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Sunday, July 20, 2014

How much do you really need to open a restaurant/cafe in Singapore?

You're a fresh grad out of university or you're one of those who have been dreaming about opening a restaurant or cafe and now you're raring to go to make your dreams come true. I have once been in this position - trying to live my glamorous dream, but yet not too sure on whether I had enough money to start off.

How much do you really need to budget your costs before setting up your restaurant or cafe?


This weekend I have the privilege to meet up with one of my former classmate who has been in the F&B business for the past couple of years. Through our conversation, I managed to gather some important considerations which I hope will help those who are thinking of setting up their own F&B business.

Before we start, I would like to present the hard truth figure to those who thinks of the glamorous successful rate of the F&B business. Based on the statistics over the past 10 years, slightly more than 70% of new businesses fail in the first year and about 90% of them fail in the next 3 years. That leaves us with only 1 out of 10 who are in existence after 3 years or more. One can remember that restaurants that have closed recently include Wok & Barrel, Preparazzi, Tea Cosy, One on the Bund and many more.

Budget Calculation

One of the main contribution for the high failure rate is usually due to either the underplanning of the costs or being over optimistic on the sales front.

When I talked to my ex-classmate, he mentioned that the budgeting for F&B business are usually bottom-up - which means that we need to calculate the fixed and variable costs such as rent and raw materials and work our way up to determine the sales figure. Obviously, the lower the operating costs the higher chances you are likely to be successful in your business. So let's analyze deeper the importance of each components.

Rent

Rental costs are usually the killer factor we have in Singapore. One can look at a few owned Reits malls such as CMT or FCT and you can see how they are consistently revising their rental rates to increase their DPU and value to unitholders. 

Based on Williams, Richard in his valuation journal in 2002, he mentioned that restaurant owners cannot afford to pay more than 5% to 8% of the total gross sales in rent if one is to be successful in the long term. In the Singapore context, my friend argued that it is virtually impossible to get the rent rate this low and he estimated the figure to be closer to 10% of total gross sales, unless the place warrant a premium of competitive advantage such as sea view or no competitor within the 2.5km radius, then it would make sense to add a percent or two more on top of it.

For example, the average price psf on Plaza Singapura is around $14/psf. So if you are looking to lease a small shop for your cafe at around 800 sqft, you are looking easily at around $11,200/month in rent. Taking the 10% rule, this means that you should be expecting around $112,000 in gross sales for the month or $1.34 million per annum. If you are looking to charge your customers at around $20 per customer, your breakeven point would be at  183 customers/day.

Some landlord will propose a variable component on top of the fixed rent. So you might get something like $6,000 + 5 % of sales. In this case, your rental costs are no longer fixed and have to bear in mind the variable components involved.

Food (Raw Materials)

The general rule of thumb is your costs for the food and other raw materials should never exceeds 35% or 1/3 of your overall gross sales. Price is always a sensitive factor to the consumers and not something that can be easily passed down to your consumers even if the price of your raw materials is up. To ensure that you get the cheapest deal, ensure that you have a network of vendors who are willing to work long term with you in times of good and bad economy. Having said that, it is important not to compromise cheap for quality as this will backfire in the long run.

Labor Costs

Labor costs are another difficult component to handle especially in Singapore. The labor tight crunch means that you probably need to hire foreign workers who are willing to dedicate service and the right attitude to the customers. The general rule of thumb is these costs should not exceeds 30% of your overall gross sales. Think of ways on how you can save costs by using automated service, e.g there are a few Japanese restaurants who are using IPAD for order and delivery of the food. The more you can save these costs at start, the higher likelihood you are going to succeed in your business.

Other Intangibles

These intangibles such as service, attitude, timeliness of the delivery and consistent quality of the food are key important ingredients to customer's brand loyalty. Often, many restaurants and cafes neglected on these aspects which can prove to be costly to the business in the long run. With Facebook, Tweeter and Instragam highly dominant in the modern technology of our everyday lives, the word of mouth can spread rather quickly for your business - either good or bad.

Sample P&L done by B

I am not an expert in this business but I think it is interesting to understand how the successful of an entrepreneur goes back to how prudent he is on the budgeting. As with investing, the higher the margin of safety, the higher chances you are likely to be the one standing out in times of adversity.

The next time you want to venture out opening a restaurant of cafe, ask yourself again, how well have you prepared?



14 comments:

  1. B,

    And that's the irony.

    If you ask successful owners of restaurants or cafes, they will tell you had they known how difficult it would be, they would never have left their jobs and started on their restaurant or cafe dreams...

    The strength of youth is not knowing what cannot be done!


    Those who wanted an "excuse" to remaining in the status quo will refer to your this post and point to the dismal odds of 1 out of 10... Why bother?

    Those who are really passionate will point to your same post and feel energized!

    Thank goodness the other 9 out of 10 will quit!

    Imagine the competition if 10 out of 10 succeed!!!



    ReplyDelete
    Replies
    1. Hi SMOL

      The younger you start the more risks you are willing to take (assuming one has the fund). The risk to the business is not anywhere lower but I guess the risk to oneself is much higher. If anything should failed, he still has a long way to bounce back.

      Increase competition is good for us consumers. We get better food at lower rates. I hope the number of successful entrepreneurs would increase though. Hopefully these people have made enough research before venturing out on their own ;)

      Delete
  2. Virtually everyone entrepreneurs I know of want to set up cafe or cake shop.

    You must be really good at it before attempting to do F&B, otherwise you will be just another flop biting the dust!

    I would rather invest my money rather than throw it away on a business venture.

    Regards,
    SG Wealth Builder

    ReplyDelete
    Replies
    1. Hi B,

      Very good post on the hard truths of the f&b business. I agree with SMOL that had people known how difficult it would be, most would not even have gone into the business in the first place. That's probably why we see more and more new young f&b entrepreneurs. Still, some can succeed but it'll take a lot of hard work and definitely passion to continue on.

      Delete
    2. Hi Gerald

      It needs to be motivated with passion, not money.

      I do not really have the passion to do an F&B business, so I'm more likely to fail before I even started.

      It is a lot of hard work, and sadly not many people realize it.

      Delete
    3. Hi SGYI

      You are right.

      The hardwork to do this is crazy ass but people just see the glamorous side of it. The F&B business is one hell of a business and it takes more than guts to run it.

      Delete
  3. Few friends of mine started a small provision shop at shenton way some years back. 5 of them, all part time work and part time managing the business. They started with great enthusiasm and hence reasonably good business initially. Eventually they closed shop after two years with capital lost - total 60-70k. Hiring of good staff is extremely difficult. Commitment/ passion to the shop diminish over time and 5 of them could not see eye to eye eventually.

    ReplyDelete
    Replies
    1. Best thing to avoid is starting a business with friends/ family actually unless everything is stated clearly on black and white and communicate with no bias and sharing the same goal.

      Delete
  4. Hi, this is an outstanding post !! your blog is very nice i am regular reader of your blog its very informatics for Business Setup Singapore

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  6. I agree with you. Building a business like restaurants or cafes is quite risky, since food is a raw material, and there are plenty of people who would rather prepare their own meals and coffees than spend money dining out. However, that shouldn’t stop anyone from giving their dream business a shot. After all, there is not shortcut to success. So, just don’t rush things up. Wait until you’re ready and knowledgeable about the market you’re aiming for, before you venture yourself into any business. Thanks for the very informative post, B! :)

    Brian Carter @ Restaurant Business Broker

    ReplyDelete
  7. my brother already having 3-4 restaurants in india.. now he wants to open one restaurant or one food stall here in Singapore.. what license required for that and where to apply..

    ReplyDelete
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