Philadelphia's extraordinary restaurant boom just keeps booming and real estate firm CBRE recently reported one in four retail real estate deals in the region is now a food-and-beverage business.
But as more entrepreneurs venture into the business and existing restaurateurs expand into regional empires, you might well wonder: Is it a bubble?
Harris Eckstut doesn't think so. "Competition is great," he said. "The best place to open a restaurant is next to another restaurant."
The former longtime restaurateur (he owned Montserrat on South Street from 1980 to 2004) and current restaurant consultant works with chefs, developers, lenders, and investors. Sometimes, he consults before restaurants open; more often, he's called in when things are going south. He also teaches a class a few times a year - the Dollars and Sense of Opening a Restaurant - at the Restaurant School at Walnut Hill College, and at Montgomery County Community College.
Among his best testimonials is one from Greg Vernick: Eckstut ran the workshop for him and his family before they opened Vernick Food & Drink near Rittenhouse. Another is from a restaurateur who wasn't: "One guy sent me a letter and said he didn't open a restaurant - but he thanked me because I saved him a million dollars." We asked for the highlights: what not to do and what to look for the next time a friend with cheffy aspirations wants you to invest. He gave us five key pitfalls.
1. The rent is too damn high. For Eckstut, restaurant management starts with a simple math equation: Your rent, insurance, taxes, and debt service combined must not exceed 8 percent of your sales. That requires start-up capital - and though the owners of Kensington's Helm boast they started with just $10,000, the typical capital needed today is about $200,000, he said. "There are three primary costs: rent and debt service, labor cost, and product cost. If you control all three, you can make money," he said. "But one of those, the rent, is fixed, so if you screw that up, you're done before you open."
2. Partner problems. The travails of Philadelphia-area restaurant dynasties Ralph's, Tony Luke's, and Tacconelli's - all three of which are entangled in intrafamilial lawsuits - are case studies in the importance of an ironclad partnership agreement. The point, Eckstut said, is to get a lawyer involved in advance. He mentioned a recent case: "This guy had been in business with his best friend and had a 49 percent stake in a restaurant. But his friend got divorced, the wife ended up with 51 percent of the business, and he was pushed out." Friends might offer, he said, but "I always tell people, the bank is your best investor. All they care about is getting paid. You may want to help a friend, but you might lose a friend, too."
3. Unfavorable leases. If you're a restaurant expert, you're probably not a real estate expert - and that can be costly. "I've seen people sign leases with no zoning contingency. The place wasn't legally zoned," he said. Then they had to take a loss. Other times, they didn't negotiate lease options. "If it's a short-term lease, three years, only two things can happen: You go out of business, or you do great, the rent goes up, and you go out of business." He pointed to Union Square Cafe, the destination Manhattan restaurant that helped transform Union Square into one of the city's most desirable neighborhoods and recently got priced out. "You don't want lease options less than 10 years, but ideally 15 or more."
4. Attention to detail. When it comes to interior decorating, a lot comes down to taste. But two things are nonnegotiable: comfort and cleanliness. That means paying attention to things like whether your chairs are comfortable (unless you don't want people to sit too long) and to acoustics (unless you want it loud, to attract a young crowd). One place to look if you're considering an investment: The bathroom. "A couple bankers I know said they go to the bathroom first. It shows attention to detail." If the bathrooms aren't clean, they expect the kitchen won't be much better.
5. Mind the margins. Fast-casual restaurants - with lower labor costs, because they cut out table service - may be the fastest-growing segment of the industry. But to Eckstut, no restaurant format is better than any other. Each, however, has its own formula for success, with specific numbers associated with things like assigning prices on a menu. For example, at an ethnic food restaurant, the cost of food should be about 20 percent of the price. At a seafood or steak place, it would be over 35 percent. Most restaurateurs want to follow their passion. But, Eckstut said, others may want to seek out the lowest product and labor cost possible. The formula for that is simple: "If you want something that has a high profit margin, buy a Taco Bell."