5 Reasons Not to Start a Restaurant

[As published in Philippine Canadian Inquirer, 1/13/2012]

Are you thinking of becoming a restaurateur? Reconsider entering the food industry at this time. Here are five reasons why serving meals is not a profitable venture.

There is a big secret in the food and restaurant industry within Canada. Restaurants are suffering, but few admit that they are. You see, if they do admit, consumers are even less likely to visit their restaurants - speeding up their demise.

Two years ago, Sandy Daza and I closed our restaurants in British Columbia within months of each other. We agreed that Canada is a brutal place to make money in the food industry.

And yet, many are attracted to the prospect of having their own restaurant. Blame this on the Food channels. They have glamorized eating out and restaurant ownership without considering how many food industry entrepreneurs have lost their life savings on that dream.

Five situations make this economic environment toxic for restaurants:

The economic downturn in the USA in October 2008. Even though we are in Canada, the USA is our largest trading partner. While Americans try to recover, Canadian consumers are cautious. Eating out is classified as consumer discretionary spending, meaning consumers do not have to buy that service. In the Christmas seasons since the downturn, restaurant sales dropped as Canadians focused their spending on gifts.

Food price inflation. The cost of each meal served has been going up. In the past year alone, vegetables are 13.2% more expensive. Meanwhile, restaurants can only increase prices by an average of 3% during the same period. The profit margin for every meal is dropping every year.

Price points. When the huge franchises like McDonalds noticed a 10% drop in overall restaurant spending, they needed a bigger piece of the pie to continue growing. Their response is called price points. A price point is a price that appeals to the next price-sensitive consumer. For example, a typical meal in 2007 might cost $6.99. The larger franchises started to offer meals at $5, $4, $3, $2, or even $1. If you had a choice of a full meal at $7 or a less filling meal at $2, I think you would go for the latter. Once that consumer is satisfied, he/she will not buy from the other restaurants for that meal, further contracting the restaurant industry.

Believe it or not, the Vancouver 2010 Olympics. This event pulled hundreds of thousands of people from all over BC into a small area in downtown Vancouver. There, consumers discovered the price points that their local restaurants were not offering. People were lining up for hotdogs and drinks for under $2. For the entire month of February 2010, sales in these few downtown fast foods and restaurants soured, to the detriment of restaurants outside that area. People got used to price points. They liked spending less for each meal.

Harmonized Sales Tax or HST. British Columbia and Ontario started collecting an extra 7 to 8% in taxes. Restaurants had to pass it on to the consumer. Already reeling from the downturn, food prices, competitor price points and the Olympics phenomenon, the small restaurants raised their prices and hid them behind the HST. Consumers are not dumb. They noticed, and goodwill was lost.

Restaurant associations admit that the market has contracted and there is an oversupply of restaurants. In 2011, an estimated one thousand restaurants closed down or exchanged ownership in British Columbia alone.

This is not to say stop building new restaurants. If you are still thinking of starting a business in the food industry, plan well for it. Be prepared with extra cash. Expect cutthroat competition and startup losses. But most of all, make sure you are offering something nobody else has or can copy, and at an attractive price.