March 5, 2019 |
Murad AlNasur wrote an excellent article on this website stating that the restaurant industry was in trouble, and that the lack of operator integrity was the root cause of the demise and not the frequently claimed issue of over-saturation. This interesting observation led me to think about operators and their attitude towards investors.
It strikes me that F&B is trendy at the moment; investors want to enter the market and are easy prey for operators who claim to be able to deliver outstanding returns and bragging rights of owning the coolest place in town. After all, an investor would rather own a sparkling tossfest in a brand new development as opposed to a chain of lower-end restaurants in the seedier parts of town. Where is the glamour in that? You don’t want to tell your suited chums in the bank that you own a share in a profitable chain of dives, do you?
But the cunning operator knows how to feed off the investor’s ego while simultaneously driving his own desire for fame and success. He conveniently adopts the position of higher knowledge and feeds in information to make the concept look great and a sure success.
So why don’t we look at the items that the investor is not told?
1. The working capital they have allocated isn’t enough. It never is. Sir Richard Branson’s wise words were that whatever working capital you think you need, triple it. But how many investors are given the true cost of working capital in the first place? Not many, as it is too scary.
2. Operators have overspent on capital or under-estimated the capital because restaurants are establishments that feed the egos of the operator, the interior designer and the chef. These three will go into a spend overdrive to obtain the best wood-fired grill, the largest chandelier and the finest armchairs in their exclusive whiskey and cigar lounge. All of which the non-existent customer will not pay for.
3. Operators haven’t done any research into what the customer wants because most restaurants are internally conceptualised and rubber-stamped. The operators who think they know best are the ones who fail in the basics of business by not bothering to ask their potential customers what they want. They are woefully lost in their own dream.
4. The space they want is too big and too expensive because their numbers are built around a certain number of covers which they can’t fit into a smaller space, and given you need to allocate a certain percentage of the space to back-of-house then you tend to take on too much, at a rental rate that is too high. When you apply a 15% rent-to-revenue ratio then you end up with a large, expensive, empty restaurant. Sounds familiar?
5. They don’t treat the money as if it is their own, because if it was their money then they wouldn’t have opened it in the first place.
6. They have no real plan as to how to scale because it is all about cashing out and making money.
But the thing that always confuses me is that investors are, well, investors. They do this for a living, or at least they have had some experience in investing. Maybe not in F&B though, which is why they take the forecasted pot of gold and inherent returns as given?
Let’s assume that they have no industry experience and that they are relying on the operator to provide them with the correct information. After all, trust is stated as the most valuable commodity in a relationship.
But why would the operator provide them with deflated, or more realistic figures, when what they want to do is show the investor how clever they are and how great their idea is? Let’s face it, they are winging it – they haven’t followed any of the basics of business and are totally reliant on their internal justification and alleged experience. So the investor is shown revenue figures that are an ‘industry standard’ multiple of a high rent and, while then all other costs are proportional, the business looks sound and thoroughly investable.
I am not saying investors are not culpable, as it is their short-term returns mentality that drives the operator to create a price structure that most people do not want to pay. But I have little sympathy for the operator; if they hadn’t pulled the wool over the investors’ eyes in the first place then they wouldn’t have to rip the consumer off.
Massaging egos, living a dream and treating other people’s money with a total lack of respect does not equal the much flaunted trust. But unfortunately that is what happens and the industry gets tarnished with a bad name.
So rules of the game appear to be clear – operators take the moral high ground, and by claiming extensive industry experience and expertise they can fool the investor into investing into a scheme that has been tried and tested in their heads, and only in their heads. Bravo.
To quote Sir Richard Branson again: “You don’t learn to walk by following rules. You learn by doing and by falling over.” So given the immorality of some operators, where does this leave the future of investment into the F&B industry?
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