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The Restaurant, from concept to operation 5th edition (2007)
therestaurantfrom concept to operation ﬁfth edition John R. Walker, DBA, CHA, FMP McKibbon Professor of Hotel and Restaurant Management University of South FloridaJOHN WILEY & SONS, INC.
This book is printed on acid-free paper.Copyright 2008 by John Wiley & Sons, Inc. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except aspermitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the priorwritten permission of the Publisher, or authorization through payment of the appropriate per-copy feeto the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission shouldbe addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions.Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts inpreparing this book, they make no representations or warranties with respect to the accuracy orcompleteness of the contents of this book and speciﬁcally disclaim any implied warranties ofmerchantability or ﬁtness for a particular purpose. No warranty may be created or extended by salesrepresentatives or written sales materials. The advice and strategies contained herein may not besuitable for your situation. You should consult with a professional where appropriate. Neither thepublisher nor author shall be liable for any loss of proﬁt or any other commercial damages, includingbut not limited to special, incidental, consequential, or other damages.For general information on our other products and services, or technical support, please contact ourCustomer Care Department within the United States at 800-762-2974, outside the United States at317-572-3993 or fax 317-572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books.For more information about Wiley products, visit our Web site at http://www.wiley.comLibrary of Congress Cataloging-in-Publication Data:Walker, John R., 1944- The restaurant : from concept to operation / John R. Walker.—5thed. p. cm. Includes index. ISBN 978-0-471-74057-5 (cloth) 1. Restaurant management. I. Title. TX911.3.M27W352 2007 647.95068—dc22 2007001279Printed 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 respectedin the halls of academiaas a scholar and pioneerof hospitality and tourism education.And to you, the professors, students,and future restaurant owners,wishing you success and happiness.
contents Preface vii Acknowledgments ix part one restaurants, owners, locations, and concepts 1 Chapter 1 Introduction 3 Chapter 2 Kinds and Characteristics of Restaurants and Their Owners 18 Chapter 3 Concept, Location, and Design 53 part two business plans, ﬁnancing, and legal and tax matters 103 Chapter 4 Restaurant Business and Marketing Plans 105 Chapter 5 Financing and Leasing 136 Chapter 6 Legal and Tax Matters 175part three menu, kitchens and purchasing 205 Chapter 7 The Menu 207 Chapter 8 Planning and Equipping the Kitchen 237 Chapter 9 Food Purchasing 263 part four restaurant operations and management 281 Chapter 10 Food Production and Sanitation 283 Chapter 11 Service and Guest Relations 314 Chapter 12 Bar and Beverages 334 Chapter 13 Technology in the Restaurant Industry 360 Chapter 14 Restaurant Operations, Budgeting, and Control 383 Chapter 15 Organization, Recruiting, and Stafﬁng 409 Chapter 16 Employee Training and Development 444 Glossary 467 Index 477
prefaceOpening a restaurant is a distinct challenge. It is also a thrill that gives one theopportunity for tremendous creative expression. Developing the menu, creatinga new dish, designing the decor, attending to your level of service or establishingan ambiance—these factors all contribute to exceeding the expectations of yourguests. However, there are numerous hurdles to overcome before opening day.The good news is that with careful planning, including the writing of a solidbusiness plan, coupled with perseverance and a touch of BAM, the chancesof success are improved. The opportunity to be the boss and call the shots isappealing. To be responsible for the buzz created and orchestrated is a rush.Maybe the concept will have legs. If successful, a restaurant operator mightbecome a small-town, or even large-town, dignitary. The twenty-ﬁrst century ﬁnds the restaurant business enjoying record salesbut also rising labor and other costs. The conditions for restaurant success maychange quickly, leaving ﬁnancial scars on some operators. There are several newstyles of restaurants, and delivery of their products and services has changed aswell. Foods formerly considered exotic are now routinely accepted and expected.Taste titillation comes by offering interesting foods and ﬂavor combinations thatchallenge chefs and owners. Helping to meet the continuing restaurant challenges is the oncoming waveof students who have studied the culinary arts and restaurant management andwho view the restaurant business as a career of choice. A restaurant can befun to operate, and the proﬁt margins can be substantial. It is interesting tolearn that at least one billionaire, Tom Monaghan, made his fortune in the pizzabusiness, and that dozens of millionaires have acquired fortunes in restaurants.Some of their stories are told in this book. The chapters of The Restaurant, Fifth Edition, are organized into four parts: Part 1 Restaurants, Owners, Locations, and Concepts Part 2 Business Plans, and Financing, Legal, and Tax Matters Part 3 Menu, Kitchens, and Purchasing Part 4 Restaurant Operations and Management The chapters within the parts take the reader step-by-step through thecomplicated process of creating and opening a restaurant. For The Restaurant,Fifth Edition, there is an increased focus toward the independent restaurateur;greater emphasis has been placed on restaurant business plans. Each chapterhas been revised, updated, and enhanced with numerous industry examples,sidebars offering advice, charts, tables, photographs, and menus. All improvethe contents and look of the book. A new Chapter 10 on food production hasbeen added to this edition, and the important topic of sanitation has been
viii ■ preface brought back. Another feature new to this edition is the introduction of a proﬁle of a restaurant at the beginning of each part of the text. An Instructor’s Manual (ISBN: 978-0-470-13605-8) 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. John R. Walker, DBA, CHA, FMP McKibbon Professor of Hotel and Restaurant Management University of South Florida
acknowledgmentsFor their insightful suggestions on this and previous editions of the text,I thank Ken Rubin, CPA; Dr. Cora Gatchalian, University of the Philippines;Volker Schmitz of California Caf´ Restaurants; Dr. Jay Schrock of the University eof South Florida; Dr. Ken Crocker of Bowling Green State University; KarlEngstrom of Mesa College, San Diego; Brad Peters of Mesa College, San Diego;Dr. Andy Feinstein of University of Nevada, Las Vegas; Dr. Karl Titz, Universityof Houston; Anthony Battaglia, Glendale Community College; Dr. Paul G. Van-Landingham, Johnson and Wales University; Dan Beard, Orange Coast College;Marco Adornetto, Muskingum Area Technical College; Thomas Rosenberger,Community College of Southern Nevada; C. Gus Katsigris, El Centro College;Karl V. Bins of the University of Maryland—Eastern Shore; Marcel R. Escofﬁerof Florida International University; H. G. Parsa of The Ohio State University;and Chef John Bandman of The Art Institute of New York. Thanks to the National Restaurant Association and to the restaurants thatallowed me to include their menus or photos, and to these restaurant companiesfor their provision of resource information: Burton M. Sack, Past President of the National Restaurant Association Charlie Trotter John Horn Red Lobster Restaurants Gary Harkness TGI Friday Stephen Ananicz The Lettuce Entertain You Group The Hard Rock Caf´se 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 NCR ALOHA Technologies SYSCO Food Service
x ■ acknowledgments Aria Restaurant B Caf´e Niche Paniﬁco 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. Cafe ´B. Cafe is a Belgian-themed bistrooffering a wide variety of beer anda cuisine that is a Belgian and ´American fusion. B. Cafe has threeowners, Skel Islamaj, John P. Rees,and Omer Ipek. Islamaj and Ipek arefrom Belgium, and Rees is Ameri-can. The owners felt that there wasa niche in New York for a restaurantwith a Belgian theme. Out of all therestaurants in New York, only oneor two offered this type of concept,and they were doing well. Since twoof the owners grew up in Belgium,they were familiar and comfortablewith both Belgian food and beer. ´Today B. Cafe offers over 25 Bel-gian brand beers, and the list isgrowing. ´ Courtesy of B. CafeLOCATION ´B. Cafe is located on 75th Street in ﬁnding the right place. They came restaurant whose owner offeredNew York City. The owners looked across the location after checking to sell. According to owner Isla-for a location for two years before the area and ﬁnding a brand-new maj, going with a building that held
2 ■ part one restaurants, owners, locations, and concepts occupancy as a restaurant was ‘‘a and journalism community. Their ■ They cannot estimate their good way to control cost.’’ They pre-opening marketing consisted percentage of proﬁt (it is did some renovations and adapted of contacting old connections, ´ 0 percent so far), as the cafe what already existed. which landed them an article in a opened three weeks prior to newspaper. They recommend that this interview. anyone who is considering open- MENU ing a restaurant should send out a WHAT TURNED OUT B. Cafe’s third partner, John P. one-time press release. DIFFERENT FROM Rees (who is also the culinary direc- EXPECTED? tor and executive chef) created the CHALLENGES The sales the ﬁrst week were as menu. The men wanted a menu expected. Sales in the second week that was a fusion of Belgian and The ﬁrst main challenge for the own- went down due to the holidays. This American, but did not want to com- ´ ers of B. Cafe was ﬁnding the right was not anticipated. Other than this, promise their ethnic backgrounds. staff. They also found organizing all went as planned. They created a menu with many vendors and purchasing products options that was not too ethnic as (such as their beer) in quantity to to alienate people. By doing this be challenging because when you MOST EMBARRASSING they hope to target the mainstream. ﬁrst open, ‘‘you have to buy, buy, MOMENT and buy’’ to be sure that you have When I asked Skel Islamaj what his enough, but you don’t know what most embarrassing moment during PERMITS AND LICENSES quantities you will need. You should opening was, he responded that The building where B. Cafe is ´ also expect to go over budget. At on the day of opening, a customer located today was previously a minimum, you should take what ordered coffee. That is when ‘‘we restaurant. This made the obtain- your expected budget is and then realized that we forgot to order cof- ing of permits and licenses a bit add on a minimum 20 percent. fee!’’ There was none! All was okay easier than it would have been had though; a server went to a coffee- the building not been a restau- house and purchased some to get FINANCIAL INFORMATION rant before. Some of the licenses them through. were transferred over. The owners ´ Annual sales at B. Cafe are hired lawyers to obtain other per- expected to reach $1 million in ADVICE TO PROSPECTIVE mits and licenses needed to gain the ﬁrst year. They have about 240 ENTREPRENEURS FROM THE ´ occupancy. B. Cafe is an LLC (lim- guest covers a week. Guest checks ´ OWNERS OF B. CAFE ited liability corporation) with three average $35 per person. A break- owners. The owners of B. Cafe ´ down of sales percentages follows. 1. Understand the business strongly recommend going with a before you get into it. preestablished site when opening a ■ Percentage of sales that goes 2. Location, location, location! new restaurant. to rent: approximately 3. Believe in your business, never 9 percent give up, and be persistent. ■ Percentage of food sales: MARKETING 85 percent ´ The owners of B. Cafe were lucky ■ Percentage of beverage sales: to be well known in the food critic 15 percent
chapter 1 introductionLEARNING OBJECTIVESAfter 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 PhotoDisc/Getty Images
4 ■ chapter 1 introduction Restaurants play a signiﬁcant role in our lifestyle, and dining out is a favorite Money 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 Buyout pleasures. Eating out has become a way of life for families. Today, more meals Potential than ever are being eaten away from home. The successful restaurant offers a high return on investment. One restaurant, Challenge then two, perhaps a small chain. Retire wealthy. To be a winner requires considerable experience, planning, ﬁnancial support, and energy. Luck alsoReasons for A Place to plays a part. This book takes you from day one—that time when you dream of agoing into Socializethe restaurant—through the opening and into operation. What kind of restaurant?restaurant Quick-service, cafeteria, coffee shop, family, ethnic, casual, or luxury? Mostbusiness: Habit restaurant dreamers—perhaps too many—think of being in the middle of a restaurant with lots of guests; skilled, motivated employees; and great A Firm social interaction, food, service, and proﬁts. The kind of restaurant concept Lifestyle you select determines, to a large extent, the kind of talents required. Talent and temperament correlate with restaurant style. Managing a quick-service Express restaurant is quite different from being the proprietor of a luxury restaurant. Yourself The person who may do well with a Taco Bell franchise could be a failure in aFIGURE 1-1: Reasons for personality-style restaurant. The range of restaurant styles is broad. Each choicegoing into the restaurant makes its own demands and offers its own rewards to the operator.business 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 contemplating 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. 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. Successful restaurants can be highly proﬁtable. Few businesses can generate as much proﬁt for a given investment. 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 restaurant, 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 boughtChef-owner Bob Kinkead, of restaurants, especially small restaurant chains. The operator is oftenKinkead’s Restaurant, bought out for several million dollars, sometimes with the option ofWashington, D.C. staying on as president of his or her own chain. The older independentCourtesy of Bob Kinkead owner can choose to sell out and retire.
chapter 1 introduction ■ 5 ■ 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. ■ Love of a changing work enviornment. A number of people go into the restarant 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 continous 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 theatrical producers. They write the script, cast the characters, devise the settings, and star in their own show. The show is acclaimed or fails according 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 helpedmost ‘‘in getting where you are today,’’ the emphasis on steady, hard workcame out far ahead of any other factor. Next in line was ‘‘getting alongwith 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 jobsecurity. Opening and operating a restaurant takes dedication, high energy, ambition,persistence, and a few other ingredients discussed throughout this text. As KarlKarcher, founder of Carl’s Jr., said, in America you can easily begin a restaurantas he did, on a cart outside Dodger Stadium selling hot dogs. Then therewas Harlan Sanders, better known as Colonel Sanders, who lost his restaurant
6 ■ chapter 1 introduction (Sanders Case, known for its special graham cracker cream pie) when the highway moved and he was forced to sell his restaurant at auction to pay off his debts. He was 66 years old and down to a monthly $105 in Social Security checks when he took to the road with his ‘‘secret blend of herbs and spices,’’ his home-style pressure cooker, an old car, and a lot of motivation and sales ability. Sleeping in the back of his car at night, he traveled from restaurant to restaurant promoting his chicken and eventually sold out for big bucks. We all know about Ray Kroc, who, back in the 1950s, was selling soda fountains when one day he received a call from the McDonald brothers for two soda machines—everyone else ordered one—so he went out to California and met the brothers at the now-familiar ‘‘Golden Arches.’’ Ray was astounded not only at how busy they were and how clean the restaurant was but also by the simplicity of the operation. The brothers were content with one restaurant and had no plans to expand so Kroc, then 52, persuaded them to allow him to franchise their operation. Billions of hamburgers later, the reasons for success are quality, speed, cleanliness, service and value. ■ 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. M. Boulanger is thought to be the father of the modern restaurant. 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 law suit 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 Fr`res Provencaux opened near the e ¸ 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.
challenges of restaurant operation ■ 7■ birth of restaurants in AmericaThe term restaurant came to the United States in 1794 via a French refugeefrom the guillotine, Jean-Baptiste Gilbert Paypalt. Paypalt set up what must havebeen the ﬁrst French restaurant in this country, Julien’s Restaurator, in Boston.There he served trufﬂes, cheese fondues, and soups. The French inﬂuenceon American cooking began early; both Washington and Jefferson were fondof French cuisine, and several French eating establishments were opened inBoston by Huguenots who ﬂed France in the eighteenth century to escapereligious persecution. Delmonico’s, located in New York City, is thought to be the ﬁrst restaurantin America. Delmonico’s opened its doors in 1827. This claim is disputed byothers. The story of Delmonico’s and its proprietors exempliﬁes much aboutfamily-operated restaurants in America. Few family restaurants last more thana generation. The Delmonico family was involved in nine restaurants from1827 to 1923, spanning four generations. Delmonico’s continued to prosperwith new owners until the ﬁnancial crash of 1987 forced it to close, and themagniﬁcent old building sat boarded up for most of the 1990s. Delmonico’s hassince undergone renovations to restore the restaurant to its former brilliance.Restaurants bearing the Delmonico name once stood for what was best in theAmerican French restaurant. With most family restaurants, the name and the business fade into history.The last of the family-owned Delmonico restaurants, at 44th Street and FifthAvenue in New York City, closed in humiliation and bankruptcy during theearly years of Prohibition. Prior to the American Revolution, places selling food, beverages, and a placeto sleep were called ordinaries, taverns, or inns. Rum and beer ﬂowed freely. Afavorite 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. Flipswere considered both food and a drink. If customers had one too many ﬂips,the ordinaries provided a place to sleep, as mentioned.■ challenges of restaurant operationLong working hours are the norm in restaurants. Some people like this;others get burned out. Excessive fatigue can lead to general health problemsand susceptibility to viral infections, such as colds and mononucleosis. Manyrestaurant operators have to work 70 hours or longer per week, too long for manypeople to operate effectively. Long hours mean a lack of quality time with family,particularly when children are young and of school age. Restaurant owners havelittle 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
8 ■ chapter 1 introduction 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 restaurant failure endangers a family’s ﬁnancial security because collateral, such as a home, is also lost. Potential restaurateurs must consider whether their personality, temperament, and abilities ﬁt the restaurant business. A few years ago, a well-known and highly successful football coach 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. Operating a restaurant demands lots of energy and stamina. Successful restaurant 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 weekend 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 restau- rant 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 the restaurants opened; some studies obtain their data from other sources, including the Yellow Pages. Parsa adds that many restaurants
buy, build, franchise, or manage? ■ 9close not because they did not succeed ﬁnancially, but because of personalreasons involving the owner or owners.1 If a restaurant survives for three years,its chances of continued operation are high. This suggests that in buying arestaurant, you should choose one that is more than three years old. One reason family-owned restaurants survive the start-up period is thatchildren and members of the extended family can pitch in when needed andwork at low cost. Presumably, also, there is less danger of theft by familymembers than from employees who are not well known. Chain restaurantowners reduce the risk of start-up by calling on experienced and trustedpersonnel from existing units in the chain. Even restaurants started by familiesor chains, however, cannot be certain of a sufﬁcient and sustainable market forsuccess. When a new restaurant opens in a given area, it must share the marketwith existing restaurants unless the population or the per-capita income of thearea is increasing fast enough to support it. Many restaurants fail because of family problems. Too many hours are spentin the restaurant, and so much energy is exerted that there is none left for abalanced family life. These factors often cause dissatisfaction for the spouse and,eventually, divorce. In states such as California, where being married meanshaving communal property, the divorce settlement can divide the couple’sassets. If a divorcing spouse has no interest in the restaurant but demands halfof the assets, a judgment of the cost can force a sale of the operation. When a husband and wife operate a restaurant as a team, both mustenjoy the business and be highly motivated to make it successful. These traitsshould be determined before the ﬁnal decision is made to ﬁnance and enter thebusiness.■ buy, build, franchise, or manage?A person considering the restaurant business has several career and investmentoptions: ■ To manage a restaurant for someone else, either an individual or a chain ■ To purchase a franchise and operate the franchise restaurant ■ To buy an existing restaurant, operate it as is, or change its concept ■ To build a new restaurant and operate it In comparing the advantages and disadvantages of buying, building, fran-chising, and working as a professional manager, individuals should assess theirown temperament, ambitions, and ability to cope with frustrations as well asthe different risks and potential rewards. On one hand, buying a restaurant maysatisfy an aesthetic personal desire. If the restaurant is a success, the rewardscan be high. If it fails, the ﬁnancial loss is also high, but usually not as high as itwould have been if the investment were made in a new building. When buyingan existing restaurant that has failed or is for sale for some other reason, the
10 ■ chapter 1 introduction purchaser has information that a builder lacks. The buyer may know that the previous style of restaurant was not successful in that location or that a certain menu or style of management was unsuccessful. 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 Career & who builds from scratch is taking a great risk. Investment Options Million-dollar investments in restaurants are fairly common. Finding investors who are ready to join in does not reduce that risk. Buy & Build & A 100-seat restaurant, fully equipped, costs any- Manage a Purchase & Operate an Operate a Restaurant Operate a where from $6,000 to $10,000 or more per seat, or Existing New in Operation Franchise Restaurant Restaurant $600,000 to $1 million. In addition, a site must beFIGURE 1-2: Restaurant career and investment options bought or leased. Examples can be given of inexperi- enced 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.’’ 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. 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 suc- cessful 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. 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.
buy, build, franchise, or manage? ■ 11 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 mediumFIGURE 1-3: Buy, build, franchise, or manage—advantages and disadvantagesThe Beach Bistro, Anna Maria Island, Sean Murphy’s award-winning restaurantCourtesy of Sean Murphy The person planning a new dinner house should know that even hugecompanies like General Mills can make big mistakes. Once owner of twoproﬁtable dinner house chains, Olive Garden and Red Lobster, General Millsbombed with Chinese, steak, and health-food restaurants. The small operator lacks the purchasing power of the chain, which can saveas much as 10 percent on food costs through mass purchasing. The new operatoris usually unsophisticated in forecasting. Compare this with Red Lobster’ssystem, which provides the manager with the number of each menu item to beprepared the next day. Each night, the manager uses a computer ﬁle on salesrecords to forecast the next day’s sales. Based on what was served on the same
12 ■ chapter 1 introduction 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 pre-prepped 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. City Zen Restaurant table view Courtesy of City Zen 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
starting from scratch ■ 13grilled no more than four or ﬁve minutes on a side with the grill set at 450◦ F.A one-pound lobster is steamed for 10 minutes. In chains, illustrated diagramstell cooks where to place a set number of parsley sprigs on the plate. Individual operators can institute similar serving-temperature and cookingcontrols. They may be able to do a better job of plate presentation than chainunit managers can. Independent operators can develop a personal following andappeal to a niche market among customers who are bored with chain operatorsand 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 prepa-ration) and of delivery (takeout). Food is a unique product because in orderto experience the exact taste again, the customer must return to the samerestaurant. The atmosphere is important to the patrons. Some would argue thatrestaurants are in the business of providing memorable experiences. Successfulrestaurateurs are generally streetwise, savvy individuals, as evidenced in TheLife of the Restaurateur, attributed to a consummate restaurateur, DominiqueChapeau, 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 panderes. 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 footballer, 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. He must always look immaculate—when drinking with ladies and gentlemen, as well as bankers, swank people, actors, commercial travelers, and company representatives, even though he has just made peace between any two, four, six, or more of the aforementioned patrons. To be successful, he must keep the bar full, the house full, the stateroom full, the wine cellar full, the customers full, yet not get full himself. He must have staff who are clean, honest, quick workers, quick thinkers, nondrinkers, mathematicians, technicians, and who at all times must be on the boss’s side, the customer’s side, and must stay on the outside of the bar. In summary, he must be outside, inside, offside, gloriﬁed, sanctiﬁed, cruciﬁed, stupidiﬁed, cross-eyed, and if he’s not the strong, silent type, there’s always suicide!2■ starting from scratchOccasionally a faculty colleague from another discipline (usually arts andscience) says that he or she is thinking of opening up a restaurant and do I haveany advice. My reply is: ‘‘Let me bring a few of my friends over to your house
14 ■ chapter 1 introduction for dinner for the next month, and then after that we’ll talk about it.’’ So far, no takers. Joking apart, doing all it takes to prepare 100 meals or more night in and night out is very different from having a few friends over for dinner because, for one thing, there are multiple choices on the menu. Would-be restaurant operators may have already worked in their family’s restaurant, perhaps starting at an early age. Hundreds of thousands of aspiring restaurant operators have tasted the restaurant business as employees of quick-service restaurants. For others, their ﬁrst food business experience was in one of the 740 cooking school programs offered in vocational school or community college programs or at cooking institutes. Yet the industry still does not have nearly enough employees, and turnover rate is high. The tens of thousands of young people who work in restaurants know that, but also welcome the experience and enjoy working with other young people who never consider the job as a career. One message comes through loud and clear: The restaurant business is highly competitive and requires inordinate energy, the ability to work long hours, and the willingness to accept a low salary. According to the National Restaurant Association, the restaurant industry is expected to add 1.9 million jobs by 2016, for total employment of 14.4 million in 2016.3 The cost of attending culinary training programs varies from none, at the many public high school programs offered around the country, to the $27,750 charged by New York City’s French Culinary Institute for a six-month course (this includes uniforms, tools, and books). The Culinary Institute of America offers a two-year associate degree program at $8,470 for freshman/sophomore and $6,090 for junior/senior years; uniforms, tools, and books are extra. A number of strong apprenticeship programs are offered by the American Culinary Federation and local community colleges, as well as by area chefs in restaurants, hotels, and clubs. Following the European tradition, students who wish to become known as master chefs often seek jobs at the name restaurants in big cities, such as New York, Atlanta, Baltimore, Chicago, Orlando, Las Vegas, Houston, New Orleans, San Francisco, and Los Angeles. Many go abroad for the same reason, building their skills and rounding out personal resumes. ■ restaurants as roads to riches Probably the biggest reason thousands of people seek restaurant ownership is the possible ﬁnancial rewards. With relatively few ﬁnancial assets, it is possible to buy or lease a restaurant or to purchase a franchise. Names like Ray Kroc of McDonald’s, Colonel Sanders of KFC chicken, and Dave Thomas of Wendy’s exemplify the potential success one can experience in the restaurant business. Dozens of McDonald’s franchise holders are multimillionaires, yet some McDonald’s restaurants fail. Some owners and franchisees of KFC stores are also wealthy. A surprise billionaire is Tom Monaghan, the Domino Pizza
summary ■ 15entrepreneur. Hundreds of lesser-known people are also making it big, some bybuilding or buying restaurants, others by becoming franchisees. Here are some of the things this book will help you with: ■ Ownership. Sole proprietorship, partnership, company or franchise. ■ Development of a business plan. A good business plan may take a while to develop, but you’re not going to obtain ﬁnancing without one. ■ Marketing/Sales. You need to know who your guests will be and how many there are of them. ■ Location. Will your location be freestanding, in a mall or a city center, suburban, or something else? ■ Who is on your team?. Your chef and staff, lawyer, accountant, insurance, sales, marketing and public relations. ■ Design/Ambiance. What design/ ambiance will you select? ■ Menu. What will your menu feature? How many appetizers, entr´es, and e desserts will you offer? ■ Beverages. Who will develop your beverage menu, and what will be on it? ■ Legal. What permits do you need? ■ Budgets. What will your budget look like? ■ Control. What kind of control system will you have, and how will it work? ■ Service. What style of service will you select and how will it operate? ■ Management. How will your restaurant operate?■ summaryEarlier we mentioned some of the things this book will help you with. Thepurpose of this book is to take the would-be restaurateur through the stepsnecessary to open a successful restaurant. Sitting in a busy restaurant can bea fascinating experience. Food servers move deftly up and down aisles andaround booths; guests are greeted and seated, orders are placed and picked up,the cashier handles a steady stream of people paying their bills and leaving. Theﬂow of customers, the warm colors, and the lighting create a feeling of comfortand style. Food servers are usually young, enthusiastic, and happy; the broiler cookstend to their grilling and sandwich making with a ﬁerce concentration. Foodorders are slipped onto a revolving spindle to be taken in succession or pop upon the electronic printer in the kitchen; the orders are prepared, plated, andplaced on the pickup counter. A silent buzzer informs the food server that anorder is ready. The entire operation could be likened to a basketball team inaction, a ballet of movement. Among the players, the restaurant personnel, the emotional level is high.This ensures that each player performs his or her assigned role, one player’sactions meshing with those of the other players. The observer may perceive anelaborate choreography paced to the desires of the customer; the restaurant is
16 ■ chapter 1 introduction orchestrated and led by a conductor, the ﬂoor manager. How intricate, how simple, how exciting, how pleasurable—perhaps. When the characters are in their places, know their assigned roles, and perform with enthusiasm, the restaurant operates smoothly and efﬁciently. To keep it that way means attention to detail and to the product, its preparation, its service; the personnel, their training and morale; cooking equipment, its maintenance and proper use; cleanliness of people, the place—and don’t forget the toilets. A hundred things can go wrong, any one of which can break the spell of a satisfying restaurant experience for the guest. Most responsible positions require that the jobholder control a number of variables. Many jobs require precise timing and deadlines, but few are conducted in settings that, as in a restaurant operation, feature one deadline followed by another, on and on, around the clock, every day of the week. Few jobs have the degree of staff turnover found in a restaurant. Few jobs require the attention to detail, the constant training of staff, the action, the movement, the reaction to and the attempt to satisfy the multitude of personalities appearing as customers and staff, day after day, week after week, year after year. The variables that must be controlled to ensure a smoothly operating restaurant can be overwhelming; the restaurant can, indeed, become a multivariate nightmare. Good luck on your way to becoming a small-town or, perhaps, a large-town, dignitary! key terms and concepts Franchise Quality control Restaurant concept review questions 1. Give three reasons why someone would want to own and operate a restaurant. 2. Success in any business requires effort, perseverance, self-discipline, and ability. What other personality traits are especially important in the restaurant business? 3. In entering the restaurant business as an owner/operator, the individual has a choice of buying, building, or franchising. Which would you choose for minimizing risks? For expressing your own personality? For maximizing return on investment? 4. How important do you think it is to have restaurant experience before entering the business as an owner/operator? 5. Give three reasons people patronize restaurants.
summary ■ 17internet exercises1. Search for a popular franchised restaurant’s home page. Find out how much it costs to obtain a franchise and how much you would need to pay in royalties and other costs to maintain the franchise.2. Use a search engine (check with your library, if necessary) to ﬁnd the article entitled ‘‘How to Start Restaurant’’ by Entreprenuer.com. Be prepared to discuss this article in class.endnotes1. H. G. Parsa, presentation at the ICHRIE Conference 2003, Indian Wells, California, August 2003.2. Personal correspondence with Holly Carvalho. November 17, 2006.3. www.restaurant.org.
chapter 2 kinds and characteristics of restaurants and their ownersLEARNING OBJECTIVESAfter reading and studying this chap-ter, you should be able to:■ List and describe the various kinds and characteristics of restaurants.■ Compare and contrast chain, franchised, and independent restaurant operations.■ Describe the advantages and disadvantages of chef-owned restaurants.■ Deﬁne what a centralized home delivery restaurant is and what it offers.Courtesy of Aria
kinds and characteristics of restaurants ■ 19■ kinds and characteristics of restaurantsBroadly speaking, restaurants can be segmented into a number of categories: ■ Chain or independent (indy) and franchise restaurants. McDonald’s, Union Square Caf´, or KFC e ■ Quick service (QSR), sandwich. Burger, chicken, and so on; convenience store, noodle, pizza ■ Fast casual. Panera Bread, Atlanta Bread Company, Au Bon Pain, and so on ■ Family. Bob Evans, Perkins, Friendly’s, Steak ’n Shake, Wafﬂe House ■ Casual. Applebee’s, Hard Rock Caf´, Chili’s, TGI Friday’s e ■ Fine dining. Charlie Trotter’s, Morton’s The Steakhouse, Flemming’s, The Palm, Four Seasons ■ Other. Steakhouses, seafood, ethnic, dinner houses, celebrity, and so on Of course, some restaurants fall into more than one category. For example,an Italian restaurant could be casual and ethnic. Leading restaurant conceptsin terms of sales have been tracked for years by the magazine Restaurants andInstitutions. Their 2005 survey of the top 400 restaurants in sales is summarizedin Figure 2-1. It shows burgers and pizza leading in sales, followed by casualdining and chicken restaurants. Ranking Concept Sales (in millions) 1 Burgers $82,301.6 2 Casual Dining $22,840.7 3 Pizza $20,943.1 4 Chicken $18,674.0 5 Sandwiches/Bakery-Cafe ´ $17,697.4 6 Doughnuts, Ice Cream, and Treats $13,747.7 7 Family Dining $13,536.8 8 Steak/Barbecue $8,607.1 9 Mexican: Limited service $8,439.0 10 Italian $6,442.6 11 Buffet/Cafeteria $6,165.6 12 Seafood: Full service $4,253.4 13 Coffee/Tea $4,442.3 14 Convenience Stores $4,314.5 15 Mexican: Full service $1,747.0 FIGURE 2-1: Top 400 16 Seafood: Limited service $1,315.0 segment ratings 17 Asian: Full service $1,054.5 Source: ‘‘Top 400 Segment 18 Asian: Limited service $879.6 Rankings,’’ Hospitality Magazine, January 13, 2006
20 ■ chapter 2 kinds and characteristics of restaurants and their owners CHAIN OR INDEPENDENT The impression that a few huge quick-service chains completely dominate the restaurant business is misleading. Chain restaurants have some advantages and some disadvantages over independent restaurants. The advantages include: ■ Recognition in the marketplace ■ Greater advertising clout ■ Sophisticated systems development ■ Discounted purchasing When franchising, various kinds of assistance are available, which is discussed later in the chapter. Independent restaurants are relatively easy to open. All you need is a few thousand dollars, a knowledge of restaurant operations, and a strong desire to succeed. The advantage for independent restaurateurs is that they can ‘‘do their own thing’’ in terms of concept development, menus, decor, and so on. Unless our habits and taste change drastically, there is plenty of room for independent restaurants in certain locations. Restaurants come and go. Some independent restaurants will grow into small chains, and larger companies will buy out small chains. Once small chains display growth and popularity, they are likely to be bought out by a larger company or will be able to acquire ﬁnancing for expansion. A temptation for the beginning restaurateur is to observe large restaurants in big cities and to believe that their success can be duplicated in secondary cities. Reading the restaurant reviews in New York City, Las Vegas, Los Angeles, Chicago, Washington, D.C., or San Francisco may give the impression that unusual restaurants can be replicated in Des Moines, Kansas City, or Main Town, USA. Because of demographics, these high-style or ethnic restaurants will not click in small cities and towns. FRANCHISED RESTAURANTS Franchising is a possible option for those who lack extensive restaurant experience and yet want to open up a restaurant with fewer risks than starting up their own restaurant from scratch. Or, if you’re a go-getter, you can open up your own restaurant, then another, and begin franchising. Remember that franchisors (the company franchising the rights to you and others) want to be sure that you have what it takes to succeed. They will need to know if you: ■ Share the values, mission, and ways of doing business of the franchisor ■ Have been successful in any other business ■ Possess the motivation to succeed ■ Have enough money not only to purchase the rights but also to set up and operate the business ■ Ability to spend lots of time on your franchise
kinds and characteristics of restaurants ■ 21 ■ Will go for training from the bottom up and cover all areas of the restaurant’s operation Franchising involves the least ﬁnancial risk in that the restaurant format,including building design, menu, and marketing plans, already have been testedin the marketplace. Franchise restaurants are less likely to go belly up than independentrestaurants. The reason is that the concept is proven and the operatingprocedures are established with all (or most) of the kinks worked out. Trainingis provided, and marketing and management support are available. The increasedlikelihood of success does not come cheap, however. There is a franchising fee,a royalty fee, advertising royalty, and requirements of substantial personal networth. For those lacking substantial restaurant experience, franchising may be away to get into the restaurant business—providing they are prepared to startat the bottom and take a crash training course. Restaurant franchisees areentrepreneurs who prefer to own, operate, develop, and extend an existingbusiness concept through a form of contractual business arrangement calledfranchising.1 Several franchises have ended up with multiple stores and madethe big time. Naturally, most aspiring restaurateurs want to do their ownthing—they have a concept in mind and can’t wait to go for it. Here are samples of the costs involved in franchising: ■ A Miami Subs traditional restaurant has a $30,000 fee, a royalty of 4.5 percent, and requires at least ﬁve years’ experience as a multi-unit oper- ator, a personal/business equity of $1 million, and a personal/business net worth of $5 million.2 ■ Chili’s requires a monthly fee based on the restaurant’s sales performance (currently a service fee of 4 percent of monthly sales) plus the greater of (a) monthly base rent or (b) percentage rent that is at least 8.5 percent of monthly sales.3 ■ McDonald’s requires $200,000 of nonborrowed personal resources and an initial fee of $45,000, plus a monthly service fee based on the restaurant’s sales performance (about 4 percent) and rent, which is a monthly base rent or a percentage of monthly sales. Equipment and preopening costs range from $461,000 to $788,500.4 ■ Pizza Factory Express Units (200 to 999 square feet) require a $5,000 franchise fee, a royalty of 5 percent, and an advertising fee of 2 percent. Equipment costs range from $25,000 to $90,000, with miscellaneous costs of $3,200 to $9,000 and opening inventory of $6,000.5 ■ Earl of Sandwich has options for one unit with a net worth requirement of $750,000 and liquidity of $300,000; for 5 units, a net worth of $1 million and liquidity of $500,000 is required; for 10 units, net worth of $2 million and liquidity of $800,000. The franchise fee is $25,000 per location, and the royalty is 6 percent.6
22 ■ chapter 2 kinds and characteristics of restaurants and their owners 100th anniversary photo, Columbia, Tampa, Florida Courtesy of Columbia Restaurant What do you get for all this money? Franchisors will provide: ■ Help with site selection and a review of any proposed sites ■ Assistance with the design and building preparation ■ Help with preparation for opening ■ Training of managers and staff ■ Planning and implementation of pre-opening marketing strategies ■ Unit visits and ongoing operating advice There are hundreds of restaurant franchise concepts, and they are not without risks. The restaurant owned or leased by a franchisee may fail even though it is part of a well-known chain that is highly successful. Franchisers also fail. A case in point is the highly touted Boston Market, which was based in Golden, Colorado. In 1993, when the company’s stock was ﬁrst offered to the public at $20 per share, it was eagerly bought, increasing the price to a high of $50 a share. In 1999, after the company declared bankruptcy, the share price sank to 75 cents. The contents of many of its stores were auctioned off at a fraction of their cost.7 Fortunes were made and lost. One group that did not lose was the investment bankers who put together and sold the stock offering and received a sizable fee for services. The offering group also did well; they were able to sell their shares while the stocks were high.
kinds and characteristics of restaurants ■ 23 Quick-service food chains as well-known as Hardee’s and Carl’s Jr. havealso gone through periods of red ink. Both companies, now under one ownercalled CKE, experienced periods as long as four years when real earnings, asa company, were negative. (Individual stores, company owned or franchised,however, may have done well during the down periods.) There is no assurance that a franchised chain will prosper. At one time in themid-1970s, A&W Restaurants, Inc., of Farmington Hills, Michigan, had 2,400units. In 1995, the chain numbered a few more than 600. After a buyout thatyear, the chain expanded by 400 stores. Some of the expansions took place innontraditional locations, such as kiosks, truck stops, colleges, and conveniencestores, where the full-service restaurant experience is not important. A restaurant concept may do well in one region but not in another. Thestyle of operation may be highly compatible with the personality of one operatorand not another. Most franchised operations call for a lot of hard work andlong hours, which many people perceive as drudgery. If the franchisee lackssufﬁcient capital and leases a building or land, there is the risk of paying morefor the lease than the business can support. Relations between franchisers and the franchisees are often strained, evenin the largest companies. The goals of each usually differ; franchisers wantmaximum fees, while franchisees want maximum support in marketing andfranchised service such as employee training. At times, franchise chains getinvolved in litigation with their franchisees. As franchise companies have set up hundreds of franchises across America,some regions are saturated: More franchised units were built than the area cansupport. Current franchise holders complain that adding more franchises servesonly to reduce sales of existing stores. Pizza Hut, for example, stopped sellingfranchises except to well-heeled buyers who can take on a number of units. Overseas markets constitute a large source of the income of severalquick-service chains. As might be expected, McDonald’s has been the leaderin overseas expansions, with units in 119 countries. With its roughly 30,000restaurants serving some 50 million customers daily, about half of the company’sproﬁts come from outside the United States. A number of other quick-service chains also have large numbers of fran-chised units abroad. While the beginning restaurateur quite rightly concentrateson being successful here and now, many bright, ambitious, and energeticrestaurateurs think of future possibilities abroad. Once a concept is established, the entrepreneur may sell out to a franchiseror, with a lot of guidance, take the format overseas via the franchise. (It is follyto build or buy in a foreign country without a partner who is ﬁnancially secureand well versed in the local laws and culture.) The McDonald’s success story in the United States and abroad illustratesthe importance of adaptability to local conditions. The company opens unitsin unlikely locations and closes those that do not do well. Abroad, menus aretailored to ﬁt local customs. In the Indonesia crisis, for example, french friesthat had to be imported were taken off the menu, and rice was substituted.
24 ■ chapter 2 kinds and characteristics of restaurants and their owners Reading the life stories of big franchise winners may suggest that once a franchise is well established, the way is clear sailing. Thomas Monaghan, founder of Domino Pizza, tells a different story. At one time, the chain had accumulated a debt of $500 million. Monaghan, a devout Catholic, said that he changed his life by renouncing his greatest sin, pride, and rededicating his life to ‘‘God, family, and pizza.’’ A meeting with Pope John Paul II had changed his life and his feeling about good and evil as ‘‘personal and abiding.’’ Fortunately, in Mr. Monaghan’s case, the rededication worked well. There are 7,096 Domino Pizza outlets worldwide, with sales of about $3.78 billion a year. Monaghan sold most of his interest in the company for a reported $1 billion and announced that he would use his fortune to further Catholic church causes. In the recent past, most food-service millionaires have been franchisers, yet a large number of would-be restaurateurs, especially those enrolled in university degree courses in hotel and restaurant management, are not very excited about being a quick-service franchisee. They prefer owning or manag- ing a full-service restaurant. Prospective franchisees should review their food experience and their access to money and decide which franchise would be appropriate for them. If they have little or no food experience, they can con- sider starting their restaurant career with a less expensive franchise, one that provides start-up training. For those with some experience who want a proven concept, the Friendly’s chain, which began franchising in 1999, may be a good choice. The chain has more than 700 units. The restaurants are considered family dining and feature ice cream specialties, sandwiches, soups, and quick- service meals. Let’s emphasize this point again: Work in a restaurant you enjoy and perhaps would like to emulate in your own restaurant. If you have enough experience and money, you can strike out on your own. Better yet, work in a successful restaurant where a partnership or proprietorship might be possible or where the owner is thinking about retiring and, for tax or other reasons, may be willing to take payments over time. Franchisees are, in effect, entrepreneurs, many of whom create chains within chains. McDonald’s had the highest system-wide sales of a quick-service chain, followed by Burger King. Wendy’s, Taco Bell, Pizza Hut, and KFC came next. Subway, as one among hundreds of franchisers, gained total sales of $3.9 billion. There is no doubt that 10 years from now, a listing of the companies with the highest sales will be different. Some of the current leaders will experience sales declines, and some will merge with or be bought out by other companies—some of which may be ﬁnancial giants not previously engaged in the restaurant business. THE SUBWAY STORY One major franchise that requires a low investment and offers a range of possible locations to franchisees is Subway, owned by Doctor’s Associates, a Florida corporation with headquarters in Milford, Connecticut. Started in 1965,
kinds and characteristics of restaurants ■ 25Subway has more than 25,278 units in 83 countries and annual sales exceeding$3.9 billion. Franchisee responsibilities include:8 ■ Paying a franchise fee ■ Improving the leasehold ■ Leasing or purchasing equipment ■ Hiring employees and operating the store ■ Paying 8 percent royalty to company (weekly) ■ Paying 2.5 to 3.5 percent advertising fee (weekly) ■ Paying additional advertising fees if the local market elects to participate in the program In return, the company promises to provide these beneﬁts: ■ Access to product formulas and operational systems ■ Site evaluation ■ Training program at headquarters ■ Operations manual ■ Representative on site during opening ■ Periodic evaluations and ongoing support ■ Informative publications ■ Marketing and advertising support Subway publishes a franchise-offering circular for prospective franchisersthat includes the names, addresses, and phone numbers of active franchiseholders, listed by state. Subway encourages the prospective franchise buyer tovisit and observe the restaurant in which they are training. One of the many Subway Restaurant franchises Courtesy of Subway
26 ■ chapter 2 kinds and characteristics of restaurants and their owners The initial fee is $15,000 for ﬁrst-time franchise buyers. This fee is reduced to $4,000 for qualiﬁed owners purchasing additional franchises. Total initial invest- ment by the franchisee ranges from $94,300 to $222,800, depending on location and equipment needs. Figure 2-2 shows the capital requirements for traditional locations. Nontraditional locations may require considerably less capital. Subway units are located in a wide range of sites that include schools, colleges, ofﬁces, hospitals, airports, military bases, grocery stores, and truck stops—even casinos. Most remarkable is the company’s statement that less than 1 percent of the units fail, which is partly accounted for by franchise holders’ options to sell their unit or resell it to the company.9 Depending on company approval, the location, hours of operation, and additional food items offered are ﬂexible. The standard Subway menu, however, cannot be omitted. No one should purchase a Subway franchise—or any other restaurant— without backup learning and experience. Subway franchise buyers attend the Franchise Training Program at headquarters at their own expense. Some 2,000 franchisees each year attend the two-week course covering manage- ment, accounting and bookkeeping, personnel management, and marketing. Lower-Cost Moderate-Cost Higher-Cost General Breakdowns Store Store Store When Due Initial Franchise Fee $15,000 $15,000 $15,000 upon signing franchise agreement Real Property 2,000 5,000 12,000 upon signing intent to sublease Leasehold Improvements 40,000 75,000 100,000 paid pro rata during construction Equipment Lease Security Deposit 3,000 5,000 7,500 before equipment is ordered Security System (not including 1,000 2,500 6,000 before order is placed monitoring costs) Freight Charges (varies by location) 2,000 3,750 4,000 on delivery Outside Signage 2,000 4,000 8,000 before order is placed Opening Inventory 4,000 4,750 5,500 within 1 week of opening Insurance 800 1,500 2,500 before opening Supplies 500 900 1,300 before opening Training Expenses (including travel 1,500 2,500 3,500 during training and lodging) Legal and Accounting 500 2,000 3,500 before opening Opening Advertising 2,500 3,250 4,000 around opening Miscellaneous Expenses (business 4,000 6,000 8,000 as required licenses, utility deposits, small equipment, and surplus capital) Additional Funds—3 months 12,000 26,000 41,000 as required Total Investment $92,050 $157,650 $222,800 N/A FIGURE 2-2: Subway franchise capital requirements (U.S. dollars as of April 2006) Source: www.subway.com, September 17, 2006.
kinds and characteristics of restaurants ■ 27On-the-job training in nearby Subway restaurants is scheduled as well, totaling34 in-store hours. Three to four trainees are assigned to a training restaurant. The buyer pays a weekly franchise fee of 8 percent and a 3.5 percentadvertising fee based on sales. The buyer has the option of life insurance; healthinsurance is another purchase option. Each franchise buyer gets a copy of aconﬁdential operations manual containing about 580 pages.Menu Selection Subway’s ﬂexibility in offering service in various types oflocations is also seen in the kinds of food offered: submarine sandwiches,salads, cookies, a low-fat menu featuring sandwiches with less than 6 grams offat, and a low-carb option featuring wraps. Subway features bread items that are prepared from frozen dough andserved fresh from the oven. The frozen dough is thawed in a retarder unit ina refrigerator. The bread rises in a proofer and is then baked in a convectionoven, in which a fan speeds the baking process. Bread formulas are speciﬁedat company headquarters and uniformly followed worldwide. Fresh-bakedgoods include white and wheat scored bread, deli-style rolls, wraps, breakfastselections (at some stores), cookies, and specialty items such as apple pie.Subway History The Subway story began when Fred DeLuca, its cofounder,was 17 years old. He and a family friend, Dr. Peter Buck, worked together ona business plan for a submarine sandwich shop. It took them four hours toproduce and was implemented with a loan of $1,000 from Dr. Buck. The ﬁrst restaurant was opened in Bridgeport,Connecticut, in 1965. It did well in its ﬁrst summer Quickwith the help of advertising slogans like ‘‘Put a foot in Serviceyour mouth,’’ emphasizing the foot-long sandwich, Familyand ‘‘When you’re hungry, make tracks for Subway.’’ DiningWhen summer ended, so did most of its sales. Dr. BroadBuck suggested opening a second restaurant. ‘‘That Classifications Casualway people will see us expanding and think that of Restaurants Diningwe’re successful.’’ It was not until they had ﬁvestores and better locations that the stores began Dinnermaking money. House DeLuca has changed the company’s system offranchise development several times over the years Fine Diningand has kept the concept simple and relatively inex-pensive for franchise buyers. FIGURE 2-3: Broad classiﬁcations of restaurantsQUICK-SERVICE RESTAURANTSAmericans in a hurry have often opted for quick-service food. The ﬁrst knownquick-service restaurant (QSR) dates back to the 1870s, when a New YorkCity foodservice establishment called the Plate House served a quick lunch inabout 10 minutes. Patrons then gave up their seats to those waiting. Today,
28 ■ chapter 2 kinds and characteristics of restaurants and their owners many quick-service restaurants precook or partially cook food so that it can be ﬁnished off quickly. Seconds count in quick-sevice establishments. The challenge for the quick-service operator is to have the staff and product ready to serve the maximum number of customers in the least amount of time. The QSR segment drives the industry and includes all restaurants where the food is paid for before service. QSRs offer limited menus featuring burgers, chicken in many forms, tacos, burritos, hot dogs, fries, gyros, teriyaki bowls, and so on. Guests order at a brightly lighted counter over which are color photographs of menu items and prices. Guests may serve themselves drinks and seasonings from a nearby counter, then pick up their own food on trays.E THE NORMAN BRINKER STORY Norman Brinker, chief executive there is something new in style. you’ll never work a day in your life. ofﬁcer (CEO) of Brinker Inter- Bennigan’s, for example, became Make work like play—and play like national, climbed the corporate known for the plants arranged hell.’’ ladder with ambition and ability. around its bar. Brinker believes President of the then-ﬂedgling restaurants have a seven-year Jack-in-the-Box burger chain, he life cycle, after which they need started his own company, Steak a major change. The original and Ale, which was bought out concept, he says, gets tired. by Pillsbury. Brinker became the Upgrading, however, must be largest stockholder of that com- ongoing. pany as well as executive vice Brinker’s type of casual din- president and board member. He ing restaurants lend themselves went on to become CEO of Chili’s to rapid expansion via franchise, and, ﬁnally, head of Brinker Inter- joint venture with ﬁnancial partners, national, which now numbers more or issuing new public stock with than 1,000 restaurants worldwide. which to buy other restaurants. Brinker is credited with leading Brinker, very athletic and an much of the growth of the casual avid horseman, suffered a dev- dining sector of the restaurant astating polo accident in 1993. business, including Steak and Ale, He was in a coma for two and Bennigan’s, Romano’s Macaroni a half weeks and suffered par- Grill, and Chili’s. Similar casual tial paralysis. With physical ther- Chili’s is one of the successful dining restaurants opened in the apy and prodigious determina- concepts developed by Norman Brinker 1980s, characterized by table tion, he recovered completely. Courtesy of Chili’s Grill and Bar service often provided by college Today Brinker gives addresses students, bright cheerful decor, on leadership and on making life Source: Norman Brinker and Don- and moderate prices—a step an adventure. Take risks, he says. ald Phillips, On the Brink (Arlington, above the fast-food level. Often ‘‘If you have fun at what you do, TX: Summit Publishing Group, 1996)