How big should I make my business?

I dusted off my trusty crystal ball for one of my clients the other day. The poor old thing doesn’t get much use lately — very few owners and managers seem to plan their business activity beyond the next six months, and a disturbing number seem to wing it on a day to day basis. This particular client likes to look well ahead and asked me for an opinion about how the future might affect his business. It was a tough call, but I gave it a go. You may be interested in my thoughts . . .

Economic factors driving the industry

Our industry is being affected by the same economic forces that have led to the decline of the corner deli bar and the local butcher. Businesses below a certain size can’t compete with the larger operators any more; their costs are too high — and they’re disappearing fast. Over the last five years the margins on food and beverage have been steadily eroded while the costs in running a business have steadily risen. It’s a lot tougher to make money than it used to be.


The larger it is the more profitable it should be

The larger it is the more profitable it should be


The long term trend is toward much larger hospitality businesses with economy of scale and the financial strength to afford labour saving equipment and technology. You can already see it in our major cities — go back ten years and I could count the number of 250+ seat restaurants in our big cities on one hand. Now they’re everywhere. The trend is for bigger and bigger. It’s not that some small hospitality businesses won’t survive, but there will be less and less of them as a proportion of the total number — and their owners will have to be very clever to stay afloat. The name of the game will be table turning.

In effect, if you can turn a fifty seat restaurant five times a day you have the equivalent of a 250 seat restaurant without the rent and overheads on the larger floor space.

Size counts but needs different management

I see two main challenges in moving to a businesses of a larger size: First, large businesses require different management structures to small businesses. You can run a small restaurant as a total dictator and get away with it. It’s possible to be the host, waiter, accountant, marketing guru, purchasing officer, etc. — all you have to do is work 100 hours a week. Try doing all these roles in a 250 seat restaurant and you’ll die in the attempt. A dictator must become a manager to survive a move to a larger, more complex business.

Larger businesses require structure or they become chaotic

Larger businesses require structure or they become chaotic

Currently, it’s feasible for a small, undercapitalised business to survive and perhaps even do quite well, by the sheer drive and determination of the owner. This is the way most people I know have started in their own business, but it’s going to get harder and harder to get up and running as time goes by. 

Consider the up-front capital required to establish a hospitality business. Over the last ten years I’ve seen the establishment costs of new businesses steadily rise to the point where it’s becoming beyond the capability of the average person to take the step out on their own. When establishment costs get too high, we will see a rapid change in the nature of the industry as the big get rapidly bigger and less small operators can afford to get into business.

Larger businesses require different management skills

Compound this with the management skills required to run a larger business and you have a double edged sword — you’ll need a big bag of money to get started and you’ll be taking a hell of a risk with that money unless you have the management skills to structure and run a larger business properly. To spell it out a different way, it will be very difficult for Fred and Mary, the ex cook and waiter, to go into business for themselves in the future.

There are other community changes that are going to affect us, as well. Have a look at what is happening to the tobacco industry. Our regulators have woken up to the fact that we are better off tackling the cost of community health services at the root cause, rather than at the hospital and medical end of the chain of events. Tobacco products are being taxed out of existence, and there is an all out assault on tobacco marketing. How long do you think it will be before the community and government turns on alcohol with the same intention? It’s only a matter of time.

Longer term planning is required

Profits on beverage will slowly decline

Profits on beverage will slowly decline

An assault on alcohol means that our industry is going to have to gear itself to making less money from beverage sales and more from food and entertainment. This will alter the basic structure of most businesses and will require careful thought and planning. It won’t happen suddenly, though. The change will be slow and insidious and will catch many operators unaware. Take a leaf (no pun intended) from the embattled tobacco industry — they did their homework and diversified into other activities outside their core, shrinking business.

How long ahead are we talking? I’m telling my clients to work on five years. That’s not long, you know. The years seem to be passing like a picket fence at the moment. The important question is: ‘Are you planning ahead. Do you know where you are going, long term; are you driving your business or following it?’ The business world can and does change quite rapidly — contingency planning and flexibility are two of the key skills of a successful business owner or manager.