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November 1, 2006updated 29 Jan 2016 5:30pm

Recipe For Success

By Spear's

If you’re thinking about buying a restaurant, make sure you’ve got the stomach for it, writes Luke Johnson

If you’re thinking about buying a restaurant, make sure you’ve got the stomach for it, writes Luke Johnson

I have spent over 15 years as a restaurateur, and can guarantee any prospective investor more thrills and spills than most business ventures. While there are fortunes to be made, it is a financial minefield for amateurs. Because we all dine out, we all believe we are experts on the trade. And, in a sense, operating a successful restaurant is, at heart, common sense. But that doesn’t mean it’s easy.

The first restaurant I started was a mixed success. In 1989 we took a lease on a converted sorting office in Mornington Crescent, with a big brewery loan to fund the refurbishment of what was to become the LA Cafe. The recession started soon after we opened and sales were poor, even though we offered great food and solid value.

Then Jim, the partner who ran the place, separated from his wife and decided to return to his homeland, America. We were lucky to get out with our money back. The episode demonstrated that timing and the right partners are everything.

Many of us have a concept or like a particular cuisine that we think would be irresistible to the public. We are convinced that we have the perfect menu, entrancing décor, and a brilliant marketing plan. In a sense, coming up with the idea is the simple part. It is the execution which is difficult. Restaurants are hard, physical work – mostly seven days and nights a week, almost every week of the year.

They rely on a professional brigade of staff, who are tough to hire and retain. And any prospective restaurateur needs lots of luck in finding the right site and fitting it out properly. Few restaurants last more than a few years, because tastes change and owners get tired. But for those with stamina and flair, it can be a lucrative career.

Opening a restaurant is far riskier than opening a shop because of the substantial capital that has to be invested in the site. Restaurants require expensive kitchens, toilets, extraction, air conditioning, furniture and other health and safety aspects unnecessary in most retail spaces.

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This means £250 of capital costs per square foot is not uncommon – or £500,000 for an 80-seat restaurant, including equipment. If you demand the most expensive finishes, then costs can be even higher. Because of economies of scale, I much prefer owning restaurants with 100 seats or more, but such larger premises are really tricky to find, and sometimes landlords seek a premium.

Restaurants are designated A3 for planning purposes and such consents are relatively rare. Landlords demand higher rents because of their scarcity. The premises usually need licensing for alcohol – a further hurdle. Tenants, meanwhile, expect a decent length lease in return for the investment – I would recommend at least 15 years – and ‘within the Act’, so that a renewal is almost certain.

I have never met a restaurateur who hasn’t experienced a nightmare in budget and timetable overruns in the building project to open their first site. No matter how good the architect, Quality Surveyor or construction company are, there will be problems.

It is worth thinking of restaurants as a combined manufacturing and retail operation. The manufacturing takes place in the kitchen, the retail aspect is front of house. Thus, running a restaurant is a complex process, with both preparation and customer service on one site.

Part of the secret of the success of Pizza Express is its very basic cooking formula: they only have ovens – no grills or frying – and no chefs, just pizzaolas, who require much less training. This type of format keeps costs under control and enables consistency of product. But these days, most regular diners want a bit more variety and choice, so new entrants need to offer a broader menu.

During my time in the business, costs have risen and profit margins fallen. Rents, rates, wages, utilities and other costs have climbed far faster than inflation. While a typical 2,000 square-foot location might have rented for £30,000 when I started, today rents of £100,000, for the same building, are not uncommon.

And, although demand from diners has remained strong, competition has also increased dramatically. There are probably four times as many high-end eating establishments in London as there were in 1990 – just look at the size of restaurant guide books, like Harden’s and Zagats these days.

Moreover, diners are more demanding and fickle than ever – a bit like New Yorkers have always been. A place can be briefly hip when new, but such temporary glory can fade rapidly and bookings evaporate unless the experience is memorable. Restaurants have high fixed overheads and need to be busy most of the time they are open.

The Ivy is, possibly, London’s most famous and profitable restaurant, partly because it turns the covers four times a day almost every day of the year, and its private dining room is permanently booked. It can manage this volume of customers thanks to its huge kitchens and tremendous staff. It makes net operating margins of at least 25 per cent on revenues, but few restaurants manage that consistently. At least restaurants tend to generate cash from the first day, since suppliers offer credit and customers pay on the spot.

I tend not to back projects involving name chefs, since I think that introduces an unnecessary extra level of risk. The best restaurants are a joint effort, and survive the departure of any single member of staff.

I would recommend aiming for concepts and sites that have opportunities to trade at both lunch and dinner – ideally seven days a week. And while any newcomer should stand out in terms of design, recipes and people, you don’t have to be really cutting edge to succeed.

Ultimately, most diners enjoy reliable comfort food for everyday eating out. Very expensive, pretentious restaurants often close because the public only ever go once. Restaurants are a repeat business, and grow by word of mouth and reviews, so you need to be sure to offer customers sensible value and a friendly welcome every time. For those who have the courage to enter the catering trade I say: good luck! You will need it.

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