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NO FREE
LUNCH
BY
EMILY
LAMBERT
OF
FROBES.COM
June
9, 2003
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actual
article
by
clicking
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One in
two new
restaurants
fails
within
two
years.
If
you're
thinking
of
trying
to beat
the
odds,
here's
the
dish.
Three
and a
half
years
ago Gary
Fuller
was vice
president
of
operations
for a
Cincinnati
Bell
affiliate.
But what
he
really
liked to
do was
cook.
Two
years
and
$400,000
into a
new
career,
Fuller
and his
wife,
Kelly
Kimberly,
a public
relations
consultant
to
Enron's
Kenneth
Lay, run
the
well-reviewed
50-seat
Laurier
Cafe &
Wine in
Houston.
Moving
from
telecom
to New
American
cuisine
has
meant a
lifestyle
change
for
Fuller.
He loves
the good
reviews,
the
satisfied
customers
and the
challenge
of the
trade.
But
these
rewards
don't
come
easy.
Fun?
"That's
a word
that has
never
crossed
my
mind,"
he says
on a
rare day
off.
If you
dream of
restaurant
riches,
you
should
know a
few
things
before
setting
up
kitchen.
This is
an
industry
riddled
with
failure.
Profit
margins,
at 1% to
5%, are
as
paper-thin
as the
finest
carpaccio.
One in
three
new
restaurants
doesn't
last a
year.
Denver
celebrity
chef
Kevin
Taylor
has
shuttered
two of
his five
restaurants
in the
past
year--one
because
of the
economy,
the
other
because
construction
out
front
chased
away a
third of
his
revenue.
And if
you
happen
to
succeed,
you may
be
working
too hard
to enjoy
your
success.
Opening
a new
restaurant
can cost
anywhere
from
$185,000
for a
franchise
outlet
to $5
million
for a
10,000-square-foot,
high-end
eatery
with
custom
decor,
although
we found
enterprising
folks
who got
going
for
less.
Daniel
Bendall,
vice
president
at
industry
consultant
Cini-Little
International,
says the
cost of
setting
up an
average
restaurant,
like a
diner,
is
around
$300 per
square
foot.
That
includes
tables,
chairs,
carpets,
kitchen
equipment
and
paint
for the
walls--but
not
property
costs.
Bankers
don't
like to
lend
into a
trade
with
such a
high
failure
rate.
Try
hitting
up
family
and
friends
for
capital.
Or go
plastic.
The
Small
Business
Administration
turned
down New
Yorkers
Brian
Karp and
Christopher
Evans,
both 32.
So they
used
credit
cards
for most
of the
$125,000
it took
them to
start
Brooklyn's
hot
sandwich
shop
Press
195 last
summer.
That
financing
is
costing
them 9%
interest.
Now that
they're
a going
concern,
they're
hoping
to pay
off the
cards'
balances
with a
bank
loan.
Don't
underbudget.
Besides
costing
you for
construction
and
equipment,
the
business
may run
an
operating
loss in
its
early
days.
One
reason
restaurants
go under
is
undercapitalization,
says
Edward
Engoron,
president
and
chief
executive
of
Perspectives/Consulting
Group, a
restaurant
business
adviser.
Location
is
crucial.
Fuller,
the
Houston
restaurateur,
opened
across
the
street
from a
strip
joint.
At least
his rent
is
cheap,
and he's
not far
from
offices
and
residential
neighborhoods.
He opted
for a
dead
rent,
one not
figured
as a
percent
of sales
volume.
That's a
good
idea if
you can
swing
it, says
consultant
Engoron.
Rents
with a
percentage
kicker,
common
in
franchise
operations,
may be
more
affordable
to a
startup.
Stephen
Hanson,
owner of
New
York's
Blue Fin
and Ruby
Foo's,
says
that the
monthly
rent
bill for
a
healthy
restaurant
is
ideally
no more
than its
sales on
one busy
day.
Next,
permits.
You'll
need
them for
occupancy,
sanitation,
fire
safety
and
liquor.
Plan
badly
and you
will
open
months
late--and
be owing
on a
construction
loan all
the
while.
After
that
come
insurance
policies,
for
liability,
workman's
compensation
and
fire.
Construction
delays
can be
deadly.
Consider
the
advantages
of using
a space
that was
a
restaurant
before,
with
kitchen
and
dining
room in
place.
If you
modify a
building
and
aren't a
Handy
Andy,
set
aside
enough
money to
hire an
architect
and
contractors.
Theodore
Adamstein,
a
founder
of
Adamstein
&Demetriou
Architects
in
Washington,
D.C.,
says it
costs
$125,000
to
$250,000
for the
design
of a
chichi
restaurant.
Think
about
starting
off with
used
equipment,
recommends
Cynthia
Renzi,
coordinator
for
continuing
education
at the
French
Culinary
Institute.
Scour
auctions
and
garage
sales.
Fuller's
only new
piece of
equipment
in his
Houston
place
was an
ice
machine.
Karp and
Evans
opted
for new
appliances
in their
Brooklyn
eatery
and say
that
was,
with
hindsight,
wise: A
warranty
covered
two
espresso
machine
repairs.
You can
be
clever
with
capital
expenses
and
still
get
killed
by your
variable
costs if
you
don't
know how
to hold
them
down.
Labor
will
typically
eat up
25% of
your
expenses.
You can
pay your
chef
$30,000
a year
and a
percent
of the
gross,
or you
can hire
a
celebrity
for
$150,000.
Food
accounts
for
another
third of
costs.
Don't be
wasteful:
Old
bread
can find
new life
as
croutons.
Consultant
Engoron
says to
budget
4% to 6%
of
revenue
for
marketing,
although
having
the
right
buzz or
location
may make
that
unnecessary.
Hanson,
the Blue
Fin
owner,
doesn't
spend a
dime on
ads.
Also
eating
away at
your
cash:
garbage
service,
the sign
out
front,
having
someone
clean
the
grease
traps,
printing
menus--and
the
temptation
to eat
or drink
up the
profits
yourself.
Whether
or not
to
invest
in
software
to print
and
tally
receipts
is a
$10,000
question.
A
point-of-sale
system,
essentially
a
computer-linked
cash
register,
helps
track
expenses
and
revenue;
that's
also
helpful
if you
find
yourself
audited
by
either
the
booze
police
or the
taxman.
Restaurants
often
deal in
cash,
and so
raise
the
suspicions
of the
enforcement
agencies.
A
point-of-sale
system
also
deters
staff
pilfering.
The
average
annual
theft
per
restaurant
employee
is $218,
according
to a
Pearson
Reid
London
House
survey.
Booze is
a
lifesaver
for many
a
restaurant.
The
typical
markup
on a
bottle
of wine
is
around
300%.
Wine
provides
a third
of the
revenue
at
Fuller's
Houston
eatery.
To
encourage
people
to drink
up, he
sells
wine by
the half
bottle
and by
the
glass.
Press
195's
Karp and
Evans
design
their
menus
around
people's
drink
preferences
in
different
seasons.
If
you're
selling
wine, be
sure to
have a
storage
area,
and know
a
zinfandel
from a
merlot.
"There's
no point
in
having a
great
wine
program
if your
staff
doesn't
know how
to
pronounce
the
wines or
how to
serve
them,"
says the
French
Culinary
Institute's
Renzi.
If a
restaurant
is going
to make
it, it
probably
will
show a
profit
within
90 days.
"About
80% of
people
who walk
through
in the
first 90
days,
that's
your
customer
base for
the next
five
years,"
says
consultant
Engoron.
Flailing
owners
often
fiddle
with the
menu or
the
concept,
but it
rarely
works.
Nor does
discounting.
A steak
offered
at half
price
never
recovers
its
value in
the
customer's
eyes,
says
Engoron.
Rest up
now. The
hours
are late
and
long.
One in
ten
owners
works 80
hours a
week or
more.
Looking
for
respect?
You
won't
find it
here.
Houston's
Fuller,
who as a
corporate
executive
used to
have
vendors
at his
beck and
call,
found at
first
that
many
suppliers
not only
didn't
return
his
calls,
they
insulted
him.
At least
the
trend is
your
friend.
Hudson
Riehle
of the
National
Restaurant
Association
predicts
restaurant
sales
will
rise
4.5%
this
year to
$426
billion.
Americans
spend 47
cents of
every
food
dollar
eating
out, up
from 25
cents in
1955.
Alas,
all this
does not
guarantee
your own
success.
As with
all
investing,
that
depends
on a
large
element
of luck.
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