“Honey, lets open a restaurant”

Feb 2003
“Honey, lets open a restaurant, make good money and retire early”. For many people, the thought of working in the restaurant trade is a romantic and fulfilling image, fueled quite often by the numerous celebrity chefs with their perfect ‘whites’ who appear on television, always smiling and never under pressure. Then reality hits, you actually do work in, or own a restaurant and find that there is just a little more to it than television suggests. As well as being extremely hard work, there is a matter of ensuring profitability in a business where margins are notoriously tight.

This has become very obvious in the US market where well known branded franchises have suffered severe financial difficulties. It’s not just McDonald’s that’s having problems, although this corporation is still immensely profitable, despite reporting it’s first ever loss, last quarter.

Historically, the best way to guarantee profitability in the restaurant trade was to purchase a franchise from one of the major brands and - “Honey, we’ve got it made”. That logic did apply when the industry was not over-saturated and competition was considerably less fierce than it is today.

Many of the restaurants that have gone under in the past year have laid the blame squarely on the terrible events of Sept 11. For some, this may be a valid excuse, especially those that relied on Twin Towers clientele, but the fact is that the foodservice market in the United States continues to show real growth of 2-3% per year and if you do things right, you should not go out of business. Most of the restaurants that have run into problems, either failed to target their customers properly, failed to keep in touch with changing customer trends or simply stretched themselves too much from a financial and expansion point of view.

Recent months have seen a number of high profile filings for Chapter 11 protection. Chapter 11 is a legal manoeuvre that allows companies to continue trading but gives them protection from their creditors as they attempt to re-structure their business. For many business entities it is one step away from bankruptcy.

Restaurant companies that have filed for Chapter 11 in the last year include a number of regional franchise owners of very famous names .One of these is AmeriKing, the second largest franchisee in the Burger King stable in the US with 361 restaurant units. It is intriguing that an organization with this number of restaurants and a world-renowned brand name can hit financial difficulties in a country where fast food is a staple diet. The chapter 11 filing did provide clues as to what went wrong. In the filing, AmeriKing announced it was going to close at least 30 Burger King restaurants, which will go some way to solving one of their biggest problems – over-expansion and a consequent heavy debt payment. The fact that the Burger King Corporation announced it would fight McDonald’s directly on the price war front, selling Whoppers at 99cents, made the picture even bleaker. One can appreciate that there is not a lot of profit on this sandwich when the normal price for the Whopper is between $2.09-$2.19.

The AmeriKing story illustrates vividly the mistakes restaurant operations tend to make. One fatal flaw that crops up consistently is the almost manic desire to grow and expand. Restaurant groups – big and small – fall into this trap. Until very recently, McDonald’s which has over 30,000 restaurants world-wide, was trying to grow its units by up to 1,000 per year. It is now paying a heavy price for this expansion and is likely to shutter up to 400 restaurants globally in 2003. Japan alone will see 176 McDonald’s units closing.

Other restaurant groups that have filed for Chapter 11 include:
California based Cimms Inc., another Burger King franchisee, with 130 restaurants:
Sybra, a unit of I.C.H. Corp, which is a major Arby’s franchisee and owns and operates 239 Arby's restaurants in nine states. Arby’s is one of the 10 largest restaurant chains in the United States.

And what about Planet Hollywood which has recently come out of Chapter 11 - for the second time in three years! The restructured movie-themed restaurant group will now likely consist of less than 30 outlets. This is a restaurant group that also fell to the folly of rapid expansion - just four years ago, it had more than 90 units globally. The slimmed down restaurant group will concentrate on high-density tourist areas such as Orlando, New York, London, Honolulu, Paris and Las Vegas. The question for this group is whether it only has a great future behind it. Time will tell.

So the next time you hear someone say “Honey, let’s do this restaurant thing”, make sure they start slowly. The ideal answer may well be “just one fish and chip shop honey, that’s all”.
Now that is where they will make money!

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Conor Cunneen is an internationally acclaimed speaker on strategy, marketing, leadership and strategy. He speaks on foodservice strategy, food service growth, profitable foodservice, foodservice trends in addition to other industries. The author is an award winning humorist and has won the coveted Chicago Toastmasters Humorous Speaker of the Year title. He is author of Why Ireland Never Invaded America – An Insightful Unique Look at Corporate Strategy

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