The old adage, “If you build it, they will come,” was based on a quote from the 1989 movie Field of Dreams starring Kevin Costner. In the movie, our hero hears mysterious voices who ask him to build a baseball field in the middle of an Iowan cornfield so his childhood idols can come back to life and play. This puts Ray, the character played by Costner, in financial hardship; but he and his family are reassured that people will come and pay to watch the games. This is the ultimate feel-good movie and has a sentimental message that has resonated with audiences across the country for decades. Unfortunately, in the real world life is a little more complicated.
As a consultant and a veteran of the hospitality industry, I am always amazed as to how many in our industry do follow that fallacy! The reality is that you can build it and they might not come at all, or they might come once and never come back again! I had a conversation recently with a bar owner who needed help. I asked him, as I always do, why did he decide to get in to the business? His response typifies a large segment of those in the hospitality industry. He told me, “I always wanted to own a tavern. I got tired of my day job sitting behind the desk.” His job during the day had nothing to do with hospitality. His explanation for his qualifications was that he always ate out and knows what it takes to have a successful business; also, his brother was great at BBQing and always cooked for the family. That is it. That gave them the confidence to invest their life savings to purchase a tavern.
While this could be dismissed as an extreme example, the logic behind his reasoning is a prevailing attitude in our industry. In Chicago, hospitality professionals have seen an increase in demand for their services. As more doctors, lawyers, accountants and traders start new careers in this industry, the realization that there is a big difference between being an investor and an operator has not set in accordingly. The underlying assumption here has been that this industry is easy, anyone can do it. Build the room, buy the product, hire some people with good looking resumes (or “burrow” them from another venue,) and voila! You are now ready, open the doors and wait for the crowd to show up!
We have seen a rise in Chicago with carbon copy lounges and restaurant. In lounges specifically, the “follow the leader” mentality combined with a proliferation of licenses by the city, and a general lack of technical know-how to survive a saturated market have created a new dilemma for the industry and given rise to so-called “promoters” and industrious and individualistic “star-tender” staff with little or no loyalty to any one establishment. Without the benefit of a professional counsel, many new and seemingly adept businesses have been sold on this trend as the new norm necessitating the need to operate within this new business model. Who propagates this new model? Mostly those who benefit from it, resulting in smaller and smaller slices of the potential business in a county with 5.2 million population and specifically a city with 2.7 million residents.
Most new businesses lack the basic infrastructure to be independent. Some have completely outsourced their promotional efforts at high costs with very little result in return. With no tools to build a database and loyalty programs, these businesses have become solely dependent on outside interest groups to do the work they ought to be doing for themselves. That in return has given rise to nomadic “promoters” who only follow the new openings and a general market with a very low attention span who follow these “promoters.” A general seesaw business model which is only effective till the next big opening and the migration of “promoters” and the guests to the next big thing!
Nearly 40 million people visit Chicago annually which is estimated to grow to 50 million by 2020. According to National restaurant Association, in 2013, Illinois restaurants alone are projected to register $21.7 billion in sales. Do you have the infrastructure to meet this demand? Is your concept strong enough to stand on its own? Do you want to lead or are you content with following because the remaining option is getting out of the business! Most new venue owners learn on the job. They spend countless hours trying to figure out their options while their options dwindle down. There are many rules to succeed in the business. Here are my 10 simple rules for new and existing businesses to make sure you are set up for success.
1. Avoid undercapitalization
It is shocking that there are really no statistics or studies on how many bars and restaurants go out of business each year. While there is a lot of false information out there about the percentage, several years ago, researchers at Cornell University and Michigan State University conducted a study of restaurants in three local markets over a 10-year period. They concluded the following: After the first year 27% of restaurant startups failed; after three years, 50% of those restaurants were no longer in business; and after five years 60% had gone south. Those numbers are closely related to the statistics for all new small businesses. I venture out to say that a majority of businesses that fail is due to lack of funds and a comprehensive financial plan. Just in case if you built it and they didn’t come right away, you should have the funds to survive the first year.
2. Do your due diligence in understanding the market
This is probably the most important aspect for new businesses. It is harder in Chicago since licenses are tied to an address. If you were to open a clothing store, you’d have much more room to maneuver. Many try to avoid the process of applying for a new license by taking over an existing one and therefore limiting their options to go where the market demand is high. Keep in mind these words,” just because you can, it doesn’t mean you should!” Take your time, do your research, talk to the neighbors, talk to the competition, weigh your options and your chances before you commit.
3. Be sure of the strength of your concept and the quality of the product
With 50 million potential visitors coming to Chicago in the coming years, there is room to be innovative. Don’t just follow the leader and copy others. What sets your product apart from others? Do you have a compelling story to attract the right consumers? This business is hard enough, don’t put yourself in the position to compete (and potentially lose,) from the get-go.
4. Create a realistic budget and stick to it.
Remember that the revenues and expenses in your budget need to match. Preparing a good budget or forecast is a matter of being systematic, careful, logical, and thorough. Monitoring your actuals against the budget on a regular basis makes it much easier to forecast the year-end balance and budget the following years.
5. Build infrastructure and in-house solutions
As I mentioned above, it has become all too common for venue owners to rely on outside help to run their businesses. This has led to a “follow the leader” mentality resulting in a lot of “burrowing” ideas, concepts and resource. Make an effort from day 1 to do as much as you can in-house, you’ll thank me down the road. Create your own training program and manual and train your own staff. Build your own data base, create your own social media and outreach plan. It will cost you more upfront but the ROI is high and will save you from many sleepless nights. No one would care more for your business than you. Don’t hand the keys to your business to others.
6. Put a strong management team together
This is a prevalent mistake in our industry on a verge of an epidemic. You have built a Bugatti and now you want to put someone who just got their driving permit behind the wheel! If it doesn’t make sense in any other business, why would it make sense here? Having 3 managers instead of one strong GM also won’t help. What makes a strong management team is experience, not how many people they know on Facebook! Our industry is full of ups and downs and surprises, only those equipped with the proper experience can cushion the impact. While I am at it, I have to confess that I did not know anything for the first 5 years in the business, but I was certain that I did. I eventually learned that lesson. It is good to have confidence, but misplaced confidence can be costly.
7. Technology is your friend, work smart
I am a big advocate for integrating technology in our day-to-day operations. Websites, social media resources, table management systems and data analysis are tools you can use to improve the performance of your business. A properly set up POS system can yield an abundance of useful information. Get in the habit of recording daily reports, mark events and promotions, specials and create a searchable history for sales and your guest profiles. So many times I have been confronted with situations where I wished my clients had done these simple steps from the beginning.
8. Promote empathy early on and improve the quality of service
There are numerous studies that link empathy to business results. They include studies that correlate empathy with increased sales, better performance and higher rate of customer Satisfaction. Simple techniques like teaching your team to listen, to smile and make eye contact, to use guests’ names, to be aware of their body language and tone, to take personal interest in people’s stories and so on, can have an immense impact on creating repeat business. But keep in mind, you as the owner or manager set the tone.
9. Don’t get married to an idea
There are no shortages of egos in our industry but the true danger lies with not being able to disengage from an idea that has run its course or is not viable. In today’s market, those who are nimble and adapt well to changing circumstances fair better than their rigid counterparts. Keep an open mind. The closest exit might be behind you. Sometimes it is prudent to take a step back to take a few steps forward.
10. Empowerment and open door policy
Meet with your team often, set goals, demand results and reward those who reach those goals. Empower them to make good decisions. While it is important to be positive, it is just as important to be an effective leader. Business is not a democracy and does not run on consensus. Be firm but fair and honest with your team. Get used to wearing multiple hats. You are their teacher, parent, sibling, baby sitter, confidant and their psychologist. Keep them close, give them the tools they need and gain their trust.
Follow these rules closely and you can increase your chances of survival. In future posts I will discuss each rule in detail. I hope you’ve found this post useful and I wish you the best of luck. Send me your questions or topics you would like discussed and I will do my best to address them. You can follow me here or on Twitter @RazaviArman.