3 ms·

Can someone help explain restaurant industry economics? when the business starts out, it's high risk and low margin. Tons of capital investment. Labor intensi

Can someone help explain restaurant industry economics? when the business starts out, it's high risk and low margin. Tons of capital investment. Labor intensive and hard to staff. If you are lucky you are pulling 15% margins Besides some exceptions, if you are lucky you may get some growth for 5-10 years. Then your brand falls out of favor (trends) and you spiral into bankruptcy. Who invests in this stuff?

tithe 3y ago
> Who invests in this stuff? Bill Ackman (founder of Pershing Square Capital Management), for one: https://lexfridman.com/bill-ackman-transcript#chapter4_investing_in_restaurants https://lexfridman.com/bill-ackman-transcript#chapter4_inves...
laweijfmvo 3y ago
Maybe not fast food / fast casual, but at least in a trendy area (NYC, SF, LA, etc.) if a restaurant catches on, they're making way more than 15% margins because they can charge whatever they want and people will go because it's cool... this would include coffee shops and other relatively low cost establishments
MrFantastic 3y ago
If I ever get rich, I would totally open a ghost pizza restaurant. Margins are good. Spoilage is a non-issue. Orders are pickup or delivery. I can bring 10 pizzas to every party.
tempsy 3y ago
You should look at Chipotle's stock.
- tonymet 3y ago
  an exception that proves the rule
- tonymet 3y ago
  also, stock prices aren't economics. In aggregate they can be useful indicators, but they are not a measure of a business' results (due to derivative factors)
mason55 3y ago
Option a, you stay small, don't chase trends, and you bring in decent profits year after year. Eventually maybe you close but not after paying back the investments plus more. Option b, you grow super fast, you have a lot locations, each one barely profitable, but you make it up on scale. You scale quickly enough that you make a lot of money before trends change. They key is that you accept that you're chasing a trend and move as quickly as possible to extract as much as you can. Option c, you come up with the core concept, and you create a franchise program. You make your money off franchise fees & shadier stuff like making the franchisers use suppliers that you own. The franchises die when trends change but some made a profit, and your capital outlays were never very high, so you make a lot of profit.
01100011 3y ago
Speculators hoping to catch the next Chipotle. Tons of activity in this space right now. I got burned trying to short one of them. These are, many times, low-float or institutionally owned and prone to heavy manipulation as well. $CAVA, $WING, $SG, $SHAK, $TXRH... lots of names that will either be the next $CMG or crash back to earth when the next trendy restaurant catches the attention of social media. I think a lot of young people are abandoning older brands like McDonalds in favor of these trendier options, so there's a lot of business there if a new brand can capture it. But like you say, nothing lasts long in that industry.
- tonymet 3y ago
  i hear that. but how about the actual economics of the businesses. e.g. return on capital . Obviously a handfull of stocks have spiked with speculation. but every town has hundreds to thousands of restaurants. And regions have dozens of growth chains all receiving investment. I get why mom & pop's invest, even if it's high risk low reward. But everything in the middle that takes on millions in capital makes no sense
duped 3y ago
More than half close within a year and it's closer to 80% after five years, but the ones that make it past that point are a lot more likely to thrive. Kinda like turtles going out to sea. > Tons of capital investment I mean it's not that much capital, compared to most businesses. You need way more money to start a software shop than a restaurant.
- tonymet 3y ago
  Well thankfully restaurant & AI startup aren't the only two industries worthy of investing in. Jokes aside, I get mom & pops. But I'm dubious on the "growth" chains like a Shake Shack or Chick Fil A. My current theory is that they are effectively MLMs with different structures: private equity MLM, owner-operator (franchisee) MLM. See Subway for the end result
  - javagram 3y ago
    Chick fil A is privately held and their franchise operator model doesn’t require a large infusion of cash from the franchisee. Only 10k cash, so it’s more like a manager job with profit sharing and I don’t see how it could be a MLM.
    - pwillia7 3y ago
      Because you have to pay for the job
  - duped 3y ago
    "MLM" is a sanitized name for "Pyramid Scheme" where the only way for a member to make profit is to bring in new people who pay up into the organization. Franchises aren't pyramid schemes. I don't know why you'd be skeptical, franchising has been very successful for the last century (McDonalds, 7-Eleven, Ace Hardware, etc) and gives steady returns to investors. And the reason why the food business always has opportunity is because people always need to eat, and are willing to spend disposable income on food. When consumer spending goes up so does the restaurant biz, and that's not going to change. And franchises are just one efficient way to create an international restaurant business. It was actually pretty surprising when Starbucks came along and didn't franchise. But just because the model is efficient doesn't mean you can't screw it up, like Quiznos. That's just short term thinking run amok.
achow 3y ago
PepsiCo acquired Pizza Hut, Taco Bell, and KFC to increase its soda fountain sales of Pepsi products.
- asdfman123 3y ago
  Fundamentally they're a sickness-as-a-service company
  - kube-system 3y ago
    Don't give CVS Health Corporation any ideas.
    - mortenjorck 3y ago
      Now that would be capturing the full value chain.

tithe 3y ago

> Who invests in this stuff? Bill Ackman (founder of Pershing Square Capital Management), for one: https://lexfridman.com/bill-ackman-transcript#chapter4_investing_in_restaurants https://lexfridman.com/bill-ackman-transcript#chapter4_inves...

laweijfmvo 3y ago

Maybe not fast food / fast casual, but at least in a trendy area (NYC, SF, LA, etc.) if a restaurant catches on, they're making way more than 15% margins because they can charge whatever they want and people will go because it's cool... this would include coffee shops and other relatively low cost establishments

MrFantastic 3y ago

If I ever get rich, I would totally open a ghost pizza restaurant. Margins are good. Spoilage is a non-issue. Orders are pickup or delivery. I can bring 10 pizzas to every party.

tempsy 3y ago

You should look at Chipotle's stock.

tonymet 3y ago
an exception that proves the rule
tonymet 3y ago
also, stock prices aren't economics. In aggregate they can be useful indicators, but they are not a measure of a business' results (due to derivative factors)

mason55 3y ago

Option a, you stay small, don't chase trends, and you bring in decent profits year after year. Eventually maybe you close but not after paying back the investments plus more. Option b, you grow super fast, you have a lot locations, each one barely profitable, but you make it up on scale. You scale quickly enough that you make a lot of money before trends change. They key is that you accept that you're chasing a trend and move as quickly as possible to extract as much as you can. Option c, you come up with the core concept, and you create a franchise program. You make your money off franchise fees & shadier stuff like making the franchisers use suppliers that you own. The franchises die when trends change but some made a profit, and your capital outlays were never very high, so you make a lot of profit.

01100011 3y ago

Speculators hoping to catch the next Chipotle. Tons of activity in this space right now. I got burned trying to short one of them. These are, many times, low-float or institutionally owned and prone to heavy manipulation as well. $CAVA, $WING, $SG, $SHAK, $TXRH... lots of names that will either be the next $CMG or crash back to earth when the next trendy restaurant catches the attention of social media. I think a lot of young people are abandoning older brands like McDonalds in favor of these trendier options, so there's a lot of business there if a new brand can capture it. But like you say, nothing lasts long in that industry.

tonymet 3y ago
i hear that. but how about the actual economics of the businesses. e.g. return on capital . Obviously a handfull of stocks have spiked with speculation. but every town has hundreds to thousands of restaurants. And regions have dozens of growth chains all receiving investment. I get why mom & pop's invest, even if it's high risk low reward. But everything in the middle that takes on millions in capital makes no sense

duped 3y ago

More than half close within a year and it's closer to 80% after five years, but the ones that make it past that point are a lot more likely to thrive. Kinda like turtles going out to sea. > Tons of capital investment I mean it's not that much capital, compared to most businesses. You need way more money to start a software shop than a restaurant.

tonymet 3y ago
Well thankfully restaurant & AI startup aren't the only two industries worthy of investing in. Jokes aside, I get mom & pops. But I'm dubious on the "growth" chains like a Shake Shack or Chick Fil A. My current theory is that they are effectively MLMs with different structures: private equity MLM, owner-operator (franchisee) MLM. See Subway for the end result
- javagram 3y ago
  Chick fil A is privately held and their franchise operator model doesn’t require a large infusion of cash from the franchisee. Only 10k cash, so it’s more like a manager job with profit sharing and I don’t see how it could be a MLM.
  - pwillia7 3y ago
    Because you have to pay for the job
- duped 3y ago
  "MLM" is a sanitized name for "Pyramid Scheme" where the only way for a member to make profit is to bring in new people who pay up into the organization. Franchises aren't pyramid schemes. I don't know why you'd be skeptical, franchising has been very successful for the last century (McDonalds, 7-Eleven, Ace Hardware, etc) and gives steady returns to investors. And the reason why the food business always has opportunity is because people always need to eat, and are willing to spend disposable income on food. When consumer spending goes up so does the restaurant biz, and that's not going to change. And franchises are just one efficient way to create an international restaurant business. It was actually pretty surprising when Starbucks came along and didn't franchise. But just because the model is efficient doesn't mean you can't screw it up, like Quiznos. That's just short term thinking run amok.

achow 3y ago

PepsiCo acquired Pizza Hut, Taco Bell, and KFC to increase its soda fountain sales of Pepsi products.

asdfman123 3y ago
Fundamentally they're a sickness-as-a-service company
- kube-system 3y ago
  Don't give CVS Health Corporation any ideas.
  - mortenjorck 3y ago
    Now that would be capturing the full value chain.