Sep 28, 2011

Same Tricks, Different Industry....

I was watching Restaurant: Impossible last night.  If you haven't seen it, it's like Kitchen Nightmares that Gordon Ramsey does on BBC.  I love that show, too, and have used it in this blog.  Chef Robert Irvine goes into a failing restaurant and tries to turn it around.  The restaurant last night was a diner in San Diego called TRAILS.  It could have as well been a scrapbook store because I heard pretty much what I listened to for nearly a decade in the scrapbook industry.

Trails had an owner who had worked in a corporate restaurant and therefore decided she was qualified to run her own.  Lacking funds, she got her dad to finance it.  Lacking profit, they later decided expanding it out be the way to increase the cash flow so her dad took out a second mortgage and now he is $600,000 in debt.  

Reminds me of those who think that liking to scrapbook qualified them to run a scrapbook store.  So, they take out a second mortgage on their home to open one without any idea how to.  They think their "passion" will be enough to carry them.  

The decor was cute and the food wasn't bad - something Chef Irvine rarely encounters in these failing restaurants.  But, they will still losing money hand-over-fist so he set about the find out why.  

First, they bought the restaurant from the previous owner at the "Emotional Price".  Dave Ramsey would call that a "Stupid Tax".  Saw it all the time in the scrapbook industry.  An owner, having put all their blood, sweat and tears into their business, believes it is worth MUCH MORE than the sum total of the inventory and  fixtures.  They believe they have a loyal customer base and that their own sweat equity is valuable.  Financials don't matter or aren't offered up or requested.  A buyer, not getting proper advice about how a business is priced, buys into the "this is my baby, take care of it" line and just wants what they want so bad they agree to the ethereal and baseless price.  The owner of Trails paid $240,000 for about $20,000 worth of restaurant equipment in a leased building.  She claimed to have gotten a "customer base" for that price, but how many of us eat at the same restaurant all the time?  As Robert Irvine pointed out, Doctors and Lawyers have valuable customer bases, restaurants don't.  

I consulted with quite a few people who would come to me wanting to buy a scrapbook business.  They most always had the "emotional price".  And, most of the time, the current owner didn't want to release financials to them. I usually said either they didn't have a clue if their business was making money or they were lying to them that it was.  If they based even part of the price on ANYTHING, they usually started with the cost of inventory and fixtures.  How much of that inventory was outdated, though?  You can't expect to recoup 100% of your investment of inventory that no one wants anymore.  I was always surprised at what people thought their little scrapbook business was worth.  I usually told people it would be cheaper just to start their own and build their own reputation.  Sometimes, you're buying a business no one wants to come to anyway.  I cringe when I see "UNDER NEW MANAGEMENT" signs.  To me, that is announcing to the public that, yes, we were awful but come try us now!  It's hard to undo customer attitudes toward a business.   So, unless the business is making the big bucks with a loyal customer base, it's probably better to build your own than buy someone else's albatross that they are eager to get rid of at your expense.  Most of these owners rarely took home a penny while they owned the place, but now will attempt to extract their profit in the sale of it.  I usually told people to walk away.  

Their second mistake for the restaurant was pricing.  They wanted good food at a great price so they priced food based on the cost of the food and nothing else.  The owner had no idea what her daily operating costs were.  She had never calculated them.  She just said, "Let's set our prices at 3 times the cost of food" or some other "sounds like a good idea" strategy.  "Hope" is not a good strategy for a business.  She was shocked to learn that her daily expenses above the cost of the food were $900 - before she even took home a penny for herself or started paying her Dad back.   Her cheap breakfasts meant her core customers were geriatric and on "fixed incomes" so she kept her prices low for them and they sang her praises - right into the poor house.  

I saw poor pricing strategies way too often.  The challenge of the scrapbook industry is that everyone is selling pretty much the same stuff.  So, some would try to be the cheapest by shaving a few cents off the price.  Then, they might heavily discount their shipping if they were online.  Or, they would succumb to customer complaints about the cost of scrapbook products and try to lighten the financial burden in hopes they would sell more.  Rarely did anyone run the math or do any research about the demographics.  

Her third problem was that as a mom, she didn't want to do dinner service - she wanted to be home with her kids.  They had tried dinner service for a while but were losing about $500 a day on it because no one was coming.  Her Chef had the same attitude - she wanted to be home with her kids, too.  So, they were trying to run a restaurant on the two cheapest meals of the day.  

If I had a dollar for every scrapbook store owner who didn't want to work too many hours because they needed/wanted to be home with children, I'd be rich.  A business is the most demanding, needy and naughty child you'll ever have.  It will over-shadow and eclipse all other children until you can afford to pay someone to manage it for you.  Even then, when there is a problem, it's YOU that has to take care of it most of the time.  As one owner who closed her store told me, "When my alarm goes off at 3 am for the third time in a week and I have to get dressed and go down to the store to take care of it, I wonder how much longer I want to work for free."  

A few years ago, Dr. Phil gave some business dreaming moms a reality check on his SHOW.  Basically, if you have kids at home, don't start a business that needs a lot of your time.  Think smaller or go get a job with regular hours.  But, the idea that you can be successful only being open when the kids are at school is unrealistic.  Your customers are probably not available during those hours.  They want to come after work and on weekends - the exact times YOU want to be home with your kids.  

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