Lou Lopez broke a sweat as he pushed a mop around the floor of his new restaurant, Lou’s Charcuteria, 220 S. Commerce, set to open Friday next to the Intrust Bank Arena.
Opening a restaurant is exhausting work. And expensive.
And those are the major reasons restaurants fail, say restaurant consultants and owners.
The brick walls and distressed wood reflect Lopez’s vision of a charcuteria, a rustic restaurant featuring cured meats found in Spain, Portugal and Venezuela. Rustic, yes, but it was still filled with new furniture and decor, televisions and a sound system, a new kitchen and a renovated bar. Lopez, who has owned, operated and opened a number of restaurants in Wichita over three decades, said opening costs were nearly $200,000.
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That’s actually low for the industry.
Although costs vary from a few thousand to a few million, according to a 2011 RestaurantOwner.com survey, the median cost to open a restaurant is $275,000, or $3,046 per seat. If the cost includes owning the building, the median cost is $425,000, or $3,734 per seat. Survey respondents estimated those median costs were 15 percent above their projected budget.
The median construction cost was $140,000, while the median cost for kitchen and bar equipment was $75,000.
And that’s simply for the opportunity to open the doors and start paying daily operating costs.
It’s hard to get definitive information on the closure rate of restaurants, but a couple of widely cited university studies put it at 50 to 60 percent over the first five years, with the highest rate within the first year. Such closing aren’t always for financial reasons.
“When we’ve seen downturns, we get an increased number of calls from people saying, ‘I’m a great cook,’ ” said Neely Carlson, vice president for education and training at the Kansas Restaurant and Hospitality Association. “We usually come back with ‘wow, but have you researched this? Do you understand the costs?’ ”
The profit margins in the business are tight, typically 3 to 7 percent, she said. Overspending on start-up costs can be fatal in the long run.
On the other hand, she said, the restaurant business offers a tremendous up side to those who do make it.
“You have to get educated,” she said. “There’s tremendous opportunity for success if you do it right.”
How to do it right
Doing it right involves consulting industry benchmarks on typical costs and completing long checklists. It’s careful planning and research. And it helps to know people in the business who can give advice.
John Arnold is in the midst of remodeling the former Famous Dave’s space at 21st and Webb into a new restaurant, Greystone Steak & Seafood. It will open in March.
He recently ordered furniture, fixtures and equipment for the new restaurant and is painting the exterior.
It’ll be the sixth restaurant opening he has been part of. He is the majority owner of Greystone as well as Deano’s Grill & Tapworks, also at 21st and Webb, and is a minority partner at Redrock Canyon Grill in Bradley Fair.
“You can’t go too fast, there are so many details,” he said. “That’s a big mistake people make sometimes.”
That’s one of the reasons to have plenty of financial reserves, so there’s less pressure to open.
He helped open Redrock Canyon Grill. That cost $1.5 million. The partners built a new building but didn’t own the land.
Greystone will also be upscale but cost less, because he’s moving into an existing space. He’s putting in a new kitchen and is completely remodeling the space, adding lots of mahogany and stone. He said it will cost less than $1 million to open.
The right amount to spend on opening all depends, he said.
It begins with the menu, he said, which leads to revenue per plate, then multiply by the number of seats and the number of seatings per day. Once the gross revenue is estimated, then prospective restaurateurs can begin to see how much they can spend to generate that revenue. That’s when they begin to see whether their plans make financial sense.
The prospective owners can adjust that calculation by changing locations, deciding whether to lease instead of build, buy used equipment instead of new, serve liquor or not, buy a product instead of make it – and that’s not counting the hundreds of smaller decisions.
“Start-ups are really tricky,” Arnold said. “There are a lot of decisions to make, everything from the kind of light bulbs to the number of forks. There are thousands of things to account for.”
The industry is rife with formulas, spreadsheets and financial advice, both free and not. Getting those calculations right is why franchises have a higher success rate than independent restaurants.
His best advice for novice restaurateurs?
“Get out while you can,” said Arnold, only half-kidding. Then he added: Get as much experience as you can operating a restaurant first.
“If you don’t have any experience, good luck to you. ... The public is unforgiving, and if they come in and there’s an hour wait and something goes wrong with their food, they won’t come back for years.”
A new restaurant
Emily Sewell, who owns Houston-based restaurant brokerage Restaurant Connections, said there are plenty of resources out there.
She echoed what Arnold said. It starts with the revenue.
“You have to take that number and work backward,” she said. “And there are all kinds of benchmarks for costs. Rent is supposed to be 8 percent of topline sales, and then you can see if the location you picked is still viable. So all things flow from that revenue number. You go right down the general ledger.”
For full-service restaurants, food typically is supposed to be 30 to 35 percent, and wages and benefits are another 30 to 35 percent. Other costs include taxes, fees, insurance, utilities and maintenance.
She recommended going to RestaurantOwner.com for its extensive financial benchmarks and expert advice.
Lopez said his guiding formula is based on long experience. He said restaurants have a one-time chance to pay for their opening costs.
Wichitans often will mob a new restaurant. It’s the honeymoon, he said, and they’re curious.
“It’s 90 days of glory,” he said. “I want to get as many bills paid as possible.”
He hopes to make back the fixed cost of opening the restaurant in the first three months. He will pour every extra dollar into paying that back.
After that first three to six months, with much of the fixed cost of the opening paid off, the business moves more toward a variable cost structure, rising and falling with the costs of food and labor.
Although Lopez said he runs restaurants in part because he likes cooking and entertaining, it’s clearly a business. Too often, he said, he runs into people who want to open a restaurant only because they like eating in restaurants and think it would be fun.
“A lot of people think it’s about selling beer and cheeseburgers,” he said. “It’s a business, like any other. You can’t fool around.”
He even put a price on experience: A restaurant could cost $500,000 to open – or it could cost $150,000 or $200,000 if prospective restaurateurs had some patience and knew somebody in the business to steer them toward smarter and less expensive options.
“Talk to somebody like me, get a mentor,” he said. “Get your ideas on paper, share them with a mentor in the business.”