Financing And Leasing Restaurant Management – 10 Questions

Please answer these 10 questions I have below. I have attached the whole book, you must get the answers from Chapter 16 Financing and Leasing. Assignment is due 7/22/2017 tomorrow at 5pm eastern time.

 

1.In drawing up a sales budget for a casual Italian restaurant, what percentage

of weekly sales should be forecasted for Friday and Saturday evenings?

2.A casual restaurant with a $1-million sales volume should have how many

full-time equivalent employees?

3.What labor, food, beverage, and occupancy costs should the above restaurant

have? Express your answer as both a percentage of sales and as a dollar

figure.

4.Aside from its value in planning, why is it essential to do a budget forecast

of sales, costs, and profit?

5.Suppose that after forecasting sales and deducting expenses, you are left

with 3 percent operating profit before interest charges and taxes. What would

you do?

6.List, in order of priority, four sources of financing you would approach in

seeking funds for your restaurant.

7.In seeking a construction loan, would you expect to have the entire amount

of the loan given to you in a lump sum? Explain.

8.The procedure in seeking a loan from the Small Business Administration is

fairly elaborate. What is the usual sequence for this process?

9.The recommendation is made to “stockpile your credit.” What does this mean?

10.Is it possible (not probable) to start a restaurant without any cash of your own? Explain.

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The

Restaurant From Concept to Operation Sixth Edition

John R. Walker, DBA, CHA, FMP McKibbon Professor of Hotel and Restaurant Management

and Fulbright Senior Specialist, University of South Florida Sarasota-Manatee

JOHN WILEY & SONS, INC.

 

 

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Library of Congress Cataloging-in-Publication Data: Walker, John R., 1944- The restaurant : from concept to operation / John Walker.—6th ed.

p. cm. Includes index. ISBN 978-0-470-62643-6 (hardback : acid-free paper) 1. Restaurant management. I. Title. TX911.3.M27W352 2011 647.95068—dc22

2010025727

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

 

 

To Donald Lundberg, Ph.D., my mentor, colleague, and friend. Don was admired and respected in the halls of academia as a scholar and pioneer of hospitality and tourism education.

And to you, the professors, students, and future restaurant owners, wishing you success and happiness.

 

 

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Contents Preface xiii

Acknowledgments xvii

Part One Restaurants, Owners, Locations, and Concepts 1

Chapter 1 Introduction 3 Early History of Eating Out 6

French Culinary History 7

Birth of Restaurants in America 7

Challenges of Restaurant Operation 13

Buy, Build, Franchise, or Manage? 15

Starting from Scratch 19

Restaurants as Roads to Riches 20

Summary 21

Chapter 2 Kinds and Characteristics of Restaurants and Their Owners 24 Kinds and Characteristics of Restaurants 25

Sandwich Shops 30

Quick-Service Restaurants 34

Quick Casual Restaurants 35

Family Restaurants 37

Casual Restaurants 37

Fine-Dining Restaurants 39

Steakhouses 40

Seafood Restaurants 42

Ethnic Restaurants 43

Theme Restaurants 47

Coffee Shops 50

Chef-Owned Restaurants 51

Celebrity Chefs 55

Centralized Home Delivery Restaurants 58

Summary 59

 

 

vi ■ Contents

Chapter 3 Concept, Location, and Design 62 Restaurant Concepts 63

Defining the Concept and Market 68

Successful Restaurant Concepts 70

Concept Adaptation 77

Changing or Modifying a Concept 77

Copy and Improve 78

Restaurant Symbology 79

When a Concept Fails 79

Multiple-Concept Chains 80

Sequence of Restaurant Development: From Concept to Opening 80

Utility versus Pleasure 84

Degree of Service Offered 84

Time of Eating and Seat Turnover 85

Advertising and Promotion Expenditures 88

Labor Costs as a Percentage of Sales 89

Planning Decisions That Relate to Concept Development 89

Profitability 91

Mission Statement 91

Concept and Location 92

Criteria for Locating a Restaurant 93

Location Information Checklist 107

Summary 108

Part Two Menus, Kitchens, and Purchasing 111

Chapter 4 The Menu 113 Capability/Consistency 116

Equipment 116

Availability 116

Price 117

Nutritional Value 120

Contribution Margin 122

Flavor 122

Accuracy in Menu 123

Sustainable Menus 128

Kids’ Menus 128

Menu Items 129

 

 

Contents ■ vii

Menu Types 132

Restaurants in Las Vegas Represent the Best Countrywide 136

Menu Engineering 136

Menu Design and Layout 138

Standardized Recipes 142

Menu Trends 142

Summary 143

Chapter 5 Planning and Equipping the Kitchen 146 Back of the House Green 150

Open Kitchen 151

Kitchen Floor Coverings 154

Kitchen Equipment 154

Equipment Stars 159

Maintaining Kitchen Equipment 169

Meeting with the Health Inspector 170

Summary 171

Chapter 6 Food Purchasing 174 Sustainable Purchasing 175

Food-Purchasing System 178

Types of Purchasing 183

Buying Meat 185

Buying Fresh Fruits and Vegetables 188

Selecting the Right Coffee 192

Summary 192

Part Three Restaurant Operations 197

Chapter 7 Bar and Beverages 199 Alcoholic Beverage Licenses 200

How to Apply for a License 201

Bar Layout and Design 202

Placement of a Bar within a Restaurant 204

Beverages 206

Bartenders 209

Basic Bar Inventory 210

Wines 212

Responsible Alcoholic Beverage Service 219

 

 

viii ■ Contents

Third-Party Liability 220

Controls 221

Summary 226

Chapter 8 Operations, Budgeting, and Control 228 Restaurant Operations 229

Front of the House 229

Back of the House 233

Control 238

Liquor Control 239

Controllable Expenses 243

Labor Costs 244

Guest Check Control 250

Productivity Analysis and Cost Control 251

Summary 252

Chapter 9 Food Production and Sanitation 254 Our Culinary Heritage 255

Native American Influence 256

African American Influence 256

Italian Influence 256

French Influence 257

Receiving 262

Storage 263

Food Production 264

Production Procedures 266

Staffing and Scheduling 268

Food-Borne Illness 268

Hazard Analysis of Critical Control Points 275

Common Food Safety Mistakes 278

Approaches to Food Safety 279

Food Protection as a System 280

Summary 282

Part Four Restaurant Management 285

Chapter 10 Restaurant Leadership and Management 289 Leading Employees 290

The Nature of Leadership 293

 

 

Contents ■ ix

Employee Input and What’s in It for Me? 295

Management Topics 296

Communicating 299

Motivating 300

Performance Management 301

Restaurant Management Issues 302

Summary 310

Chapter 11 Organization, Recruiting, and Staffing 314 Task and Job Analysis 315

Job Descriptions 319

Organizing People and Jobs 323

Staffing the Restaurant 325

Civil Rights Laws 333

Questions to Avoid on the Application Form and during the Interview 338

Careful Selection of Personnel 343

Summary 345

Chapter 12 Employee Training and Development 348 Orientation 349

Training 350

Part-Time Employees 352

Training and Development 352

Methods for Training Employees 360

Leadership 363

Summary 369

Chapter 13 Service and Guest Relations 371 Service Encounter 373

Gamesmanship 374

Greeters 375

Server as Independent Businessperson 376

Foodservice Teams 376

Hard Sell versus Soft Sell 378

Formality or Informality 379

Setting the Table 380

Taking the Order 380

Magic Phrases 382

Servers’ Viewpoint 383

Difficult Guests 384

 

 

x ■ Contents

Service Personnel as a Family 387

Greeter or Traffic Cop 387

Tact: Always 388

Summary 388

Chapter 14 Technology in the Restaurant Industry 391 Technology in the Restaurant Industry 392

Table Management 404

POS Systems 408

Web-Based Enterprise Portals 410

Gift Card and Loyalty Programs 411

Guest Services and Web Sites 412

Restaurant Management Alert Systems 412

Summary 413

Part Five Business Plans, Financing, and Legal and Tax Matters 415

Chapter 15 Restaurant Business and Marketing Plans 417 Business Plan 418

The Difference between Marketing and Sales 422

Marketing Planning and Strategy 423

Market Assessment, Demand, Potential, and Competition Analysis 425

Marketing Mix—The Four Ps 429

Summary 445

Chapter 16 Financing and Leasing 448 Sufficient Capital 449

Preparing for the Loan Application 450

Uniform System of Accounts for Restaurants 457

Securing a Loan 463

Leasing 476

What Is a Restaurant Worth? 483

Summary 485

Chapter 17 Legal and Tax Matters 487 What Business Entity Is Best? 488

Buy–Sell Agreement with Partners 495

 

 

Contents ■ xi

Legal Aspects of Doing Business 495

Depreciation and Cash Flow 499

Retirement Tax Shelters 501

Business Expenses and Taxes 502

Reminders 503

Local, State, and Federal Taxes 504

Federal Laws Governing Employment 505

Legal Aspects of Contract Services 510

Complications in Discharging Employees 510

Reporting Tips to the Internal Revenue Service 510

Selling Liquor to Minors 511

Time Off to Vote 511

Wage and Hour Audits 511

Interpretation and Clarification of Government Regulations 512

Falls 512

Summary 513

Glossary 515

Index 529

 

 

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Preface A one-stop guide to the restaurant business, the Sixth Edition of The Restaurant continues the success of previous editions, providing all of the skills and infor- mation needed to master every challenge and succeed in this highly competitive and rewarding industry.

However, there are numerous hurdles to overcome before opening day. The good news is that, with careful planning, including the writing of a solid business plan, coupled with perseverance and a pinch of luck, the chances of success are improved. The opportunity to be the boss and call the shots is appealing. To be responsible for the buzz created and orchestrated is a rush. Maybe the concept will have legs. If successful, a restaurant operator might become a small-town, or even large-town, dignitary.

Restaurants are struggling with continuing economic uncertainties and ris- ing labor and other costs—particularly health care. The conditions for restaurant success change quickly, leaving financial scars on some operators. There are sev- eral new styles of restaurants, and delivery of their products and services has changed as well. Foods formerly considered exotic are now routinely accepted and expected. Taste titillation comes by offering interesting foods and flavor com- binations that challenge chefs and owners, and entice guests.

For the Student

Opening a restaurant is a distinct challenge. It is also a thrill that gives one the opportunity for tremendous creative expression. Developing the menu, creating a new dish, designing the decor, attending to the level of service, or establishing an ambience—these factors all contribute to exceeding the expectations of guests.

The Restaurant will help those who are interested in learning more about the restaurant industry. It will help students gain the knowledge they need to be successful in an easy-to-read style with several features like sidebars and profiles of successful restaurateurs that impart the knowledge of experts for your benefit.

For the Instructor

The Restaurant is a comprehensive primer for restaurant management courses at the college and university level. It is used for a variety of restaurant courses and covers everything from the concept; types of ownership; types of restaurants; menus, planning, and equipping the kitchen; purchasing; bar and beverages; opera- tions, budgeting, and control; food production and sanitation; restaurant leadership and management; organization and staffing; training and development; service and

 

 

xiv ■ Preface

guest relations; technology; business and marketing plans; financing and leasing; and legal and tax matters.

The Restaurant assumes no specific knowledge other than a general familiar- ity with restaurants. It can be used at any course level in a restaurant, hospitality, or culinary arts program. It is also suitable for seminars and continuing education courses.

Helping to meet the continuing restaurant challenges is the oncoming wave of students who have studied the culinary arts and restaurant management and who view the restaurant business as a career of choice. A restaurant can be fun to operate, and the profit margins can be substantial. It is interesting to learn that at least one billionaire, Tom Monaghan, made his fortune in the pizza business, and that dozens of millionaires have acquired fortunes in restaurants. Some of their stories are told in this book.

New to this Edition For The Restaurant, Sixth Edition , revisions include:

■ New reorganization of the chapters. Characteristics of restaurants, the menu and kitchens, and restaurant operations now comprise the first three parts of the text. Management, planning, and finance topics are now orga- nized in the last two parts of the book.

■ NEW! Chapter 10: Restaurant Leadership and Management. This new chapter defines the characteristics of being an effective leader as well as what it takes to successfully lead restaurant employees.

■ It’s easy being “green.” The themes of sustainability and sustainable restaurant management have been added throughout this new edition.

■ New sections on the early history of eating out and restaurants in America are included in Chapter 1.

■ An increased focus toward the independent restaurateur. ■ A new section on purchasing meat has been added to Chapter 6: Food

Purchasing. ■ New sections on cocktails, spirits, and nonalcoholic beverages have been

added to Chapter 7: Bar and Beverages. ■ New sections on the influences of Native American and African

American food have been added to Chapter 9: Food Production and Sanitation.

■ Greater emphasis on restaurant business plans, restaurant manage- ment, and restaurant operations.

Additionally, each chapter has been revised, updated, and enhanced with numerous industry examples, sidebars offering advice, charts, tables, photographs, and menus.

All these additions and changes enhance the contents, look, and usefulness of the book.

 

 

Preface ■ xv

Features

The Restaurant, Sixth Edition is carefully structured for teaching and learning. The chapters of The Restaurant are organized into five parts and take the reader step-by-step through the complicated process of creating, opening, operating, and managing a restaurant:

Part One: Restaurants, Owners, Locations, and Concepts

Chapter 1. Introduction Chapter 2. Restaurants and Their Owners Chapter 3. Concept, Location, and Design

Part Two: Menus, Kitchens, and Purchasing

Chapter 4. The Menu Chapter 5. Planning and Equipping the Kitchen Chapter 6. Food Purchasing

Part Three: Restaurant Operations

Chapter 7. Bar and Beverages Chapter 8. Operations, Budgeting, and Control Chapter 9. Food Production and Sanitation

Part Four: Restaurant Management

Chapter 10. Restaurant Leadership and Management Chapter 11. Organization, Recruiting, and Staffing Chapter 12. Employee Training and Development Chapter 13. Service and Guest Relations Chapter 14. Technology in the Restaurant Industry

Part Five: Business Plans, Financing, and Legal and Tax Matters

Chapter 15. Restaurant Business and Marketing Plans Chapter 16. Financing and Leasing Chapter 17. Legal and Tax Matters

AIDS TO FACILITATE LEARNING The writing in The Restaurant, Sixth Edition , is clear and engaging, in a conver- sational style using numerous industry examples for ease of understanding topics and concepts.

Following are pedagogical features found within each chapter:

■ Clearly stated Learning Objectives so students and faculty can monitor learning progress.

 

 

xvi ■ Preface

■ Numerous Industry Examples are interspersed throughout to help students understand the topics and concepts being discussed.

■ Interesting Sidebars highlight facets of the restaurant industry. ■ New Illustrations and Photographs enliven the text, and diagrams, flow

charts, and sample materials provide examples and focal points for discussion.

■ Restaurant Profiles are featured at the beginning of each of the five parts of the book. These profiles highlight a particular restaurant and detail all components of its organization.

■ Key Terms and concepts are highlighted in the text and described in the glossary. A list of these Key Terms is also provided at the end of every chapter.

■ Review Questions help hone the students’ skills and offer critical-thinking opportunities.

■ Internet Exercises provide opportunities to go beyond the book in search of information relating to the chapters.

Additional Resources

To aid students in retaining and mastering restaurant management concepts, there is a Study Guide (ISBN: 978-0-470-93045-8), which includes chapter objectives, chapter outlines, and practice quizzes that include key term and concept reviews.

An Instructor’s Manual (ISBN: 978-0-470-62645-0) and set of PowerPoint Slides to accompany this textbook are available to qualified adopters from the publisher, and are also available for download at www.wiley.com/college/walker.

The Test Bank has been specifically formatted for Respondus, an easy-to-use software program for creating and managing exams that can be printed to paper or published directly to Blackboard, WebCT, Desire2Learn, eCollege, ANGEL, and other eLearning systems. Instructors who adopt The Restaurant, Sixth Edition , can download the Test Bank for free. Additional Wiley resources also can be uploaded into your LMS course at no charge.

A companion web site (www.wiley.com/college/walker) provides readers with additional resources as well as enables instructors to download the elec- tronic files for the Instructor’s Manual, PowerPoint Presentations, Test Bank, and Respondus Test Bank.

John R. Walker, DBA, CHA, FMP McKibbon Professor of Hotel and Restaurant Management

and Fulbright Senior Specialist, University of South Florida Sarasota-Manatee

 

 

Acknowledgments For their insightful suggestions on this and previous editions of the text, I thank Dr. Cihan Cobanoglu, University of South Florida Sarasota-Manatee; Ken Rubin, CPA; Dr. Cora Gatchalian, University of the Philippines; Volker Schmitz of Cal- ifornia Cafe Restaurants; Dr. Jay Schrock of the University of South Florida; Dr. Greg Dunn and Dr. Katerina Annaraud of the University of South Florida Sarasota-Manatee; Karl Engstrom of Mesa College, San Diego; Brad Peters of Mesa College, San Diego; Dr. Andy Feinstein of California Polytechnic Univer- sity, Pomona; Dr. Karl Titz, University of Houston; Anthony Battaglia, Glendale Community College; Dr. Paul G. VanLandingham, Johnson and Wales University; Dan Beard, Orange Coast College; Marco Adornetto, Muskingum Area Technical College; Thomas Rosenberger, College of Southern Nevada; C. Gus Katsigris, El Centro College; Karl V. Bins of the University of Maryland—Eastern Shore; Marcel R. Escoffier of Florida International University; H. G. Parsa of the Uni- versity of Central Florida; and Chef John Bandman of The Art Institute of New York.

Thanks to the National Restaurant Association and to the restaurants that allowed me to include their menus or photos, and to these restaurant companies for their provision of resource information:

Burton M. Sack, Past President of the National Restaurant Association Charlie Trotter John Horn Red Lobster Restaurants Gary Harkness T.G.I. Friday’s Stephen Ananicz The Lettuce Entertain You Group The Hard Rock Cafes David Cohn and the Cohn Restaurant Group Dick Rivera Sean Murphy, The Beach Bistro Holly Carvalho Jim Lynde, Senior Vice President People, Red Lobster The Garcia Family John C. Cini, President and CEO of Cini Little U.S. Bank The Childs Restaurant Group Danny Meyer Culinary Software Services Outback Steakhouse, Inc. Union Square Hospitality

 

 

xviii ■ Acknowledgments

NCR ALOHA Technologies SYSCO Food Service Aria Restaurant B. Café Niche Panificio 21 Club David Laxer, Bern’s Restaurant Richard Gonzmart, Columbia Restaurants

And, finally, to the numerous restaurant operators who have graciously given their time and ideas, photographs, and menus, my sincere appreciation.

 

 

PART ONE

Restaurants, Owners, Locations, and Concepts

The Concept of B. Café

Courtesy of B. Café

B. Café is a Belgian-themed bistro offering a wide variety of beer and a cuisine that is a Belgian and American fusion. B. Café has three owners, Skel Islamaj, John P. Rees, and Omer Ipek. Islamaj and Ipek are from Belgium, and Rees is Ameri- can. The owners felt that there was a niche in New York for a restaurant with a Belgian theme. Out of all the restaurants in New York, only one or two offered this type of concept, and they were doing well. Since two of the owners grew up in Belgium, they were familiar and comfortable with both Belgian food and beer. Today B. Café offers over 25 Bel- gian brand beers, and the list is growing.

LOCATION

B. Café is located on 75th Street in New York City. The owners looked for a location for two years before

finding the right place. They came across the location after checking the area and finding a brand-new

restaurant whose owner offered to sell. According to owner Islamaj, going with a building that held

 

 

2 ■ Part One Restaurants, Owners, Locations, and Concepts

occupancy as a restaurant was ‘‘a good way to control cost.’’ They did some renovations and adapted what already existed.

MENU

B. Cafe’s third partner, John P. Rees (who is also the culinary direc- tor and executive chef) created the menu. The men wanted a menu that was a fusion of Belgian and American, but did not want to com- promise their ethnic backgrounds. They created a menu with many options that was not too ethnic as to alienate people. By doing this they hoped to target the main- stream.

PERMITS AND LICENSES

The building where B. Café is located today was previously a restaurant. This made the obtain- ing of permits and licenses a bit easier than it would have been had the building not been a restaurant before. Some of the licenses were transferred over. The owners hired lawyers to obtain other permits and licenses needed to gain occupancy. B. Café is a limited liability corpo- ration (LLC) with three owners. The owners of B. Café strongly recom- mend going with a preestablished site when opening a new restaurant.

MARKETING

The owners of B. Café were lucky to be well known in the food critic

and journalism community. Their preopening marketing consisted of contacting old connections, which landed them an article in a newspaper. They recommend that anyone who is considering open- ing a restaurant should send out a one-time press release.

CHALLENGES

The first main challenge for the own- ers of B. Café was finding the right staff. They also found organizing vendors and purchasing products (such as their beer) in quantity to be challenging because when you first open, ‘‘you have to buy, buy, and buy’’ to be sure that you have enough, but you don’t know what quantities you will need. You should also expect to go over budget. At minimum, you should take what your expected budget is and then add on 20 percent.

FINANCIAL INFORMATION

Annual sales at B. Café are expected to reach $1 million in the first year. They have about 540 guest covers a week. Guest checks average $38 per person. A break- down of sales percentages follows. . ■ Percentage of sales that goes

to rent: approximately 9 percent

■ Percentage of food sales: 85 percent

■ Percentage of beverage sales: 15 percent

■ They cannot estimate their percentage of profit (it is 0 percent so far), as the café opened three weeks prior to this interview.

WHAT TURNED OUT DIFFERENT FROM EXPECTED?

The sales the first week were as expected. Sales in the second week went down due to the holidays. This was not anticipated. Other than this, all went as planned.

MOST EMBARRASSING MOMENT

When I asked Skel Islamaj what his most embarrassing moment during opening was, he responded that on the day of opening, a customer ordered coffee. That is when ‘‘we realized that we forgot to order cof- fee!’’ There was none! All was okay though; a server went to a coffee- house and purchased some to get them through.

ADVICE TO PROSPECTIVE ENTREPRENEURS FROM THE OWNERS OF B. CAFÉ

1. Understand the business before you get into it.

2. Location, location, location! 3. Believe in your business, never

give up, and be persistent.

 

 

CHAPTER 1

Introduction LEARNING OBJECTIVES

After reading and studying this chap- ter, you should be able to: . ■ Discuss reasons why some peo-

ple open restaurants.

■ List some challenges of restau- rant operation.

■ Outline the history of restaurants.

■ Compare the advantages and dis- advantages of buying, building, and franchising restaurants.

Courtesy of Sysco

 

 

4 ■ Chapter 1 Introduction

Money

A Place to Socialize

Challenge

Habit

A Firm Lifestyle

Reasons for going into the restaurant business:

Express Yourself

Buyout Potential

FIGURE 1.1: Reasons for going into the restaurant business

Restaurants play a significant role in our lifestyles, and dining out is a favorite social activity. Everyone needs to eat—so, to enjoy good food and perhaps wine in the company of friends and in pleasant surroundings is one of life’s pleasures. Eating out has become a way of life for families. Today, more meals than ever are being eaten away from home.

The successful restaurant offers a reasonable return on investment. One restaurant, then two, then perhaps a small chain. Retire wealthy. To be a winner in today’s economy requires considerable experience, planning, financial support, and energy. Luck also plays a part. This book takes you from day one—that time when you dream of a restaurant—through the opening and into operation. What kind of restaurant do you want to run? Would you prefer quick service, cafeteria, coffee shop, family, ethnic, casual, or luxury? Most restaurant dreamers—perhaps too many—think of being in the middle of a restaurant with lots of guests; skilled, motivated employees; and great social interaction, food, service, and profits. The kind of restaurant concept you select determines, to a large extent, the kind of talents required. Talent and temperament correlate with restaurant style. Managing a quick-service restaurant is quite different from being the proprietor of a luxury restaurant. The person who may do well with a Taco Bell franchise could be a failure in a personality-style restaurant. The range of restaurant styles is broad. Each choice makes its own demands and offers its own rewards to the operator.

This book shows the logical progression from dream to reality, from concept to finding a market gap to operating a restaurant. Along the way, it gives a comprehensive picture of the restaurant business.

Going into the restaurant business is not for the faint of heart. People con- templating opening a restaurant come from diverse backgrounds and bring with them a wealth of experience. However, there is no substitute for experience in the restaurant business—especially in the segment in which you are planning to operate.

Chef-owner Bob Kinkead, of Kinkead’s Restaurant, Washington, D.C.

Courtesy of Bob Kinkead

So why go into the restaurant business? Here are some reasons others have done so, along with some of the liabilities involved. Figure 1.1 shows reasons for going into the restaurant business.

■ Money: The restaurant is a potential money factory. According to the National Restaurant Association (NRA) the restaurant industry totals $580 billion in sales.1 Successful restaurants can be highly profitable. Even in a failing economy the NRA is predicting restaurant-industry sales to advance 2.5 percent in 2010 and equal 4 percent of the U.S. gross domestic product.2 Few businesses can generate as much profit for a given invest- ment. A restaurant with a million-dollar sales volume per year can generate $150,000 to $200,000 per year in profit before taxes. But a failing restau- rant, one with a large investment and a large payroll, can lose thousands of dollars a month. Most restaurants are neither big winners nor big losers.

■ The potential for a buyout: The successful restaurant owner is likely to be courted by a buyer. A number of large corporations have bought restau- rants, especially small restaurant chains. The operator is often bought out

 

 

Chapter 1 Introduction ■ 5

for several million dollars, sometimes with the option of staying on as pres- ident of his or her own chain. The older independent owner can choose to sell out and retire.

■ A place to socialize: The restaurant is a social exchange, satisfying the needs of people with a high need for socialization. Interaction is constant and varied. Personal relationships are a perpetual challenge. For many people there is too much social interplay, which can prove exhausting. On a typical day in America in 2009, more than 130 million individuals will be food service patrons.3

■ Love of a changing work environment: A number of people go into the restaurant business simply because the work environment is always upbeat and constantly changing. A workday or shift is never the same as the last. One day you’re a manager and the next day you could be bartending, hosting, or serving. Are you bored of sitting behind a desk day after day? Then come and join us in the constantly evolving restaurant world!

■ Challenge: Few businesses offer more challenge to the competitive person. There is always a new way to serve, new decor, a new dish, someone new to train, and new ways of marketing, promoting, and merchandising.

■ Habit: Once someone has learned a particular skill or way of life, habit takes over. Habit, the great conditioner of life, tends to lock the person into a lifestyle. The young person learns to cook, feels comfortable doing so, enjoys the restaurant experience, and remains in the restaurant business without seriously considering other options.

■ A fun lifestyle: People who are especially fond of food and drink may feel that the restaurant is “where it is,” free for the taking, or at least available at reduced cost. Some are thrilled with food, its preparation, and its service, and it can also be fun to be a continuous part of it.

■ Too much time on your hands: A lot of people retire and decide to go into the business because they have too much time on their hands. Why a restaurant? Restaurants provide them with flexibility, social interaction, and fun!

■ Opportunity to express yourself: Restaurant owners can be likened to the- atrical producers. They write the script, cast the characters, devise the settings, and star in their own show. The show is acclaimed or fails accord- ing to the owner’s talents and knowledge of the audience, the market at which the performance is aimed.

When restaurant owners were asked by the author and others what helped most “in getting where you are today,” the emphasis on steady, hard work came out far ahead of any other factor. Next in line was “getting along with people.” Then came the possession of a college degree. Close also was “being at the right place at the right time.” Major concerns were low salaries, excessive stress, lack of room for advancement, and lack of long-term job security.

Opening and operating a restaurant takes dedication, high energy, ambition, persistence, and a few other ingredients discussed throughout this text. As Carl

 

 

6 ■ Chapter 1 Introduction

Karcher, founder of Carl’s Jr., said, in America you can easily begin a restaurant as he did, on a cart outside Dodger Stadium selling hot dogs.

Early History of Eating Out4

Eating out has a long history. Taverns existed as early as 1700 B.C.E. The record of a public dining place in Ancient Egypt in 512 B.C.E. shows a lim- ited menu—only one dish was served, consisting of cereal, wild fowl, and onion. Be that as it may, the ancient Egyptians had a fair selection of foods to choose from: peas, lentils, watermelons, artichokes, lettuce, endive, radishes, onions, gar- lic, leeks, fats (both vegetable and animal), beef, honey, dates, and dairy products, including milk, cheese, and butter.

The ancient Romans were great eaters out. Evidence can be seen even today in Herculaneum, a Roman town near Naples that in A.D. 70 was buried under some 65 feet of mud and lava by the eruption of Mt. Vesuvius.5 Along its streets were a number of snack bars vending bread, cheese, wine, nuts, dates, figs, and hot foods. The counters were faced with marble fragments. Wine jugs were imbedded in them, kept fresh by the cold stone. Mulled and spiced wines were served, often sweetened with honey. A number of the snack bars were identical or nearly so giving the impression that they were part of a group under single ownership.

Bakeries were nearby, where grain was milled in the courtyard, the mill turned by blindfolded asses. Some bakeries specialized in cakes. One of them had 25 bronze baking pans of various sizes, from about 4 inches to about 1.5 feet in diameter.

After the fall of Rome, eating out usually took place in an inn or tavern, but by 1200 there were cooking houses in London, Paris, and elsewhere in Europe, where cooked food could by purchased but with no seating. Medieval travelers dined at inns, taverns, hostelries, and monasteries.

The first café was established in then Constantinople in 1550. It was a cof- feehouse, hence the word café.6 The coffeehouse, which appeared in Oxford in 1650 and seven years later in London, was a forerunner of the restaurant today. Coffee at the time was considered a cure-all. As one advertisement in 1657 had it: “ . . . Coffee closes the orifices of the stomach, fortifies the heat within, and helpeth digesting . . . is good against eyesores, coughs, or colds . . . ” Lloyd’s of London, the international insurance company, was founded in Lloyd’s Coffee House. By the eighteenth century, there were about 3,000 coffeehouses in London.

Coffeehouses were also popular in Colonial America. Boston had many of them, as did Virginia and New York. Both the words café, meaning a small restau- rant and bar, and cafeteria come from the single word café, French for coffee.

In the eighteenth century, with the exception of inns which were primarily for travelers, food away from home could be purchased in places where alcoholic beverages were sold. Such places were equipped to serve simple, inexpensive dishes either cooked on the premises or ordered from a nearby inn or food shop. Tavern-restaurants existed in much of Europe including France and Germany with

 

 

Birth of Restaurants in America ■ 7

its winestuben that served delicatessen, sauerkraut, and cheese. In Spain bodegas served tapas. Greek taverns served various foods with olive oil.

French Culinary History The first restaurant ever was called a “public dining room” and originated in France. Throughout history France has played a key role in the development of restaurants. The first restaurant ever that actually consisted of patrons sitting at a table and being served individual portions, which they selected from menus, was founded in 1782 by a man named Beauvilliers. It was called the Grand Taverne de Londres. However, this was not the beginning of the restaurant concept .

The first restaurant proprietor is believed to have been one A. Boulanger, a soup vendor, who opened his business in Paris in 1765.7 He sold soups at his all- night tavern on the Rue Bailleul. He called these soups restorantes (restoratives), which is the origin of the word restaurant . Boulanger believed that soup was the cure to all sorts of illnesses. However, he was not content to let his culinary repertoire rest with only a soup kitchen. By law at the time, only hotels could serve “food” (soup did not fit into this category). In 1767, he challenged the traiteurs’ monopoly and created a soup that consisted of sheep’s feet in a white sauce. The traiteurs guild filed a lawsuit against Boulanger, and the case went before the French Parliament. Boulanger won the suit and soon opened his restaurant, Le Champ d’Oiseau.

In 1782, the Grand Tavern de Londres, a true restaurant, opened on the Rue de Richelieu; three years later, Aux Trois Frères Provençaux opened near the Palais-Royal. The French Revolution in 1794 literally caused heads to roll—so much so that the chefs to the former nobility suddenly had no work. Some stayed in France to open restaurants and some went to other parts of Europe; many crossed the Atlantic to America, especially to New Orleans.

Birth of Restaurants in America The beginning of the American restaurant industry is usually said to be in 1634, when Samuel Coles opened an establishment in Boston that was named Coles Ordinary. It was a tavern—the first tavern of record in the American colonies. It was quite successful, lasting well over 125 years.8

Prior to the American Revolution, places selling food, beverages, and a place to sleep were called ordinaries, taverns, or inns. Rum and beer flowed freely. A favorite drink, called flip, was made from rum, beer, beaten eggs, and spices. The bartender plunged a hot iron with a ball on the end into the drink. Flips were considered both food and a drink. If customers had one too many flips, the ordinaries provided a place to sleep.

In America the innkeeper, unlike in Europe, was often the most respected member of the community and was certainly one of its substantial citizens. The innkeeper usually held some local elected office and sometimes rose much higher

 

 

8 ■ Chapter 1 Introduction

than that. John Adams, the second president of the United States, owned and managed his own tavern between 1783 and 1789.9

The oldest continually operating tavern in America is the Fraunces Tavern in New York City, dating from about 1762. It served as the Revolutionary head- quarters of General George Washington, and was the place where he made his farewell address. It is still operating today.

The restaurant, as we know it today, is said to have been a byproduct of the French Revolution. The term restaurant came to the United States in 1794 via a French refugee from the guillotine, Jean-Baptiste Gilbert Paypalt. Paypalt set up what must have been the first French restaurant in this country, Julien’s Restaurator, in Boston. There he served truffles, cheese fondues, and soups. The French influence on American cooking began early; both Washington and Jeffer- son were fond of French cuisine, and several French eating establishments were opened in Boston by Huguenots who fled France in the eighteenth century to escape religious persecution.

Delmonico’s, located in New York City, is thought to be the first restaurant in America. Delmonico’s opened its doors in 1827. This claim is disputed by others—in particular by the Union Oyster House in Cambridge, Massachusetts, opened in 1826 by Atwood and Bacon and still operating.10 The story of Del- monico’s and its proprietors exemplifies much about family-operated restaurants in America. John Delmonico, the founder, was a Swiss sea captain who retired from ship life in 1825 and opened a tiny shop on the Battery in New York City. At first, he sold only French and Spanish wines, but in 1827 with his brother Peter, a confectioner, he opened an establishment that also served fancy cakes and ices that could be enjoyed on the spot. New Yorker’s apparently bored with plain food, approved of the petits gateaux (little cakes), chocolate, and bonbons served by the brothers Delmonico. Success led in 1832 to the opening of a restau- rant on the building’s second story, and brother Lorenzo joined the enterprise. Lorenzo proved to be the restaurant genius. New Yorkers were ready to change from a roast-and-boiled bill of fare to la grande cuisine —and Lorenzo was ready for New Yorkers.

A hard worker, the basic qualification for restaurant success, Lorenzo was up at 4:00 A.M. and on his way to the public markets. By 8:00 A.M. he appeared at the restaurant, drank a small cup of black coffee, and smoked the third or fourth of his daily 30 cigars. Then home to bed until the dinner hour, when he reappeared to direct the restaurant show. Guests were encouraged to be as profligate with food as they could afford. In the 1870s a yachtsman gave a banquet at Delmonico’s that cost $400 a person, astronomical at the time.

Delmonico’s pioneered the idea of printing a menu in both French and English. The menu was enormous—it offered 12 soups; 32 hors d’oeuvres; 28 different beef entrees, 46 of veal, 20 of mutton, 47 of poultry, 22 of game, 46 of fish, shellfish, turtle, and eels; 51 vegetable and egg dishes; 19 pastries and cakes; plus 28 additional desserts. Except for a few items temporarily unobtainable, any dish could be ordered at any time, and it would be served promptly, as a matter of routine. What restaurant today would or could offer 371 separate dishes to order?

 

 

Birth of Restaurants in America ■ 9

Delmonico’s expanded to four locations, each operated by one member of the family. Lorenzo did so well in handling large parties that he soon was called on to cater affairs all over town. Delmonico’s was the restaurant. In 1881 Lorenzo died, leaving a $2-million estate. Charles, a nephew, took over, but in three years he suffered a nervous breakdown, brought on, it was believed, by overindulgence in the stock market. Other members of the family stepped in and kept the good name of Delmonico’s alive.

Delmonico’s continued to prosper with new owners until the financial crash of 1987 forced it to close, and the magnificent old building sat boarded up for most of the 1990s. Delmonico’s has since undergone renovations to restore the restaurant to its former brilliance. Restaurants bearing the Delmonico name once stood for what was best in the American French restaurant. Delmonico’s served Swiss-French cuisine and was the focus of American gastronomy (the art of good eating). Delmonico’s is also credited with the invention of the bilingual menu (until then French was the language of world-wide upscale restaurant menus, so diners could understand the menu in any part of the world and order their choice of dishes knowing what would be served), Baked Alaska, Chicken a la King, and Lobster Newberg. The Delmonico steak is named after the restaurant.

Few family restaurants last more than a generation. The Delmonico family was involved in nine restaurants from 1827 to 1923 (an early prohibition year), spanning four generations.11 The family had gathered acclaim and fortune, but finally the drive for success and the talent for it were missing in the family line. As has happened with most family restaurants, the name and the restaurants faded into history.

Although Delmonico’s restaurant is to be admired for its subtlety, grace, and service, it will probably remain more of a novelty on the American scene than the norm. While they won the kudos of the day and were the scene of high-style entertaining, there were hundreds of more typical eating establishments transacting business. It has been so ever since. It should be pointed out that there is also an American style in restaurants; in fact, several American styles. There are coffee shops, quick-service restaurants, delis, cafeterias, family-style restaurants, casual dining restaurants, and dinner house restaurants, all now being copied around the world. They meet the taste, timetable, and pocketbook of the average American and increasingly that of others elsewhere.

The Americans used their special brand of ingenuity to create something for everyone. By 1848, a hierarchy of eating places existed in New York City. At the bottom was Sweeney’s “sixpenny eating house” on Ann Street, whose proprietor, Daniel Sweeney, achieved the questionable fame as the father of the greasy spoon. Sweeney’s less-than-appealing fare (“small plate sixpence, large plate shilling”) was literally thrown or slid down a well-greased path to his hungry customers, who cared little for the social amenities of dining.12 The next step up was Brown’s, an establishment of little more gentility than Sweeney’s, but boasting a bill of fare, with all the extras honestly marked off and priced in the margin.

In 1888 Katz’s deli (a fancy word for sandwich shop) was opened by immi- grants in the Lower East Side of New York City. Long before refrigeration,

 

 

10 ■ Chapter 1 Introduction

smoking, pickling, and other curing methods of prolonging the useful life of food had been perfected. The Lower East Side was teeming with millions of newly emigrated families and, given the lack of public and private transportation, a solid community of customers was readily available. Katz’s reputation for serv- ing the flavors of the Old World created a loyal following for many generations of residents and visitors to New York.13

More and more, eating places in the United States and abroad catered to the residents of a town or city and less to travelers. The custom of eating out for its own sake had arrived. Major cities all had hotels with fine restaurants that attracted the rich and famous.

The nineteenth century also saw the birth of the ice cream soda, and marble- topped soda fountains began to make their appearances in so-called ice cream parlors. This century brought about enormous changes in travel and eating habits. Tastes were refined and expanded in the twentieth century and it is interesting to note that there are thirty-five restaurants in New York City that have celebrated their one hundredth birthdays. One of them, P.J. Clark’s, established in 1890, is a real restaurant-bar that has changed little in its hundred years of operation. On entering one sees a large mahogany bar, its mirror tarnished by time, the original tin ceiling, and a tile mosaic floor. Memorabilia ranges from celebrity pictures to Jessie, the house fox terrier that guests had stuffed when she died and who now stands guard over the ladies’ room door. Guests still write their own guest checks at lunch time, on pads with their table number on them (this goes back to the days when some servers could not read or write and were struggling to memorize orders).14

The public restaurant business grew steadily, but even as late as 1919 there were still only 42,600 restaurants in this country. For the average family in small cities and towns, dining out was an occasion. The workman’s restaurant was strictly meat and potatoes. In 1919 the Volstead Act prohibited the sale of alcoholic beverages and forced many restaurants that depended on their liquor sales for profit out of business. It also forced a new emphasis on food-cost control and accounting.

In 1921, Walter Anderson and Billy Ingram began the White Castle ham- burger chain. The name White Castle was selected because white stood for purity and castle for strength. The eye-catching restaurants were nothing more than stucco building shells, a griddle, and a few chairs. People came in droves, and within 10 years White Castle had expanded to 115 units.15

Marriott’s Hot Shoppe and root beer stand opened in 1927. About this time, the drive-in roadside and fast-food restaurants also began springing up across America. The expression car hop was coined because as an order-taker approached an automobile, he or she would hop onto the running board. The drive- in became an established part of Americana and a gathering place of the times. In 1925, another symbol of American eateries, Howard Johnson’s original restau- rant, opened in Wollaston, Massachusetts. Howard Johnson is credited with being the first restaurant to franchise. His first store was an ice cream parlor. In 1928 he had convinced a friend to build a restaurant and sell Howard Johnson’s ice cream.

 

 

Birth of Restaurants in America ■ 11

Johnson’s profit came from selling Howard Johnson’s ice cream to the restaurant. By 1939 there were 107 Howard Johnson’s restaurants operating in six states.

After the stock market crash of 1929 and the Great Depression, America rebounded with the elegance and deluxe dining of the 1930s à la Fred Astaire. The Rainbow Room opened in 1934. This art deco restaurant championed the reemergence of New York as a center of power and glamour.

Trader Vic’s opened in 1937. Although the idea was borrowed from another restaurant known as the Beachcomber, Trader Vic’s became successful by drawing the social elite to the Polynesian-themed restaurant where Vic concocted exotic cocktails including the mai-tai, which he invented.16

At the World’s Fair in 1939, a restaurant called Le Pavillon de France was so successful that it later opened a nightclub in New York. By the end of the 1930s, every city had a deluxe supper club or nightclub.

The Four Seasons opened in 1959. The Four Seasons was the first elegant American restaurant that was not French in style. It expressed the total experience of dining, and everything from the scale of the space to the tabletop accessories was in harmony.17 The Four Seasons was the first restaurant to offer seasonal menus—spring, summer, fall, and winter, with its modern architecture and art as a part of the theme. Joe Baum, the developer of this restaurant, understood why people go to restaurants—to be together and to connect with one another. It is very important that the restaurant reinforce why guests choose it in the first place. Restaurants exist to create pleasure, and how well a restaurant meets this expectation of pleasure is a measure of its success.18

The savvy restaurateur is adaptable. Being quick to respond to changing mar- ket conditions has always been the key to success in the restaurant business. An interesting example of this was demonstrated in the early 1900s by the operator of Delmonico’s. As business declined during a recession in the 1930s, Delmonico’s opened for breakfast, then began delivering breakfast, lunch, dinner, and other fare to Wall Street firms for late-evening meetings. Next he turned his attention to the weekends when Wall Street was quiet. He built up a weekend catering business and developed a specialty of weddings. Later he connected with tour groups going to Ellis Island and encouraged them to stop off for meals.19

World War II was the watershed period that made eating away from home a habit to be enjoyed by millions of people and thought of as a necessity by other millions. Since World War II, a number of social and economic trends have favored the restaurant business. The most important has been the rise in family income, the principal source of which has been the working woman. The more disposable income available, the greater the likelihood of eating out. Lifestyle changes have also been important for restaurant sales. Millions at work or travel- ing eat away from home at restaurants out of necessity, foregoing a “brown bag.” Despite economic cycles, many people perceive restaurant eating to be some- thing deserved or even a different kind of necessity. The tremendous increase in divorce and the number of singles living alone, coupled with smaller living quarters, favors dining out as an escape.20

 

 

12 ■ Chapter 1 Introduction

Following World War II, North America took to the road. There was a rapid development of hotels and coffee shops. They sprang up at almost every highway intersection. The 1950s saw the emergence of a new phenomenon—“fast food.”21

Perhaps one of the most colorful of the franchise stories involves the originator of Kentucky Fried Chicken, “Colonel” Harland Sanders. He had been a farmhand, carriage painter, soldier, railroad fireman, blacksmith, streetcar conductor, justice of the peace, salesman, and service station operator. At the age of 65, he found himself operating his own Kentucky restaurant/motel with little business because a new interstate highway bypassed it by 7 miles. His only income was a social security check of $105 per month.22 He had previously experimented with frying chicken in his restaurant and found that preparing it in a home-sized pressure cooker produced an especially tender product in seven minutes. He set off on a trip around the country to sell restaurant operators a franchise to produce and sell what he now called Kentucky Fried Chicken (KFC). He often slept in the back of his old car wrapped up in a blanket because he could not afford a motel room. Since it was a promotion package and procedure only for cooking chicken, the franchise could be used in an existing restaurant. The initial investment was low, only enough to buy a few needed pieces of cooking equipment. The franchisee would pay the Colonel 5 cents for every order served.23 The Colonel’s thoughts on marketing: “If you have something good, a certain number of people will beat a path to your doorstep; the rest you have to go and get.”24 A $5,000 investment in KFC in 1964 was worth $3.5 million five years later.

Of all the hospitality entrepreneurs, none have been more financially suc- cessful than Ray Kroc. Among the remarkable things about him was that it was not until the age of 52 that he even embarked on the road to fame and fortune. The accomplishment is all the more astounding because Kroc invented noth- ing new. In fact, the concept was leased from two brothers who had set up an octagonal-shaped, fast-food “hamburgatorium” in San Bernadino, California. Kroc was impressed with the property’s golden arches, the McDonald’s sign lighting up the sky at night, and the cleanliness and simplicity of the operation. Even more fascinating was the long waiting line of customers.25

Kroc’s genius came in the way of organizational ability, perseverance sparked with enthusiasm, and an incredible talent for marketing. His talents extended to selecting equally dedicated close associates who added financial, analytical, and managerial skills to the enterprise. The McDonald’s Corporation is the projected image of one man, entrepreneur par excellence, who believed with a passion that business means competition, dedication, and drive. The empire was built in good part as a result of his arch-competitiveness, best illustrated by his reply to this question: “Is the restaurant business a dog-eat-dog business?” His reply: “No, it’s a rat-eat-rat business.”

The 1960s and 1970s saw the introduction of new establishments like Taco Bell, Steak and Ale, T.G.I. Friday’s (now Friday’s) Houston’s, Red Lobster, and others. Several new chains have emerged and are discussed in the subsequent chapters from time to time and the “indy” (independent) restaurateur is also discussed throughout the text.

 

 

Challenges of Restaurant Operation ■ 13

Challenges of Restaurant Operation

Long working hours are the norm in restaurants. Some people like this; others get burned out. Excessive fatigue can lead to general health problems and sus- ceptibility to viral infections, such as colds and mononucleosis. Many restaurant operators have to work 70 hours or longer per week, too long for many people to operate effectively. Long hours mean a lack of quality time with family, partic- ularly when children are young and of school age. Restaurant owners have little time for thinking—an activity required to make the enterprise grow.

In working for others, managers have little job security. A shift of owners, for example, can mean discharge. Although restaurant owners can work as long as the restaurant is successful, they often put in so many hours that they begin to feel incarcerated. Family life can suffer. The divorce rate is high among restaurant managers for several reasons. Stress comes from both the long hours of work and the many variables presented by the restaurant, some beyond a manager’s control.

One big challenge for owners is the possibility of losing their investment and that of other investors, who may be friends or relatives. Too often, a restau- rant failure endangers a family’s financial security because collateral, such as a home, is also lost. Potential restaurateurs must consider whether their personal- ity, temperament, and abilities fit the restaurant business. They must also factor the economy into the equation. New restaurants are always opening, even in a failing economy. New restaurant owners can count on the fact that, even in a bad economy, people still have to eat, even if they go out less often and spend less when they do.26

Consumers are carefully watching how they spend their hard-earned money, and restaurant dining is a part of discretionary income, meaning people will spend first on essentials and then on niceties like dining out. They may trade down and dine at quick-service or casual restaurants instead of using fine-dining restaurants. Even grocery stores are going head to head with restaurants, trying to lure budget-conscious and time-starved consumers away from eateries toward a variety of prepared foods.27

Christopher Muller, a restaurant professor at the Rosen College of Hospi- tality Management, says that it would not surprise him if around 10 percent of restaurants closed in this the most challenging times for restaurants in decades.28

A few years ago, the well-known and highly successful football coach Vince Lombardi described the perfect football player as “agile, mobile, and hostile.” In the same vein, the perfect restaurant operator could be described as “affable, imperturbable, and indefatigable.” In other words, he or she is someone who enjoys serving people, can handle frustration easily, and is tireless.

Lacking one or more of these traits, the would-be restaurant operator can consider a restaurant that opens on a limited schedule, say for lunch only, or five nights a week. Alternatively, an operator can be an investor only and find someone else to operate the restaurant. However, most restaurants with limited hours or days of operation have problems with financial success. Fixed costs force operators to maximize facility use.

 

 

14 ■ Chapter 1 Introduction

Operating a restaurant demands lots of energy and stamina. Successful restau- rant operators almost always are energetic, persevering, and able to withstand pressure. Recruiters for chain restaurants look for the ambitious, outgoing person with a record of hard work. The trainee normally works no fewer than 10 hours a day, five days a week. Weekends, holidays, and evenings are usually the busiest periods, with weekends sometimes accounting for 40 percent or more of sales. The restaurant business is no place for those who want weekends off.

Knowledge of food is highly desirable—a must in a dinner house, of less importance in fast food. Business skills, especially cost controls and marketing, are also necessities in all foodservice businesses. Plenty of skilled chefs have gone broke without them. A personality restaurant needs a personality; if the personality leaves, then the restaurant changes character.

Whatever the true rate of business failure, it is clear that starting a restaurant involves high risk, but risks must be taken in order to achieve success. Restaurants may require a year or two, or longer, to become profitable and need capital or credit to survive. A landmark study by Dr. H. G. Parsa found the actual failure rate of restaurants in Columbus, Ohio, was 59 percent for a three-year period. The highest failure rate was during the first year, when 26 percent of the restaurants failed. In the second year, 19 percent failed, and in the third year, the failure rate dropped to only 14 percent.

Dr. Parsa’s study is valid because it used data from the health department in determining when the restaurants opened; some studies obtain their data from other sources, including the Yellow Pages. Parsa adds that many restaurants close not because they did not succeed financially, but because of personal reasons involving the owner or owners.29 If a restaurant survives for three years, its chances of continued operation are high. This suggests that in buying a restaurant, you should choose one that is more than three years old.

One reason family-owned restaurants survive the start-up period is that chil- dren and members of the extended family can pitch in when needed and work at low cost. Presumably, also, there is less danger of theft by family members than from employees who are not well known. Chain restaurant owners reduce the risk of start-up by calling on experienced and trusted personnel from existing units in the chain. Even restaurants started by families or chains, however, cannot be certain of a sufficient and sustainable market for success. When a new restaurant opens in a given area, it must share the market with existing restaurants unless the population or the per-capita income of the area is increasing fast enough to support it.

Many restaurants fail because of family problems. Too many hours are spent in the restaurant, and so much energy is exerted that there is none left for a balanced family life. These factors often cause dissatisfaction for the spouse and, eventually, divorce. In states such as California, where being married means having communal property, the divorce settlement can divide the couple’s assets. If a divorcing spouse has no interest in the restaurant but demands half of the assets, a judgment of the cost can force a sale of the operation.

 

 

Buy, Build, Franchise, or Manage? ■ 15

When a husband and wife operate a restaurant as a team, both must enjoy the business and be highly motivated to make it successful. These traits should be determined before the final decision is made to finance and enter the business.

Buy, Build, Franchise, or Manage?

A person considering the restaurant business has several career and investment options:

■ To buy an existing restaurant, operate it as is, or change its concept ■ To build a new restaurant and operate it ■ To purchase a franchise and operate the franchise restaurant ■ To manage a restaurant for someone else, either an individual or a chain

In comparing the advantages and disadvantages of buying, building, franchis- ing, and working as a professional manager, individuals should assess their own temperament, ambitions, and ability to cope with frustrations as well as the differ- ent risks and potential rewards. On one hand, buying a restaurant may satisfy an aesthetic personal desire. If the restaurant is a success, the rewards can be high. If it fails, the financial loss is also high, but usually not as high as it would have been if the investment were made in a new building. When buying an existing restaurant that has failed or is for sale for some other reason, the purchaser has information that a builder lacks. The buyer may know that the previous style of

Career & Investment

Options

Manage a Restaurant in Operation

Purchase & Operate a Franchise

Buy & Operate an

Existing Restaurant

Build & Operate a

New Restaurant

FIGURE 1.2: Restaurant career and investment options

restaurant was not successful in that location or that a certain menu or style of management was unsuc- cessful. Such information cuts risks somewhat. On the other hand, the buyer may find it difficult to overcome a poor reputation acquired by the previous operator over a period of time. There are no quick fixes in overcoming a poor reputation or a poor location, but clearly, knowledge of these circumstances decreases risk. Figure 1.2 illustrates the restaurant career and investment options.

Without experience, the would-be restaurateur who builds from scratch is taking a great risk. Million-dollar investments in restaurants are fairly common. Finding investors who are ready to join in does not reduce that risk.

A 100-seat restaurant, fully equipped, costs anywhere from $6,000 to $10,000 or more per seat, or $600,000 to $1 million. In addition, a site must be bought or leased. Examples can be given of inexperienced people who have gone into the business, built a restaurant, and been successful from day one. Unfortunately, more examples can be given of those who have failed.

By contrast, a sandwich shop can usually be opened for less than $30,000. As one entrepreneur put it, “All you really need is a refrigerator, a microwave oven, and a sharp knife.”

 

 

16 ■ Chapter 1 Introduction

Franchising involves the least financial risk in that the restaurant format, including building design, menu, and marketing plans, already has been tested in the marketplace. Some franchises require less than $10,000 to start, including the franchise fee and other operational expenses.30 Even so, franchises can and have failed.

The last option—being a professional manager working for an owner— involves the least financial risk. The psychological cost of failure, however, can be high.

Luckily, no one has to make all of the decisions in the abstract. Successful existing restaurants can be analyzed. Be a discriminating copycat.

Borrow the good points and practices; modify and improve them if possible. It is doubtful that any restaurant cannot be improved. Some of the most successful restaurants are surprisingly weak in certain areas. One of the best-known fast-food chains has mediocre coffee; another offers pie with a tough crust; yet another typically overcooks the vegetables. Still another highly successful chain could improve a number of its items by preparing them on the premises.

The restaurant business is a mixed bag of variables. The successful mix is the one that is better than the competition’s. Few restaurants handle all variables well. Michelin has been in the business of evaluating and recommending restaurants and hotels for over a century.31 For restaurants, Michelin stars are based on five criteria: quality of the products, mastery of flavor and cooking, “personality” of the cuisine, value for the money, and consistency between visits.32 In all of France, only 18 to 20 restaurants are granted the Michelin three-star rating. In the United States, hundreds of restaurants do what they were conceived to do and do it well—serve a particular market, meeting that market’s needs at a price acceptable to that market. The advantages and disadvantages of the buy, build, franchise, or manage decision are shown in Figure 1.3.

The person planning a new dinner house should know that even huge com- panies like General Mills can make big mistakes. Once owner of two profitable dinner house chains, Olive Garden and Red Lobster, General Mills bombed with Chinese, steak, and health-food restaurants.

The small operator lacks the purchasing power of the chain, which can save as much as 10 percent on food costs through mass purchasing. The new operator

Original Potential Psychological Investment Experience Personal Cost of Financial Potential Needed Needed Stress Failure Risk Reward

Buy medium high high high High high Build highest high high highest Highest high Franchise (A) Ex. Subway low to medium low medium medium Medium medium to high Franchise (B) Ex. Applebee’s high high high high High High Manage none medium to high medium medium None Medium

FIGURE 1.3: Buy, build, franchise, or manage—advantages and disadvantages

 

 

Buy, Build, Franchise, or Manage? ■ 17

The Beach Bistro, Anna Maria Island, Sean Murphy’s award-winning restaurant

Courtesy of Sean Murphy

is usually unsophisticated in forecasting. Compare this with Red Lobster’s system, which provides the manager with the number of each menu item to be prepared the next day. Each night, the manager uses a computer file on sales records to forecast the next day’s sales. Based on what was served on the same day in the previous week and on the same day in the previous year, sales dollars for each menu item are forecast for the next day. Frozen items can be defrosted and preprepped items produced to meet the forecast. Wholesale purchasing and mass processing give the chain an additional advantage. The Red Lobster chain processes most of its shrimp in St. Petersburg, Florida. Their shrimp are peeled, deveined, cooked, quick-frozen, and packaged for shipping daily to Red Lobster restaurants. Swordfish and other fish are sent to several warehouses, where they are inspected and flown fresh to wherever they are needed.

Quality control is critical; all managers should carry thermometers in their shirt pockets so they can check at any time that food is served at exactly the correct temperature. For example, clam chowder must be at least 150◦F when served; coffee must be at least 170◦F and salads at 40◦F or lower. Swordfish is grilled no more than four or five minutes on a side with the grill set at 450◦F. A 1-pound lobster is steamed for 10 minutes. In chains, illustrated diagrams tell cooks where to place a set number of parsley sprigs on the plate.

Individual operators can institute similar serving-temperature and cooking controls. They may be able to do a better job of plate presentation than chain unit managers can. Independent operators can develop a personal following and appeal to a niche market among customers who are bored with chain operators

 

 

18 ■ Chapter 1 Introduction

Dining at a popular La Jolla, California, restaurant

Courtesy of the San Diego Convention & Visitors Bureau

and menus. This puts individual owners at an advantage over chain competitors. Being on the job and having a distinct personality can really make the difference.

The restaurant business has both the element of production (food preparation) and of delivery (takeout). Food is a unique product because in order to experi- ence the exact taste again, the customer must return to the same restaurant. The atmosphere is important to the patrons. Some would argue that restaurants are in the business of providing memorable experiences. Successful restaurateurs are generally streetwise, savvy individuals, as evidenced in The Life of the Restaura- teur , attributed to a former consummate restaurateur, Dominique Chapeau, of the Chauntaclair Restaurant, Victoria, British Columbia:

It’s a wonderful life, if you can take it. A restaurateur must be a diplomat, a democrat, an autocrat, an acrobat, and a doormat. He must have the facility to entertain presidents, princes of industry, pickpockets, gamblers, bookmakers, pirates, philanthropists, popsies, and panderers. He must be on both sides of the “political fence” and be able to jump the fence . . . He should be or should have been a foot- baller, golfer, bowler, and a linguist as well as have a good knowledge of any other sport involving dice, cards, horse racing, and pool. This is also useful, as he has sometimes to settle arguments and squabbles. He must be a qualified boxer, wrestler, weight lifter, sprinter, and peacemaker.

 
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