I recently went through a video which included industry stalwarts in the fine dining space. Was very informative, i always wondered why restaurants have a higher failure rate than most other businesses. There is a fixed cost element when it comes to restaurants which includes wages, rent , electricity etc , regardless whether you get patrons visiting your restaurant these cost always remain. And since the raw materials are a wide range, its difficult to negotiate and reign over prices. These are mainly to do with places which have a wide menu and not the one product type restaurants/qsr.
The variables involved are just too many, ranging from checking of pilferage to minute things like wastage, shelf life of inventory, the design of the menu, handling the staff and checking their behaviour with the customers, handling the bad customer, tallying the inventory at the day’s end. Because of these variables the margins come down drastically. Apart from these costs there are also costs related to compliance. This goes higher if you serve alcohol as well.
Even though are restaurant is a low barrier to entry business, the variables involved are just too many. Standardization will increase scale and margins , but for a standalone restaurant which intends to have a lot on their menu. It is difficult to scale.
I guess a better way to look at valuations in this industry can be the number of variables the chain has to handle. The smaller the variables more the optimization better the margins as asset turnover will increase.
Simple Finance 