Owning a restaurant offers many possibilities for growth, creativity and culinary adventure. The industry as whole is still growing and expanding. Yet, the industry is also highly competitive and dynamic. Consumers' spending habits have grown more cautious, while their dietary preferences have become more specific and their expectations of food quality have grown more discerning. Now more than ever, restaurant owners must implement savvy business practices and pay attention to the latest trends if they want to be successful.
What is required to operate a restaurant business?
Restaurant businesses relying heavily on labor, food products and equipment, and capital intensity is generally high. While experienced staff and quality menu items can raise labor costs for owning a restaurant, having a sound business plan in place can help to offset costly mistakes.
- Licenses and certifications are required. Running a restaurant business requires a fair amount of paperwork. This includes local, state and federal business licenses and permits such as a health operational permit, food safety certification and a food handler permit. Restaurants will also need to ensure your location is properly zoned for a restaurant business and pass a health inspection, which can be anywhere from one to three times a year.
- Location can make all the difference. Due to heavy competition, restaurants need to ensure they have a good location. There are many important aspects to good restaurant location, which can make a huge difference in a restaurant's value and growth potential.
- Quality food items and ingredients. Establish relationships with several reputable local food companies. Check routinely for quality. Carefully track all food usage and cost.
- Commercial restaurant equipment. Inspect all equipment to ensure it is in full working order.Check for all warranties and leases. Reliable commercial kitchen equipment is crucial to running a profitable operation.
- Experienced and knowledgeable staff. Hiring experienced cooks and managers are important to maintain a well-run restaurant, which means they may be paid higher wages. However, wages for servers, hostesses and cleaning staff may not be as high, as many of these staff members may be entering the workforce for the first time.
Are restaurant businesses very profitable?
The restaurant industry as a whole is expected to grow slowly, yet with concerns with food costs and maintaining sales volume may mean that overall profit margins can be slim. According to BizBuySell Insight data, the median revenue for restaurant businesses is $543,977. The average cash flow multiple is 2.07, resulting in a median sale price of $185,000. To generate profit, restaurant businesses must monitor gross profit dollars for menu items while providing high quality dishes and meeting high service standards.
- Profits vary depending on gross profit contribution. Restaurant businesses tend to worry about how high or low food costs are. Instead, profits are based on a menu item’s gross profit dollars. Profits are further affected by volume of customers and the type of turnover needed, depending on the type of restaurant.
- Demand from customers in your immediate market can affect profit margins. While there’s no exact formula to calculate menu costs, understanding what your immediate market is able and willing to pay is an important factor in profitability. This can include evaluating nearby competitors, consumer demographics and spending habits in your local area. It means that location can greatly influence how profitable a restaurant can be.
- Food waste and shortages can be a concern. Profit margins will be greatly influenced by product use. In other words, money can be lost when you account for food spoilage, extra waste and carelessness in handling ingredients. Operators need to watch out continually for the influx of products in order to manage high profitability.
- Market share concentration is high. The largest segment is high and therefore slower growing. However, quick-service and fast-casual sales are expected to grow steadily.
- Barriers to entry are high. Rising labor costs, as well as a complex regulatory and legislative environment at the local, state and federal levels put pressure on new and existing businesses, ability to be profitable.
- Food and menu trends are expected to meet pent up demand. Customers remain more cautious and selective with their spending, including where they choose to eat. They expect better food choices, as well as convenient access, such as mobile ordering and payment options. However, the costs of enabling such trends continue to be a barrier.
Is the restaurant industry very competitive?
The restaurant industry is increasingly competitive, with many newer players shining as they tap into new food and menu trends.Combine that with the challenge of rising labor costs and keeping qualified staff, restaurant owners are feeling continual pressure to maintain profit margins. As a result, trends veer towards higher growth in quick-service and fast-casual restaurants.
What are the keys to a successful restaurant business?
A successful restaurant business requires a good understanding of the market, how to manage food production efficiently while maintaining a solid profit margin. It also requires skilled employees, great service and keeping up to current regulatory procedures.
- Maintaining quality control. A restaurant will never be successful with poor quality food. Businesses also need to create a worthwhile experience for diners by maintaining high standards of service, cleanliness and ambience.
- Higher quality of menu items and service means repeat business. As maintaining sales volume remains a top concern, restaurants will need to keep up with industry trends and increasing rely on word of mouth advertising. Operators will need to ensure they are capitalizing on consumer interest in healthy food items and increased use of technology.
- Attracting local support. Restaurant owners should attract repeat customers and encourage word of mouth, as local support is important to a restaurant’s growth.
- Create a targeted value proposition and branding. Understanding and responding to market trends is important to attracting new and returning customers. Also, being able to stand out from your competitors will ensure longevity.
- Location is key. Locations with high foot traffic that are within close proximity to other areas in demand, such as movie theaters, shopping malls or transportation hubs are key success factors.
Owning a restaurant business can be a challenge, considering the industry is growing slowly (but steady) and market concentration is high. Furthermore, customer demand for healthier and more exotic menu items means that owners need to continually keep up with trends. However, savvy business owners will be successful if they provide customers with what they want, maintain a good profit margins while bring in repeat customers. With careful planning and an eye on current best practices, a restaurant business could be a profitable move.
“2017 State of the Industry,” National Restaurant Association, Print edition: 978-1-931400-94-7, Digital edition: 978-0-9978029-0-0, National Restaurant Association 2017.
Mealey, Lori, “How to Start a New Restaurant,” The Balance Small Business, 4 July 2018, Dotdash, https://www.thebalancesmb.com/how-to-open-a-new-restaurant-2888644, Accessed May 2018.
“How to Open a Restaurant in California,” UpCounsel, https://www.upcounsel.com/how-to-open-a-restaurant-in-california, Accessed May 2018.
“Don’t Fall Victim to Restaurant Profitability Myths,” National Restaurant Association, https://www.restaurant.org/Manage-My-Restaurant/Operations/Back-of-House/Dont-fall-victim-to-restaurant-profitability-myth, Accessed May 2018.
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