To paraphrase Nick Kokonas, the co-founder of Alinea:
“Everyone says running a restaurant is not a good business. But if it’s not a good business, why do so many people do it?”.Nick Kokonas
After founding and running Mesa Salvaje for 2 and a half years, and having bought a pizzeria nearly a year ago, and having watched KC open her fine dining speakeasy restaurant, I feel like I can say with relative confidence that running restaurants can be good business, if you are running them well.
There are two simple reasons that the industry has a reputations for being a bad business: the familiarity that everyone in the entire world has with the concept of what a restaurant is, and the low barriers to entry to opening a restaurant. Millions of people have the dream to become an astronaut, a footballer, or to become the President of the United States, but the barriers to entry for attaining these dreams are extremely high, and only the most qualified people achieve it, while the beauty but also the problem with the dream of opening a restaurant is that it is very attainable. With an idea and ~$100,000 (as a loan, from personal savings, or fundraised from friends and family), almost anyone can open a restaurant. Essentially, lots of people who shouldn’t open restaurants often do, and struggle or fail to build a real business based on strong operations and a real understanding of the restaurant business model.
Fortunately, this means that there are real businesses to be built for those who do understand what they are undertaking when they open a restaurant, and Mesa Salvaje is (finally) proving itself to be a good business, probably even better than I had anticipated.
The keys to the Restaurant Business Model
There are a few simple but vital keys to understanding the restaurant business, of which food is just a small part:
- There is in-built operating leverage in the business model, with many of your costs fixed but your revenue totally variable. This is a blessing if you achieve success, but the cause of many restaurant failures. There are an infinite amount of things that can go wrong. Margin of safety and access to flexible capital are incredibly important.
- Above a certain level of quality, consistency is more important that incremental quality.
- Team culture, organization, and dynamics are vital to the success of the business, and cannot be modeled in Excel.
- Mental resilience is just as important to the success of a restaurant as financial resilience.
- Your sales will have an upper-bound based on # seats & average check size. Managing costs is therefore incredibly important for profitability.
I had to handhold Mesa Salvaje for the first 2 years while it got off the ground, as a parent holds a toddler. While we were establishing ourselves it was super important that I was there to witness everything firsthand – to make sure we opened early and closed after our publicized hours, to critique the food coming out of the kitchen, to talk to the regular customers and the infrequent visitors to understand how they perceive our offering, to motivate the team when the days were long and slow and to organize them when we were crazy busy, to be on hand to rapidly solve any problem that presented itself – and there were many. And as a parent with a toddler, I was equally enamored with and driven crazy by the evolution of the restaurant, and suffered from a severe lack of sleep and personal wellness. This is not an easy job.
But the beauty of the restaurant business is that those restaurants that succeed in establishing themselves create a virtuous cycle: word of mouth brings new customers for no incremental cost, increased sales and rotation of product allows for more efficient and organized division of labor and management of inventory, and staff grow accustomed to the new rhythm of work and their capacity for increased customer volumes grows. Many of the costs remain fixed – rent, public services, accountant fees, insurance, general maintenance, and (generally) staff costs – but the sales grow.
It’s funny to live it, because even as things are improving there are constant worries. Is this temporary? What happens when the team gets too busy and risk burning out/offering a worse service? Are my bills growing just as fast as my sales? Is it too early to think about hiring someone new? Would demand disappear if I raised prices? There isn’t really a lightbulb moment, but rather a gradual adjustment to a new reality in which things just work, and problems (which never disappear) become much more manageable or find a way of solving themselves. There are challenges associated with growth, but almost all problems are solvable when the customer demand is there, and investments in new team members, equipment, or even a new shop can solve existing bottlenecks but also unlock new growth opportunities. Your toddler can grow up very quickly, when things are going right.
The risk for Mesa Salvaje at this point is about not succumbing to complacency, and managing the business effectively. For the past few months I have been surprised by our capacity to continue to grow and receive more and more customers, but essentially I can rely on the demand being there and plan for a relatively narrow range of revenue generated weekly. I can tweak the product mix and try and upsell etc… but if I’m building for the long term my focus is a) ensuring that we don’t lose relevancy, and b) managing costs to balance investment, creativity, and good pay for my team with a sustainable business that can withstand pressure from new and existing competition, rising commodity prices, rent, taxes etc…
I recently traveled to the US for a month, and it felt like I was driving away from the University campus having dropped my child off for their freshman year. At this point I have two great teams who know what they are doing, and have the tools they need to take out a great experience. Sometimes the best thing for me to do is leave them to do their jobs.
Heuristics and lessons learned
- You need to budget almost as much money for enduring losses on your way to breakeven as you budgeted to open the restaurant in the first place.
- Pricing is hugely important from day one. If you underprice your product, you may get customer demand and still never breakeven, and raising prices when customers already have an anchor price is much harder than starting off higher. (lesson learned the hard way).
- Similarly, setting the right tone for team culture from day one is huge. Every detail matters, because culture compounds and is very difficult to change.
- In an age of social media, every customer can act as a food critic and needs to be treated as such. Positive reviews and social media posts are golddust – you can’t buy them and that makes them more valuable than any other form of publicity. Every 4 star review is a dagger to my heart, as it means that there was nothing wrong but it wasn’t spectacular, and I need at least five 5 star reviews in order to offset that review and maintain my 4.8 star rating on Google Maps.
- All-in staff costs should always be between 28-35% sales. Any higher and you won’t be able to make the business work with that staff level, long-term. Any lower and you risk being short-staffed and putting too-high a burden on the staff members you have.
- A consistent operating income margin between 15-20% is a good place to be after two years in business. Above 20% is best in class. This can give you a sense of what your income might look like, given the natural upper limit to sales.