Sandwich Shops

Sandwich and sub shops are comparatively simple to open and operate compared to a full-service restaurant. The menu consists of various kinds of hot and cold sandwiches made with a selection of bread/buns and toppings or fillings of different meats and vegetables/salad and pickle items. Little or no cooking is required.

Hot and cold soups and pastries may also be offered along with a selection of hot and cold beverages.

A good example of a sandwich shop is Jimmy John’s gourmet sandwich shop, which now franchises over 600 stores. Founded in 1983, with an investment of only $25,000 by then 19-year-old Jimmy John Liautaud, Jimmy John’s sandwich shops have enjoyed impressive growth. Part of the success is due to the irreverent attitude expressed by signs in the window that advertise “free smells” and “freakishly fast service,” and employees are hired for their ability to “be real.”

The company is focused on fresh gourmet sandwiches—for example, turkey sandwiches are made with boneless turkey breasts, not pressed turkey, and name-brand ingredients are used.

Sandwich Shops

Another interesting example is The Sandwich Shop in San Francisco which offers the East Coast piled high with the California freshness. Guests rave about the place and even say that if you’re not into a “sammy” they have an incredible homemade teriyaki or Korean barbecue beef with kimchi. In Seattle, the Baguette Box serves “multi-culti” subs like crispy drunken chicken, lemongrass steak, and grilled chorizo.

Sandwich shops require limited kitchen equipment and a much lower investment than a conventional restaurant. All that is required are a couple of stainless steel tables, service counters, a slicer, a can opener, and a few hotel pans to hold the sandwich ingredients. Add a few tables, chairs, and decor of choice and you’re in business.

FRANCHISED RESTAURANTS

Franchising is a possible option for those who lack extensive restaurant experience and yet want to open up a restaurant with fewer risks than starting up their own restaurant from scratch. Or, if you’re a go-getter, you can open up your own restaurant, then another, and begin franchising. Remember that franchisors (the company franchising the rights to you and others) want to be sure that you have what it takes to succeed. They will need to know if you:

■ Share the values, mission, and ways of doing business of the franchisor
■ Have been successful in any other business
■ Possess the motivation to succeed
■ Have enough money not only to purchase the rights but also to set up and operate the business
■ Have the ability to spend lots of time on your franchise
■ Will go for training from the bottom up and cover all areas of the restaurant’s operation

Franchising involves the least financial risk in that the restaurant format, including building design, menu, and marketing plans, already have been tested in the marketplace.

Franchise restaurants are less likely to go belly-up than independent restaurants. The reason is that the concept is proven and the operating procedures are established with all (or most) of the kinks worked out.

Training is provided, and marketing and management support are available. The increased likelihood of success does not come cheap, however. There is a franchising fee, a royalty fee, advertising royalty, and requirements of substantial personal net worth.

FRANCHISED RESTAURANTS

For those lacking substantial restaurant experience, franchising may be a way to get into the restaurant business—providing they are prepared to start at the bottom and take a crash training course. Restaurant franchisees are entrepreneurs who prefer to own, operate, develop, and extend an existing business concept through a form of contractual business arrangement called franchising. Several

franchisees have ended up with multiple stores and made the big time. Naturally, most aspiring restaurateurs want to do their own thing—they have a concept in mind and can’t wait to go for it.

Here are samples of the costs involved in franchising:

■ A Miami Subs traditional restaurant for a single unit has a $30,000 fee, a royalty of 6 percent of monthly gross sales, a payment of 3 percent of monthly gross sales to the advertising fund, and a net worth of at least $350,000 with $150,000 of this minimum net worth in liquid assets.
■ Chili’s requires a monthly fee based on the restaurant’s sales performance (currently a service fee of 4 percent of monthly sales) plus the greater of (a) monthly base rent or (b) percentage rent that is at least 8.5 percent of monthly sales.
■ McDonald’s requires $300,000 in cash or liquid assets, a $45,000 initial fee, plus a monthly service fee based on the restaurant’s sales performance (about 4 percent) and rent, which is a monthly base rent or a percentage of monthly sales. Equipment and preopening costs range from $905,200 to $1,746,000.
■ Pizza Factory Express units (200 to 999 square feet) require a $7,500 franchise fee, a royalty of 5 percent, and an advertising fee of 2 percent.
Equipment costs range from $25,000 to $90,000, with miscellaneous costs of $3,200 to $3,900 and opening inventory of $6,000.
■ Earl of Sandwich has options for one unit with a net worth requirement of $750,000 and liquidity of $300,000; for five units, a net worth of $1 million and liquidity of $500,000 is required; for 10 units, net worth of $2 million and liquidity of $800,000. The franchise fee is $25,000 per location, and the royalty is 6 percent.

What do you get for all this money? Franchisors will provide:

■ Help with site selection and a review of any proposed sites
■ Assistance with the design and building preparation
■ Help with preparation for opening
■ Training of managers and staff
■ Planning and implementation of preopening marketing strategies
■ Unit visits and ongoing operating advice

There are hundreds of restaurant franchise concepts, and they are not without risks. The restaurant owned or leased by a franchisee may fail even though it is part of a well-known chain that is highly successful. Franchisers also fail. A case in point is the highly touted Boston Market, which was based in Golden, Colorado. In 1993, when the company’s stock was first offered to the public at $20 per share, it was eagerly bought, increasing the price to a high of $50 a share.

In 1999, after the company declared bankruptcy, the share price sank to 75 cents.
The contents of many of its stores were auctioned off at a fraction of their actual cost. At one point in time McDonald’s purchased Boston Market, only to sell it months later to Sun Capital Partners.

Fortunes were made and lost. One group that did not lose was the investment bankers who put together and sold the stock offering and received a sizable fee for services. The offering group also did well; they were able to sell their shares while the stocks were high. Quick-service food chains as well-known as Hardee’s and Carl’s Jr. have also gone through periods of red ink. Both companies, now under one owner called CKE, experienced periods as long as four years when real earnings, as a company, were negative.the company is surviving despite the bad economy.

“Despite a tough economy, Carl’s Jr. is setting sales records in new markets, continuing to grow its unit count and giving customers what they want—premium quality burgers at fair prices,” said Andy Puzder, chief executive officer of CKE Restaurants, Inc., parent company of Carl’s Jr. and Hardee’s chains. “Posting back-to-back sales records in less than two months is remarkable. Wall Street seems to need a few success stories to shake it out of the doldrums, and we’re thrilled to be able to provide some.”10

However, there is no assurance that a franchised chain will prosper. At one time in the mid-1970s, A&W Restaurants, Inc., of Farmington Hills, Michigan, had 2,400 units. In 1995, the chain numbered a few more than 600. After a buyout that year, the chain expanded by 400 stores. Some of the expansions took place in nontraditional locations, such as kiosks, truck stops, colleges, and convenience stores, where the full-service restaurant experience is not important. In 2000, Yorkshire Global Restaurants, Inc., became the parent company for A&W and Long John Silver’s. In 2002 Yorkshire Global Restaurants, Inc., was acquired by Tricon Global Restaurants, Inc. To reflect the acquisition the company was renamed Yum! Brands, Inc.

A restaurant concept may do well in one region but not in another. The style of operation may be highly compatible with the personality of one operator and not another. Most franchised operations call for a lot of hard work and long hours, which many people perceive as drudgery. If the franchisee lacks sufficient capital and leases a building or land, there is the risk of paying more for the lease than the business can support.

Relations between franchisers and the franchisees are often strained, even in the largest companies. The goals of each usually differ; franchisers want maximum fees, while franchisees want maximum support in marketing and franchised service such as employee training. At times, franchise chains get involved in litigation with their franchisees.

As franchise companies have set up hundreds of franchises across America, some regions are saturated: More franchised units were built than the area can support. Current franchise holders complain that adding more franchises serves only to reduce sales of existing stores. Pizza Hut, for example, stopped selling franchises except to well-heeled buyers who can take on a number of units.

Overseas markets constitute a large source of the income of several quickservice chains. As might be expected, McDonald’s has been the leader in overseas expansions, with units in 119 countries. With its roughly 31,500 restaurants serving some 50 million customers daily, 17,000 locations are outside the United  States, accounting for about half of the company’s profits.

A number of other quick-service chains also have large numbers of franchised units abroad. While the beginning restaurateur quite rightly concentrates on being successful here and now, many bright, ambitious, and energetic restaurateurs think of future possibilities abroad.

Once a concept is established, the entrepreneur may sell out to a franchiser or, with a lot of guidance, take the format overseas via the franchise. (It is folly to build or buy in a foreign country without a partner who is financially secure and well versed in the local laws and culture.)

The McDonald’s success story in the United States and abroad illustrates the importance of adaptability to local conditions. The company opens units in unlikely locations and closes those that do not do well. Abroad, menus are tailored to fit local customs. In the Indonesia crisis, for example, french fries that had to be imported were taken off the menu, and rice was substituted.

Reading the life stories of big franchise winners may suggest that once a franchise is well established, the way is clear sailing. Thomas Monaghan, founder of Domino’s Pizza, tells a different story. At one time, the chain had accumulated a debt of $500 million. Monaghan, a devout Catholic, said that he changed his life by renouncing his greatest sin, pride, and rededicating his life to “God, family, and pizza.” A meeting with Pope John Paul II had changed his life and his feeling about good and evil as “personal and abiding.” Fortunately, in Mr. Monaghan’s case, the rededication worked well. There are more than 8,000 Domino’s Pizza stores worldwide, with sales of about $3 billion a year in the United States.

Monaghan sold most of his interest in the company for a reported $1 billion and announced that he would use his fortune to further Catholic church causes.

In the recent past, most foodservice millionaires have been franchisers, yet a large number of would-be restaurateurs, especially those enrolled in university degree courses in hotel and restaurant management, are not very excited about being a quick-service franchisee. They prefer owning or managing a full-service restaurant. Prospective franchisees should review their food experience and their access to money and decide which franchise would be appropriate for them. If they have little or no food experience, they can consider starting their restaurant career with a less expensive franchise, one that provides start-up training.

For those with some experience who want a proven concept, the Friendly’s chain, which began franchising in 1999, may be a good choice. The first Friendly’s Ice Cream shop opened in Springfield, Massachusetts, in 1935. Today, the chain has more than 700 units. The restaurants are considered family dining and feature ice cream specialties, sandwiches, soups, and quick-service meals. Let’s emphasize this point again: Work in a restaurant you enjoy and perhaps would like to emulate in your own restaurant. If you have enough experience and money, you can strike out on your own. Better yet, work in a successful restaurant where a partnership or proprietorship might be possible or where the owner is thinking about retiring and, for tax or other reasons, may be willing to take payments over time.

Franchisees are, in effect, entrepreneurs, many of whom create chains within chains. McDonald’s had the highest system-wide sales of a quick-service chain, followed by Burger King. Wendy’s, Taco Bell, Pizza Hut, and KFC came next. Subway, as one among hundreds of franchisers, has 32,831 restaurants in 91countries. There is no doubt that 10 years from now, a listing of the companies with the highest sales will be different. Some of the current leaders will experience sales declines, and some will merge with or be bought out by other companies—some of which may be financial giants not previously engaged in the restaurant business.

RESTAURANT - CHAIN OR INDEPENDENT

The impression that a few huge quick-service chains completely dominate the restaurant business is misleading. Chain restaurants have some advantages and some disadvantages over independent restaurants. The advantages include:

■ Recognition in the marketplace
■ Greater advertising clout
■ Sophisticated systems development
■ Discounted purchasing

When franchising, various kinds of assistance are available, which is discussed later in the chapter.

Independent restaurants are relatively easy to open. All you need is a few thousand dollars, a knowledge of restaurant operations, and a strong desire to succeed. The advantage for independent restaurateurs is that they can “do their own thing” in terms of concept development, menus, decor, and so on. Unless our habits and taste change drastically, there is plenty of room for independent restaurants in certain locations.

Restaurants come and go. Some independent restaurants will grow into small chains, and larger companies will buy out small chains. Once small chains display growth and popularity, they are likely to be bought out by a larger company or will be able to acquire financing for expansion.

A temptation for the beginning restaurateur is to observe large restaurants in big cities and to believe that their success can be duplicated in secondarycities. Reading the restaurant reviews in New York City, Las Vegas, Los Angeles, Chicago, Washington, D.C., or San Francisco may give the impression that unusual restaurants can be replicated in Des Moines, Kansas City, or Main Town, USA. Because of demographics, these high-style or ethnic restaurants will not click in small cities and towns.

RESTAURANT - CHAIN OR INDEPENDENT

Kinds and Characteristics of Restaurants

Broadly speaking, restaurants can be segmented into a number of categories:
■ Chain or independent (indy) and franchise restaurants: McDonald’s, Union Square Cafe, or KFC
■ Quick service (QSR), sandwich: Burgers, chicken, and so on; convenience store; pasta; pizza
■ Fast casual: Panera Bread, Atlanta Bread Company, Au Bon Pain, and so on
■ Family: Bob Evans, Perkins, Friendly’s, Steak ’n Shake, Waffle House
■ Casual: Applebee’s, Hard Rock Cafe, Chili’s, T.G.I. Friday’s
■ Fine dining: Charlie Trotter’s, Morton’s The Steakhouse, Fleming’s, The Palm, Four Seasons
■ Other: Steakhouses, seafood, ethnic, dinner houses, celebrity, and so on

Of course, some restaurants fall into more than one category. For example, an Italian restaurant could be casual and ethnic. Leading restaurant concepts in terms of sales have been tracked for years by the magazine Restaurants & Institutions.

Their survey of the top 400 restaurants in sales is summarized in Figure 2.1.

Top 400 segment ratings
FIGURE 2.1: Top 400 segment ratings




CHAIN OR INDEPENDENT   The impression that a few huge quick-service chains completely dominate the restaurant business is misleading. Chain restaurants have some advantages and some disadvantages over independent restaurants...

FRANCHISED RESTAURANTS   Franchising is a possible option for those who lack extensive restaurant experience and yet want to open up a restaurant with fewer risks than starting up their own restaurant from scratch. Or, if you’re a go-getter...

Restaurants as Roads to Riches

Probably the biggest reason thousands of people seek restaurant ownership is the possible financial rewards. With relatively few financial assets, it is possible to buy or lease a restaurant or to purchase a franchise. Names like Ray Kroc of McDonald’s, Colonel Sanders of KFC chicken, and Dave Thomas of Wendy’s exemplify the potential success one can experience in the restaurant business. Dozens of McDonald’s franchise holders are multimillionaires, yet some McDonald’s restaurants fail. Some owners and franchisees of KFC stores are also wealthy. A surprise billionaire is Tom Monaghan, the Domino’s Pizza entrepreneur. Hundreds of lesser-known people are also making it big, some by  building or buying restaurants, others by becoming franchisees.

Declining consumer confidence took a bite out of restaurants’ sales and profits in 2008, leading to bankruptcy filings at casual dining chains like Bennigan’s and the closure of more than 600 Starbucks locations.

With the economy in trouble, all segments of the restaurant industry are feeling it. Consider all the effects of a failing economy. While prices of food and energy costs (heating, lighting, kitchen equipment, etc.) go up, sales slow down.

Restaurants as Roads to Riches
Restaurants as Roads to Riches

Here are some of the things this book will help you with:

■ Ownership: Sole proprietorship, partnership, company, or franchise.
■ Development of a business plan: A good business plan may take a while to develop, but you’re not going to obtain financing without one.
■ Marketing/Sales: You need to know who your guests will be and how many there are of them.
■ Location: Will your location be freestanding, in a mall or a city center, suburban, or something else?
■ Who is on your team?: Your chef and staff, lawyer, accountant, insurance, sales, marketing, and public relations.
■ Design/Ambience: What design/ambience will you select?
■ Menu: What will your menu feature? How many appetizers, entr´ ees, and desserts will you offer?
■ Beverages: Who will develop your beverage menu, and what will be on it?
■ Legal: What permits do you need?
■ Budgets: What will your budget look like?
■ Control: What kind of control system will you have, and how will it work?
■ Service: What style of service will you select and how will it operate?
■ Management: How will your restaurant operate?
■ Operations: An overview of restaurant operations.

Restaurant - Starting from Scratch

Occasionally, a faculty colleague from another discipline (usually arts and sciences) says that he or she is thinking of opening up a restaurant and do I have any advice. My reply is: “Let me bring a few of my friends over to your house for dinner for the next month, and then after that we’ll talk about it.” So far, no takers. Joking apart, doing all it takes to prepare 100 meals or more night in and night out is very different from having a few friends over for dinner because, for one thing, there are multiple choices on the menu.

Would-be restaurant operators may have already worked in their family’s restaurant, perhaps starting at an early age. Hundreds of thousands of aspiring restaurant operators have tasted the restaurant business as employees of quick- service restaurants. For others, their first food business experience was in one of the 740 cooking school programs offered in vocational school or community college programs or at cooking institutes. Yet the industry still does not have nearly enough employees, and the turnover rate is high. The tens of thousands of young people who work in restaurants know that, but also welcome the experience and enjoy working with other young people who never consider the job as a career. One message comes through loud and clear: The restaurant business is highly competitive and requires inordinate energy, the ability to work long hours, and the willingness to accept a low salary. According to the National Restaurant
Association, the restaurant industry is expected to add 1.8 million jobs by 2019, for total employment of 14.4 million in 2019.

Starting from Scratch
Starting from Scratch
The cost of attending culinary training programs varies from none, at the many public high school programs offered around the country, to the $29,950 charged by New York City’s French Culinary Institute for a six-month course (this includes uniforms, tools, and books). The Culinary Institute of America offers a two-year associate degree program at approximately $14,700 for fresh-man/sophomore and $13,800 for junior/senior years; uniforms, tools, and books are extra.

A number of strong apprenticeship programs are offered by the American Culinary Federation and local community colleges, as well as by area chefs in restaurants, hotels, and clubs.
Following the European tradition, students who wish to become known as master chefs often seek jobs at the name restaurants in big cities, such as New York, Atlanta, Baltimore, Chicago, Orlando, Las Vegas, Houston, New Orleans, San Francisco, and Los Angeles. Many go abroad for the same reason, building their skills and rounding out personal resumes.

Buy, Build, Franchise, or Manage?

A person considering the restaurant business has several career and investment options: ■ To buy an existing restaurant, operate it as is, or change its concept■ To build a new restaurant and operate it■ To purchase a franchise and operate the franchise restaurant■ To manage a restaurant for someone else, either an individual or a chain In comparing the advantages and disadvantages of buying, building, franchising, and working as a professional manager, individuals should assess their own temperament,...