Restaurant Offense And Defense-Get In The Game

Here is something to consider, let’s call it the paradox of a bad economy. 

You will not only have to play “Defense” during 2009, you will have to play “Offense” as well.

While some, including me, have predicted that 10% or more of the existing foodservice units will close their doors in 2009 (roughly 100,000 outlets) something else will be happening. Another 100,000 will open.  

How can this be true? How can new restaurants open in such bad times? Especially when credit is so tight, costs are up, revenues and customer counts are down, and unemployment is passing 7% nationally?

Here’s one answer. Back in 1992, my colleague from UNLV, Bob Woods, and I published the results of a 10-year study of restaurant openings and closings across the country. One of the surprising conclusions was that in times of economic disruption, and high unemployment, more restaurants opened than closed. These were mostly small independent restaurants or small single-unit franchise units in local markets. 

Our explanation was that these places opened because when folks lose their jobs they sometimes make the decision to strike out on their own. People take their severance pay, or their retirement savings, or the more traditional route of borrowing money from friends and family and “buy themselves a job.” The small business researcher David Burch called this business model “Income Substitution.”   You’ve heard it before, “I’ve always wanted to open my own restaurant. This seems like the time to make my move.”

The restaurant business, even in 2009, is a remarkably easy-entry business. With a small amount of capital investment, anyone can open a sandwich shop or pizza delivery store, a Chinese or Mexican restaurant, or a local saloon. With good timing and desire, finding a recently closed restaurant which is still fully-equipped is really not very difficult. In many markets retail real estate is 50% cheaper than it was a year ago, and “free rent” for a few months is easily negotiated. Landlords need tenants, and restaurants are hard to retrofit for other retail uses.

So what does this mean for you? One of our other findings was that in a steady market environment where the population is not growing and no new demand is being generated (remember the housing collapse?), there tends to be a remarkably stable number of restaurants. Basically, for every restaurant that opens, another must close. For every one or two that closes, one will open. The battle is for market share, with the “new and improved” entrant having a slight attractiveness advantage over existing units.

This is where the Offense and Defense strategies emerge. 

Take a look at your immediate market, roughly the 2-3 miles around your restaurant, and identify the recent closings as well as any you think are on the brink. Then, ask yourself what you need to do to be the one who survives while others are dying—go on the Offensive and move to make yourself the better customer choice. Change your playbook (pricing, value menu, service quality) and spend some money to let the market know that you have. If you have the financial resources, this is a great time to open your second or third unit. Investing in a down market gives you a competitive advantage when things turnaround.

At the same time, scan your local market area to see what new players might be entering over the next 3-6 months (call a commercial real estate agent to see what sites are currently available and check out the business start-up section of your local paper for new corporate filings). Look closely at what these new entrants are going to offer, and what, if anything, your existing local competition is doing about it. Somebody is going to close when the new kid comes to town—you want to make sure it isn’t your business. A great Defense is built on knowing what the other guy is going to do and being there first to protect your assets. 
 

It’s not enough to sit on the sidelines and wait for things to change.  My advice, go get in the game, the other side is already on the field.