The worst business model in the world

"Because I'm not as stupid as I look"

I consider myself to be quite a good cook. In fact I would say I'm the third best cook I know (behind a lady who worked at Alain Ducasse in Paris and a chap who was a semi-finalist in Masterchef). So inevitably people sometimes ask me "why don't you go and start a fancy restaurant". And my response invariably is:

"Because I'm not as stupid as I look."

A fine-dining restaurant is probably the most suicidally insane business model devised by mankind. It is the business school equivalent of trying to deep-fry ice-cream inside a chocolate teapot in the middle of the Sahara. As the old saying goes, the best way to create a small fortune is to start with a large fortune and open a restaurant.

Probably the worst business model in the world...

Putting my analyst's hat on there are a number of reasons why a posh restaurant restaurant counts as the World's Worst Business Model.

• High upfront capex requirement: Villeroy & Boch china? Check. Reidel glasses? Check. Linen tablecloths (and associated recurring laundry bill)? Check. Three million bucks out the door before day one? Check. Put frankly, although it has little or nothing to do with the food the fixtures and fittings for a contemporary fine diner mean you need to stump up a seven figure sum before you've even fired up the oven.
• High ongoing fixed costs: As a rule of thumb, ingredient costs make up about a third of the menu price in a good restaurant. That's your variable cost. Unfortunately much of the rest is fixed (largely rent). So even after you've fitted out the place and fired up the oven you then have a ridiculously large fixed cost base to cover before you start making a penny of profit.
• Low volumes: Fixed costs aren't always bad -  McDonalds thrives with a high fixed cost, but that's because they pump tremendous volumes through that cost base (similar to the business model for data-processing companies like ADP or Amadeus). Unfortunately a high-end restaurant doesn't have that scalability - while McDs might turn tables twenty times an hour, you're lucky if you can turn them twice in an evening.
• Cyclical demand pool: Oh and did I also mention that low volume demand pool is completely hostage to economic circumstance? (there's a reason why cheaper entz like McDonalds or Cinemas flourish in a recession) So which you volume upside is capped by limited capacity, your volume downside is completely hostage to the macro environment. Worst of both worlds.
• Low leverage: You want to double the size of your restaurant? You need to find twice as much space, source twice as many fittings and hire twice as many staff. Hassle factor - high. Scalability factor - nil.
• Vast competition, lower margins: You would think such criminally low returns would deter new competition. Unfortunately not - restaurants are one of those eternal "oh I reckon I could do that" propositions which attracts fresh new mugs at every turn (I blame Masterchef). Result - high competition, limited pricing power, low margins.
• Exogenous risk: One bad review from Frank Bruni at the NY Times or Fay Machler in the London Evening Standard? You may as well pack up now.

Which is a very long-winded way of bringing me to my main topic of discussion, which is the counter-factual - if a restaurant is the world's worth business model then what is the world's best?

Step forward the dullards of enterprise software...