DTEJD1997 Posted March 16, 2017 Posted March 16, 2017 This is one of the more fascinating threads I've read in a while.. Sort of a "how to" discussion on building your own little Berkshire. There is a Dairy Queen franchise in a small town near where I live that is not known for speedy or efficient service. But they are the only real ice cream shop in town and so they get an undeserved amount of business (they're essentially a monopoly). I believe that with some retraining, a few staff changes, and some remodeling, it could be a very profitable business. Does anyone have any experience in this area that can contribute? I don't have a lot of money and would likely need an outside investor or substantial seller financing, not to mention actually buying the place from the owner. Any thoughts? Have a good day if you want to, Alex If you are truly serious about taking over/buying out the local Dairy Queen franchise...I would suggest working there first. You don't have to work full time...maybe 2 days a week. After a couple of months, you'll get the inside scoop. You will know what sales are, you will know who the good workers are, who the slackers are.... You will also get a better handle on if it is as profitable as what you think it is. The amount of money needed for Dairy Queen franchise is going to be rather substantial...it is going to be in the order of hundreds of thousands of dollars ($700k), potentially even more than that (up to $1.5MM). In order to take over a franchise, you WILL have to work in the business. You will also have to get approval from the franchisor. You will also have to go through specialized training at corporate HQ. You are going to have to pay the franchisor a substantial transfer fee, which appears to be $35k. The royalty fee is fairly low at 4%, but there is a 5% to 6% mandatory marketing fee too. So you will give up 9% or 10% right off the top. Another thought....if the DQ franchise is poorly run, it might have "negative" goodwill associated with it that is going to take a lot to overcome. Depending on how bad the negative feelings are, might it not be easier to simply open up a competing shop and run them under?
StockDuck13 Posted March 16, 2017 Posted March 16, 2017 This is one of the more fascinating threads I've read in a while.. Sort of a "how to" discussion on building your own little Berkshire. There is a Dairy Queen franchise in a small town near where I live that is not known for speedy or efficient service. But they are the only real ice cream shop in town and so they get an undeserved amount of business (they're essentially a monopoly). I believe that with some retraining, a few staff changes, and some remodeling, it could be a very profitable business. Does anyone have any experience in this area that can contribute? I don't have a lot of money and would likely need an outside investor or substantial seller financing, not to mention actually buying the place from the owner. Any thoughts? Have a good day if you want to, Alex If you are truly serious about taking over/buying out the local Dairy Queen franchise...I would suggest working there first. You don't have to work full time...maybe 2 days a week. After a couple of months, you'll get the inside scoop. You will know what sales are, you will know who the good workers are, who the slackers are.... You will also get a better handle on if it is as profitable as what you think it is. The amount of money needed for Dairy Queen franchise is going to be rather substantial...it is going to be in the order of hundreds of thousands of dollars ($700k), potentially even more than that (up to $1.5MM). In order to take over a franchise, you WILL have to work in the business. You will also have to get approval from the franchisor. You will also have to go through specialized training at corporate HQ. You are going to have to pay the franchisor a substantial transfer fee, which appears to be $35k. The royalty fee is fairly low at 4%, but there is a 5% to 6% mandatory marketing fee too. So you will give up 9% or 10% right off the top. Another thought....if the DQ franchise is poorly run, it might have "negative" goodwill associated with it that is going to take a lot to overcome. Depending on how bad the negative feelings are, might it not be easier to simply open up a competing shop and run them under? Thank you, it sounds like you've got some good experience (or know-how) in this area. Have you owned a franchise in the past? I'm not sure how bad the negative feelings are since I don't live in that city nor have I been there in a long time (for obvious reasons). I have almost no expertise operating a franchise or shop so it's probably best that I don't pursue this idea, but that doesn't stop me from thinking about it. Off the DQ topic, has anyone built a mini-Berkshire of small businesses?
DTEJD1997 Posted March 16, 2017 Posted March 16, 2017 This is one of the more fascinating threads I've read in a while.. Sort of a "how to" discussion on building your own little Berkshire. There is a Dairy Queen franchise in a small town near where I live that is not known for speedy or efficient service. But they are the only real ice cream shop in town and so they get an undeserved amount of business (they're essentially a monopoly). I believe that with some retraining, a few staff changes, and some remodeling, it could be a very profitable business. Does anyone have any experience in this area that can contribute? I don't have a lot of money and would likely need an outside investor or substantial seller financing, not to mention actually buying the place from the owner. Any thoughts? Have a good day if you want to, Alex If you are truly serious about taking over/buying out the local Dairy Queen franchise...I would suggest working there first. You don't have to work full time...maybe 2 days a week. After a couple of months, you'll get the inside scoop. You will know what sales are, you will know who the good workers are, who the slackers are.... You will also get a better handle on if it is as profitable as what you think it is. The amount of money needed for Dairy Queen franchise is going to be rather substantial...it is going to be in the order of hundreds of thousands of dollars ($700k), potentially even more than that (up to $1.5MM). In order to take over a franchise, you WILL have to work in the business. You will also have to get approval from the franchisor. You will also have to go through specialized training at corporate HQ. You are going to have to pay the franchisor a substantial transfer fee, which appears to be $35k. The royalty fee is fairly low at 4%, but there is a 5% to 6% mandatory marketing fee too. So you will give up 9% or 10% right off the top. Another thought....if the DQ franchise is poorly run, it might have "negative" goodwill associated with it that is going to take a lot to overcome. Depending on how bad the negative feelings are, might it not be easier to simply open up a competing shop and run them under? Thank you, it sounds like you've got some good experience (or know-how) in this area. Have you owned a franchise in the past? I'm not sure how bad the negative feelings are since I don't live in that city nor have I been there in a long time (for obvious reasons). I have almost no expertise operating a franchise or shop so it's probably best that I don't pursue this idea, but that doesn't stop me from thinking about it. Off the DQ topic, has anyone built a mini-Berkshire of small businesses? No, I've never owned a franchise. HOWEVER, I've studied them a bit (business & law)...and have known people that have owned them. I've seen the inside books on many of them... My conclusion is that if you are young, full of energy, have a good idea, have adequate capital, and have a couple of strong operational people to help, is to bypass becoming a franchisee and do your own concept. Obviously, there are exceptions, as some franchises are incredibly profitable and worth becoming part of, but that is the exception. If you kind of invert the situation and think about it this way.... If you have a restaurant and can CLEAR 10% (franchise fee) after all expenses, you've probably got a pretty good thing going. I know several local operators of various restaurants and they are knocking it out of the park. They are doing their own thing and are incredibly successful. Not franchisees either. Most of these guys spend very little to essentially nothing on advertising also, their product and business does the advertising for them. Word of mouth and happy customers is always the BEST form of advertising.
netnet Posted March 17, 2017 Posted March 17, 2017 First of all restaurants tend to be terrible businesses. The people I know who have made decent money long term in restaurant businesses have either franchised the concept or made money on the real estate. For an excellent 50,000 foot look at the business check out what Tren Griffen has to say--the issues boil down to no moat and what he calls the wholesale transfer problem, which is somebody else has a power over your business (viz. Michael Porter) in this case it is the owner of the real estate and/or the franchisor. As far as your specific example, let's invert it, a la Munger: What would kill the business? Well after the two mentioned above, supposed some enterprising young woman sees what you see and opens a ice cream parlor (franchise or not) in the area. Unless there is something quite odd about that area, there is absolutely nothing stopping anyone from doing this. Clearly, you are willing to put up with the mind numbing hours and tedium of running a restaurant, so with that drive and persistence, you might think of running a better business!
premfan Posted March 17, 2017 Posted March 17, 2017 I own a franchised hotel. Without reading none of the recent content and focusing on the context of local business's. It's a cinch to buy a independent hotel then franchise it under an economy brand. Absolute cinch. The story: - Bought independent hotel right off highway small population about 60,000. - We did what the franchise required to get it to the standard of the economy brand - This took us about three months. Once in there online reservation system it went non-linear. - Pre purchase sales as i remember was 100-120k a year. Yes the hotel was in the red when purchased. Yet price under replacement value and once the sales rep confirmed with some work we can franchise it that was our value add. Or my trademark TVA ( the value add). It was our green light. - Normalized revenue since franchised has been between 20-25k a month in revenue. Not extraordinary but the hotel business has extremely amazing operating leverage. Also we structured it we think efficiently by having a on-site manager. All that being said, i am scared of Airbnb. With all this new supply there is a mini price war happening between our 4 economy brand competitors. We have no debt. So we will be fine. There will be blood with leveraged up hotels. Also if ever consider doing this gameplan never ever buy from a Khan or Patel. They have there own operating system and its beautiful. I briefly befriended a patel years ago and he explained the employee arbitrage system. They are truly master operators. You will not do TVA if you buy from them. Now i'm going to read the recent posts.
oddballstocks Posted March 17, 2017 Posted March 17, 2017 First of all restaurants tend to be terrible businesses. The people I know who have made decent money long term in restaurant businesses have either franchised the concept or made money on the real estate. For an excellent 50,000 foot look at the business check out what Tren Griffen has to say--the issues boil down to no moat and what he calls the wholesale transfer problem, which is somebody else has a power over your business (viz. Michael Porter) in this case it is the owner of the real estate and/or the franchisor. As far as your specific example, let's invert it, a la Munger: What would kill the business? Well after the two mentioned above, supposed some enterprising young woman sees what you see and opens a ice cream parlor (franchise or not) in the area. Unless there is something quite odd about that area, there is absolutely nothing stopping anyone from doing this. Clearly, you are willing to put up with the mind numbing hours and tedium of running a restaurant, so with that drive and persistence, you might think of running a better business! Extremely simplified but in theory yes. In reality no. There are a TON of ice cream shops near us, some thrive and others last a few years and go out of business. In business theory these are all the exact same right? They all sell soft serve, their locations are all on the same road. So why do some last and others don't? It's subtle things, like customer service etc. Restaurants are hard, food is a tough sell. You can do well selling alcohol. A neighbor took over the family restaurant. It's a standard type place, dining room, bar, and rental hall. He amped sales by bringing in a ton of craft beer and pumping bar sales. The place went from an old timers place to being hip. You make money on some of the meals. The killer for any of these businesses are employees. That's what kills this guy. He'll hire someone and they'll last a few months, get bored and quit. The costs to train an employee are high, and customer service suffers with constant turnover. You will usually have steady bartenders, but wait staff turns a lot. The same is true for ice cream shops, ice cream especially. Most places hire a bunch of young high school girls during the summer. They are only there for a season. Each season you're trying to re-train for service with an entirely new staff. Ice cream is a really interesting thing, the barriers to entry are low. Yet just buying a soft serve machine and hanging a shingle out on a main road isn't enough to be successful. From afar maybe that's all it takes. But from afar everything looks easy. The devil is always in the details.
BG2008 Posted March 17, 2017 Posted March 17, 2017 I own a franchised hotel. Without reading none of the recent content and focusing on the context of local business's. It's a cinch to buy a independent hotel then franchise it under an economy brand. Absolute cinch. The story: - Bought independent hotel right off highway small population about 60,000. - We did what the franchise required to get it to the standard of the economy brand - This took us about three months. Once in there online reservation system it went non-linear. - Pre purchase sales as i remember was 100-120k a year. Yes the hotel was in the red when purchased. Yet price under replacement value and once the sales rep confirmed with some work we can franchise it that was our value add. Or my trademark TVA ( the value add). It was our green light. - Normalized revenue since franchised has been between 20-25k a month in revenue. Not extraordinary but the hotel business has extremely amazing operating leverage. Also we structured it we think efficiently by having a on-site manager. All that being said, i am scared of Airbnb. With all this new supply there is a mini price war happening between our 4 economy brand competitors. We have no debt. So we will be fine. There will be blood with leveraged up hotels. Also if ever consider doing this gameplan never ever buy from a Khan or Patel. They have there own operating system and its beautiful. I briefly befriended a patel years ago and he explained the employee arbitrage system. They are truly master operators. You will not do TVA if you buy from them. Now i'm going to read the recent posts. In a world that is overtly political correct, the observation about the Patels is one of the more interesting observations I've read lately. My family grew up in the Chinese take out business. If any other ethnicity tried to come in, they would get killed. Even within the Chinese community, I would imagine that 90% of the Chinese take out in the US is run by people from FuJien province in China. There are so many interesting dynamics and levers to the story that it would probably require multiple posts. I have mentioned this before. In NYC, you don't ever want to compete against the Koreans on a mid price lunch spot. They have such an efficient systems that sells everything from ramen to salads to sandwiches that anyone else just gets killed. This is partially why Cosi can't turn a profit. My wife has commented how you never want to buy a dry cleaner or a restaurant from a Korean family. If they can't make it work, no one else can. It kind of ties into you never want to buy a regional mall from David Simon of Simon properties. If Simon can't make it work, don't try. The Korean restaurants tend to operate 24 hours a day. The amount of food that they serve relative to the price is insane along with the 10 complimentary kimchi dishes that they give you. I never want to take over an operation from a Korean family. Years ago, I was on the sell side for a portfolio of 50-60 gas stations. I was talking to the MD and he was explaining that a private equity buyer can hold onto core positions and sell the non-core assets via one-off to Indian families. The Indian families will pay $1mm each and have the parents as well as all the children running it and it can generate $250k in EBITDA a year. It's just amazing how certain ethnicity develop expertise in certain sub-sectors that no other ethnicity can compete against them. This isn't to say that these businesses are great. They often involve a willingness of the business owners to work an absurd amount of hours so that no other ethnicity dare compete in the same space.
oddballstocks Posted March 17, 2017 Posted March 17, 2017 I own a franchised hotel. Without reading none of the recent content and focusing on the context of local business's. It's a cinch to buy a independent hotel then franchise it under an economy brand. Absolute cinch. The story: - Bought independent hotel right off highway small population about 60,000. - We did what the franchise required to get it to the standard of the economy brand - This took us about three months. Once in there online reservation system it went non-linear. - Pre purchase sales as i remember was 100-120k a year. Yes the hotel was in the red when purchased. Yet price under replacement value and once the sales rep confirmed with some work we can franchise it that was our value add. Or my trademark TVA ( the value add). It was our green light. - Normalized revenue since franchised has been between 20-25k a month in revenue. Not extraordinary but the hotel business has extremely amazing operating leverage. Also we structured it we think efficiently by having a on-site manager. All that being said, i am scared of Airbnb. With all this new supply there is a mini price war happening between our 4 economy brand competitors. We have no debt. So we will be fine. There will be blood with leveraged up hotels. Also if ever consider doing this gameplan never ever buy from a Khan or Patel. They have there own operating system and its beautiful. I briefly befriended a patel years ago and he explained the employee arbitrage system. They are truly master operators. You will not do TVA if you buy from them. Now i'm going to read the recent posts. In a world that is overtly political correct, the observation about the Patels is one of the more interesting observations I've read lately. My family grew up in the Chinese take out business. If any other ethnicity tried to come in, they would get killed. Even within the Chinese community, I would imagine that 90% of the Chinese take out in the US is run by people from FuJien province in China. There are so many interesting dynamics and levers to the story that it would probably require multiple posts. I have mentioned this before. In NYC, you don't ever want to compete against the Koreans on a mid price lunch spot. They have such an efficient systems that sells everything from ramen to salads to sandwiches that anyone else just gets killed. This is partially why Cosi can't turn a profit. My wife has commented how you never want to buy a dry cleaner or a restaurant from a Korean family. If they can't make it work, no one else can. It kind of ties into you never want to buy a regional mall from David Simon of Simon properties. If Simon can't make it work, don't try. The Korean restaurants tend to operate 24 hours a day. The amount of food that they serve relative to the price is insane along with the 10 complimentary kimchi dishes that they give you. I never want to take over an operation from a Korean family. Years ago, I was on the sell side for a portfolio of 50-60 gas stations. I was talking to the MD and he was explaining that a private equity buyer can hold onto core positions and sell the non-core assets via one-off to Indian families. The Indian families will pay $1mm each and have the parents as well as all the children running it and it can generate $250k in EBITDA a year. It's just amazing how certain ethnicity develop expertise in certain sub-sectors that no other ethnicity can compete against them. This isn't to say that these businesses are great. They often involve a willingness of the business owners to work an absurd amount of hours so that no other ethnicity dare compete in the same space. Please retell the take out stories, who cares if it takes multiple posts. This is the gold of this message board. Awesome stories. There are 'moats' in the real sense of the word in commodity businesses. The moat is when there are skills and efficiencies passed down through families. If you are an outsider you can never learn this information, only those in the family can know. What's fascinating about this is the knowledge doesn't escape. I think it's because people know that if it does their advantage is gone. What strikes me about this is "the system", the idea that there is an optimal way to run a business and these ethnic groups discover them. There's a broader lesson here that strikes me as well. The idea that there might be business secrets we learn and that we can preserve by passing them onto children. I've been thinking about this a lot, what secrets or edges I have that I can let me kids in on and no one else. It's a fascinating concept.
Jurgis Posted March 17, 2017 Posted March 17, 2017 Isn't the major "secret": They often involve a willingness of the business owners to work an absurd amount of hours so that no other ethnicity dare compete in the same space. I.e. owner works 24 hours, their family works 24 hours, and/or hires (potentially illegal) immigrant workers who work 24 hours for below official wage salary. Which makes the operation the low cost operator. There might be more to it, but the huge-work-for-cheap is likely major component, no?
Pelagic Posted March 17, 2017 Posted March 17, 2017 Isn't the major "secret": They often involve a willingness of the business owners to work an absurd amount of hours so that no other ethnicity dare compete in the same space. I.e. owner works 24 hours, their family works 24 hours, and/or hires (potentially illegal) immigrant workers who work 24 hours for below official wage salary. Which makes the operation the low cost operator. There might be more to it, but the huge-work-for-cheap is likely major component, no? +1 Don't underestimate the value of a couple teenagers working in the family business for next to nothing. As an outside owner it's not something you can replicate but it is something you have to compete with if you're entering their market.
undervalued Posted March 17, 2017 Posted March 17, 2017 I own a franchised hotel. Without reading none of the recent content and focusing on the context of local business's. It's a cinch to buy a independent hotel then franchise it under an economy brand. Absolute cinch. The story: - Bought independent hotel right off highway small population about 60,000. - We did what the franchise required to get it to the standard of the economy brand - This took us about three months. Once in there online reservation system it went non-linear. - Pre purchase sales as i remember was 100-120k a year. Yes the hotel was in the red when purchased. Yet price under replacement value and once the sales rep confirmed with some work we can franchise it that was our value add. Or my trademark TVA ( the value add). It was our green light. - Normalized revenue since franchised has been between 20-25k a month in revenue. Not extraordinary but the hotel business has extremely amazing operating leverage. Also we structured it we think efficiently by having a on-site manager. All that being said, i am scared of Airbnb. With all this new supply there is a mini price war happening between our 4 economy brand competitors. We have no debt. So we will be fine. There will be blood with leveraged up hotels. Also if ever consider doing this gameplan never ever buy from a Khan or Patel. They have there own operating system and its beautiful. I briefly befriended a patel years ago and he explained the employee arbitrage system. They are truly master operators. You will not do TVA if you buy from them. Now i'm going to read the recent posts. Can you please explain more about "the employee arbitrage system"? Other than the two books already mentioned here, can someone list more books about insights about the different systems like the Patels use, etc? I've heard about the Patel hotel business briefly from Monish's book. If someone can summarize a list of brokers/websites that they use to browse the small business for sale/sell, that will be good also. I've seen one website Biz buy sell. I've never registered for the website but some brokers want you to pay up just to get little information about the business. Anyone experience the same thing? What are the usual expenses you guys paid just to get some information on their books (sales, inventory, profit, etc)?
DTEJD1997 Posted March 17, 2017 Posted March 17, 2017 My family grew up in the Chinese take out business. If any other ethnicity tried to come in, they would get killed. Even within the Chinese community, I would imagine that 90% of the Chinese take out in the US is run by people from FuJien province in China. There are so many interesting dynamics and levers to the story that it would probably require multiple posts. Interesting that you mention this.... One of the many business ideas that I've had is that in my neck of the woods, I think the Chinese takeout is vulnerable to disruption. Why? Lots of the small takeout restaurants are not well run...They are dirty to downright filthy. A good number are downright rundown. The eggrolls are SHOCKINGLY bad, almost inedible. Sometimes the food is not fresh, ie. frozen broccoli...The fried rice is bad...workers are sometimes rude. Sure, the food is usually fairly inexpensive...but who wants 2 lbs of mainly bad rice? What if a competitor came in...and had the following: A). small, clean restaurant B). well trained, polite workers (at least those that faced public) C). slightly higher prices, but higher quality ingredients....All food fresh, including eggrolls D). Slightly smaller portion size. Who needs/wants 3 lbs. of food? E). Open longer hours, hitting late night eaters (carryout only) F). Smaller menu size for efficiency G). All food prepared fresh, no #$%^ steam trays! I think Chinese takeout operators have gotten "fat & lazy" in my area, no real competition in the space. Vulnerable in my eyes...
Spekulatius Posted March 17, 2017 Posted March 17, 2017 Isn't the major "secret": They often involve a willingness of the business owners to work an absurd amount of hours so that no other ethnicity dare compete in the same space. I.e. owner works 24 hours, their family works 24 hours, and/or hires (potentially illegal) immigrant workers who work 24 hours for below official wage salary. Which makes the operation the low cost operator. There might be more to it, but the huge-work-for-cheap is likely major component, no? I agree with above that the willingness to work long hours is the biggest factor. The whole family chips inhours, including the kids. Competing with paid employees is very hard and even paid employees are mostly less reliable and honest. This is not just true for restaurant or service business, but also for other business lie construction business where you can get incredible value from contractors, if you know how to deal with them. We had some work done in my old house when we were living in the Bay Area for about from Chinese contractors for about half what a regular contractor would charge, and the work was quite good (not the highest attention paid to detail, but pretty decent). However, we could do this, because my wife is Chinese and new the right contacts and how to deal with them in their own language.
Jurgis Posted March 18, 2017 Posted March 18, 2017 This is not just true for restaurant or service business, but also for other business lie construction business where you can get incredible value from contractors, if you know how to deal with them. We had some work done in my old house when we were living in the Bay Area for about from Chinese contractors for about half what a regular contractor would charge, and the work was quite good (not the highest attention paid to detail, but pretty decent). However, we could do this, because my wife is Chinese and new the right contacts and how to deal with them in their own language. In Boston area Vietnamese own the hardwood floor business. I've hired them twice and like you said, I got the 1/2-1/4th the price of the real contractor and good quality. I won't ask where they got materials, where they disposed of garbage and most likely no insurance, no health for employees, etc. :-\ I would have loved to hire them for other jobs, but I don't talk the language so it was hard to ask if they did other jobs and how/etc.
rb Posted March 18, 2017 Posted March 18, 2017 This is not just true for restaurant or service business, but also for other business lie construction business where you can get incredible value from contractors, if you know how to deal with them. We had some work done in my old house when we were living in the Bay Area for about from Chinese contractors for about half what a regular contractor would charge, and the work was quite good (not the highest attention paid to detail, but pretty decent). However, we could do this, because my wife is Chinese and new the right contacts and how to deal with them in their own language. In Boston area Vietnamese own the hardwood floor business. I've hired them twice and like you said, I got the 1/2-1/4th the price of the real contractor and good quality. I won't ask where they got materials, where they disposed of garbage and most likely no insurance, no health for employees, etc. :-\ I would have loved to hire them for other jobs, but I don't talk the language so it was hard to ask if they did other jobs and how/etc. This is also true in the Toronto area. The price for the Chinese contractors is about 1/2 as for the white guy. The work quality I'd say is about 90%. You can find one for about anything. There's also none of the bullshit usually associated with contractors. They quote you a price, they come, do the job, you pay them, they leave. If you have any 1st generation immigrant friends they'll know plenty of contractors. I don't ask for any for any worker's comp proof.
BG2008 Posted March 18, 2017 Posted March 18, 2017 I own a franchised hotel. Without reading none of the recent content and focusing on the context of local business's. It's a cinch to buy a independent hotel then franchise it under an economy brand. Absolute cinch. The story: - Bought independent hotel right off highway small population about 60,000. - We did what the franchise required to get it to the standard of the economy brand - This took us about three months. Once in there online reservation system it went non-linear. - Pre purchase sales as i remember was 100-120k a year. Yes the hotel was in the red when purchased. Yet price under replacement value and once the sales rep confirmed with some work we can franchise it that was our value add. Or my trademark TVA ( the value add). It was our green light. - Normalized revenue since franchised has been between 20-25k a month in revenue. Not extraordinary but the hotel business has extremely amazing operating leverage. Also we structured it we think efficiently by having a on-site manager. All that being said, i am scared of Airbnb. With all this new supply there is a mini price war happening between our 4 economy brand competitors. We have no debt. So we will be fine. There will be blood with leveraged up hotels. Also if ever consider doing this gameplan never ever buy from a Khan or Patel. They have there own operating system and its beautiful. I briefly befriended a patel years ago and he explained the employee arbitrage system. They are truly master operators. You will not do TVA if you buy from them. Now i'm going to read the recent posts. In a world that is overtly political correct, the observation about the Patels is one of the more interesting observations I've read lately. My family grew up in the Chinese take out business. If any other ethnicity tried to come in, they would get killed. Even within the Chinese community, I would imagine that 90% of the Chinese take out in the US is run by people from FuJien province in China. There are so many interesting dynamics and levers to the story that it would probably require multiple posts. I have mentioned this before. In NYC, you don't ever want to compete against the Koreans on a mid price lunch spot. They have such an efficient systems that sells everything from ramen to salads to sandwiches that anyone else just gets killed. This is partially why Cosi can't turn a profit. My wife has commented how you never want to buy a dry cleaner or a restaurant from a Korean family. If they can't make it work, no one else can. It kind of ties into you never want to buy a regional mall from David Simon of Simon properties. If Simon can't make it work, don't try. The Korean restaurants tend to operate 24 hours a day. The amount of food that they serve relative to the price is insane along with the 10 complimentary kimchi dishes that they give you. I never want to take over an operation from a Korean family. Years ago, I was on the sell side for a portfolio of 50-60 gas stations. I was talking to the MD and he was explaining that a private equity buyer can hold onto core positions and sell the non-core assets via one-off to Indian families. The Indian families will pay $1mm each and have the parents as well as all the children running it and it can generate $250k in EBITDA a year. It's just amazing how certain ethnicity develop expertise in certain sub-sectors that no other ethnicity can compete against them. This isn't to say that these businesses are great. They often involve a willingness of the business owners to work an absurd amount of hours so that no other ethnicity dare compete in the same space. Please retell the take out stories, who cares if it takes multiple posts. This is the gold of this message board. Awesome stories. There are 'moats' in the real sense of the word in commodity businesses. The moat is when there are skills and efficiencies passed down through families. If you are an outsider you can never learn this information, only those in the family can know. What's fascinating about this is the knowledge doesn't escape. I think it's because people know that if it does their advantage is gone. What strikes me about this is "the system", the idea that there is an optimal way to run a business and these ethnic groups discover them. There's a broader lesson here that strikes me as well. The idea that there might be business secrets we learn and that we can preserve by passing them onto children. I've been thinking about this a lot, what secrets or edges I have that I can let me kids in on and no one else. It's a fascinating concept. Unfortunately, I think the moat here is from one ethnic group to another. This is the part that I previous did not appreciate as much. However, the restaurant businesses are inherently tough. There is little barrier to entry within the ethnic group. For example, my family moved to the US in 1992. My dad came much earlier. When he opened the take out, there were maybe 5-6 takes outs in a town of 60,000 residences on a predominantly Jewish town on Long Island. By the time I arrived, we were up to 12 or 13. Even though, housewives on Long Island love to order Chinese Food, there is only so much aggregate demand. This means that the overall revenue opportunity is split between all the restaurants. Each restaurant opening is met with disdain among the incumbent. The way a Chinese take out operated was the following (These are all 1990s figures when I was a young teen helping out the restaurant): This is an illustrative example from the 1990s. So today's figures need to be higher in order for the business to work. Gross $30,000/month Food cost = 40-50% Rent = Hopefully below $2,000, over $3,000, it gets really difficult 3 full time Kitchen staff who work 72 hours, paid roughly $2,200, $1,700, and $1,200 (These are mid 90s figures) for different skill levels. You always need the guy who gets paid $2,200. 1 full time customer facing personnel who is actually extremely important position. $2,000 per month. This function is typically filled by the family's children. The parent usually doesn't understand English well enough to handle this task. Nat gas > $1,000 a month Electricity, waste disposal, phone, printing (menus), packaging, misc > $1,000 a month Delivery personnel (usually the owner/wife/driving age children) - $1,000 per month plus tip. Driver usually provide car and absorb car payment, fuel, and insurance cost. From these numbers you can see that if the family has a father who can cook, then the $2,200 cost is eliminated, if the wife can answer the phone, then the $2,000 cost get eliminated. Or if the children can work from 3pm till 9Pm, then the counter staff job frees up, and the wife can deliver and they wind up capturing the tips etc. Let's assume that the COG is 45% and the rent is $2,500, the operating cashflow look like the following: By hiring everyone = $30,000 Rev - $13,500 Cog - $2,500 Rent - $2,200 Chef - $1,700 Sous Chef - $1,200 Helper - $2,000 Counter - $1,000 Nat Gas - $1,000 Utility Misc - $1,000 Delivery Guy = $3,900 By having your family work = $30,000 Rev - $13,500 Cog - $2,500 Rent - $1,700 Sous Chef - $1,200 Helper - $1,000 Nat Gas - $1,000 Utliity Misc + $1,000 tip - $500 car expense = $9,600 On the surface, this may look like a decent business. You're making 13% to 32% pre-tax margin. The reality is that you need to stay on top of your employees. You need to be there in the restaurant. In both cases, there is a management salary that is not paid. The truth is that you can't hire a manager. No one cares about this business as much as you do. You can't just pay $2,500 to hire a manager to do this job for you. Heck, if you hired everyone you wind up with $1,400 monthly pre-tax profit anyway. The cost of setting up a Chinese take out is about $100,000 back then. So a 17% pre-tax return is really crappy for a business where you can go out of business very quickly. Work intensity - How hard was it exactly? It's rough. Days are 10AM to 10PM. If your family worked, the parents tend to work all seven days. People bitch about working 70-80 hour weeks, I did it as a 16 year old during the summer. What's the expectation for children? During my senior year of high school, I was captain of both the football and wrestling team and took a bunch of AP classes, my parents never failed, till this day, to remind me that I worked "the least" of all my siblings. They still say, with a straight face, that I took the easy way out. In season, I would get home from sports practice and make my own meals and do my school work. Saturdays is gameday, so there is no work. I'm expected to work during Sundays. When I'm not playing sports during the spring semester, my parents would pick me up around 4PM right before the dinner rush and drop me home around 9PM. We ate as many meals at the restaurant as possible. During the summer, I'm expected to work 5-6 days from 10am to 10pm. As a side note, going into my sophomore year of college, I would work the 12 hours shifts, go to this 24 hour gym with my buddy, lift weight, and then I will run 5-6 miles. I had a bet that I would get a six pack abs that summer. It was just work, sleep, workout, repeat. If I had to be honest with myself, I was lucky that I got to play sports. My sibling did work more hours in the restaurant than I did. Us kids also work summer jobs to help out the family. I worked as a fish monger since I was 14 years old. My siblings worked at other Chinese take outs during the summer as we have "excess capacity" with four kids off from school. I thought being a fish monger was the best job in the world. It was either over 100 degrees in the kitchen or being around a lot of ice and cold fish. I loved the latter. Most of the time, the summer earnings went back to the parents as we know that paying a house mortgage, cars, and saving for college was tough on Long Island. Despite all of this, my parents worked way more than all of us. They legitimately worked 80 hours weeks for 10 years. I think my dad worked for 2-3 years without taking a day off. This is probably a good place for me to take a break. But I'm happy to answer questions about this business. Overtime, you learn to fix things that breaks. You can't fix the fridge. But if a faucet broke or pipe burst, you learn to solder and stuff. We did a little renovation during my high school years. I remember putting tiles down on Thanksgiving day. That's the one day a year when we close the restaurant. Competition wise - There's no moat. There's no ways around. It seems like there's no shortage of dumb money that would open up a new restaurant in town. I guess it's in the DNA of the people to want to be owners rather than work for others. There is a typical 5 year minimum training process to become a chef in a Chinese take out. You start out as a prep guy, you cut things, moped and cooked the simplest dished like fried rice. Then you move onto having to use a wok which requires a wrist motion that takes some time to master. You need to develop culinary expertise like how to brown the meat in the wok, then cook the noodles etc so that it's done. This is where you start using seasoning. Some people are great cooks and some people just don't have any culinary fiber in their body. Then you move onto the dishes that require sauces. The chef actuallys have to make about 8 different kids of sauces from scratch. One thing that Chinese take out do a terrible job of is marketing. Sometimes I look at Chipotle and I'm like a bunch of Monkeys can run that. In the Chinese restaurant, everything is made from scratch. This means that we will buy the Chicken breast and then debone it. We do not buy chicken breast where an employee in a meat packing plant have added value by removing the skin and the breast. Frankly, it's also higher quality when you get the whole breast yourself. So, there's the skinning, deboning, then freezing, and then slicing it into pieces, marinating, and then ultimately cooking it. All the shrimps are peeled and devined by use. I've developed skills to peel and devine 10 pounds of shrimp in 15-20 minutes. All the veggies are cut by hand. We go through a ton of broccoli, carrots, celery, mushrooms, peppers, onions, etc. Everything is cut by hand. The egg rolls, dumplings (we make our own dough), and sweet and sour (fried nuggets) are done in house by hand. The sauces are made in house. It typically require a rich chicken broth as a base, browning anise seed, scallions, peppers etc. We roast our own ribs. This requires a homemade sauce which requires fresh fruits to be grounded. It is then marinated and roasted once. Then we have to finish it via the salamander made to order. The soups are made every morning from scratch. Everything takes time. Most restaurants have two busy shifts, lunch and dinner. If you look at a menu, there are 3-4 soups that we have to make every morning. There are 20 appetizers that we make in house. We roast the pork ourselves. We debone the pork shoulders ourselves. The bones are used to make stock. There is no waste. There is no down time in the kitchen. If you're not actively cooking for order, you're prepping by either cutting meat or veggie, making sauce, making stock, frying things in advance. I estimate that the kitchen staff had about 3x the productivity of an American employee. That's why I love my fish monger job so much. I just had to smile, weigh the fish, wrap it, and collect payment. My best friend delivered for us when I was in college. From time to time, he would say things like "if I ran your place, I would do so and so as I learned in finance." I think a lot of us finance types think you can just take out certain cost or fire a specific employee. This is a bit of fallacy that we investors fall into. I guarantee you that 99% of the people on this board if they take control of our business and try to improve upon it, sales will likely collapse. The only thing that could've been improve upon is a ordering system. If all the ordering can be done domino style (with apps) without a phone call, it will actually massively improve the experience. Managing people is tough. By the time I was 18, I've dealt with all sorts of employees. There are employees who simply can't produce. They get let go. There are employees who are very productive and they know that you can't afford to fire them. So they wage all sort of psychological warfare on you. This is lesser of an issue if the male owner is the chef. Then he can fire that guy and the business can still produce a good quality product. But if the chef is a hired gun and he unwillingly make it tough on the owner, the owner has to put up with that BS. Unlike an ice cream shop, you can have your chef leave on a Friday night. Who's going to make all that stuff from scratch? Each restaurant is a breeding ground for more competition. This immersive environment where someone rise from prep to chef allows the hardworking and frugal to save up money. Well, there's typically an indenture servitude element associated with paying off debt accumulated from gaining access to the US. Usually by 7-10 years in, a chef would save up enough money that he wants to republicate this with his own family. Because he rise up through the rank, he has also learned every facet of the kitchen operation. Everything that the general public views as positive about hardworking Chinese American also makes this business so darn tough. Most people want to stay near New York. This is how you wind up with 15-20 Chinese take outs in a 60,000 town on Long Island.
BG2008 Posted March 18, 2017 Posted March 18, 2017 My family grew up in the Chinese take out business. If any other ethnicity tried to come in, they would get killed. Even within the Chinese community, I would imagine that 90% of the Chinese take out in the US is run by people from FuJien province in China. There are so many interesting dynamics and levers to the story that it would probably require multiple posts. Interesting that you mention this.... One of the many business ideas that I've had is that in my neck of the woods, I think the Chinese takeout is vulnerable to disruption. Why? Lots of the small takeout restaurants are not well run...They are dirty to downright filthy. A good number are downright rundown. The eggrolls are SHOCKINGLY bad, almost inedible. Sometimes the food is not fresh, ie. frozen broccoli...The fried rice is bad...workers are sometimes rude. Sure, the food is usually fairly inexpensive...but who wants 2 lbs of mainly bad rice? What if a competitor came in...and had the following: A). small, clean restaurant B). well trained, polite workers (at least those that faced public) C). slightly higher prices, but higher quality ingredients....All food fresh, including eggrolls D). Slightly smaller portion size. Who needs/wants 3 lbs. of food? E). Open longer hours, hitting late night eaters (carryout only) F). Smaller menu size for efficiency G). All food prepared fresh, no #$%^ steam trays! I think Chinese takeout operators have gotten "fat & lazy" in my area, no real competition in the space. Vulnerable in my eyes... I'm not sure where you live. If you're in the Midwest or Southwest, then I can see that the food is likely crappy. I laid out some of the economics and the reality of the Chinese take out business in a previous post. The business on Long Island near NYC is still extremely competitive. It's ironic that I sometime order Chinese delivery now when I don't feel like making dinner. In my opinion, the food has good quality, it's just greasy. You mentioned steam trays, that would not fly here in New York/Long Island. The housewives here have very discerning taste for an entree that cost $10 which has freshly cut veggies and high quality protein. I think you're describing Panda Express. They have quite a few thousand locations. I think there are easier things to disrupt than the Chinese take out business. Now, I've heard from friends and relatives that the business has gotten much harder overtime. Why? Look at my family. We were in the business from the late 80s to 2004. That's a 15 year span when we worked crazy hours. Our success is the reason why this business can't sustain itself. All my siblings wind up going to college and we have white collar jobs. Labor cost has gotten a lot more expensive. While minimum wage has gone up not that much, labor cost in a Chinese take out has gone up a very large amount. That staff that we used to pay $1,200 a month now commands 2x that. The problem is that revenue has not risen as quickly. Most town likely has more competition rather than less. Why has labor gone up so much? It is tied to the GDP of China. There used to be a seemingly endless supply of cheap labor via immigration. It's also what the new comers is used to. In the 90s, that new immigrant was a rice farmer and the restaurant work was likely better pay and less work than what he did on the field. In 2017, the kitchen staff is either a single child who has been spoiled or an US kid who failed out of school. Neither sources make good employees. My siblings and I all wind up going to college and work white collar jobs. We are not the exception, we are the norm. There is no cheap labor around. Any sorts of disruption would have to involve a much smaller menu. I doubt that hiring minimum wage employees of non-Chinese origin in the US will never really work. This is partially because the "Chinese Take Out" product itself has such a high value to price ratio. Consumers are conditioned to getting a ton of quality food for low prices. I think the US consumer is okay paying $10 for a scooped tray of rice, beans, and grilled protein from Chipotle. It's a steam tray concept as well. But deep down, US consumer are so conditioned to what the neighborhood Chinese restaurant offers that they are only willing to pay $7 for the same food item of the same quality as Chipotle. I've often thought about this years ago.
Spekulatius Posted March 18, 2017 Posted March 18, 2017 Re Chinese in Long Island I live in Long Island near the border of Suffolk and Nassau county and did not find the Chinese food very desirable. As I mentioned before, am a transplant from the Bay Area, CA and my wife is Chinese ethnically, but we both found the Chinese food quite terrible, especially the takeout variety. So far, we only tried it once. They solely cater to the "white" populace and only have standard fare like Kung Pao, Orange Chicken, egg roles etc. There are a few good restaurants in between, which I think are mostly recent opening from emigrants. Those are sit in restaurants which do takeout on the side and charge a little more. There is a cluster of decent places near Stony Brook catering to the large population of Asian Students there. I did find Indian restaurants to be much better than in CA generally, but for Chinese food, it is the opposite. I can attest to the long hours are willing to work and determination that Chinese emigrants have to get ahead and provide for their kids. Comparatively speaking, Vietnamese, Thai and Philippino's seem to be less successful. Compared to all these above, I grew up with a golden spoon emigrating from Europe with a very good education.
Pelagic Posted March 18, 2017 Posted March 18, 2017 Great posts BG. For some of the Chinese takeout restaurants I frequent, it seems like they have a 100 or more menu items. Do you think having such a large menu slows down the business during peak times if someone orders one of the less common options? Could a Chinese restaurant that took the best selling third of their menu and made that their new menu do better i.e. stocking higher quality ingredients, more time spent on prep, etc. One show I enjoy is The Profit with Marcus Lemonis and he occasionally invests in restaurants, usually those with something that passes as a brand in their local area and multiple locations. One of the things he almost always does when investing in restaurants is simplify the menu using data on what people are ordering and what dishes have the best margins and fit best with the brand the restaurant is trying to create. Just wondering if this logic applies in the Chinese takeout business too. I've noticed he also encourages restaurants to branch out with food trucks as a higher margin side business.
SharperDingaan Posted March 18, 2017 Posted March 18, 2017 Look at a small business as a family enterprise - maximizing its value as a family unit. Members that wouldn't be otherwise employable, or would be underemployed, are now contributing by saving costs; and the bigger your extended family in this position - the greater your advantage. It's not unusual for a premises, or even a franchise, to also be owned by a rich uncle; & rented to the family; the uncle working the 'capital' side, and the family working the 'operating' side. The expectation is also that the operating business has zero/nominal terminal value; you make your money from operating it (no different to most other personal businesses), & your 'retirement' fund is the building itself after paying off the mortgage via the monthly rent. Its very efficient, & more than adequate for most purposes. But the business itself isn't profitable. If you had to pay minimum wage for all those hours, it would be very difficult to turn a profit - and most of the benefit would go to everyone but your family. And if you did turn a profit - it's unlikely to be enough for your risk. Hence there are very few 2nd or 3rd generation owners - they get out. SD
vinod1 Posted March 18, 2017 Posted March 18, 2017 Really terrific posts BG. Really appreciate sharing all the details. Very informative and eye opening for me. Thank you! Vinod
vinod1 Posted March 18, 2017 Posted March 18, 2017 Look at a small business as a family enterprise - maximizing its value as a family unit. Members that wouldn't be otherwise employable, or would be underemployed, are now contributing by saving costs; and the bigger your extended family in this position - the greater your advantage. It's not unusual for a premises, or even a franchise, to also be owned by a rich uncle; & rented to the family; the uncle working the 'capital' side, and the family working the 'operating' side. The expectation is also that the operating business has zero/nominal terminal value; you make your money from operating it (no different to most other personal businesses), & your 'retirement' fund is the building itself after paying off the mortgage via the monthly rent. Its very efficient, & more than adequate for most purposes. But the business itself isn't profitable. If you had to pay minimum wage for all those hours, it would be very difficult to turn a profit - and most of the benefit would go to everyone but your family. And if you did turn a profit - it's unlikely to be enough for your risk. Hence there are very few 2nd or 3rd generation owners - they get out. SD SD, You have a wonderful way of looking at the broader picture. Invariably I have to re-read your posts - because they are packed with wisdom. Vinod
DTEJD1997 Posted March 18, 2017 Posted March 18, 2017 Hey all: Some thought/observations about the Chinese restaurant business. I've lived and traveled in many different parts of the USA, particularly in the Midwest & South. I've been to NYC many times... NYC Chinese, even those that cater to the "white" community are heads & shoulders BETTER than what is generally available in the Detroit/Michigan area. The amount of food preparation HERE is significantly LESS than what was described as happening in NYC. Sauces are NOT prepared fresh. Meat is NOT processed in the restaurant to the degree it is in NYC. Eggrolls are not made fresh, and on and on. Heck, some places even use frozen vegetables! A lot of the restaurants are not clean. Some, I don't know how they pass health inspections. Believe me when I tell you that I am not a neat freak, and am willing to go to some sketchy places... The place that comes closest to the NYC model, BUT STILL FALLS SIGNIFICANTLY short does a BOOMING business. I would not be surprised if these guys are doing $12k in sales per week. They may even be doing more. They usually have two cooks manning the woks, a front counter person, an assistant, and a prep person, a delivery person. No doubt that these people are working hard, very hard...but that does not mean that they have an unbeatable business model. A). Simplify the menu. They have WELL over 100 items. I am going to guess that the top 20 items get 80% of the dollar volume of sales. B). By weight, they give you a silly amount of food. Of course, the majority of that weight is rice, eggroll & vegetables. C). Their prices are eminently reasonable. HOWEVER, would people pay slightly more for LESS food that is higher quality? I strongly suspect they would. D). I've had friends/associates that didn't like Chinese food. Sometimes they thought is was "OK", but not that great. Why is that? They ate at crappy buffets, or simply had no exposure. My ex-girlfriend was like that. She didn't like the food. I took her to some good places and she totally turned around in her opinion. Over the course of a year, it became one of her favorite things. I very much suspect that the population here would be receptive to trying different types of more "authentic" Chinese food if simply given the exposure. E). A lot of the Chinese restaurants have been in my area for DECADES. I suspect they've been passed down from generation to generation. F). Few restaurants are open late. Taco Bell will frequently have a drive through line extending out into the street. What if a Chinese takeout was open late to capture the late night crowd? Carry out only. Maybe combine that with a special, limited menu. Maximize that menu for quickness, efficiency & profitability. So the market here is totally different than the market in other areas of the country. I think it is vulnerable to disruption and or competition. The opportunity does NOT lie in doing things the same as others, but in doing it different & better.
DooDiligence Posted March 20, 2017 Posted March 20, 2017 Thanks BG & SD (I'll definitely re-read this thread if I start contemplating restaurants/food service...) Ditto to Premfan for the hospitality model...
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