When to Shut Down Your Bleeding Restaurant

You know that current conditions are tough, but you have a glimmer of hope. 

You hope for things to improve. 

Customers will start thronging your restaurant like good old times, and they will start praising your food, once again. Your chefs will be busy, once again, trying to cater to every customer. And you will be all smiles just by looking at your bank balance. 

You have been imagining this for the last one year, or more. 

Now you have started questioning your beliefs. You are stuck with a bleeding Restaurant. Frustration has started slowly crawling in. Your best optimistic thoughts have started failing you. Your staff can see it in your eyes. Your friends are half expecting it whenever you talk to them. You have run multiple simulations in your mind, but none of them seem to be working. The losses are piling up and you can’t seem to find a way to turn it around. 

It’s time to call it a day. The most dreaded moment since you started your restaurant. But now it seems like an eventuality. There is no other way, perhaps. 

You finally want to shut down your bleeding restaurant. Or Cafe, or Cloud Kitchen, or Home Kitchen, or QSR or any other name which represents your food retail business. 

The ‘mind’ was adamant on this decision for quite some time. It was the ‘heart’ which was pushing you so far. Finally, the ‘mind’ prevailed.

But what took you so long? By postponing the decision which you could have taken six months back. 

Was it laziness? I don’t think so.

Was it Passion for the business? Then how many new things you honestly tried before pulling the plug. 

Was it Hope? Then it should have factored in the market condition. 

Honestly speaking, you can’t explain or justify the timing of your restaurant closure. It is always debatable on the timing, the early symptoms or triggers for it. And the best part, even on the last day of operation, you are having two minds – to continue or shut down. 

I will tell you why you behave like this. I call it “The Investor Syndrome”. This behavior is very common in stock markets or investment decisions. It starts when we invest in a share or in a business. Before investing, we do some research – the basics of the business, typical upside, some growth targets (like 30% growth in a year; doubling the investment in 3 years and so on). Wherever we have picked up the growth targets from, had also suggested some stop loss triggers, albeit in a hushed voice. We ignored that hushed voice, because we thought it would not happen to us.

First Mistake!! We overestimate our luck. 

When the stock price moved below the stop loss trigger, we had two options. First one was a logical decision – book your loss and exit. The second option was a rather emotional one – stay put till the prices recover. And because we also have some sentimental values attached with our investments, we often go along with the second option. We start thinking that the market correction is just a small blip, and it will recover soon to achieve greater heights. The heights, which justify our investment horizon and targets. 

Second Mistake!! We become optimistic when we lose. 

The elusive price target now becomes even more elusive. With every market cycle, it seems farther and farther away. Sometimes, the price also moves in the green zone, giving us an assurance that very soon the thighs will change. It shows some early promises for change as well. But with time, it becomes a frustrating investment rather than a rewarding one. And very often (more than 45% cases for retail investors), we sell our stocks when it offers a “No Profit No Loss” situation. We congratulate ourselves for avoiding any loss. We believe to become an expert because we avoided loss in this investment and recovered our principal. 

Third Mistake!! Assuming “Zero Loss” is still a face saving scenario. 

What about the time cost of money? What about the opportunity cost you have incurred in pursuit of this non-yielding investment? If you take these into account, you will realize the actual loss from your investment. And, we are not even quantifying the value of your time, effort and mental trauma arising from this bad investment. 

If you have invested in the Stock Market, you will relate to this phenomenon. The same cycle is repeated in our business as well. Now, take the case of your restaurant. 

Whenever we start a new restaurant or cloud kitchen, we start with some basic objectives and targets. Sometimes, the targets are in terms of Net Profit per month, sometimes it is getting your investment back in a certain no. of years (The Payback Period) or % return on capital invested or similar. Generally, these expectations are based on some sales turnover, some cost calculations and some other cost considerations. Even if these are sketchy numbers, we have some assumptions to begin with. If the actual scenario is in line with or better than expectations, then there is no looking back. But what if your actual numbers are lower than expectations. 

What if You record a lower sales turnover and profits in the first month of operation? Nothing, we just brush it off. It’s just the beginning, things will pick up slowly. That’s how we convince ourselves. Even our friends say “Just wait and watch. You will make it big. Don’t worry.” But what if the same continues for the second month? Do we react in a similar way, or start introspection? Do we just try some more promotion offers, or start re-analyzing the basics of business. 

Probably, we are committing the FIRST MISTAKE. Overestimating our Luck. We still believe that more promotions will sort things right, and ignore all other factors now. 

Very quickly, we become a victim of false optimism. We start looking up the internet for creative ways of marketing, we think of more products to augment our offering, tying up with various influencers and spending even more to acquire a customer. All these efforts, which promise to bring in more customers, more frequently thereby more sales.

No analysis of cost so far. No introspection on product taste and market acceptability. No analysis of order patterns. No repeat customer analysis. No mechanism for “Voice of Customer”. In some cases, no customer segments either. SECOND MISTAKE. Now we are optimistic without rational reasoning. 

If this situation continues for long, we just try to recover our initial investment and then call it a day. But this situation never arrives in Food retail business. Your QSR / Restaurant / Cloud Kitchen will not give you the opportunity to withdraw capital from business unless it is profitable. So, you keep on chasing an illusion. And you give up when you realize this fact. It may be after 6 months, 12 months or longer but eventually it happens. You finally decide to hang your boots. Chasing the elusive dream. The THIRD MISTAKE. Chasing the “Zero Loss” mentality. 

So, when should you actually foresee the inevitable? How do you decipher the early signals? I will advise you of very simple and practical methods. It is very easy to identify the “First Mistake”. If you are not profitable in the first 100 days of operation, treat this as a ‘Stop Loss’ trigger. Analyze all the basic assumptions about your business. The cuisine, the set-up, customer segments, pricing, menu selection et al. Go through each one of these with a fine tooth comb and a questioning mind. 

If you are able to make any radical change in your business setting (radical, not in bits and pieces), only then continue your efforts. Otherwise, just wind up and cut your losses. You have goofed up with something fundamental in business. Accept it and try again. With a fresh mind. 

If you continue after the first trigger, and still things don;t improve for another 3 months, check for the “Second Mistake”. Are you just optimistic without any rationale? If you still have your heart in the business, maybe it’s time for your mind to take over. If you are still having losses, maybe there is a big mismatch in one of the three components of business –  Product, Market or Customer. Look at all the three components with a magnifying glass. If required, get external help in fixing the loophole. 

Most probably, this is the last chance you have before moving to a point of no return. So, you have your best chances within the first 6 months of operation. If you are not able to set it right within the first 6 months, maybe you never will. So, don’t chase the third mistake, just shut down, and focus your energy somewhere else. 

Please understand one thing very clearly. Failure of one venture doesn’t mean you are a loser. In fact, your second venture could be much more rewarding if you apply the lesson from first failure correctly. Don’t lose heart if you are shutting down your first restaurant. You are not alone. There are many more before you, and there will be many more after you as well. If you still decide to operate in the same business, maybe you will succeed if you change one of the three main components – Product, Market or Customer. 

Wish you All The Best

Randheer

P.S. All through this article, I have not made any comment on the current market phenomenon of lock-downs and challenging market conditions. There is a reason behind this. First and most important reason is, this is not a normal market scenario. Something which happens once in a century can’t be defined as normal market behavior. This is a storm. Let this just pass. Don’t attempt anything heroic in this storm. Trying something heroic in this scenario is akin to taking  disproportionate risk with average reward. The best suggestion under this scenario is “Just maintain the status quo”. Or else, cut your losses. .  In the meanwhile, if you are looking for enhancing your restaurant marketability, you can check this course “The Clickable Restaurant”.