is more focus on price and the total experience – in simple terms, diners want to know what kind of bang they are getting for their buck.
Another phenomenon is people want to feel good. The media is plastered with bad news, so the small window to feel good is at a restaurant table eating comforting food they may not normally eat. Comfort food becomes a big seller. It’s interesting that even fine dining restaurants have jumped all over the gourmet hamburger trend. Casual restaurants are reviving dishes that were stored in the recipe books for years as the pre-recession consumer was looking for more healthy foods, less fried foods and watching calories closer than their wallets. During this economic downturn it appears the “feel good foods” are a hit.
Another aspect of evaluating consumer habits is the sympathy choices. Rich or poor, there was budget tightening. Even people who had plenty of income and assets have changed how they eat and spend money. There are fewer $75 dollar bottles of wine, $50 dollar steaks and extravagant desserts. The fine dining establishments have seen a double digit decline in sales for months.
How do you combat all of these negative forces? As always, give the guest what they want and keep your regular customers loyal.
Regular Customers
If you hadn’t developed a method to communicate with your loyal clientele before the recession, you are discovering how important it is when they are not at your tables as frequently (or not there at all) any more. Direct mail and email are the tools of choice. Other media possibilities include newspaper, website, television and radio. These are expensive and make it difficult to reach your client base specifically. Email is perhaps the most effective and less expensive. Regular communication about the changes you have made in your menu to reflect the guest’s focus on value is important.
Getting New Customers
New customers, while difficult to motivate, are more susceptible to your contacts than ever before. They are looking for value. Your competition may not be as aggressive at changing their operations to meet the consumer’s demands. There are fewer dollars to be spent and fewer new diners, but the ones that are out there are looking for new experiences. Their eyes and ears are more tuned to listen for things that fit their budgets and taste buds in this economy.
Clearly the best source of new business, in any economic climate, is word of mouth. That is why you want to make every effort to maintain and increase you regular customer frequency. The second best source of new clients is personal contact with you or a member of your staff.
Your Marketing Plan
The key to keeping your revenue and profits up is having a viable plan based on the facts known about the consumer environment we have pointed out. If you had a previous marketing plan for your restaurant, scrap it and design a plan on the new circumstances. Key elements include;
- Make sure you have a customer loyalty program in place and direct communication ability with your regular guests. Step up the frequency of contact.
- Be creative. Anyone can offer 15 or 20 percent off existing menu prices through coupons, specials and discounts – don’t do it. The potential long term damage to your brand is inevitable. The look of desperation is not a message you want to convey. Look at your inventory. What can you menu that is a value to your guest, but keep your margins within reason. Use your suppliers. Find new products that offer bargain pricing and comfort to the diner.
- Service must be impeccable. The guest is looking for value in their experience at your restaurant. “Value” is more than just price. Value is a package. It is meeting and/or exceeding what the customer expects. Whatever your concept, from fine dining to quick service, there is a minimum of standards that the diner expects when they walk in the door based on the price points you have established for your concept. Get your staff involved, informed and re-trained if necessary.
- Consider additional changes to cut costs and increase sales. Everything from catering, brunches, party trays, group sales, additional hours (or shorter hours) and operational procedures have to be examined. Make the changes that will add sales dollars and cut costs.
Summary
You may think it’s too late to react. If so, you must have a crystal ball or some other method of knowing the recession is over or won’t last longer. As recessions go, the end is as elusive as the beginning. What if the end is a year away? How about two years? What if it gets worse?
In reality, the plan you put in place now will work in any business climate. There is never too late in the restaurant business. We work on deadlines – some in the next minute, next five minutes, hour, day or week. One big deadline is while your doors are still open.
Restaurant Lessons from a Recession (Part One)
History is a teacher. The lessons we learn are supposed to help us be more prepared, avoid mistakes and correct our paths into the future to lessen the chance of a repeat historical calamity. Hopefully, we won’t see this financial crisis, dubbed a recession, again, but if we do, here are some notes to remember.
The Start of a Recession – When does a recession start? What are the signs? If we knew the full answer to that, recessions would be easier to get out of with actions implemented in the early stages. Few people labeled this economic period a “recession” until late last year. By that time the restaurant industry had already started its freefall. We were faced with unprecedented price increases, lower consumer discretionary spending and a general business climate that saw a whirlwind of corporate belt tightening that included layoffs, less travel, fewer meetings and conventions. Perhaps the most damaging for the restaurant industry was the consumer’s outlook for the future. As the world was looking for solutions, dining out became a luxury that was eliminated from the budgets of many people.
The best estimate most economists have agreed upon is about October last year we could officially call ourselves in a recession, even though the term and the measuring sticks financial wizards use weren’t confirmed until much later. The key we have to remember is that jobless claims, home sales, consumer spending, corporate earnings, commodity pricing trends and other indicators are reported well after they occur. In other words, hindsight is too late.
Our industry needs better forecasting and leading numbers rather than following numbers.
The Consumer Mindset - Of all the lessons we need to remember is the mental stages of our guests. As the stock market took a tumble, the banks became insecure and negative publicity ruled the news, the average Joe changed. He became fearful of his future, his income, ability to survive and his long term prognosis for security. The impact was a general belt tightening that included the rich, the middle class and the poor. Many of our old guests changed their eating habits without regard to their personal financial prosperity. Eating out became a perceived extravagance that should be curtailed, whether financially necessary for any individual guest or not. People who are continuing to eat out as frequently at restaurants are eating differently. The diner is paying attention to value, pricing and portions.
As habits changed the restaurant industry responded poorly at first. It took many months for us to change our menus, advertising and marketing to keep our guests. In many cases it was too little far too late. The upscale, trendy, expensive segment of the hospitality business is seeing double digit declines in sales and the casual market is reeling from less dramatic declines, but still in a small margin business, 3% to 10% sales declines is the entire profit structure.
The industry has to recognize that small margins leave no room for cash reserves. In a recession there is no way to raise capital for survival. It is too late.
The Chains Become Predatory – It should have been predictable that the chains would take drastic actions and use their ability to work on shareholder money to compete for every last penny of the consumer dollar. The chains are;
- Feeding on each other. It is the old “monkey see”, “monkey do” game. Each tries to beat the other with lower priced offerings. From 99¢ specials it went to 89¢ and then 79¢. “Two-fers” went competitively from $25 down to $10 at major brands of the casual restaurant segment. Only history will tell us if the consumer will return to these hyped up discounters as wallets open again. The food quality and presentation is so poor some of the offerings are barely edible. The rush to get butts back into seats may leave permanent scars as the chains battle each other.
- Feeding on franchisees. After months of low-priced, and in many cases loss-leader, promotions the franchisees are becoming very vocal. Remember, most restaurant chains earn a percentage of each sales dollar a franchise brings in whether the franchisee is profitable or not. So while the chain’s corporate numbers are acceptable the store owners take a bath.
- Feeding on themselves. Corporate executives know the only thing that keeps them in their jobs is the shareholder. The value of each share of stock is what fuels the fires of the future. If profits (and stock price) go down, shareholders aren’t happy. However, rather than take the temporary earnings hit, corporations are selling off their stores to keep earnings respectable. That will work for a few quarters, but eventually it catches up. As assets dwindle, so do the prospects for future financial leveraging.
In the long term, the consumer will decide the fate of the chains’ marketing ploys. It will be interesting to see if the bargain basement perception works as the economy revives. The consumer may not be so apt to re-visit places that will be remembered for cheap junk food as an acceptable place to eat in the future. Permanent damage can only be assessed over time.
For the independent restaurants and smaller venues, the lesson is recognizing the customer’s need for reassurance and that we can be aware of their fears and changing habits. We have to find better ways to communicate with guests and adapt quickly.
Survival of the Fittest and Quickest – Thousands of restaurants have closed and are closing. Those that were barely surviving before 2008 left the scene first. The restaurants short on cash went second and the ones who did little or nothing to respond to the conditions above went third. Some restaurants didn’t respond well but exist as a result of deep pockets they are willing to reach into.
Chains are not shy about closing non-performing properties. The most notorious to date is probably the reported 900 stores Starbucks has shed. Across the whole spectrum, all parts of the restaurant industry have lost seats. As we emerge from this onslaught of bad news, many restaurants will be stronger. Others will continue to struggle for long periods of time as they made marketing moves that will permanently harm their brand.
The lesson is finding ways to better understand our guests and creatively keep adapting to the perception of value. Marketing becomes a daily requirement and not a knee-jerk excuse for advertising more of the same old thing.
Part two of this series will deal with lessons in marketing a restaurant during the recession.
NRA Poll Shows Twitter Leading the Pack
A poll running the week of May 11, 2009 shows some insights on Twitter as an Internet social marketing tool. According to the poll, 76% of all restaurants don’t use Twitter at all. Of the 24% who use Twitter, they use it for advertising and the format for distribution of coupons.
Arguably, Twitter seems to lead the pack of Internet interactive social marketing tools. While the number of restaurant users is surprising, the verdict on the long term rewards as a marketing method is still months away. There have yet to be glowing accolades of any real long term successes.
Consultants and other news hounds who look for something to say would lead you to believe that if your restaurant isn’t using Twitter, you will be left in the dirt. Savvy restaurant owners know that this medium only reaches a small number of customers in a tight age group. These owners also realize that the users only looking for bargains may not be the best place to generate new guests.
Many restaurant operators, particularly independents, have found that the time and effort versus the rewards don’t equal what other tools can provide to a wider audience at a lower time commitment. The jury is still out, but we will keep the vigilance and follow the results as reports come in.
Destination Designation – Not Performing in Economic Downturn
Many high end food operations previously positioning themselves as “destination” restaurants are getting hit hard in this recession. Almost every segment of the food service world has been affected in one way or another, but double digit declines for the special occasion operations are the norm. The same store sales decline is on top of last year’s price increases.
The lesson is one for the restaurant industry. The high profile chefs, celebrity owners and notable expensive dining options have set themselves up for immediate long term declines in sales and traffic count. People either can’t afford luxuries or are cutting back as fear of the unknown economic stability continues to reign. The wealthy are eating differently, just like everyone else. The moderate income households who used to go to destination restaurants for anniversaries, birthdays and holidays are scaling back and settling for more casual and less expensive restaurants.
The question is, can you be both? The answer is unclear, but many high end operators are scrambling to find ways to offer less pricey options without hurting their brand forever. Many are implementing a separate bar menu that offers everything from “gourmet” mini-burgers, flatbread pizzas, fresh fish tacos and even nacho platters. Many of the offerings are copies of what neighborhood bistros have been dishing out for years. A little splash of truffle oil and fresh morel mushroom pizzas may not satisfy or meet the customer’s expectations.
Value is the issue. Can you take a sports bar’s nachos and change the chips to homemade blue corn tortillas with barbecued sirloin and Maytag blue cheese compare when you double the price? Time will tell as the downturn continues. It is highly doubtful the consumer will fall for this pretense and even less likely the high-end chefs can control their urge to change their ways to appeal to the masses.
One thing is certain. More destination restaurants will try to downscale a part of their operation on a long term basis in the future. They will try to level out the public perceptions as our industry faces challenges like the past year and the 9-11 disaster a few years ago. Pricey dining is clearly a luxury people quickly forego when money becomes tight and the economy’s future is unclear. In a few months we will have the answer from the consumer’s response.
