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Comment by tonymet

2 years ago

Can someone help explain restaurant industry economics?

when the business starts out, it's high risk and low margin. Tons of capital investment. Labor intensive and hard to staff. If you are lucky you are pulling 15% margins

Besides some exceptions, if you are lucky you may get some growth for 5-10 years. Then your brand falls out of favor (trends) and you spiral into bankruptcy.

Who invests in this stuff?

18 comments

tonymet

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mason55  2 years ago

Option a, you stay small, don't chase trends, and you bring in decent profits year after year. Eventually maybe you close but not after paying back the investments plus more.

Option b, you grow super fast, you have a lot locations, each one barely profitable, but you make it up on scale. You scale quickly enough that you make a lot of money before trends change. They key is that you accept that you're chasing a trend and move as quickly as possible to extract as much as you can.

Option c, you come up with the core concept, and you create a franchise program. You make your money off franchise fees & shadier stuff like making the franchisers use suppliers that you own. The franchises die when trends change but some made a profit, and your capital outlays were never very high, so you make a lot of profit.

01100011  2 years ago

Speculators hoping to catch the next Chipotle. Tons of activity in this space right now. I got burned trying to short one of them. These are, many times, low-float or institutionally owned and prone to heavy manipulation as well.

$CAVA, $WING, $SG, $SHAK, $TXRH... lots of names that will either be the next $CMG or crash back to earth when the next trendy restaurant catches the attention of social media.

I think a lot of young people are abandoning older brands like McDonalds in favor of these trendier options, so there's a lot of business there if a new brand can capture it. But like you say, nothing lasts long in that industry.

  • tonymet  2 years ago

    i hear that. but how about the actual economics of the businesses. e.g. return on capital .

    Obviously a handfull of stocks have spiked with speculation. but every town has hundreds to thousands of restaurants. And regions have dozens of growth chains all receiving investment.

    I get why mom & pop's invest, even if it's high risk low reward. But everything in the middle that takes on millions in capital makes no sense

MrFantastic  2 years ago

If I ever get rich, I would totally open a ghost pizza restaurant.

Margins are good. Spoilage is a non-issue.

Orders are pickup or delivery.

I can bring 10 pizzas to every party.

laweijfmvo  2 years ago

Maybe not fast food / fast casual, but at least in a trendy area (NYC, SF, LA, etc.) if a restaurant catches on, they're making way more than 15% margins because they can charge whatever they want and people will go because it's cool...

this would include coffee shops and other relatively low cost establishments

duped  2 years ago

More than half close within a year and it's closer to 80% after five years, but the ones that make it past that point are a lot more likely to thrive. Kinda like turtles going out to sea.

> Tons of capital investment

I mean it's not that much capital, compared to most businesses. You need way more money to start a software shop than a restaurant.

  • tonymet  2 years ago

    Well thankfully restaurant & AI startup aren't the only two industries worthy of investing in.

    Jokes aside, I get mom & pops. But I'm dubious on the "growth" chains like a Shake Shack or Chick Fil A.

    My current theory is that they are effectively MLMs with different structures: private equity MLM, owner-operator (franchisee) MLM.

    See Subway for the end result

    • javagram  2 years ago

      Chick fil A is privately held and their franchise operator model doesn’t require a large infusion of cash from the franchisee. Only 10k cash, so it’s more like a manager job with profit sharing and I don’t see how it could be a MLM.

      1 reply →

    • duped  2 years ago

      "MLM" is a sanitized name for "Pyramid Scheme" where the only way for a member to make profit is to bring in new people who pay up into the organization. Franchises aren't pyramid schemes.

      I don't know why you'd be skeptical, franchising has been very successful for the last century (McDonalds, 7-Eleven, Ace Hardware, etc) and gives steady returns to investors. And the reason why the food business always has opportunity is because people always need to eat, and are willing to spend disposable income on food. When consumer spending goes up so does the restaurant biz, and that's not going to change. And franchises are just one efficient way to create an international restaurant business. It was actually pretty surprising when Starbucks came along and didn't franchise.

      But just because the model is efficient doesn't mean you can't screw it up, like Quiznos. That's just short term thinking run amok.