Misconceptions drive naive restaurant investment

In Australian Domestic Tourism, Food, Harmonisation, National Headlines, New South Wales, Northern Territory, Queensland, South Australia, Tasmania, Victoria, Western Australia

TTN: Restaurant consultant Tony Eldridge says it’s not the economy but misconceptions about running restaurants that has seen Australian restaurants go bust. Eldridge says the downturns many restaurants have faced since the GST could have been handled by a more experienced hospitality workforce, and that cashflow issues have forced smaller venues into the cash economy.

Hospitality operators have been pushing their luck and now they’re paying the price.

From goodfood.com.au, 13th August 2013

OPINION: Recent articles in Fairfax Media concerning the state of our restaurant industry are small windows into an industry in crisis. You can be forgiven for thinking differently if you mainly eat out in the evenings late in the week – when restaurants are generally full – but public perception and reality are at odds right now.

The reasons why restaurants are experiencing difficulties are quite complex. Underlying a number of lesser issues is the explosion in the number of restaurants in our capital cities over the past 20 years. Property developers have been largely responsible, by including hospitality spaces in many new buildings on the assumption that there is an almost infinite demand for food and beverage. Melbourne and Sydney are the worst affected, currently being around 30 per cent oversupplied with eateries. There are just not enough customers to go round.

New entrants are entering the industry in unprecedented numbers because of the perception – largely driven by the media – that food is the art of the time, and they put eye-watering amounts of money into projects in the unfounded belief that restaurants are an easy way to make a good living, which is far from the truth. As I tell aspiring restaurateurs in my professional capacity as a restaurant consultant:

”You are in the entertainment industry, and simultaneously you are selling food and beverage products that are judged emotionally by the public. Your business is governed by the whims of fashion. It is open long hours and you are working when the rest of the world and your family are enjoying recreation.

”Your staff are a volatile mixture of artistic and logical people, with varying working hours and degrees of commitment to what they are doing.

”You carry anything up to 2500 different items in stock. They have to be stored at critical temperatures, used in strict rotation, are all decomposing at different rates, and have to be sold before they end up in the waste bin.

”Your customers come and go when they feel like it – with no consistency or predictability. Their perceptions of reality and their emotions are twisted by the consumption of alcohol. Meanwhile, your staff are on drugs and are sleeping with each other.

”You are running a bizarre custom manufacturing facility with a sales office attached and your customers consume your product in your presence.”

You may think this is tongue-in-cheek, but any restaurateur will verify it for you. It’s far from easy to run a good restaurant. People mostly fail to appreciate the complexity and see the life of the restaurateur as the combination of hedonistic hobby and career.

As a result of stiff competition, selling prices in restaurants have not kept pace with inflation for some years, despite what you may think. At the same time all the costs involved in operating hospitality businesses have risen at, or above, inflation. Some of the main costs, such as food supplies and energy, have risen quite dramatically.

Profit margins have now shrunk to all-time lows and many restaurants are in trouble, often propping themselves up by delaying supplier payments and payment to the ATO.

The situation took a sudden turn for the worse when the European debt crisis emerged some months ago, and the dining public became cautious with their spending. Top-end restaurants, which were already suffering from the effect on tourism of the high Aussie dollar, were first hit, but so were a number of hospitality groups that had expanded too rapidly in a rising economy and were highly geared.

The downturn was sudden; many restaurants sustained a drop in average spend of about 25 per cent, and were not quick enough stripping their costs back to maintain profitability. A severe shortage of skilled key staff in the hospitality industry contributed to the problem, as many of the managers and chefs concerned were not experienced enough to react appropriately.

Often hospitality operators fail to provide a safety margin for their businesses by accepting locations with very high rent and then compounding their mistake by creating over-the-top decor at huge cost. A disturbing number of multimillion-dollar restaurant and hotel projects have also been undertaken without proper feasibility assessments. It is common for these projects to be underwritten by wishful investors who are sold the dream and expect a financial return that was never going to be realised in the first place.

Smaller restaurants have a dubious advantage by being able to artificially stay afloat by moving to the cash economy and cheating on their taxes, whereas their larger cousins who have nearly a corporate structure have a great deal of difficulty doing this. As the economics in the industry deteriorate, many otherwise law-abiding operators are faced with the choice of evading taxes or going out of business.

This has now led to a two-tiered restaurant industry where a lack of tax enforcement has meant many smaller operators, who are technically insolvent, are able to seemingly prosper by benefiting from the advantage of not having to pay the same GST, PAYE and company tax as their larger, more visible cousins.

The recent media attention on hospitality group failures is a symptom of an industry that has moved ahead of demand and is now succumbing to market forces that will eventually redress the imbalance. In the meantime, go have a meal at a restaurant; they need your money.

Tony Eldred is a restaurant consultant.

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