For ten years I was in the food business. From 1998 to 2008, my family and I operated a chain of hamburger stores that were franchised from the United States. Like many Filipinos, I wanted to start a small food business in the Philippines. Seeing the long queues and over-worked cash registers made the food business seem like a “can’t miss” opportunity.
But those ten years represented some of the hardest struggles of my life. Running a restaurant is not easy. When I hear people say managing a successful restaurant is all about serving good food and extending good service, I just shake my head. They don’t know the half of it.
In the United States, the failure rate of restaurants has been measured at three out of every five or 60%. Many reality shows on television feature failing, near-death restaurants resurrected by popular chefs such as Gordon Ramsey (“Kitchen Nightmares”) and Robert Irvine (“Restaurant Impossible”). While these shows do not necessarily reflect the state of the restaurant industry, they do show how difficult and unforgiving the business can be.
There are so many variables in the restaurant profitability equation. Good food and good service only cover the revenue side. Meanwhile, food cost, rent, wastage, pilferage, and salaries cover part of the expense side. We haven’t even touched on the behavioral side of the restaurant business. This includes personnel attitudes and behavioral patterns, customer relationships and the entire value chain: suppliers, vendors, landlords and contracted service providers.
Despite these challenges, more and more restaurants and food concepts are opening in the Philippines. Go to a mall, drive to the business district or even when you pass the last corner before you turn into your street; chances are you will come across new restaurants opening up.
So I decided to find out why. In my research I sought to find out the answers to these questions:
- What are the current trends in the industry?
- Which concepts are people lining up for?
- Theoretically, how profitable would these restaurants be?
- Is the “Branding Argument” still valid today?
- What qualities are people looking for in a good restaurant?
- Why are more restaurants still opening?
My methodologies included the following:
- Social media marketing. I define social media as digital “Word-Of-Mouth”. Who hasn’t been influenced by a post to try a new restaurant or coffee shop, right? I made a list of the most recommended restaurants from friends and focus groups. Then, I would schedule a visit to these restaurants on weekdays and weekends to assess the quality of food and service.
- Interviews. I would conduct random interviews with some of the customers, service crew and the store manager to get an idea of their preferences plus their viewpoints on the business and the industry.
- Time-Motion Analysis. The purpose of time-motion analysis is to measure the efficiency of the restaurant. This covers the ordering system and the time it takes to have the food served from the moment payment is made.
- Random surveys. Old habits are hard to break! This is what I used to do when I was running a restaurant. I would visit a competitor and do an accounting of the average check per customer.
- Food sampling. My preferred research methodology! Of course, I had to sample the food served. I would order one of two items: the most basic or the most recommended.
The results of my research formed my opinions on this piece. I just want to make it clear that I cannot identify the restaurants sampled in this article because this is not an advertorial. I can only go as far as describe the food and the concept.
The answers are dispersed throughout the different stages required to start a small food business in the Philippines.
First, let us define what we mean by “small.”
A small business in the Philippines is characterized as having low capitalization, low gross annual sales, and small manpower complement. So for the purpose of this article, let us forget the large-scale foreign and local fast food franchises where the required capitalization will exceed Php20 Million.
The food concepts I visited include:
- Dive-type or “hole-in-the-wall” establishments.
- Delivery concepts.
- Out-of-mall restaurants
- Food booths in well-patronized markets.
I estimate the costs of setting up these restaurants range from Php50,000 to Php2 Million. Costs include capitalization expenses, initial inventory and working capital for three to six months.
Some of these were small businesses that grew to become local franchises and the rest are local concepts that for now have no plans to franchise.
With these in mind, here is how you can start a small food business in the Philippines:
1. Define Your Concept
Product differentiation is critical in today’s highly competitive food retail market. You need a concept that will give your customer greater value.
I’ve noticed that many new concepts are focusing on customizing their products according to what the customer wants.
People think this is a great way to make the customer feel like he’s in charge and he is. But the intrinsic value of customization is that it is a great way for the restaurateur to improve his profit margin.
Everything starts out with the basic ingredients: burger patty and the bun or a pizza crust. Then you choose the toppings on your product: bacon, egg, cheese, pepperoni, mushrooms, BBQ sauce, chili; it’s all fun, and you are in control of what you want. But these toppings carry a healthy profit margin with them!
Customization is a smart concept for a restaurant because you give the customer flexible pricing options and at the same time protect your profit margin.
2. Develop and Test Your Product
Before you decide to push through with your food business, you have to develop and test your product first.
Always have the main product in your concept. If you are planning to start a Mexican-themed restaurant, perhaps create a signature burrito and store made corn chips.
Identify your Buyer Persona and create a few beta test groups. Come up with at least three versions and have these tasted by the beta test groups. Collate the surveys and interview the beta test groups on their experience with the different versions.
You must be prepared to have an extended beta-testing period because you want to fine-tune the quality of your product. The final version will determine your food cost.
3. Develop Your Service System
One of our worst customer experiences was with a restaurant that had been open for two weeks. It would have been understandable if this was their first restaurant, but it was their third!
You’d think that the restaurant owner would have figured out his system by now. Unfortunately, he hadn’t, and their Facebook page is inundated with several scathing comments on the quality of their service. Hardly anything was mentioned on the quality of their food because everyone was venting on their poor service.
Your system must guarantee quick service without compromising the quality of your food. You make your customer happy, and you increase the turnover rate of your business. High turnover means higher sales!
Developing an effective service system comes down to a number of factors:
- Preparation time of your food. You have to set parameters on how fast food is prepared and factor this in your service flow.
- Complexity of your menu. Keep your menu simple. Focus on a signature item and a few sidings for variety. The less time a customer spends on the cashier, the faster your service flow.
- Competency of your restaurant crew. Your cashiers are your front-line sales people. They must know the products like the back of their hands. They must know which items to recommend or to push. The same goes for waiters if it is an ala carte system.
- Inventory turnover. If you have items that need to be marinated for 24 hours, make sure these are properly rotated from freezer to refrigerator to the marinade bath in time for cooking.
- Product forecasting. In addition to slow service, the worst thing for a restaurant is to run out of stock. This comes down to poor product forecasting.
4. Conduct a Project Study
Once you have your product and system finalized, commission a project study. This must include the following:
- Market Study. Find out if there is demand or a market for your product. Determine your Buyer Personas and learn their purchasing behavioral patterns.
- Marketing Study. Design a marketing framework on how you plan to reach your target market. This is important for your branding strategy.
- Financial Study. This will make or break your plan to start a small food business in the Philippines. The financial study will determine how much capital you will need to set up and maintain your business for at least six months.
5. Build a Business Plan
The project study will be the basis for your Business Plan. This is a necessary document which will be the blueprint or reference point for your restaurant.
Additionally, the Business Plan will be the reference point if you are trying to secure funding for your business. Banks, investors, incubators and accelerators and potential partners would want to know everything about your business.
For them, yours will be an investment, and they will want a substantial return on their money.
6. Register Your Business
When you have secured enough funding, it would be time to register your business.
You can register your business online. If you plan to set up a corporation go to the Securities and Exchange Commission or SEC website. If it is a single proprietorship or partnership, register your business at the Department of Trade and Industry or DTI website.
As a registered business, you can avail of better credit terms with suppliers and leasing arrangements with landlords.
7. Identify Your Location
It used to be that the success of a restaurant would depend greatly on location. But that may no longer be the case today.
One of the best burgers I’ve tried was not located in a high-traffic area. In fact, if you were not looking you would probably miss it. It took us 45 minutes to find the place. But it was worth it. The burger was so good!
Why did we try the place? I read about it on Facebook. Social Media is “Word-Of-Mouth” in the virtual world. When I visited their Facebook page, all of the comments were encouraging. Even the Google search results yielded positive reviews.
Be that as it may, having a good location with a high volume of foot traffic, plenty of parking options will always be a plus for your business.
Here’s my two cents worth of advice: Forget the malls! These are over-rated locations. Yes, they do bring in the volume, but they also bring in the competition. Ever notice the high number of empty restaurants inside the mall?
Another thing is some malls calculate rent as “34% of gross sales or the fixed rate, whichever is higher.”
Do the math: If your food cost is 50% and labor cost is 10% how much money would you have left if rent is pegged at 34%?
8. Develop Your Brand
One of the biggest mistakes by food retailers is not developing their brand at the start. I should know because this was one of my biggest mistakes when I started out.
Our product had so many selling points, but we could not settle on one that would define the main item. We also had a supporting dish that encroached on the role of the main item. In the end, the branding strategy was a convoluted mess.
Back then, we had to rely on traditional marketing strategies which were expensive, unsustainable and difficult to measure. The ROI on traditional marketing is very low.
Today with online marketing tools, strategies can be updated, improved and revised because performance can be measured in real time. Online marketing strategies are also more affordable which result in higher ROI.
It is much easier to develop a small food business brand today through online marketing. All you need is an interactive e-commerce website, Twitter and e-mail marketing for market acquisition, Facebook, Pinterest and Instagram for posting content and regular blogging activity.
Hire a social media manager or digital marketer to put these all together so you can generate leads for your business.
9. Qualify Your Suppliers
The key to having a profitable business is having a great tasting product that offers value and quality for the customer and an attractive profit margin for you as the proprietor.
In the burger restaurant, we visited a quarter pound burger costs only 50 pesos. Compare this with the regular fast food burger which costs three times but does not taste anywhere as good as this burger.
The restaurant’s concept is to grill your burger upon order. I noticed the burgers were not made uniformly which told me these were formed inside the store. In fast food restaurants, the patties are delivered blast frozen from a meat refinery.
A kilo of ground beef costs at the supermarket is around 188 Pesos per kilo. Thus, for a quarter pounder, the cost of the patty would be 26 Pesos. I’m assuming the proprietor buys local ground beef directly from a manufacturer at 20% less the regular price. Adjusted, the food cost of his patty should be at 21 Pesos or 42%.
In the fast food business, food costs can exceed 50%. This is why for fast food the name of the game is volume. They have to sell more to recoup lower profit margins.
Fast food margins are very low because everything is refined, packaged or imported. For example, their French fries are imported either from Portland, Oregon or Australia.
But did you know you can make better French fries from store bought raw potatoes? All you need is a high-starch variety like Russet potatoes. Cut them Julienne style and soak them in water overnight to get rid of excess starch. The following day they are ready for frying.
And the cost? At least 50% cheaper than the imported fries!
Find a supplier who can assure you of consistently good quality ingredients at lower than retail prices. As a contingency plan, look for at least two suppliers. The competition will keep them honest, and you are assured of a second supplier if the other one runs out of stock.
10. Hire Right-Fit People
This is the Waterloo of several restaurants we tried. Service is consistently horrible.
The service crews are not prepared or trained properly. They do not know the menu, have no personality and appear lost most of the time.
The restaurant managers are not proactive. Most of them are just standing around like a coat hanger. They are not supervising the floor or attending to customers.
Some of the off-duty services were interacting with the front line crew which only served to distract the cashiers from doing their jobs. In one restaurant which served grilled chicken, the manager and the service crew was sleeping on some of the tables!
Meanwhile, in a Dimsum kiosk we visited, the attending crew was busy gossiping among one another even though a line had formed in front of them.
The food business isn’t just about the quality of your food. You must invest in the right people to manage your business. Qualify them accordingly and give them all the training they need. These are the people who are willing to work long, hard hours in the restaurant and give their best every single day.
Even though my restaurant did not succeed, I was blessed with having worked with some of the best people as service crew and managers. It did not matter if the store had only one customer or 1,000. They always gave their best.
In fact, when I moved from the food business to BPO, I brought them with me!
11. Do a Dry Run
Do not open your doors to official business unless you are 100% certain the serving system and the crew can handle a high volume of orders.
Conduct a 1-2 week dry run to iron out the kinks of your service and to give your people more practice. Start out the dry run during off-peak hours such as 2:00 pm to 6:00 pm.
As the crew becomes more confident, move the dry run to busier hours. Try dinner hours or 6:00 pm to 8:00 pm which is shorter and less busy compared to lunch time.
Promote the dry run in social media and give incentives so people will go out of their way to try your food. A good campaign would be: “We are on DRY RUN. Only 100 burgers will be served from 2:00 pm to 5:00 pm. First come, first serve only. Once the door closes, try again tomorrow!”
Another one would be: “We are on DRY RUN. First, 50 customers will be given 50% discount on their burgers!”
12. Official Day 1 of Business!
When the surveys and figures show that the restaurant is ready for official business, schedule the day when your small food business will finally open to the public.
When I was planning the launch of our restaurant, we focused a significant portion of our limited resources on developing nice looking menus and menu boards.
Trust me when I say hardly anyone will care about how your menu will look like. In every menu, the diner will primarily focus on one thing: Price.
Save your money and keep your menu designs simple. Some of the restaurants we visited only used the blackboard or print outs.
Start your Small Food Business in the Philippines
Lastly and most importantly, if you plan to start a small food business in the Philippines be prepared to embrace the grind! The food business is very tough. There will be long hours, and you have to manage many variables to make your business profitable.
As a parting thought, I believe you no longer need to own a franchise to succeed in the food business. The selling points for franchising were that you were buying a “tried and true system” and a “recognized brand”.
For these, you have to fork over a franchise fee of anywhere from 250 Thousand Pesos to 20 Million Pesos plus monthly royalties of 7% to 12% of gross income. Again, do the math. Now you have to capitalize the franchise fee! I’m sure there will be nicer things to look at than your income statement.
I enjoyed and had the best experiences with the “hole-in-the-wall” establishments. The food was great, and the service was good, and the overall value was excellent. My worst experiences were with the mall-based establishments and franchises. Service was bad; most of the time food was out of stock. And the quality was between fair to good.
If you invest time and resources, you can fine tune an efficient service workflow. As far as the branding argument is concerned, social media and other online marketing tools have rendered this myth. If you consistently offer great food with great service, the online community will build your brand.
If you plan your business well and commit to building it, your concept may grow to become a very lucrative and rewarding enterprise.