Entrepreneurs who start new restaurants may overestimate the size of the market in their area and not take into account the tough competition they will face from established restaurants with loyal clientele. Doing a feasibility study prior to investing the time and money to open a restaurant can help an entrepreneur make a more informed decision about the venture’s chances of success.
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Obtain Market Statistics
Studying demographic characteristics such as age and income will help you estimate the size of your potential market. If you are planning a mid-price, family-style restaurant for example, you need to know how many families reside in your area. A heavy population of singles or college students will probably not support your restaurant. The U.S. Department of Commerce Census Bureau website is a good place to begin your research.
Evaluate Potential Locations
A high-traffic location is preferable, one close to major streets with lots of visibility to vehicle or pedestrian traffic. Make sure parking is ample and easy for customers to access. Look for businesses in the area that could create demand for your restaurant — large office complexes, hotels or retail centers for example. Be sure to consider the tradeoff between a location’s suitability and the lease cost. Saddling a new restaurant with a lease payment that is too high can make it extremely difficult for the venture to reach positive cash flow.
Related Reading: Business Plan Vs. Feasibility Study
Review the Competition
Look not only at the total number of restaurants in your immediate area but also at the styles of restaurants that are prevalent. Consider whether your area is already saturated with restaurants similar to the concept you will be offering — similar cuisine, price point and target markets. Analyze the strengths and weaknesses of each major competitor and determine whether your proposed restaurant will stand apart from competitors and be memorable to customers.
Study the Industry
Join your state or local restaurant and hospitality organizations. Attend their meetings, talk with other restaurant owners and review any statistical information they publish about the growth and health of the industry. The National Restaurant Association also publishes studies and statistics about industry trends and growth. Decide whether given the current economic environment it is advisable to launch a new restaurant. Find out if any restaurants in the area have closed in the last two years and why.
Look at Your Cost Structure
Once you have a good idea what type of food you want to offer, break down the cost of each menu item. Determine who your major suppliers will be and ask them for pricing. Software programs are available to help you accurately calculate projected food cost. You may consider reducing the number of items on your menu to keep food cost down. You may also find that given the food cost projections, the prices you will have to charge are higher than your local market will support.
Evaluate Management Capability
An entrepreneur contemplating opening a restaurant should take a hard look at whether he has the skill set and experience to make the venture a success. He should ask himself whether he has the eye for detail to maintain high customer satisfaction. He needs to be able to train and motivate staff members who may have limited experience or education. He needs to understand how to make the kitchen operation run smoothly. He may determine that it is not feasible for him to be the general manager of the restaurant’s operations and elect to hire a manager who already has a track record of success in the industry.