The booming restaurant business

In my life outside economics, I am an entrepreneur — a restaurateur to be exact. I have been involved in the restaurant business for more than 25 years and throughout my career, I have opened more than a hundred food establishments. Some continue to operate today, while others I have either sold or closed.

Today, my company operates a group of restaurants all of which are meant to promote and preserve Philippine heritage. Keeping our history and culture alive, through food, is our purpose. You may recognize some of our establishments under the brands XO46 Heritage Bistro, Arroz Ecija and ¡OYE! Tapas & Grill, among others.

The restaurant business is booming, thanks to our consumer-driven economy. OFW remittances, IT-BPO earnings and significant increases in infrastructure spending have all contributed to the rise of the middle class and their capacity to consume the 4Fs — food, fashion, furnishings, and fun. Now more than ever, Filipinos are eating out given more disposable income. In fact, a recent marketing survey reveals that supermarkets sell less grocery items since members of households eat out more often.

This has made the restaurant industry one of the most attractive businesses to get into for both fledgling entrepreneurs and established businesses. Some succeed — but many fail. Obviously, there is more to it than meets the eye.

With the new year is right around the corner, I am certain that thousands out there have intentions to cash-in on the food business. Before you do, heed some advice from an old hand in the industry.

BUT FIRST, A PERSPECTIVE THROUGH STATISTICS
The latest formal audit conducted by Department of Trade and Industry (DTI) revealed that as of the beginning of 2016, there were approximately 6,652 full-service restaurants, 4,477 fastfood restaurants, 3,772 food kiosks, 3,748 cafeterias, and 1,445 bars & pubs operating in the country. I reckon the number should be 10% to 15% higher today given that the survey was conducted some time ago. Note, the survey excludes establishments in the underground economy.

The survey further showed that the food industry generated robust revenues throughout the period of audit. Full-service restaurants generated the most gross income, raking in P158.1 billion; fastfood chains generated P144.8 billion; food kiosks earned P17.7 billion; cafeterias took in P15.8 billion while bars & pubs made P10.9 billion. Interestingly, only P4.9 billion was generated through e-commerce (or online ordering and delivery services). This suggests that Filipinos still prefer to dine within the restaurant premises.

In terms of profitability, the industry had an average income and expense ratio of 1:19. In other words, for every one peso spent by a food establishment, one peso and nineteen centavos was generated back. This is a higher rate of return that most other industries.

The trickle-down contribution of the food service industry to the economy is substantial as well. Collectively, the industry spent P395.3 billion on their respective supply chains, salaries, rent and other operating expenses. As a result, the food service industry contributed nearly 3% to gross domestic product.

Unfortunately, there are no formal studies to ascertain the real mortality rate in the restaurant business. I can only speculate. Closure rates are higher for full-service restaurants, whether fine-dining or casual. In my experience, less than 60% survive the first three years of operations.

No data is available for fast-food restaurants, food kiosks, cafeterias, and bars but I reckon mortality rates are not as high as those of full service.

CLARITY OF CONCEPT
Those without experience in the restaurant business have an oversimplified notion of it. They believe that just because our 102 million population needs to eat three times a day, one can never fail in the food trade. How wrong they are. As mentioned above, the sheer number of food establishments in operation make it one of the most competitive businesses to get into.

Apart from the obvious — a good location, good food, and good pricing — one of the most overlooked factors that help increase one’s chances of success is what we call “clarity of concept.”

Customers need to know what to expect in your restaurant before they even consider dining in it. Hence, communicating your concept in a clear manner is crucial to induce trial usage.

The factors that comprise a restaurant concept are: the category it belongs to, the cuisine served and its competitive advantages.

There are many categories of food establishments out there, among the most common are fastfood restaurants, casual dining restaurants, and fine dining establishments.

Generally speaking, fast-food restaurants are defined as those having over-the-counter service. Casual dining restaurants are characterized by having all-day dining in a informal environment. Fine dining establishments are those whose food are made-to-order and operate only during lunch and dinner. There are those who operate with multiple categories too. Some fine dining restaurants turn into bars after dinner hours, hence, the moniker “restobar.” Others are casual dining restaurants but also offer dry goods in a restaurant-deli format. The permutations are endless.

Being clear about what category you belong to gives the potential diner an idea of the kind of experience he will have and how much he will likely spend in your establishment. This is the first consideration for a visit.

The second factor is the theme of the restaurant. A theme is usually associated with the cuisine served. It could be Italian, Japanese, Mexican, or a combination of them in fusion style. Once defined, it is important to stay true to it. The worse thing a restaurateur can do is to declare an establishment an Italian restaurant, then include sweet and sour pork on the menu. Integrity in cuisine correlates to authenticity and quality.

The third factor are a restaurant’s competitive advantages. These are what set your establishment apart from the competition. It is what compels people to try it in the first place.

Competitive advantages come in various forms. Some trumpet the chef’s reputation like Margarita Fores of Cibo. Other use the provenance of their ingredients in the same way Green Pastures does. Specialty restaurants use their original recipes as a selling point like Max’s Chicken. A few use the extensivity of selection as an advantage like Viking Buffet.

In my opinion, having a product specialty is the most effective competitive advantage. Consider how Prince Albert of the then Intercontinental Hotel survived four decades on the back of the reputation of its roast beef.

A word of caution. A restaurant’s competitive advantages must be subtly communicated. I say “subtly” because to oversell a competitive advantage may result to over-expectation. This could backfire should the dining experience be less than spectacular.

Effective self identification of a restaurant’s concept is achieved through the several mediums. Among them are the restaurant’s name and logo, its byline (“Café,” “Bistro,” “Pub,” etc.), mood management and collaterals (e.g. menu, leaflets, print ads, Internet postings, etc.).

KEEP AN EYE ON THE FUNDAMENTALS
While clarity of concept is important to induce trial usage, it is still the quality of the food, service and prices that will have customers coming back.

To gauge food quality is subjective. What is good for one may not be good for all. What is important is that the greater majority rate your products as either excellent or at the very least, above-average. Anything less than this puts you in danger. The challenge is to get their “real” impressions and not their polite feedback. For this, we rely on their unfiltered comments on social media as well as our in-house feedback forms. Being sensitive to the sentiments of your customers provides the road map for your improvement.

On prices, its important to remember that prices matter to all, even to the so called “affluent market.” In the end, what customers are looking for is good value. Value is a an interplay of food quality, quantity and dining experience, relative to price.

The market is big enough and the economy strong enough to absorb new entrants in the restaurant business. Do it right and you will be rewarded well.

 

Andrew J. Masigan is an economist.