Executive Strategy

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Future Challenge of Restaurants

Restaurants are Facing a Change in the Dining Industry

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A few years ago, me and my friends set off to bring a new, classic cocktail experience to Los Angeles. It was exciting, time consuming and expensive but really, really fun. Everyone knows the restaurant business is risky and no matter the rate of success it can be a business model that has low margins and is dependent on public tastes. Now in the industry we are seeing with increased competition, higher wages and less institutional funding.

Competition is real and more challenging is the notion that everyone, even the best fans are also critiques. Social media can make the smallest mom-and-pop restaurant a star; it can also make them a pauper. It can be galvanizing for businesses especially restaurants because they need people to like them and if they don’t it will drive them to the competition.

With the increased minimum wage, we are going to see higher prices. The question then becomes will people pay for a higher priced food? If they see value and they can afford it -yes. That muffin that was $3.50 will soon be $4.00, will the consumer absorb the cost or change their dining habits?

Earlier this year I was in a discussion with a group of bankers and they talked about what loans were not making it in their underwriting process:

1. Weed

2. Restaurants

The failure rate of the restaurant business has always been high. Restaurants traditionally have sought private funding, friends and family but after a few years of chartered returns banks have been a useful resource for expansion and gap funding. Now with these resources draining restaurateurs will have to look for other avenues or think ahead about how they will manage cash shortfalls and growth.

Is the restaurant business risky yes but that does not mean it is a bad investment. It may mean more research, better evaluation of foot traffic before signing the lease with added scrutiny on the economics of the menu. When I am consulting for restaurants now, their flow of traffic in the door isn’t the main concern, the outlier question is what are doing online for delivery and pickup: Postmates, Uber Eats, Amazon.  Even though the dynamics of this industry are changing, people will always pay for tasty food.