What is it that makes the restaurant industry even harder than your average entrepreneurial affair? Well, let’s start with the nature of the industry itself.
When I studied business, there was a section on choosing attractive industries. In this particular course, it was presented that there are three main factors that contribute statistically to the success of a start-up venture.
First, the industry should be relatively small (as in, under a billion in total sales nationally).
Second, the industry has to feature minimal competition.
Last, the industry should offer an attractive net profit margin (at least 20%).
Restaurants? Fail. Fail. Fail.
The foodservice industry is huge (over $60 billion in Canada annually), there are operators literally on every corner, and average profits are less than 4% according to the Canadian Restaurant & Foodservice Association.
Harsh? I guess. But I’m the type of person who likes to examine every angle. I’ve never been content to just blunder into something assuming that I’m somehow different than every other failure to come before me. It’s not bitterness or pessimism talking when I state that the restaurant industry is for crazy people. I’m just being a realist.
So what to do? My approach was and continues to be specialization. I’ll use Nectar as the example since it’s already been done, but feel free to insert your own specialty idea in its place.
First, off, the huge restaurant industry problem. The solution? Shrink the industry. Choose a niche where you can distinguish yourself and focus on that exclusively. Nectar specialized in desserts. By doing so, we changed our industry from restaurants (huge), to Dessert Bars (small). Don’t define yourself as a restaurant, define yourself by your specialty.
Second, competition. If you’re the only place around that does what you do, you can focus on doing it well instead of worrying all the time about what your neighbors are doing. At Nectar, if someone else started doing something like us, we took it as an opportunity to focus even more on our core business. (For example, when Starbucks opened across the street, we started opening later because we never identified as a coffee house in the first place. We focused on our dessert bar identity instead of being distracted into being a coffee house.) Focus on what makes you unique and special and let other businesses do their thing as well.
Last, profit margins. This is a tough one that I’ll devote some more time to. We know that restaurants aren’t all about the fat stacks, but you need that cash in the bank to keep a place alive. While good management is essential, specialization can give you an edge, something I’ll be going into detail on in the future.
The point of all this is as follows: restaurants are for crazy people. While all businesses have their challenges, the restaurant industry is particularly cruel. A way to manage those challenges, and the one I advocate for small owner/operators, is to specialize. Focus on a niche to effectively shrink the industry, minimize competition and get a financial edge.