Episode Transcript
[00:00:00] Hey, if you're a restaurant owner and you feel like things are harder today than they were yesterday, harder today than they were 10 years ago, harder today than they've ever been before, it's not you. You're not crazy. They are. They have never been this hard. It's never been so difficult to run a profitable restaurant than it is right now in the year 2025. I want to talk a little bit about why that is. And most importantly, I want to talk about how you combat that, how you move forward, how you build a profitable restaurant. All of that on today's episode of Restaurant Strategy.
[00:00:30] There's an old saying that goes something like this. You'll only find three kinds of people in the world. Those who see, those who will never see, and those who can see when shown. This is Restaurant Strategy, a podcast with answers for anyone who's looking.
[00:01:01] Hey everyone, thanks for tuning in. My name is Chip Close. This is the Restaurant Strategy podcast. Two episodes every week. One episode focused on operations. That's today. And then the other episode every week is focused on marketing. That comes on Thursdays. So two episodes every single week. Nearly 500 episodes under our belt at this point. And we are just getting started. If you don't know me, my name is Chip Close. I've been in the industry for 25 plus years. I run a coaching group. It's called the P3 Mastermind. If you've been listening for a while, you know all about that group coaching, helping restaurants increase profitability. I wrote a book. It's called the Restaurant Marketing Mindset. Did you know I also have a membership site, it's called Restaurant Foundations. It is home to an online course, 44 video lessons, a resource bundle of worksheets, spreadsheets, templates, ebooks, all in there, constantly adding new documents to it. We also have a series of mini courses called Playbooks. They are in there. We do monthly masterclasses. We do ask me anything sessions. All those are recorded. So they end up being an incredible library in there. All of that is $97 a month and we are offering you 30 days free. The link is in the show notes. If this is interesting to you to go check out all the resources, by all means, listen, take me up on it. Sign up, get the free membership, go in and literally download everything. Watch all of the content. And if you think that's all you need, cancel before it starts charging at the end of the 30 days. What I obviously hope you'll do is stick around for a while because we're always adding new Content to always something new. There's a reason to be a Foundations member. But even if you just go in there and steal everything over the course of 30 days, that's fine, too. It's absolutely free for your first month. Again, Restaurant Foundations, it's the name of our membership site. Over a hundred members in the group. And my goal over the next 12 months is to triple that in size. I need you guys to do it. I want you guys to go check it out. The link is in the show notes.
[00:02:57] Okay, so today I want to talk about rules and games. I started off by saying, if it feels harder than it ever has been, you're not crazy. It is. It is harder today to run a profitable restaurant than at any other point in history. And certainly I've been in this industry for the last 25 years, and I can attest to the fact that it is getting harder. Before I dive in and before we talk about why it's harder and sort of, you know, diagnose the symptoms and the problems and then come up with some solutions. Before that, I want to go back and I want to talk a little bit about games, Rules and games. There's this saying. It says, the rules are what make games fun. So let me use the example, because we're here in the United states. So American football, 11 players versus 11 players. By the way, it's the same thing with European football, but for American football, right, There are rules. The field is 50 yards wide. The field is 100 yards long. You get four chances to move the ball 10 yards. If you do that, you get another four chances. And the idea is to drive the ball all the way down the field and make either a field goal or a touchdown at the end of the game. 60 minutes. Whoever has the most points wins. That is a game. Now it's 11 players versus 11 players. And there are rules for forward passes and what you can and can't do. Let's say I'm the assistant manager, right? Assistant coach on a big NFL team, and I come up with this brilliant play, and I run in, I throw it in the head coach's face, and I say, this play is awesome and it will definitely work. And the head coach looks at it, and it takes him about 20 seconds to realize that I've drawn up a play with 12 players.
[00:04:26] And he sits and he looks at. You know, he sits up and he looks at me, and he goes, we can't use this. And I said, why? He said, because it's got 12 players. I said, yeah, yeah, yeah, but it'll definitely work. And he said, of course it'll definitely work because we've got an unfair advantage. We'll have 12 players against 11 players, but the rules are that we can only put 11 players and we can only line 11 players up against 11 players. The rules are what make games fun. That's why spectators show up to see two teams playing with the exact same set of rules and watch them strategize and push their way to victory. The rules are what make games fun. And the constraints that you have in your business, that we all have in our businesses, but especially in the restaurant industry, you have to embrace the rules as something fun because you could make, I have no doubt you could make the very best restaurant in the world, but it wouldn't last very long. In fact, we're watching that in real time. Some of the best restaurants in the world, some of the best restaurants in history, are closing their doors simply because it's unsustainable to, to. To run a restaurant that requires so many staff, requires so many patrons, or requires such a dollar amount. It's difficult, right? So if you've got an army of well trained cooks there to execute your food, but then it requires that you charge $1,000 ahead, $2,000 ahead, you're not going to be in business very long. There's a finite number of people who are willing to pay that price in order to have a meal in your. Phenomenal.
[00:05:56] So I have no doubt that given no constraints, given no rules, you could make the best restaurant that the world has ever seen. But we do have rules. You have to pay people what they're worth so that they show up to work and they work very hard and they stay productive and passionate about what they're doing, right? You can't charge too much. This way you can attract people who are willing to pay what you do charge.
[00:06:20] The rules are what make games fun. And if you don't embrace that, if you don't understand that that's a key piece of success, then you're going to lose, then you're going to fail. So I said the title of this episode is all really about rules and games.
[00:06:33] There's a book called the Infinite Game and it was written by Simon Sinek, but it's based on the work of Dr. Cars. So he wrote this book out 30 years prior. And the whole idea is understanding that there are finite games and infinite games. Right? In finite games again, in my football, there's two teams going up against each other. Whoever gets the most points win it is finite. There is a beginning and then there is an end. And we declare a winner and a loser based on the results, and then we move on. The whole point is to see who is better, who is the better team.
[00:07:09] But business is an infinite game, and the whole point is not to destroy all your competition. Contrary to popular belief, the goal of an infinite game is to simply stay alive, is to be able to keep playing the game.
[00:07:24] This is something really, really important. Alex Hormozy talks about this similar idea, and again, I'm using all these analogies and stories so you can see the fact that this is not an original idea. People have been talking about this and writing about this for a long time. I've been talking about it, and I'm just trying to be really deliberate and draw attention to other people who are also talking about it. Alex Hormozy says business is not a matter of, you know, best team wins. It's all about last man standing. Can you sustain? Can you stay alive longer than everybody else if you do that, if you outpace everybody, if you stay standing beyond everybody else, that is success.
[00:08:00] So if everybody is playing that infinite game of just trying to stay in the game, that's how we get thriving marketplaces, right? We get Wall Street. Wall street has all these big banks, right? Morgan Stanley and Chase and Deutsche bank and Goldman Sachs and all that. Yes, they are competing for investors, they are competing for dollars, they're competing in the market. But they largely succeed because the others exist. They're playing an infinite game. They're just trying to be successful, not to put the others out of business, but to just be successful, to make returns for their investors and on and on. It's the same thing with restaurants, right? I always use the example of car dealerships, right? If you're trying to sell cars, why would you put your dealership right next to all the other dealerships? And yet all across this country, dealerships plop themselves down right next to other dealerships. The idea being that the people who are in the market for a new car are going to come down to that part of town, they're going to drive down that road, and maybe they'll go to Ford and maybe they'll go to Chevy, and maybe they'll go to BMW and maybe they'll go to Toyota or wherever they're going to go. Maybe they'll try a whole bunch of cars. The idea is, if you are not right, you're running a Ford dealership and people are coming down for Toyota, maybe put your Ford dealership right next to Toyota and being like, well, people are going to come for Toyota, but maybe they'll see something in our lot and come give us a try, come ask us some questions, come walk through the, our showroom.
[00:09:24] They are playing an infinite game and they understand that their competition are also collaborators in their success. And it's a really important thing to understand.
[00:09:32] The rules are what make games fun. And we, anybody in business is playing an infinite game. Our idea, the whole point of it is not to put people out of business, but to simply survive and to keep going.
[00:09:46] Now, I said at the beginning that it's harder to today in the year 2025, harder than ever before to run a profitable restaurant. And that's because of a bunch of reasons. Some are just natural market conditions. Some are the country, you know, coming into its own and people having better jobs and, and all of that, right? That, that's inevitable as a developing nation becomes a developed nation, becomes a powerhouse, the way the United States has been over the last, let's say, 50, 60 years.
[00:10:14] When you look at the factors required to have a profitable, successful, consistent legacy restaurant, a lot of those conditions 50 years ago that existed don't exist anymore. So again, if you run a business, I work with a lot of legacy brands, I call them. I work with a lot of family run restaurants, restaurants that are being passed down from father to son, that are being passed down from grandfather to mother to, to daughter, like it's getting passed down. And what happens is right when you're in the, when it's a third generation restaurant, right, the parents are looking at you going, well, like, I made it work. I don't understand why you can't make it work. And the grandparents are going, man, I did this so well. I can't believe you can't do it well. And the difference is that the rules were different back then. The rules were different in the 90s, the rules were different in the 70s than they are now.
[00:11:09] Rent, cost of goods and labor, to name three. Three of our biggest expenses are way different now than they were at any other point in history in the 70s. And guess what? In the 90s as well, the IRS didn't really care about how much tip money was flowing through until at some point right around the early 2000s, they realized just how much revenue, just how much income was passing through and how much tax revenue they were losing out on.
[00:11:36] That's when they started caring very, very much. So in the 70s and the 90s, if your grandparents ran this restaurant, they were able to run their restaurant largely outside of the view of the irs, let's say, right? Minimum wage has gone up. Tip credit now is disappearing in a lot of states. Rent, cogs and labor, let's dive in and focus on each of them. Danny Meyer once said, our industry was built on the promise of cheap rent and cheap labor. So what happens when neither of those things are true anymore? And I think that's important to understand.
[00:12:09] Cheap rent is not a foregone conclusion.
[00:12:13] Leases are getting harder and harder and harder, especially as more shopping centers go up. And they need to be anchored with restaurant spaces. You know, they need a big restaurant, a casual restaurant, a bagel shop, a coffee shop, all of that.
[00:12:24] So what happens when the landlords are dictating terms where you cannot possibly succeed? I work with a of bunch, bunch of clients. Perfect examples. In Southern California, Southern California, those commercial real estate, those landlords own massive swaps. In Orange County, California, for example, there are a couple of companies that own almost everything, almost in the entire commercial real estate space. And they dictate the terms. So they've got percentage rent, they've got kickers in there that make it almost impossible for you to really like beat the house as an owner, as a restaurant operator.
[00:13:01] So what happens when rent and labor are no longer cheap? Labor certainly is no longer cheap. Minimum wage keeps going up. There are plenty of states where we've gotten rid of the tip credit. All of that makes it very, very difficult to run a profitable restaurant. And of course we know what's happened over the last 24 months with cost of goods. Right now we're looking at the price of beef. So last year, this time of year we're talking about eggs. This year we're talking about beef. Next year this time we might be talking about pork or chicken wings or whatever this happens.
[00:13:31] Cost of goods surges up. Now part of that has to do with tariffs or droughts or water usage or any of a number of things. Some of them are natural market conditions and some of them are some sort of man made, like a little bit of what we're dealing with right now. So rent, cogs, labor are all very different now than they were in the 90s and in the 70s, right? They're totally, totally infringing upon our ability to make money. So I want to just say here that understand you finding a space with rent under 8% and the further you can cut that under 8%, right? That's the magic number. Rent should be 8% of revenue max. Total occupancy should be between 10 and 12, meaning with your cam charges and all your utilities and all that should be between 10 and 12. And any meaningful amount that you are below that, the. The better off you are going to be when it deals with cogs. Right? Your cost of goods should come in around 25 to 27%. Blended food to beverage. Obviously, food has to be under 30. Beverage should be around 20.
[00:14:37] So they blend out to be around 25 to 27. Based on your concept, that is a rule for success. And labor has to be below 30%. Unless you're in, let's say, California, Oregon, Washington, then I think Your number is 35%.
[00:14:51] Blended COGS plus labor, that equals prime cost. That number has to be under 60%. That's the rule. In order for you to make a meaningful amount of money, I talk about 20% operating profit. It's got to be under 60%. Anything more than that, it's just cutting into your take.
[00:15:08] So again, rules and games. These are the rules.
[00:15:10] So much of what I think we do in the P3 mastermind, the group coaching program that I run, is about teaching people the rules, putting systems into place so that you can successfully navigate the constraints of our business and use them to your advantage.
[00:15:25] Right. You have to understand dining habits have changed. Expectations on the part of the diner have changed. And Gen Z, the new generation, wants different things than the generations before, than the millennials, than Gen X, than certainly than the boomers. What they're after is different. What they expect from a restaurant is different. They're going to be coming into their own, and they're going to have real disposable income over the next, let's say, 10 to 20 years. That has to be acknowledged. And all of that is going to make our industry more challenging. Now, it's going to be impossible if you keep playing by the same rules. By the rules you learned from your parents, by the rules you learned from your grandparents, the rules you learned from mentors of yours who ran restaurants at a different time in history.
[00:16:09] You have to acknowledge right now, rent, if a landlord is trying to get you to sign a lease, where your rent is going to be more than 8% of revenue, you walk away. It's just a losing proposition.
[00:16:21] If you can't get your food costs under 30 and your beverage costs under 20, then that is not a sustainable restaurant. If you can't get your labor below 30%, or let's say 35% in a state like California, then you walk away. One of the things that we have to talk about Is that the concept you have in your mind may not be sustainable.
[00:16:41] You have to come up with a concept that can work within those frameworks. There's a reason there are a million Chili's. There's a reason there are a million Taco Bell. Because they learn the rules, they understand what they have to do in order to be profitable. They know the footprint, they know how many staff members, they know what kind of demographic makeup they're looking for when they put down a new property. They know how much revenue they need, what AUV needs to be. In order to be insanely profitable, you have to do the exact same thing. What do you need to generate and where do you need to keep your expenses? If any of this sounds too difficult, I promise you it's not. We can make it very, very easy. I want to leave you with two reminders. Number one, again, Restaurant Foundations. It's my membership site. The link is in the show notes. You can get 30 days absolutely free and you cancel whenever you want. It's very easy to do it. Obviously I hope you stay for a long time, but you do not have take advantage of it for as long as it is useful to you and then you cancel. The other piece is the P3 mastermind. It's the group coaching program I run where I work with independent restaurant owners to help them put these pieces into place to generate consistent, predictable 20% profits. If it sounds impossible, I promise you it's not. I've worked with hundreds and hundreds of restaurants over the last five years. We currently have almost 150 restaurants in the program. Right now we are showing them how to do this. We only ask for a six month commitment simply because we can show you how to do all this stuff in six months. In reality, we hope you'll stay for a long time. Most of our members stay for two plus years. The program works. The impact we make is real. If you're curious about this, there's no pressure, but just get on a phone call. On that phone call, it is not the hard sell. It's about me answering your questions about you answering some questions about your restaurant. And we just see if it's a good fit. If it's a good fit, we'll show you how we can get started and what we would do. And if it's not a good fit, at least we will connect it. It's the best part of my week getting to chat with listeners.
[00:18:35] RestaurantStrategyPodcast.com schedule and that link is also in the show notes. Those are the two things I wanted to say. Understand that we are playing an infinite game and the rules are what make games fun.
[00:18:47] If you are not making 20% profit, I promise you it's a lot more fun when you're making money and you're making serious money. So you get to support you, your family, you get to take care of your friends, your neighborhood, your employees, be a key pillar of your community.
[00:19:02] Again, the Restaurant Foundation's membership site, the link to the free 30 day trials in the show notes, and the P3 mastermind. If you want to have a phone call, it's 30 minutes, totally free, zero pressure, but we get to know each other and let's see if it's a good fit. RestaurantStrategyPodcast.com schedule and that link is also in the show notes. Again, I appreciate you guys being here. Thank you very much and I will see you next time.