Yes, You Can Start a Restaurant in a Down Economy

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So you're thinking about opening a restaurant. The allure of fame and fortune seduces you, your love of food drives you, and you want to heat up your life in an exciting industry. That's all fine and well--just as long as you make sure the flame isn't turned up too high. Even in a healthy economy, the restaurant failure rate tells a grim tale, but in a recession, the industry is even more unforgiving. Expensive food spoils, labor costs are high, restaurant-goers are harder to come by, restaurants close and life goes on.

But we also know we're talking to a special breed of people: entrepreneurs. Entrepreneurs have the drive to go against the grain and the nerve to try their luck in such a ruthless industry. We're not saying don't do it. We're just saying to equip yourself with the right tools or you might just find yourself at the bottom of the food chain. To help you get started, we reached out to a handful of industry experts and food entrepreneurs and compiled the perfect recipe for starting a restaurant or food business in a down economy.

Start with a Dose of Reality

Though you may be anxious to start stirring up business, you can't afford to skip this one step: building a solid foundation. "The biggest thing to avoid is 'Polaroid Syndrome'--here's me in my restaurant, here's me with my chef,'" warns Clark Wolf, founder and president of Clark Wolf Co., a food, restaurant and hospitality consulting firm. "That's not what this is. This is something very different and a lot more work."

Starting a restaurant requires in-depth knowledge about much more than just food. It's also about marketing, financing and people skills. Even if you're not single-handedly equipped with all that know-how, it's not necessarily a deal-breaker. "Take [on] a working partner, someone who's as equally involved in the business as you but brings something different to the table," advises Marilyn Schlossbach, a restaurateur and consultant who has been involved in the industry for more than 20 years.

Possessing the right knowledge is only part of the equation; having sufficient capital comprises the rest. "Historically, people have heard that undercapitalization is the No. 1 cause for failure in business," Wolf says. "It has never been truer. You really need to know not just how much money you need to open the restaurant, but also where the rest of it is coming from." Have enough capital to endure the first six months, Wolf advises, as well as an additional source of capital to get your business through several months after that.

Add a Good Concept and a Handful of the Right Ingredients

While the restaurant industry in general has taken a hit, one segment in particular seems to be faring better than the others. The fast-casual category is capturing customer dollars by offering healthier options at more affordable price points that spell value for consumers. In 2007, fast-casual chains enjoyed a 13.3 percent spike in sales growth and a 9.5 percent jump in unit growth, making it the growth vehicle for the limited-service restaurant industry, according to food-service consulting firm Technomic.

Both Schlossbach and Wolf agree that fast-casual has potential, but Wolf also believes success isn't so clearly labeled. Regardless of the segment, restaurateurs need to focus on making their customers feel better--the No. 1 reason people go to restaurants, says Wolf. Whether through good food or good service, ensure that customers will feel comfortable and safe. And take note of what customers crave. Wolf points out that people craved comfort foods, such as mashed potatoes, after the economic crash in '87 and sushi after 9/11. And now? "The icons of this economic period are 1) a really good hamburger from really good meat and bacon because it's an American birthright, and 2) we are entering the macaroni-and-cheese economy, but the cheese is much better," he says. "Both [dishes] are going to be served with farmer's market greens." Wolf recommends using in-season, local, heirloom and organic ingredients.

J. Dean Loring, 51, and Michael Gilligan, 52, seem to be right on the money. In 2007, they founded Burger Lounge, a fast-casual hamburger restaurant in La Jolla, California. They use only organic, grass-fed beef served on a proprietary bun, focus on presentation and deliver it all with an elevated level of service designed to exceed their guests' expectations. And while other restaurants are contracting or downright going out of business, Burger Lounge is expanding. It's opening a fourth location, averages sales of $1,100 per square foot and projects year-end sales of more than
$5 million. "A lot of people are sitting on the sidelines and are nervous about what's going to happen," Loring says, "but we see a lot of opportunities both in real estate and in presenting a product that dovetails with people's needs now. I wouldn't say our company or product or model are recession proof, but they thrive in that market."