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Restaurants: a bad business?


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#1 Jonathan Day

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Posted 22 March 2003 - 02:28 PM

I'm taking a risk here, because I don't know the restaurant business "from the inside".

But from the outside, the independent restaurant business looks like an economic disaster. By that I mean one where most participants will find it difficult to earn what economists call supernormal returns -- returns above the cost of the funds invested. Returns that an ordinary investor would say are commensurate with the risk entailed. More simply: real money.

There are plenty of industries that have been "bad" for a long time. Steel, for example, where irrational competition from "national champions" and capacity that has been easier to add than to withdraw has meant that margins have stayed persistently low. Airlines, where capacity is costly to withdraw (because the critical airport landing "slots" are not easily tradeable) and where the industry is therefore subject to constant price wars.

Of course a few companies in just about every industry make real money. Southwest Airlines is profitable, even when virtually every major airline is at risk of bankruptcy. Nucor has outperformed the metals sector. But the curve in "bad" industries is a steep one: only a few companies win.

By the independent restaurant business I mean free-standing restaurants, not fast food outlets or chains. Olive Garden, McDonald's: no. Single establishments: yes. Distinctive members of a group, e.g. Café Boulud: yes.

What's wrong with the business? I'm going to make a whole series of assertions here, knowing that many of them will be wrong. Those who know, please correct me.

First, many restaurants are operated by chefs, skilled in cooking but untrained in any principles of business: marketing, pricing, organisation, people management, cost control. And that's a big problem, because even if you happen to be completely clued in on these things (perhaps you went to a great culinary school and learned them in the management course), you are faced with competitors who often don't know whether they are making or losing money, or why. And the worst kind of competitor is a dumb competitor. The steel industry was crippled because many "national champion" steel mills were operated by civil servants who were unskilled in business and funded by governments who didn't care about their returns. Bad competitors give away "surplus" (again, returns over the cost of capital or "real money") to customers or to suppliers.

An example: almost all restaurants give away free options, called reservations. A punter can book and cancel with no penalty. Some members of this board have reported double- or treble-booking, waiting for a sought-after waiting list to clear, and then cancelling the others. Even where a credit card is taken, most places allow a cancellation up to 24 hours before the meal. This is just bad management, yet as long as most restaurateurs allow it, it's hard for a rational restaurateur to break away.

Second, the industry is incredibly fragmented, and it's far too easy to enter. Where the money is coming from, I don't know. I suspect that the business works, in part, because employees are willing to take low wages, e.g. chef-owners who pay their employees a minimum wage and themselves less. But, at least everywhere I have lived, new restaurants seem to open frequently. A fragmented industry is usually a "bad" industry, because it's hard to secure agreement amongst participants about the terms and conditions (let alone price) at which things will be sold.

Third, it's subject to fads and fashions. Tastes change. An important critic can drastically change the fortunes of a restaurant.

Fourth, both the fixed costs and the variable costs in an independent restaurant are high, especially at the top end. This isn't like the software business, where the fixed costs are high, but the cost of manufacturing each new product is almost nil. Nor is it like some service businesses (say, hairdressing, though my sense is that this isn't a great business either) where capacity can be aligned with demand. It costs a lot to open the doors of a restaurant, whether or not any customers turn up. And I will bet that, even at high-priced joints, most of the gross margin on food gets eaten up by labour and administrative cost, leaving little for the owners. Operating regulations in restaurants are rigorous and expensive to comply with. Employees are hard to manage. Etc.

Finally, for the most part independent restaurants don't achieve sufficient operating scale to get efficiencies in purchasing, administration and the like.

I said earlier that even bad industries have their winners. Usually these are the firms that are prepared to run with a radically different business model than their struggling competitors. Southwest Airlines flies people from place to place, but with a totally different model than American, United or Delta. Nucor developed the "minimill" model, sharply different to its integrated competitors.

What are the winning models in independent restaurants? One guess is that scale has something to do with it, so that groups like Dinex (Boulud's group in New York), or the Danny Meyer restaurants, or the Lettuce Entertain You group in Chicago may be advantaged over single-location restaurants. Even here, most of these seem to be privately held: the business may be too volatile to be attractive to outside owners. That in itself doesn't mean that real money isn't being made in these groups: law firms are, by regulation, privately owned, yet many of them make good money.

Do you agree with the basic thesis, that most independent restaurants will do no better than break even over the long run? Do the five reasons why this is a "bad" business correspond to your experience? What does it take to make "real" money in an independent restaurant, especially where the owners and employees have aspirations for high quality?

And if this is such a "bad" business, why do you think people keep opening restaurants?
Jonathan Day
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#2 Basildog

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Posted 22 March 2003 - 05:45 PM

The problem is that if you have restaurants run by accountants...you get MacDs :raz:

I'm probably a good example of the independant that does not make "real money".We make a living, enough to pay everyone, pay the mortgage, and have a holiday.and thats the way i like it!

I have no ambition to be rich and i'm too much of a realist to know that you don't get rich cooking for 20 people a night.

We have looked at expanding in the past, but for what? More money, more stress, more pressure
We came to our senses and decided to be small and perfectly formed. :laugh: We could resit tables, but who wants to be rushed through a meal?We could increase the price radically ( we have just had an increase, but not huge), but i want to run a place that many people can enjoy, not just the rich.


In our case it boils down to heart ruling head. We could be more efficent, more profitable, leaner and meaner, but i doubt it would be as much fun! :biggrin:

#3 Jonathan Day

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Posted 23 March 2003 - 03:00 AM

Basildog, just to be very clear: I think your aspirations are fine and honourable. And I see nothing wrong with what you are doing, and it seems to be working well for you. And if you are keeping things the bills and the staff paid when operating on that scale, my guess is that you are a good businessman as well as a good chef.

My point was that an outside investor would probably not realise much of a return from your operation, or from one serving 100 covers a night. You would cover your bills, pay the staff, and the till would be empty. There wouldn't be anything left for the investor. Private finance, the chef-owner and his family putting up the cash, may be the better way for independent restaurants.
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#4 jackal10

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Posted 23 March 2003 - 04:15 AM

As an angel investor, you are right. Its a crazy business. Capital intensive, labour intensive, top-end limited, and worst of all fickle. You are only as good as your last meal (or last review). It also takes time to establish and get into the guides.

Very roughly:

Food and drink costs 30%
Overheads (heat, light, power, insurance, linen, flowers, breakages etc) 30%
Staff costs: 30%

Leaving 10% for profit, tax,(VAT/sales tax at 17.5%) and payment on the capital.
Not much need go wrong to eat into that 10%. A few bad nights, someone dropping an expensive bottle, two slices instead on one on the plate...

Bear in mind it can cost up to a million to start a new upmarket restaurant, its a wonder anyone does.
Few restaurants can consistently clear six figures per annum - thats roughly needing 500 per session, or 10 per cover in clear profit just to pay the interest - whatever currency you choose. Not surprising that restaurants need to charge 100+ per cover. For many the sums only work because the capital has been sunk in previous generations, and the family work for a pittance.

Most of the money is made from spin-offs, like the books or the TV appearances, or the increase in property value rather than serving meals in the restaurant. It might be full on Saturday night, but the problem is geting bums on seats at slack times, when you still have to pay fixed costs, even if you wind down the staff to a bear minimum.

#5 ngatti

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Posted 23 March 2003 - 07:24 AM

Most of the money is made from spin-offs, like the books or the TV appearances, or the increase in property value rather than serving meals in the restaurant. It might be full on Saturday night, but the problem is geting bums on seats at slack times, when you still have to pay fixed costs, even if you wind down the staff to a bear minimum.


Much of the real money used to also be made in the "skim". Which in this day and age of electronic transactions is fast disappearing. Not trying to be contentious here. Just pointing out what was once a major fact of restaurant business life. Using the skim to pay illegal help and vendors in cash used also to be far more common (and helped contribute to the financial success of the principals). It's still done, but not on the scale it once was, say 15 years ago.

The 'skim' is the pocketing of cash receipts from the till before the tax-man cometh.

Nick

#6 Basildog

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Posted 23 March 2003 - 09:05 AM

The 'skim' is the pocketing of cash receipts from the till before the tax-man cometh.

Nick

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#7 Tim D

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Posted 02 May 2003 - 03:19 AM

When I first entered the restaurant business I recieved this sage advice:

"If you want to make a small fortune in the restaurant business, start with a large one"

I've seen variations of that thought in many places and it is at it's core a true statement that can be applied to many enterprises, not just foodservice. I chose to open a retail store instead of a bistro, but in the end the results are the same; Long hours, very little profit, stress on multiple levels. The point I'm trying to make is that, although it is common in the restaurant business to have these money isssues, it is certianly not unique. Like Basildog, I love my business and making millions was never the point, so we endure all of our trials with the determination that is our hallmark.
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#8 Chef/Writer Spencer

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Posted 03 May 2003 - 07:15 AM

yeah unless you're some kind of stephen hawkin meets thomas keller meets J.D. Rockefeller you'd do better to use your hard earned money as kindling. it takes intellect, vigilance and an uncanny knack for PR to sustain a restaurant let alone make any kind of meaningful profit.

#9 Jonathan Day

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Posted 04 May 2003 - 04:59 AM

In another Symposium thread (here) I discussed the idea of so-called Winner Take All markets, economic systems in which a very small number of actors collect a disproportionate share of the economic payoff.

I asserted that restaurants (and I mean "real" restaurants here, not chains) are examples of such markets. To test this, you might look at the payoff to the (relatively) best restaurateurs or chefs. Suppose that you could "score" each chef on a scale from 1 to 100 (I know, this is a big supposition) where 100 is best. Now suppose that you discovered the following:

Chef....Score....Payoff ($000)
-------------------------------------
A..........100.......750
B............98.......400
C............95.......300
D............90.......150
E............88.......100

etc.

The "score" here is a measure not of the chef's aptitude or skill, but his or her relative desirability from an employer's or customer's point of view. By "payoff" I mean the total income of the chef: salary, profit share from the restaurant, book deals, TV appearances, etc. Think of Jamie Oliver's Sainsburys deal.

Now in this case, chef C is only 5% "worse" than chef A, yet A takes away more than twice as much money. This would be an example of a Winner Take All market. A similar phenomenon occurs for CEOs and for athletes.

So my question to "insiders" in the business is as follows: does the pattern of payoffs look like this? Even though the restaurant business is, in general, a difficult one, do those at the very top of the ladder (Gordon Ramsay, etc.) make largish amounts of money?

Note that I am not saying that Winner Take All markets are a "good" thing -- in fact I believe, along with some economists, that they are socially damaging.

Also note that a top chef may choose to divert funds to other purposes, e.g. charging customers less, or funding charitable purposes, or training other chefs, or closing the restaurant for 6 months of the year. It is said that Alice Waters earns little surplus from Chez Panisse, and that Ferran Adria basically breaks even on El Bulli. Economic theory explains many behaviours, but people, troublesome lot that they are, sometimes don't act as economists predict that they would.
Jonathan Day
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#10 jackal10

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Posted 04 May 2003 - 06:42 AM

I'm not sure about your analysis of restaurants as "Winner take all" market.
Reatuarants are certainly capital intensive, labour intensive, top-end limited (you can get only so many bums on the seats) and fickle. The capacity limitation means there will be several winners, but the ones at the margin will suffer first in a recession.

However "Winner take all" markets are usually those where the switching costs are high, so it is easier for the incumbent to keep customers than for a new entrant to gain them, such as where there is some network externality. For restaurants the switching costs are low - where there is competition its easy for a customer to change aligence. Few restaurants run loyalty schemes, other than being recognised by the Maitre'd.

Restaurants are more akin to a fashion business, which does have some element of the network effect: everyone, when they hear about it, wants to go to the fashionable place, forsaking the previous fashion, so in that sense it is winner takes all, and the network is that of the spread of news of the fashion. Some restaurants have even tried to simulate that by making it very hard to get in, but the policy can backfire. . However I suspect fashion only applies to the early adopters. To buld a long-term business you need to appeal to more than just the fashionistas, and like any other business, that means long term consistency and excellence, and features like location and value. Remember it can take 2 years to get into the guides.

Where there may be an element of lock-in is in the external activities: TV appearances, cookery books, newspaper columns, product endorsements etc. These help drive customers to the restaurant, and I suspect generate more money for the successful chef than the market limited by the restaurant's capacity.

#11 Jonathan Day

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Posted 04 May 2003 - 12:44 PM

Jackal10, let me recap the "Winner Take All" idea with the analogy of a law firm. For corporate customers, it isn't that difficult to switch from one firm to another. And yet when a company is doing a large and difficult M&A deal, where millions will be lost if the deal fails (or if tax treatments go wrong), there is a push to use the best "white shoe" firm possible, to the point that companies will try to get the top firms conflicted so that they cannot advise a competitor. The firm generally acknowledged as the very best at M&A can (and does) charge something like 30%-50% more than the number two. The extra money is nothing compared to the potential cost of "getting it wrong".

Now I would argue that something like this holds with top-rated restaurants. Suppose you are travelling from, say, Chicago to Paris, with a week in which to dine at fine restaurants. You know that some restaurants are rated at the top of the guides. Your trip, before you lift the first fork to your mouth, has cost a bundle, what with hotels, airfare, foregone income from vacation, and the like. So what if a three-star restaurant will cost €500 for two? You've gotten up in the middle of the night, a month in advance, to grab that table at L'Astrance; will you really quibble about the price?

The economic mechanisms operating here are, I think: (1) an information problem in that you know that chef A will be better than chef B, but you have no idea how much; (2) a high opportunity cost, since you may not be able to repeat the trip any time soon; (3) a kind of network externality that stems from chef A's reputation; (4) a reinforcing effect for (3) as more and more people try to book chef A's restaurant, struggle to do so, and decide that chef A must be worth a lot more.
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#12 Jon Tseng

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Posted 04 May 2003 - 01:32 PM

I guess the view from 30,000 feet is that food service is a very mature industry (low barriers to entry, cutthroat competition &tc &tc). Normally I guess you'd see consolidation here. However consolidation tends to lead to generic chains (McDonalds, Pizza Express &tc). i.e. if normal market forces applied & consolidation occured traditional individual restaurants would tend to get wiped out.

i.e. restaurants exist in contradiction to free market forces; this helps explain all the factors outlined previously which make the standalone restaurant such a sh*t business model i.e. low barriers to entry, high capital intensity, zero scalability, highly exposed to the cycle &tc &tc.

cheerio

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#13 John Whiting

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Posted 04 May 2003 - 01:55 PM

I remain convinced that it is more interesting to compare the restaurant business with the performing arts, with particular attention to classical music, because these are the chefs I continue to be most interested in. Jonathan, what you say about Alice Waters and Chez Panisse is absolutely correct -- I know it from inside. All the surplus goes into enlarging and maintaining Alice's extended family of employees, which numbers well over a hundred. If Chez Panisse had been only modestly successful, it would have been much as it is now, only smaller and probably a bit shabby.

I cast no aspersions on successful chefs, but it's certainly true that when a musician becomes more concerned with his income than with his art, and starts to perform as he thinks his expanding public would like him to, his art becomes hollow and bombastic. Basildog's manner of running a restaurant seems to correspond to the attitude of a number of small long-running chamber groups I've worked with, and it makes me wish that his establishment were more readily accessible to London.
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#14 Jonathan Day

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Posted 04 May 2003 - 02:41 PM

Another way of framing both Jon and John's comments, I think, is that many restaurateurs and chefs have different goals in mind ("utility functions" in economist-speak) than accumulating piles of cash. The "rational actor" chef/owner would readily yield to the forces of consolidation and sell out to McDo's; or realise that he/she was earning well below the minimum wage when earnings were reckoned on an hourly basis. But many chef/owners march to a different drummer.

I do think that many independent restaurants pay insufficient attention to stability and basic financial strength. Their goal might not be to earn scads of money but simply to build an institution that can weather the storms of boom and recession. This more modest objective would lead to better discipline in cost control, pricing and the like.

John, doesn't classical music, at the very, very top (and by this I do not mean "the best" but "the most in demand") obey the Winner Take All model -- i.e. a large gap in earnings between the top 10 (conductors, violinists, quartets, etc.) and the rest? The simple reason for this would be that record producers would be more likely to bet on "name" performers than on those of the next tier.

I grew up in a musician's household, and spent much of my childhood surrounded by talented and diligent classical musicians who eked out modest livings through teaching, playing in the local symphony and the like. The musicians who made recordings were in a different world altogether.

As I have said, I don't think the Winner Take All phenomenon is socially optimal, or that it implies that everyone acts as homo economicus.
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#15 Basildog

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Posted 04 May 2003 - 05:55 PM

Thank you John.Did you know you can fly down to Newquay for a tenner? :wink:

#16 jackal10

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Posted 05 May 2003 - 12:46 AM

The economic mechanisms operating here are, I think: (1) an information problem in that you know that chef A will be better than chef B, but you have no idea how much; (2) a high opportunity cost, since you may not be able to repeat the trip any time soon; (3) a kind of network externality that stems from chef A's reputation; (4) a reinforcing effect for (3) as more and more people try to book chef A's restaurant, struggle to do so, and decide that chef A must be worth a lot more.

I think you are exactly correct here. The issue is that of information flow. I wonder how that has changed with boards like this. I expect it to speed up a lot compared to paper media, like guide books. If so, that will have a de-stabilising effect, since one bad meal at Restaurant X, and every restaurant has bad days will be reported round the world in hours, just as an outstanding meal, or celeb sighting at Restaurant Y. Guide books may take a year or two to tell that this restaurant is not good or the chef has moved ( I'm assuming you are far away and don't have access to the newspaper reviews).

Reputational value is a whole interesting area of economics in itself, and for example is possibly what drives the Free Software movement, such as the software this Board is implemented with. I teach and research this stuff at the University of Cambridge.

I guess the view from 30,000 feet is that food service is a very mature industry (low barriers to entry, cutthroat competition &tc &tc).


Restaurants have high barriers to entry. It can easily cost £1m to set up a new high-end restaurant. The marginal cost of an extra cover is low. Consolidation doesn't work because the high value chef has limited capacity. Successful chefs opening second restaurants almost always fail, since the standard in both restaurants drop as they take their eye off the ball.

#17 aliwaks

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Posted 05 May 2003 - 07:30 AM

Jonathan,

I think that there is an equation you are missing in your theory. This is going to sound very naive and girlish but some of us open retaurants becasue we can't imagine doing anything else and we find a way to make it work..I'm still trying to figure that out. Started out grossly undercapitalized when a partner dropped out a week before opening and have been STRUGGLING ever since. No cash to advertise or promote so we're working on word of mouth till May 18 when our big review comes out. That unfortunately will make us or break us adn I'll deal with that when I get to it.

Whether or not there is a possibility for me to make "real money" I do not know, I figure since am not a chef opening a second restaurant would not be as disatrous since I could just hire another chef, I have been banking (no pun inteneded) on my little restaurant gaining enough accolades to entince investors in to pondering what I can do with a whole lot of money since I pulled off quite a feat with so little money. And thats how I was planning to make money in this business.
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#18 Jonathan Day

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Posted 05 May 2003 - 07:43 AM

Aliwaks,

Your perspective makes good sense. In fact it fits exactly with the perspective I set out elsewhere. It doesn't sound naive at all.

If I were investing in a business that I thought would make money but was otherwise uninterested in, I would insist on returns that are greater than my so-called "cost of capital" -- my best alternative for the money I'm investing. If the business doesn't return at least that cost of capital, I would rationally withdraw my investment.

My point about restaurants is that many owner-managers have the same attitude that you do: running a restaurant is what they want to do, it gives them pleasure, it is the exercise of their art, and therefore they don't demand the financial returns that a dispassionate outside investor would.

This is great from the restaurateur's perspective (psychic satisfaction is far more important than financial, in my view) and from the customer's. It isn't good from the perspective of an outside investor looking at restaurants purely as an investment. They are competing with a passionate chef/owner who is (economically) irrational, because she/he is pursuing goals other than economic ones. This is one reason why restaurants are "a bad business". It is also why outside ownership (investors other than the owner-manager-chefs or their immediate circle) is probably a bad idea for restaurants.
Jonathan Day
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#19 Jonathan Day

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Posted 05 May 2003 - 08:00 AM

I guess the view from 30,000 feet is that food service is a very mature industry (low barriers to entry, cutthroat competition &tc &tc).


Restaurants have high barriers to entry. It can easily cost £1m to set up a new high-end restaurant. The marginal cost of an extra cover is low. Consolidation doesn't work because the high value chef has limited capacity. Successful chefs opening second restaurants almost always fail, since the standard in both restaurants drop as they take their eye off the ball.

Several interesting points here.

First, I'm not sure that consolidation will apply to most independent restaurants, since if you are trying to drive a single service concept (e.g. Froggy's Pizza, a chain of pizza places featuring variations on cuisses de grenouilles as toppings) it is probably cheaper to tear down and rebuild than to transform an existing business. One chain can acquire another (McD's takes Pret-a-Manger, for example) but the costs of buying and integrating an existing single-location business are probably higher than those of building anew. I guess the exception would be one where the acquired restaurant is on a prime piece of otherwise inaccessible real estate, and the acquiror is buying the site rather than the business.

Is it true that successful chefs launching second restaurants almost always fail as businesses? Exceptions might be Daniel Boulud, Gordon Ramsay, Marco Pierre White (who eventually got in trouble and bailed out, but it isn't clear that this stemmed from his opening a second restaurant), Alain Ducasse, Vongerichten, Nobu.

Finally, on the barriers to entry. Opening a high-end restaurant does seem a daunting proposition, given costs for fit-out, kitchen, regulatory compliance, staffing, etc. Still, I am astonished at the number of new restaurants that seem to open every month; most at the low to middle end, to be sure, but some at the high end as well. Somehow there is a ready supply of would-be Gordon Ramsays ready to enter, realise sub-economic returns, and try to make it work. See Aliwaks's post, just before this one.

Again, this is consistent with a Winner Take All economic system. Lots and lots of people want to be actors or involved in the movies, even though they know that most of them will fail, and even though they know that every additional entrant reduces the average chances for all the others. So there is a steady stream of people prepared to wait tables while trying to "break in". I think something like this applies to restaurants. The economists's explanation for this (remember that in pure economic theory the only motivator is financial gain) is that each entrant irrationally believes that she or he will be the next big star (Julia Roberts, Jamie Oliver, etc.). The non-economic explanation may be that acting, like running a restaurant or writing novels, is an inherently satisfying thing to do, hence lots of people jump in without calculating the odds of earning a lot of money (or even surviving).
Jonathan Day
"La cuisine, c'est quand les choses ont le go�t de ce qu'elles sont."

#20 John Whiting

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Posted 05 May 2003 - 10:48 AM

Jonathan, "winner-take-all" may operate at the top end of the classical spectrum if you're looking at financial success, but these musicians are by no means regarded (by those who know) as the best. They often go on beyond their finest years (if they ever had any). For instance a late friend was a recording engineer, one of whose specialties was the note-by-note editing of celebrated pianists past their prime, even inserting brief takes from anonymous younger musicians when the pianists in question couldn't produce an editable version. (If it were possible to rescue the disasters of aging chefs, just think of the possibilities! :biggrin: )

Aliwaks, you describe the motivation of many an artist: they just can't help themselves!
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#21 dave88

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Posted 08 May 2003 - 08:42 PM

Big business dictates (in the US of N. America) how people spend their money. I have lost much faith in the ability of the people in the US of N. America to be able to think independently and/or not be manipulated by clever, greedy, liars as exist in these monopolistic times we USA'ites live. It seems to me now, quantity is the answer, not quality. People here don't know or care about quality. The one's who are able to develop incestuous relations with P.R. agencies and make friends with the 'untouchables' are the one's who make it. Food and the ability to create emotions relating to food will only go so far. Sure, there will always be folks who know what's good and what's bad, but they're old money. There needs to be a need to take new money and old money. It's as simple as creating a demand --increasing demand.

As Emeril once told me, "You gotta be a people person."

#22 John Whiting

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Posted 08 May 2003 - 11:26 PM

I share dave88's pessimism about the population as a whole, but take qualified comfort from the fact that within our enormous nation there are various single-minded minorities, many of of them large enough to form small nations in themselves. They may be too spread out to support many restaurants of unostentatious integrity outside the metropolitan areas, but the growth of high quality internet mail order is encouraging, as well as the burgeoning farmers' markets. As for restaurants, the best source of information remains, not advertising, but word of mouth -- particularly if eGullet's collective virtual mouths are included in the equation!
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#23 malachi

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Posted 28 May 2003 - 11:51 AM

An interesting topic. As both an ex-Chef and an ex-Venture Capitalist (no, seriously) I have to say that you're touching on a lot of the causes here.

Would I ever invest my own money in a Restaurant? Hell no.
Would I ever invest my own money in any food service business? Probably not.
Would I ever invest someone else's money in any food service business? Maybe.
Would I ever invest my own money in my own Restaurant? I'd rather be dead and burning in Hell.

As noted above in the thread - the margins in the Restaurant business are truly terrible. What makes the business side even worse, however, is that the revenue is entirely non-forecastable. These two simple facts combined with the high risks (staff turnover, health department, bad reviews, equipment failure, breakage and waste) result in a business venture that is entirely non-rational.

Is this a bad thing? Of course not. Any and all good restaurants are, IMHO, labours of love. And love, of course, is the definition of non-rational.

Finally... the throw gas on the embers... I think the true nightmare in running a high-quality restaurant lies in the simple fact that the vast majority of the populace has no taste and no appreciation for quality food or a quality restaurant. In addition, the majority of customers are fickle and tend to choose restaurants based on factors and attributes either unrelated to, or at best only tangentially related to, your efforts. Thus - trying to build a customer base that will fill the room or at least bring in enough sales per day to keep you going is a desperate and perhaps unwinnable battle.
fanatic...

#24 baruch

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Posted 28 May 2003 - 03:15 PM

this addresses some of the thoughts i have had re: the restaurant biz. obviously, 1 can NOT ignore the start-up costs, cost-of-capital, ongoing food & drink costs, overhead, labor costs, etc, etc... & i am NOT denigrating; HOWEVER,

no 1 is "forced" to open a restaurant, just as no 1 is forced to open a dry cleaners. where is it written that 1 "deserves" to make a profit simply by working hard, etc... there is no such thing in any business. what i would rather know are:

a) food costs are ridiculously low: a potato "costs" $ .10 & nyc restaurants charge $6!!!!
salad ingredients add up to $ .50 & charge $10
even when hi-end expensive food is purchased, the mark-up to customers is crazy!

so how come restaurants say they don't make $'s on their food??

b) drink: just had a remy VSOP last nite for $14!!!!!!!!!!! a bottle, @ retail, costs me $30 - much less when
purchased wholesale by a restaurant.
same for wine. beer, u ask: a bud "costs" maybe $.50, but we pay $6!!??

so how come restaurants say they don't make all-that-much on drinks???

c) labor?? when is the last time one looked into a kitchen, including hi-end. if all the personal had to return
to their respective 3rd world countries, then & only then would labor costs approach working wages!
a restaurant's labor costs are less than Nike's!!!
maitre d's - more should have graduated from jr hs.
only a very few restaurants have significant costs related to "real " professional help. besides the
entrpreneur/owner, just how smart does 1 have to be - its not exactly rocket science.

left with the chefs: ummm, i keep hearing how LOW the wages are, sooooooooo, how much ARE
these labor costs????

d) overhead costs: like running anything, "it is what it is" quit griping!!! i wish i didn't have to pay for MY
refrig costs when i am not using, i.e., fixed costs are just like - fixed costs!! it doesn't change from biz-
to-biz!!!

walk down any street in nyc - HELLO!!! THERE ARE TOO MANY FOOD PLACES - TOO MANY RESTAURANTS!!
where is it written that we need another restaurant? so, caveat emptor - if u can't take the heat, don't open a restaurant - go sell shoes, or life insurance.

IF U DO WANT TO OPEN A RESTAURANT, 1st work 50-75 hrs/wk for some jerk who treats u like crap for very little salary or peddle goods door-2-door; then be thankful u MAY have a talent for the kitchen.

i'm tired of hearing all the whining, i'm tired of overpaying for mediocre food & worse service, i'm tired of being overcharged for crappy wines, i'm tired of hearing about unsophisticated clienteles.
i'm tired of all the criticisms from restaurant people about how hard the business is. if more restaurants disappear, maybe, just maybe, the industry will wake up & provide a service that = the price!!!

if anyone disagrees with the above, try this riddle on for size: how come the restaurants that serve a unique product, provide excellent service, charge relatively reasonable prices for wines ALWAYS make money, a la chez panisse, french laundry, daniel, le bernadin, etc... & the ones that provide a commodity, provide descent service, don't overcharge ALWAYS make money, a la, the corner burger/pizza/chinese - vs - the ones that "CLAIM" to do the same, but actually provide arrogant service, overcharge for everything almost always lose money - le cirque - need i say more?

Edited by baruch, 28 May 2003 - 04:53 PM.


#25 Basildog

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Posted 28 May 2003 - 03:52 PM

You might just be tired. :biggrin:

#26 baruch

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Posted 28 May 2003 - 05:07 PM

:biggrin: silly me, i thought this was supposed to be a thoughtful discussion section, wrong again on egullet. unequal rules unevenly applied :hmmm:

#27 malachi

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Posted 28 May 2003 - 05:21 PM

While I don't want to simply dismiss your anger (I'm sure many restaurant patrons would agree with you) I'm afraid that your points are based on a fair amount of ignorance when it comes to the realities (economic and otherwise) of food service businesses. If this is a topic that you care about (which seems to be true for the level of venom in your post) then it would probably be worth your while to gather more information about the business.

For some quick examples:

food costs are ridiculously low: a potato "costs" $.10 & nyc restaurants charge $6!!!!


If, in fact, a restaurant were to serve you a generic cheap raw and unadorned potato for $6 then you would be right in being upset. But the reality is that you're comparing apples to tarte tatin. You need to incorporate the cost of the other ingredients, waste and utilities.

labor?? when is the last time one looked into a kitchen, including hi-end. if all had to return to their respective 3rd world countries.... their labor costs are less than Nike's!!!


To be honest, the per-employee, per-hour labour costs are (while obviously much higher than Nike's) quite reasonable. The trouble is that even at these low base costs, the total grows rapidly when you look at the actual headcount of a restaurant. And once you start to calculate the actual headcount costs (including such lovelies as workers comp) it balloons in a sudden and frightening way.

left with the chefs: ummm, i keep hearing how LOW the wages are, sooooooooo, how much ARE these labor costs????


Given that some of those posting here are back of the house professionals, you should be aware that this is an emotional and sensitive issue. It is why I left the business. In my last job in a restaurant I was the Chef de Cuisine in an award-winning and busy restaurant. I was salaried. One day I did the math to figure out how much I was making per-hour. Turned out the dishwasher had a better base than I did. I almost doubled my income while halving my hours worked in the first year out of the biz.

overhead costs: like running anything, "it is what it is" quit griping!!! i wish i didn't have to pay for MY refrig costs when i am not using.


Actually, I'm afraid it is not like "running anything."
This is where you lack of exposure to the business is skewing your viewpoint the most.
The overhead of running a restaurant is not like the overhead of running a music store which is not like the overhead of running a dry cleaner which is not like the overhead of running a waste disposal company which is not like the overhead of running a pipe fitting manufacturing company. While it may seem like there is little if anything to the restaurant business when it comes to overhead - this is an illusion.

The reality is that an excellent businessman running a very tight ship in the restaurant world and maximizing their margins with a popular and expensive restaurant is unlikely to ever get past 12% margins. In fact, getting to 10% qualifies you as a superstar in this business.

IF U DO WANT TO OPEN A RESTAURANT, 1st work 50-75 hrs/wk for some jerk who treats u like crap for very little salary


If you throw in "while being screamed at in 125 degree heat and surrounded on all sides by objects which can maim you" then you've got a perfect description of what everyone who cooks for a living goes through.

i'm tired of hearing all the whining, i'm tired of overpaying for mediocre food & worse service, i'm tired of being overcharged for crappy wines, i'm tired of hearing about unsophisticated clienteles.  i'm tired of all the criticisms of restaurant people, being just that, usually restaurant people. if more restaurants disappear, maybe, just maybe, the industry will wake up & provide a service that = the price!!!


There are thousands of restaurants out there that cater to someone with your perspective - that deliver on the promise of providing food at low costs. Is it great food? Of course not. You get what you pay for.

As a friend said to me one, "yeah - and I'm all bent out of shape about the lack of $15k Ferraris on the market."
fanatic...

#28 baruch

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Posted 28 May 2003 - 06:44 PM

thank u for responding in such a detailed manner. as a pt of reference i have invested in a # of businesses covering a fairly large variety of endeavors. ALL BUSINESS HAS COMMON THREADS REGARDLESS OF THE PRODUCT.

#29 Andrew Fenton

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Posted 28 May 2003 - 07:13 PM

In my last job in a restaurant I was the Chef de Cuisine in an award-winning and busy restaurant. I was salaried. One day I did the math to figure out how much I was making per-hour.

A mistake, in almost any profession. It's always a fun exercise for junior associates at big law firms to calculate what their hourly wage would be...

#30 baruch

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Posted 28 May 2003 - 07:36 PM

thank u for responding in such a detailed manner. as a pt of reference i have invested in a # of businesses covering a fairly large variety of endeavors. ALL BUSINESS HAS COMMON THREADS REGARDLESS OF THE PRODUCT. & why is it someone always has to be described, as malachi states, as angry????? is it not possible to discuss issues without being thought of as angry? does this imply a vested interest or simply a lack of understanding of the intent or imply an attitude that does not allow dissent? & why is it always this "us vs. them" attitude? sorry, but its a little too obvious, u come from the restaurant side. its also obvious that it tis u that seems to have a problem with the economics of a restaurant.

venom?? i'm confused? when 1 describes what so many others think, or believe, or question; that's venom?? instead of suggesting i collect more info about the restaurant biz, i suggest u take a business course in economics, marketing, management, & financing.

fact: food costs ARE low. so, 1st of all one is starting with a very low commodity price. to that, one would add cost of additional items + labor, etc... to arrive at a total cost of that particular item. in fact, which it appears u're not as familar as u would like to believe, no business generally goes down to that level. u may ask why? - pls do - because, in addition to other costs, one would need a full-time cost consultant to monitor. which u acknowledge, one is trying to cut costs - does this, so far, sound angry or venomous or upset??? i choose the little higher road - why don't u walk us through how a unadorned simple generic cheap raw potato becomes french fries with, alas!!! garlic, herbs & spices with the appropiate costs. now KIM u start with a $.10 item & charge $6. curious as to YOUR math.

labor: are u agreeing or disagreeing with my angry, venemous statements??? sounds as if u have no arguement?? generally, low wages * lo hrly wages = relatively lo labor costs. other companies i have purchased would love to have those labor costs. am i still angry??

the back-of-the-hse pros - sensitive issues - sounds, again, like u are agreeing. ummm, am i still as angry & venomous as u imply or are u starting to see the lite?

oh my God!!! its not like running anything else? u must be kidding? u're NOT suggesting the restaurant business is so different & so unique, its not like running anything else?? pls don't say that to someone who went to a bona fide graduate business school, particularly those that specialize in case studies. let's see, the past 100 yrs have seen many new businesses that seem to allow executives to move from different industry -to-different industry with skills that are transferable. but U suggest that a business involved in food service & has a much longer history is so different that doesn't allow one outside to understand. the fact is, it is people like yourself that stick to outmoded models or use some insular circuitous reasoning to justify a lack of business sense. what is your mystery?? real estate savvy allow one to buy or lease a "space", business sense allows one to put together a business plan, not some seat-of-the-pants plan like u seem to adhere to, etc.......

again, it appears u agree re: being prepared to accept the difficulties of the food business if that is what u what; however, it doesn't guarantee u a profit as u seem to think u're "entitled" to.
am i still angry??? sounds more like level-headedness vs your attempt @ justifying an untenable position.

my perspective? u have no idea of my perspective. u sound like u are, in fact, the bitter one.
are their really thousands of restaurants out there to my perspective? i don't think so. u unfortunately miss the subtleness of the point, but that's ok, i didn't really think u would comprehend the forum.

as i pointed out, great food restaurants can & do make money. can find the clientele to support their dreams & endeavors WHEN THAT RESTAURANTS DELIVERS ALL THAT I HAVE MENTIONED ABOVE.