Maybe one more factor is food wastage. By having a large menu, the amount of food wastage + increased supply chain management cost reduces profit margin. My guess is restaurants that serve multiple dishes from few basic ingredients work out better.
Great post. Thinking about it, I could find so many similarities which can be passed on to a gym as well. Similar real estate play, proximity capping the reach, the need to try a new gym after each year - fad, longer time of capital recovery. Equipment starts getting older, excitement drops, high skilled labour - fitness coaches hard to keep. Gym owners desperately try to hook in with a longer association to milk the one time users but eventually passes on the ownership to someone else who again wants to build their own gym - similar aspirations of having their soul into it and eventually cashing out after the first 3-5 year run to cut losses. Don’t scale up and the few that have they have made it into a real estate play more or less.
What about food delivery though? Does that change the game a little — increasing your geographical penetration beyond 5km to maybe 10 + resulting in more recurring revenue? GMs would be low on deliveries, but it helps in keeping the lights on?
This piece is genius! Once you point out that top of funnel acquisition is more or less fixed by proximity it seems obvious that most new restaurants will fail plus your point about a desire for novelty in restaurants suggests they face an even leakier funnel than other businesses. Makes perfect sense once you say it, but I’d never thought about it that way. No idea if it’s true in practice (also not a restauranteur), but it definitely explains a lot in theory.
Three types that have bypassed these structural problems:
1. Where bulk of your patrons are tourists: If you market yourself well (ratings on Google/Zomato, good real-estate), you don't have a fixed set of people looking to try out new stuff
2. Restaurant that solve the anti-loyalty problem by driving high repeat orders (low GM that you mentioned)
I have a piece about restaurants in my draft, and this comes up on my feed haha! To your point, I think that’s why a restaurant serves its local community — I’m more likely to return to a place because of convenience.
I think apart from higher repeat velocity, Fresh menu launch could be a thing like every 6-12 months, i see star hotels doing it quite, i think that's what results in higher ltv. It'll keep the momentum!
Great post, thanks. I bought a higher end florist 5 years ago and learned this biz is eerily simiilar to restaurants. Just as with many Indian dishes, flower arrangements aren't modular either, hence there is not a "Starbucks" of flower chains (at least in the US). My gross margin hovers around 72% but good designers are paid similarly to top quality chefs so combined with rent, insurance, etc, a net margin around 10-12% is about the best I can hope for (and some lean months it's a negative net).
Thanks for demystify the resturant business and dashing our childhood dream successfully of opening up a restaurant to serve good food and make some money. Very nicely written as always.
The standout quote for me was the one that mentioned, '...soul doesn't scale.' Thanks for sharing these valuable insights and, more importantly, the thought-provoking questions.
However, if people conducting market research for starting a new restaurant are already doing these evaluations, what drives them to move forward with funding despite these severe potential challenges?
Do you think this is why we are seeing more restaurants stapled onto larger stores? Like the Panda Express inside the Target, or the McDonalds inside the gas station.
that's a typcial restaurant/night club lifecycle. hence I see incase of restaurant owners, who have had success with their restaurant/brand either to stay small or single unit due to difficulty of scaling up, or in fear of loosing out the charm of its products with scale, milk the cash cow well and diversify across multiple other business.
Plus any new innovation in food is quickly copied (be it a boba tea, neopolitan pizza or choco lava cake).
Or with Nightclubs owners its like the hip place with the long waitlist, then fall, eventually led by a 360 degree concept change, and renovation, and the cycle continues.
i know, so i read this concept of passion tax, how people work in sports industry (i saw that perosnally during my time at Rajasthan Royals, operational folks working 16 hrs a day at a very basic pay) and media industry, pay a passion tax, as the remuneration or salary is a significant discount to the market opp. cost, so i find the same concept in restaurants industry. And to a surprise if you ask someone, why they have opened up a cafe/restaurant, mostly the answer will be its their "passion".
Maybe one more factor is food wastage. By having a large menu, the amount of food wastage + increased supply chain management cost reduces profit margin. My guess is restaurants that serve multiple dishes from few basic ingredients work out better.
Great post. Thinking about it, I could find so many similarities which can be passed on to a gym as well. Similar real estate play, proximity capping the reach, the need to try a new gym after each year - fad, longer time of capital recovery. Equipment starts getting older, excitement drops, high skilled labour - fitness coaches hard to keep. Gym owners desperately try to hook in with a longer association to milk the one time users but eventually passes on the ownership to someone else who again wants to build their own gym - similar aspirations of having their soul into it and eventually cashing out after the first 3-5 year run to cut losses. Don’t scale up and the few that have they have made it into a real estate play more or less.
What about food delivery though? Does that change the game a little — increasing your geographical penetration beyond 5km to maybe 10 + resulting in more recurring revenue? GMs would be low on deliveries, but it helps in keeping the lights on?
My brother just opened a restaurant in NY this weekend...I wonder if it's rude to send him this...
“penetration has maxed out” how dearly i wish these words were said by a significant other
This piece is genius! Once you point out that top of funnel acquisition is more or less fixed by proximity it seems obvious that most new restaurants will fail plus your point about a desire for novelty in restaurants suggests they face an even leakier funnel than other businesses. Makes perfect sense once you say it, but I’d never thought about it that way. No idea if it’s true in practice (also not a restauranteur), but it definitely explains a lot in theory.
thank you :)
Three types that have bypassed these structural problems:
1. Where bulk of your patrons are tourists: If you market yourself well (ratings on Google/Zomato, good real-estate), you don't have a fixed set of people looking to try out new stuff
2. Restaurant that solve the anti-loyalty problem by driving high repeat orders (low GM that you mentioned)
3. Cafes which have become hand-out spots
I have a piece about restaurants in my draft, and this comes up on my feed haha! To your point, I think that’s why a restaurant serves its local community — I’m more likely to return to a place because of convenience.
I think apart from higher repeat velocity, Fresh menu launch could be a thing like every 6-12 months, i see star hotels doing it quite, i think that's what results in higher ltv. It'll keep the momentum!
😂😂 that's what happens it turns out to be shit second time
Great post, thanks. I bought a higher end florist 5 years ago and learned this biz is eerily simiilar to restaurants. Just as with many Indian dishes, flower arrangements aren't modular either, hence there is not a "Starbucks" of flower chains (at least in the US). My gross margin hovers around 72% but good designers are paid similarly to top quality chefs so combined with rent, insurance, etc, a net margin around 10-12% is about the best I can hope for (and some lean months it's a negative net).
Thanks for demystify the resturant business and dashing our childhood dream successfully of opening up a restaurant to serve good food and make some money. Very nicely written as always.
Agreed with most of your points barring Chinese and Japanese restaurants scaling.
Hai Di Lao, Din Tai Fung, Tim Ho Wan, Ippudo, Coco Ichibanya are some fantastic examples of how to scale Chinese food.
fair. not that it doesnt scale, but is tougher to.
The standout quote for me was the one that mentioned, '...soul doesn't scale.' Thanks for sharing these valuable insights and, more importantly, the thought-provoking questions.
However, if people conducting market research for starting a new restaurant are already doing these evaluations, what drives them to move forward with funding despite these severe potential challenges?
Do you think this is why we are seeing more restaurants stapled onto larger stores? Like the Panda Express inside the Target, or the McDonalds inside the gas station.
that's a typcial restaurant/night club lifecycle. hence I see incase of restaurant owners, who have had success with their restaurant/brand either to stay small or single unit due to difficulty of scaling up, or in fear of loosing out the charm of its products with scale, milk the cash cow well and diversify across multiple other business.
Plus any new innovation in food is quickly copied (be it a boba tea, neopolitan pizza or choco lava cake).
Or with Nightclubs owners its like the hip place with the long waitlist, then fall, eventually led by a 360 degree concept change, and renovation, and the cycle continues.
so much work :/
i know, so i read this concept of passion tax, how people work in sports industry (i saw that perosnally during my time at Rajasthan Royals, operational folks working 16 hrs a day at a very basic pay) and media industry, pay a passion tax, as the remuneration or salary is a significant discount to the market opp. cost, so i find the same concept in restaurants industry. And to a surprise if you ask someone, why they have opened up a cafe/restaurant, mostly the answer will be its their "passion".