Article

Ten BIG Mistakes Startup Restaurateurs Make (and Need to Avoid!)

Most of us are afraid of making mistakes. This fear is not only a drain on your energy, but is also completely impossible to avoid. Humans make mistakes, and we all make them all the time. Mistakes teach you to do things better the next time, to learn and to grow. The creator of the Dyson vacuum cleaner is famous for saying that he made over 5,000 prototypes - that's over 5,000 mistakes! - before he got a design that worked in all the ways he wanted it to. Anyone who has been in the restaurant business for a day can reel off a dozen areas of operations that are prone to errors.

But there are mistakes, and then there are MISTAKES - all caps, bold-face, and underlined. These are the mistakes that are very hard to recover from. They are mistakes that will cause your business to fail, perhaps even before you open your doors. These mistakes are ones that tend to happen early in the development process, when you are determining your concept, securing your space, and getting financed. Happily, you can mitigate the potential effects of these serious errors by knowing ahead of time and taking decisive action to avoid them.

Read on to learn more about the 10 BIG mistakes that a smart restaurateur can avoid through good research, good planning, and a clear head during startup.

MISTAKE #1:
Lack of a Clear, Cohesive Vision

If you are creating a restaurant, you probably have lots of ideas of what you want that restaurant to be. You've considered what you want to serve, how you want to serve it, what you want the restaurant to look like, where you might be located, and perhaps even what your name or logo looks like. That's the fun part of restaurant development.

That said, all elements of a successful restaurant concept have to work together to express a consistent and clear message to your prospective customer, or else they won't know who you are or what you stand for. And if customers can't understand what your concept is all about from the moment they engage with your online marketing or your street presence, they are much less likely to even give you a try.

Imagine a restaurant concept called the "The Griddle". What does that name suggest to you?

What if I told you that The Griddle focused on Latin-style seafood? And you ordered online for pickup because the restaurant has no seating? You can see how the elements of this concept don't hang together: a "griddle" typically implies a certain kind of menu (namely, pancakes) and perhaps a particular dining experience that doesn't include ordering from your phone.

This is a rather extreme example, but it drives home the point that everything about your concept needs to "speak with the same voice" and be clear and sensible to both your guests and your staff.

You should be able to summarize your concept in 1-2 sentences, and everyone should be able to understand what your concept is all about without having to ask you more questions. This cohesive vision also serves as your "guardrails" for subsequent adjustments to your concept over time. Does adding this menu item or this approach to service fit with the overarching concept of your restaurant?

If it doesn't, then maybe it's not such a good idea, even if on the surface these changes might appear to help your bottom line. Confused customers choose other restaurants, and confusing concepts are harder to get funded.

MISTAKE #2:
Not Understanding the Market

A successful restaurateur has to know the target market extremely well, the way that you know your best friend. From a purely practical standpoint, you have to understand your target customers' behaviors: When they go out, what do they do and why? What kind of transportation do they usually rely on? What times of year do they typically travel out of town? But you also have to have strong insights into your customers' psychology. What do they care about? What challenges do they face? Knowing customers this deeply helps identify restaurant offerings and services that will resonate with these guests.

THE COMPETITON CHANGES ALL THE TIME.
You can be very sure that restaurants that target the same customers that you do will be paying attention to what your place is doing and, if they are good operators, they'll be adapting accordingly. Notice that I defined your competition as "RESTAURANTS THAT TARGET THE SAME CUSTOMERS."

On top of knowing the customer, you also need to know your restaurant's neighborhood extremely well. Here's an example: I live in a college town that has neighborhoods within walking distance of campus that have very high dining demand when classes are in session, but they become ghost towns when the students leave.

So many restaurants have tried but failed to make a go of it in these neighborhoods, not understanding that locals don't go to these areas at all because there isn't convenient parking nearby. If someone isn't aware of very specific demand patterns like these, their restaurant can quickly go out of business, even though on paper the neighborhood may have looked promising.

One small restaurant chain I know did something very clever to grow its business by cultivating a deep understanding of the local market. To start with, the operators did their homework and developed a strong concept that connected with the local market. But once they opened their first unit, they saw that a lot of the business came from take-out and delivery orders which was great for revenue, but put a huge strain on the kitchen of the original store which had never been designed to handle this volume of delivery.

So they plotted the addresses for the delivery orders on a map and saw that the vast majority of orders came from within a one-mile radius. Armed with this information, they opened four more stores (not all at once, mind you!), each one about one mile away from the first store, but in a different direction each time, selected based on the density of delivery orders.

That ensured that the market for their new units was already there, and from there they could grow each unit to capture the next mile or so of customers. If they hadn't really drilled down into their sales data, they might have tried to open new units in completely new neighborhoods where getting sales traction would have been much harder.

MISTAKE #3:
Trying to be All Things to All People

No restaurant can successfully attract every type of guest. When I work with startups, a big red flag for me is when the entrepreneur says "My target market is everyone!" It tells me that they haven't really focused on what kind of concept would resonate most strongly with the customer base in their market. We can point to many of the mid-price bar-and-grill chains for great cautionary tales about what happens when you try to appeal to the broadest possible market. Many of these chains are struggling because, in an effort to get as many people in the door as possible, they lost sight of what their concepts really are.

Some tried to embrace too many different menu item categories at the same time: burgers and pastas and pizzas and salads and stir fries and curries and, well you might get the idea. That puts pressure on buildout costs as well as on operations. Others played around with portions and pricing, making it unclear who exactly they were trying to attract: seniors looking for an early bird dinner? Families with kids? Singles at the bar? If you define your concept as "something for everyone", you don't have a concept - you have a foodservice version of the Sears catalog.

MISTAKE #4:
Thinking "Better Food and Better Service" is Enough

It may seem counterintuitive, but successful restaurants aren't as much about having great food or topnotch service as they are about having a sound business model. I am sure you can think of lots of restaurants out there that do quite well despite not having particularly noteworthy food or reliably effective service. Solid execution on menu and service are "table stakes" - to keep your business going, you have to perform reasonably on the plate and in the dining room. But what really makes restaurants succeed for the long haul is a combination of an engaging concept, sensible food and labor costs, controlled buildout budget, and a good lease, which leads us to…

MISTAKE #5
Compromising on the Lease

Probably the biggest factor in a restaurant's long term success is the real estate it occupies. First of all, you need to select a location that meets key criteria for your concept: the right amount of space, configured in a way that allows you to execute well, and in a location that is appropriate for your target customers and their travel patterns. Even really great concepts with tremendous financial backing cannot survive if they get the location wrong.

Once you've found that optimal location, it needs to have lease terms that your concept can support. Rent is the main term to pay attention to: your rent on its own should not exceed 6% of your revenues, and all of your occupancy costs (including common area maintenance charges and your share of the property taxes and building insurance) shouldn't be more than 10% of your total revenues.

And there are other lease terms that need to be considered too, such as escalation clauses, renewal terms, and covenants related to opening hours, exclusivity or design. The best start-up restaurateurs ensure that they have a good lawyer review the lease in detail before they commit to any piece of real estate, no matter how good the location might be.

MISTAKE #6:
Not Being Flexible

You might have chosen to start your own place because you've always had a dream of what you want your restaurant to do and be, right down to the tiniest detail. Having a strong vision is good, but you also have to be willing to adapt that vision as you learn more about your market and your costs. Many of the restaurant entrepreneurs I work with are so strongly attached to their ideas that they will not entertain any deviation from their plans, even if their plans are highly unlikely to end up as viable businesses.

For example, one group of bright students came to me with an idea for a frozen ice pop business, selling out of specially-fabricated bicycles at beachside locations in the Northeast during the summer months. On the face of it, it's an interesting idea. But the students were so committed to their vision for the business that they wouldn't make adjustments to their concept that would allow this kind of operation to cover its costs, to say nothing of generating a profit. Seasonal businesses are really, really tricky to operate successfully.

Vision and youthful enthusiasm are both great to have, but you have to be willing to face the realities of costs, health codes, labor availability, and permitting before you go too far down the restaurant development track. And once you are open, you still need to stay flexible. Conditions change, tastes change, the availability of ingredients or talent changes, and so does your competition. What was working well in Year One might have to be tweaked in Year Two to Year Three. Good restaurateurs are like pro surfers in that they have the right equipment and the right skill, but adapt to that day's waves to get a great ride.

MISTAKE #7:
Underestimating the Competition

The competition changes all the time. You can be very sure that restaurants that target the same customers that you do will be paying attention to what how your place is doing and, if they are good operators, they'll be adapting accordingly. Notice that I defined your competition as "restaurants that target the same customers."

WHEN YOU WRITE A BUSINESS PLAN,
it's typical to project your sales by day of the week and then extrapolate from there what your sales might look like by month and for the year. We design our businesses so that we show a profit based on those sales projections, and there will be some days when those projections will be spot on. But it's foolish to assume that every Monday will perform similarly, or that your costs will be in control when you first open up.
THEY WON'T BE.

If you own a bar and grill, your competition isn't just other bar-and-grill restaurants. It is any restaurant in your trade area that offers sit-down dining and a full bar at roughly the same price point. And competitors that have been in business awhile have gotten there by being nimble (see Mistake #6 above, about being flexible).

What's more, if you find success in your location, other restaurants targeting similar people are very likely to come into the neighborhood, as restaurants actually do better when they cluster together with concepts with similar pricing. This is why your concept needs to be strongly rooted in a good understanding of the customers in the area so that you can build a solid relationship with those guests that will keep them coming back to you even when they have additional dining choices down the block -- or to have delivered to their homes.

MISTAKE #8:
Lack of Documented Systems and Procedures

Restaurateurs are Jacks-and Jills-of all trades. The good ones can wait tables, work the line, wash dishes, and greet customers as well as competently do everything else the manager of a startup has to be able to do. Just because you can do everything well, however, doesn't mean you should. You need to develop your restaurant concept so it can run perfectly well without you, because you will want to take a vacation, be able to care for family members, or even get sick yourself from time to time.

That means you need to develop operating procedures for every aspect of the restaurant and document them so that others can step into these roles as needed.

But the Really Big Mistake here is waiting to create and document these procedures until after your restaurant is open. The smart thing to do is develop your operating plan and processes early in the development process and get them down on paper before you go looking for your location.

Why so early? Well, those operating procedures will help you figure out how much space you need to run your restaurant, how many employees you'll need to hire and how you'll train them, and what equipment you'll need to install. You'll want to know all of this when you are putting together your financial projections and your buildout budget, as well as when you start hunting for real estate. Take the time to map out all these details early and it will save you a great deal of scrambling later, as well as protect you from making expensive mistakes in designing and equipping your operation.

MISTAKE #9:
Undercapitalization

Many startup restaurateurs have to work on a shoestring, often because they don't have much access to capital other than their savings and the generous contributions of close family or friends. It's tempting to raise just enough money to cover the buildout and then hope that the subsequent revenue from operations will be sufficient to keep you in business. But you'll need much more than your buildout costs in order to finance that opening day.

Don't forget about opening inventory which, if you have a full bar and/or a good selection of wine, can be thousands of dollars just for the alcohol, to say nothing of inventories of food, tableware, glassware, paper products, cleaning supplies, and everything else you need to have ready to go on Day One of operations.

You'll have some pre-opening marketing expense to create buzz so that you'll have paying customers when you finally cut the ribbon. (Doing your own social media marketing isn't actually free -- it steals your time and energy away from vital aspects of development and opening that only you can do. It's better to hire someone who's good at social media and really knows how to generate followers.)

You'll need a contingency fund to cover unforeseen circumstances during your buildout, because "stuff happens". Materials and supplies arrive damaged or otherwise unusable, mistakes get made in measuring or purchasing, or surprises appear when you open up a wall or a ceiling that require additional construction outlays that you didn't anticipate. To cover these add-ons, you'll want to carry a minimum of 5% on top of your estimated buildout budget as a slush fund, and even more if you are going into an older building where unforeseen repairs during construction are more likely.

You'll also want a cushion of working capital to cover your first couple of months of operating expenses. That's because you may have cost over-runs that cannot be supported by your sales. These over-runs might be because you have some staff turnover right at the start of your operations -- some of your hires may not work out so you have to hire and train replacements, or you may need to over-staff initially to account for natural "melt" in your staffing.

Over-runs also may come in food purchasing. It's normal to have quite a bit of food waste during the first weeks of operations while your staff is getting up to speed and you are getting a better handle on what menu items sell well or how much prep to do. I tell restaurateurs to start their restaurants with a working capital fund equal to three months of fixed costs and six weeks of variable costs if at all possible. This leads us to our last mistake…

MISTAKE #10:
Relying on Being Profitable Immediately

When you write a business plan, it's typical to project your sales by day of the week and then extrapolate from there what your sales might look like by month and for the year. We design our businesses so that we show a profit based on those sales projections, and there will be some days when those projections will be spot on. But it's foolish to assume that every Monday will perform similarly, or that your costs will be in control when you first open up. They won't be.

You're learning how this operation can and needs to run, so your costs may be high at first. You may have lots of friends who come to support you when you first open, but then don't come back again for a few weeks -- and the rest of the market doesn't know who you are yet, so your sales volumes may well be below your estimates. There are snowstorms and rainstorms and unexpected water main breaks on the street outside and a million other things that can eat into your carefully crafted projections.

And even if all goes well, it takes a while for any new restaurant to find its equilibrium in terms of customers and operations. It may be several months before your concept is performing the way you projected and actually turning a reliable profit. Assume that things will be a bit slow in the early weeks despite a big jump in sales in your first couple of days as you celebrate your opening with people who know and love you. Make sure you've got that working capital fund in place to cover your rent, your payroll, and your vendor invoices while your restaurant finds its feet.

You Can't Avoid Mistakes
(Just Try to Dodge the Big Ones)

You're still going to make mistakes as you create your restaurant. (If you don't, you are the first restaurateur in history to have a pain-free buildout and opening!) But you can readily recover from small mistakes if you develop your concept and your business plan to avoid the Big Ones.