Are restaurants really a bad business?
People constantly say the restaurant business is terrible, low margins, high failure rates, and not much money to be made. But that’s never fully made sense to me because I personally know multiple people who became multi-millionaires starting with restaurants and are far more successful than many tech or online entrepreneurs. It seems like there’s a big disconnect between the common advice and real-world outcomes, and I’m curious why restaurants get such a bad reputation despite clear examples of people doing extremely well in the industry.
There are also many examples of people doing poorly lol. It's an industry that people feel qualified to get in to without experience, which is a recipe for disaster
I want to own a restaurant later in life, possibly on an island in the south. Cruise in, have some wine, talk with regulars, have Michelin quality food and a large bar scene. I would only open it if I could absorb the total loss of the restaurant no problem. So with those expectations, that is my approach in ownership in the restaurant biz. You can make money and it would be nice to make money and have fun doing it, but most restaurants fail or are money pits.
Many people try to do this very same thing, thinking it's all biscuits and gravy, but do not have the financial wherewithal to absorb the eventual losses.
Yeah - key is to be able to absorb losses. It's like gambling. You gotta be ok if you lose $8M or whatever the total restaurant cost is. But you have to ask yourself - was the customer supremely happy with their experience? If yes, then you have won.
Survivorship bias.
One of the worst businesses by far in terms of failure rate, scalability, consistency of revenue, and profitability. Vast majority of people who run restaurants do it for the love of cooking.
I have an ownership stake in an OpCo with a restaurant. F&B is a consistent loss leader, which is surprising when you consider the gross margins on a lot of what is sold. As a guy not running the operation and looking at the numbers, I would say liquor is a much better business to be in than restaurants. Higher gross margins, no spoilage, no (or minimalistic) kitchen, and lower payroll.
I agree. I’d even add trend-driven food and beverage brands, like Oakberry, which is doing extremely well, or Chobani with Greek yogurt. These types of businesses tend to perform better.
Probably the second worst business I can think of
As a son of a former restaurant owner, don’t ever become one lol
Most people who open a restaurant don't realize the hard realities: it absolutely takes over your life, it's exhausting, and you can fail even if you do everything right. How many fantastically profitable restaurants bit the dust during COVID, or simply through sudden changes in public taste? Most people opening up restaurants don't have enough (or any) experience or realize the commitment required. Also, different models have different risk/reward profiles: running a McDonalds is a very different business model than running a club or a coffee shop, and fine dining is a different beast entirely.
I bartended and managed restaurants through college (and for some years part time afterwards) and I saw so many people ruin their businesses by doing stupid things like tailoring the menu to their personal tastes, hiring people who weren't qualified/trustworthy, trying to sleep with the staff, not paying taxes, not being on site enough, drinking in their own bar, giving free stuff to friends and family, and otherwise undermining their business. There's no end of ways to ruin your restaurant. You can make a lot of money, but you are going to earn every penny of it.
For anyone who hasn't spent a lot of time working in restaurants that thinks they can just buy in and collect profits....buy bonds or rental properties, or buy stock of publicly traded restaurant operators like Yum Brands.
read the book kitchen confidential by Anthony Bourain and you have your answer. It is really one of the toughest areas to make money.
It's a great book, by the way, even if you have zero interest in opening/owning a restaurant. He was one heck of a writer (RIP)
Ya they suck. God awful
What is your business? Money laundering? Even then there are better businesses.
HELLOOOOO LAUNDROMATS! ;-)
There is a difference between starting a new concept and a franchise. Vastly different conversations as a franchise has a much lower failure rate (assuming it is also not a new franchise concept)
You also have hosts of people with no business experience jumping in given low barriers to entry.
Some thoughts. They are risky for a few key reasons in my opinion:
1) Fad risk - can kill your momentum
2) PR risk (e.g. health issues) - can kill your brand
3) Critical supplier price risk - e.g. what if meat or produce spikes
4) Discretionary - may not be the best in a down economic cycle
I'm sure there are some really profitable restaurants or franchises out there. These are probably ones with strong unit economics, stable pricing when sourcing, (less) discretionary, strong location, etc...
As others have said, it's probably "the" business that people with zero business experience get into as well, which probably inflates failure rates.
Piling on to confirm that anecdotal evidence notwithstanding; the failure rate of restaurants is exceptionally high and even the ones that don't fail outright are (more often than not) surviving; not thriving.
Edit: if you want some statistical proof of this, go look at SBA loan data. You can filter by NAICS code to see how many SBA loans were made, how many of those were charged-off, and how many of the charge-offs were for restaurants. They represent a significantly higher proportion of the charge offs (both # and $) than they do of the total population. My own anecdotal experience as a lender conforms with the observed data.
The failure rate of every kind of business is high; that’s not an argument.
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