How to start a restaurant business?
Recent statistical data suggests that 52% of the consumers prefer to spend their money on the restaurant visit rather than any sort of other purchase. The restaurant industry is worth 863 billion, which amounts to 4% of the U.S. GDP. If you have been thinking of contributing to this number, it behooves you to do this. There are, for sure, some stumbling issues to get the restaurant fully operational and profitable. For example, more than half of restaurateurs consider the high costs of operation and food as well as staffing to be the main challenges for the successful launch of the restaurant. We would briefly explain to you in this article how to deal with the problems that arise most frequently and come to the end goal of being the owner of the successful restaurant business.
You should define what exactly your share of the market will be. It is usually done by looking closely at the age, sex, education, race, eating habits, the budget of your potential customer, and creating his portrait. Usually, it comes down to gathering data on three fronts: demographics, psychographics, and behavior. Understanding your target audience is essential to refine your business plan, including the competitors’ landscape (primarily indirect once), menu items, location, marketing, and the conceptualization of your restaurant.
Who is your customer?
Depending on different generations, the marketing and the selection of the menu items can differ. For example, the typical representative of the generation Z will prefer casual dining restaurants or quick service. Millennials will be less likely to go to McDonald’s for a quick bite compared with generation Z. Organic food appeals more to Generation X, while the restaurant’s social media promotion will be relatively useless with the target on baby boomers.
You should also account for the place of dwelling of your potential customer: be it rural, suburban, or urban area. Suburban dwellers are more likely to have children than urban dwellers, so choosing the family-type of restaurant would be more profitable. Urban dwellers crave novelty and different food trends, thus supplying your restaurant with avocado sandwiches would be a good idea. The rural population usually stick with one-two best options when choosing their regular dinner place, so you should look for your loyal clientele there.
Psychographics is essential to understand what values your customers share, or what habits they have and how can your restaurant be aligned with their values: healthy food, evening jazz, weekend sports games, etc.
How do you define your customer?
There are three basic ways to define your target audience:
- Visit the competitor’s restaurants in the area and collect data on the profiles of the customers
- Consult the censuses to get the idea of the characteristics of the populace in different states/regions/cities
- Create a survey based on the preliminary information you have about your target audience or discuss in the specially designed focus group format
With the knowledge of who is your central customer, you can move on to writing the business plan for your restaurant.
The most critical mistakes during the launch of a restaurant come with the poor management of finances, which is unwise allocation of the financial resources, high rental expenses, and lack of progress monitoring and analytics. These fatal problems can be easily avoided by creating the proper business plan and concentrating a lot of attention, most importantly, on the financial model of the restaurant business.
How do you choose the type of restaurant and its concept?
Before starting the business planning, you should decide on the type of restaurant you would like to begin: quick-service, midscale, or upscale. You should do that having your seed capital, target audience, and your business aspiration in mind.
Quick-service restaurants have limited menu options. KFC, Taco Bell, In-and-Out Burger are the most prominent examples of quick-service restaurants. Midscale restaurants (Long Horns or Ruby Tuesday’s) are usually done in the family-style with a moderately priced menu. Upscale restaurants are there to provide flawless service and exceptional cuisine. Fleming’s Prime Steakhouse & Wine Bar or Mastro’s Restaurants serve an excellent example for the beautiful dining concept, which belongs to the upscale restaurant type.
Provided you have little money, one of the cheapest options (with low launch costs and low overhead) would be the pop-up restaurant or food truck. Marketing for those is usually efficient through social media. You can also consider launching pizzeria, coffee shop, or ethnic restaurants. There are no limits for the concepts of the restaurant: nobody stops you from developing your own as a subtle combination of different types.
How do you compose the business plan?
- Restaurant concept
- Choosing Location
- Market Analysis
- Menu Design
- Restaurant Design
- Hiring employees
- Marketing campaign
- Financial planning
Firstly, you should have the idea and the idea of how you would realize it. This is to be mentioned in your executive summary, which you should try to make as comprehensive and concise as possible. Your investors will look primarily at the executive summary of your restaurant business to decide whether they would like to be introduced with concrete numbers further on.
Secondly, you should describe your company (personnel, location, contacts, legal structure) in the company description section. The area should be planned to give you an advantage over your competitors. Will your restaurant be visible and accessible? Will your restaurant located on this particular spot attract your key demographics? Won’t you suffer losses because of the high labor costs in the region?
Thirdly, it is vital to execute a profound market analysis. This section should give reliable answers to three questions:
- What is your target audience? (industry analysis)
- What are your main competitors? (competition analysis)
- How do you plan to reach your audience? (marketing analysis)
Fourthly, based on the ambiance and concept of your restaurant, you have to design and engineer the menu. You can opt for hiring specially qualified people to do that. Generally, it can be done by adjusting the profitability and popularity of the items on the menu with their prices.
The problem here is that around 60% of restaurateurs pay little, if none, attention to the menu engineering. Thus, they lose the alternative 15% of the potential restaurant profitability.
To the engineer, the menu takes three steps:
- determine the cost of each meal based on its ingredients;
- categorize the menu items according to their profitability and popularity (you can do that in the 2X2 matrix);
- based on the two previous steps, apply the promotion techniques to some meals, or lower the price for another.
In the fifth turn, restaurant design allows for the creation of the conceived setting and spirit of your restaurant. While having to balance between the seating places and the zoning of the personal space, make sure not to forget about the furniture, its style, quality, portability/non-portability. Decide on whether you would like to have multiple rooms with the possibility to arrange for the private dining options or open rooms with more space and higher occupancy.
In the sixth turn, the marketing campaign is meant to ensure your presence in the minds of people. Your restaurant business barely exists unless it is being promoted. Marketing tolls should correspond to the type of restaurant and the choice of the target audience. They can include but not limited to:
- outdoor advertisements
- social media posts
- discounts and loyalty program
- promotion through the influencers
- affiliate marketing
- website creation and constant updates
- special events to announce about the restaurant launch
How can financial planning help your restaurant business?
Finally, and, most importantly, without constructing the financial model for the restaurant business, there is little chance you could succeed. There are, at the very least, three core reasons for the importance of financial planning:
- It helps to predict your financial flows
- It assists you in adjusting the restaurant’s financial reality
- It avails for the perfect pitch of your restaurant business to investors
The lack of money is not a problem for business. You can try out different funding options:
- SBA loan programs
- Peer-to-peer lending services
- Bank loans
- Crowdfunding (Kickstarter)
- Angel investor or investor
Whatever option you choose, you can incorporate the information about your debts and necessary payments into your financial model and account for them to calculate your future financial growth.
Based on the input data you inserted, the financial model is designed to show you:
- revenue breakdown of your restaurant business (what brings you the bulk of revenue?)
- predicted levels of profitability of your restaurant (what is the increment rate of your income?)
- cash flow (what are the financial inflows and outflows in your restaurant business?)
- break-even analysis (when will you start getting the positive net profit after tax?)
- benchmark KPIs (how is your financial outcome compared with the industry outcome?)
- top expense categories (what takes a lot of your resources?)
- sales assumptions (when should you expect more/less of customers?)
You can download excel restaurant template financial model for your future restaurant business here:
Business planning and financial planning gives any business owner or start-up founder confidence in his company. For you to join Emeril Lagasse or Gordon Ramsay in the list of top-5 richest restaurateurs, you should act with all passion for the industry and plan thoroughly ahead.