Should You Open A Restaurant? Yes! No! Here's Why!
You love food. You go to restaurants all the time. You worked in one during summer vacation once or maybe for a year or two.
Your friends come to you to ask where they should go for dinner, and ask your opinion on whether a place is worth trying. They ask you to order when you go out together. And now you've got a little extra money in your savings account, one or two hundred thousand rmb. It's not enough to buy a house and it's not collecting much interest. Maybe you should take the plunge and invest in a restaurant?
Maybe you've got even more than that, a few million, still not enough to buy a house in downtown, but enough to try out the food and beverage industry on your own.
So many restaurants are busy, aren't they? How much does the food on the plate cost, after all, compared to what they are charging for it?
Plus, it seems like everyone else has opened a restaurant. Why shouldn't you?
Well, don't let me stand in the way! I think it's a great idea, a grand idea, maybe the best one you've ever had!
I just have a few small questions first! I'm sure they won't stop you. Don't think twice!
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Do you have a background in restaurant management? Years of experience? If not, how are you going to know when things are going well or going bad, and how to fix them?
Do you have a connection to a landlord who will give you a great price on a great property? If not, are you prepared to compete for the opportunity to pay high rent?
To get an idea of current prices, I spoke with Federico Rossi of Reco Real Estate, who handles a lot of properties in Xuhui and Jing'an. He told me that for streets in the central areas of the former French Concession (Anfu Lu, Wukang Lu), you can expect to pay 25-28rmb per day per square meter.
That's about 150,000rmb a month in rent for a 200 square meter restaurant.
For "secondary" streets or projects from big state-owned developers, you might be lucky and pay 16-18rmb per square meter per day. Oh, and you'll need to pay a three-month deposit up front, even on a three-year lease.
Do you think you will open in a nice mall? This is a dream. Nice malls don't gamble on first-time restaurant owners, and malls that do accept people with no track record are usually not nice.
How big of a space can you afford? Have you done the math to determine how many seats you can fit in there at one time, and how much each person needs to spend to make you profitable?
What price level will your restaurant be at? If it's not expensive, then you need volume. Do you have the space for that? Do you have the operations for that?
If it's expensive, then you need a very good chef. Do you have one? If not, how will you get one? Why will they work for you and not someone else?
Do you even have the ability to recognize a great chef? "They worked in a five-star hotel" is not an answer.
Do you have the budget for a good designer? I got a quote from one many restaurants use (and I like): about 250,000rmb for a 200 square meter restaurant. And that doesn't include the acoustic, kitchen or engineering consultants, much less the project management and construction costs. (The design fee can be significantly less or more depending on the designer.)
How long of a lease are you going to be able to get? Can you make your investment back in that time -- and profit? It's not uncommon for an untested brand to get no more than a three-year lease.
Why does Shanghai need your restaurant? There are already more than 100,000 restaurants in Shanghai, and endless variations in every category.
Where are you going to open? If you're downtown and want a streetside location, you are going to pay alot.
If you're not downtown, is your business model adapted to the neighborhood? Is your restaurant going to be so outstanding that people will cross the river or go to a district they don't usually go to? How are you going to achieve that?
If you want to be downtown but can't afford a prime location, how are you going to attract customers to a second floor, or a fringe area?
What's your actual profit going to be? Look at your investment, and then do the math from your percentage of profit, from the profit margin, from the actual revenue. How much do you think you will actually make?
Do you know that net profit, even for successful restaurants, is usually around 3-5%? (EBITDA will be higher but that's a little complicated for this stage.) Sure, some restaurants are making hundreds of thousands of RMB per month, but for every restaurant that is reliably profitable, many restaurants are just getting by — even ones who look or are full all the time.
What's the end goal of your investment? Do you want to be involved in day-to-day operations? If not, do you have a strong general manager who you trust? Won't steal from you? Will handle the restaurant as if he or she owns it, but will work for a reasonable salary?
If not, how are you going to find that person? Are you prepared or do you have the time to step in and try to do it yourself? Would you even know how?
Maybe a delivery-focused business would solve some of the problems. Location, size, service. Good idea! But do you want to give away 25% of your gross revenue to the delivery platforms? Can you still profit, or even make money, after losing a quarter of your sales?
Are you going to invest alone? Do you have millions of rmb to potentially lose? If not, how many other investors will there be? One of the top reasons restaurants fail is that the investors don't get along at some point. Of course, everyone was friendly and positive at the beginning, easy to get along with.
But opening a restaurant involves hundreds — thousands — of small decisions. Will we have tablecloths? What's the budget for plateware? Can we afford a dishwashing machine? Should we buy it or rent it? Which POS system will we use? Do we expand to a second restaurant?
It's inevitable that as the investors go through these questions, there will be disagreement. Someone will want to do it cheaply. Someone will want to spend. Conflict is guaranteed.
Will all of the investors be reasonable, rational and have high EQs? Will they be able to navigate the conflicts without making it personal? Can they all compromise? What if they are not equal partners? Who will lead? These are not questions you can prepare for. You only get the answers once the issues arise and you learn that other people are hell.
How are you going to attract staff? Providing housing and meals is a good way to attract people, but are you ready to become the manager of a dormitory, and all the problems that brings, as well? What will you do when your employees, who live together, get in a fight? Don't show up for work? Damage the apartment you've rented for them or disturbed the neighbors?
Are you good at: human resources, accounting, China marketing, interpersonal communication, explaining the minute details of how food tastes and why, keeping a positive attitude in the face of daily problems, leading a team, knowing when chefs are taking kickbacks from suppliers, Dianping promotions, taking criticism whether it's right or wrong, drinking with customers, working with people who might not have a high degree of education, listening to a thousand different opinions and picking out which ones are valid, compromise, not sleeping much, navigating bureaucracy and being comfortable with the unknown?
Can you afford to lose all the money you will be putting in? Wouldn't you rather give it to me?
Read all the questions and think you have all the answers? Then you're either crazy, brave, foolish or brilliant (maybe all four), which means...
Congrats!!! You're ready to open a restaurant!
(This article is intended to dissuade everyday people from investing in something they don't fully understand, and losing their time, money and energy to a notoriously difficult business. Of course, there are many other restaurant professionals who are able to juggle all of these problems and still come out profitable, and they are only a little crazy because of it. They deserve respect. The moral of this story? Leave the restaurant investing to the professionals. And give your money to me, instead.)
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Illustrations: Cheesecake
