Long before his friends landed interviews for their first jobs, Lee Shadle began developing his first business, a fast-casual Italian restaurant called Pesto Creative Italian Bistro. As a junior at Ohio State University, Shadle created Pesto as a project for a business class in the winter of 2004.
The next year, while completing his marketing degree, Shadle took his business plan to every bank he could find in Columbus, Ohio. In February 2005 he secured a small-business loan for $400,000 and Pesto opened in Columbus on Dec. 17 of that year, when Shadle was just 22.
Shadle’s appreciation for fast-casual standout Chipotle Mexican Grill directed his entrepreneurial energy toward that segment of the industry.
“I first experienced that model that Chipotle had during my sophomore year of college, and I fell in love with the simplicity and the freshness,” he says. “I wanted to create the Italian version of Chipotle. I felt there was an opportunity, and I still do, for a fast-casual Italian concept in that marketplace … so I decided to go for it.”
But despite his enthusiasm and persistence, he wasn’t able to make his venture profitable. He shut down Pesto in late November 2007. Shadle cites his inexperience as an operator and a problematic location — a low-visibility site with several vacant retail spaces nearby that he says robbed Pesto of guest traffic — as primary causes of the closure.
“I made every mistake in the book,” he says. “The learning curve was steep, and unfortunately our location … wasn’t able to cover up those things.”
In foodservice, many businesses follow the same arc as Pesto. A longitudinal study of just the Columbus market conducted by Ohio State professor H.G. Parsa in 2003 revealed that the cumulative failure rate for new restaurants from 1996 to 1999 was 59 percent. By the third year of existence, the study found, franchised units of restaurant chains closed at a rate of 57 percent, and independents closed at 61 percent. Other hospitality school studies estimate similar three-year failure rates industry-wide of more than 50 percent.
The industry’s many cuisines and service segments provide ample opportunities for entrepreneurs who recognize an opening for a new concept, but obtaining startup capital, real estate or operational know-how can prove difficult, especially for young people like Shadle.
“I think the hardest part was just getting people to believe that I could pull this off,” he says. “I had to get a variety of people on board: the bank, the landlord, investors. The hardest part was building those relationships and getting people to believe in the concept.”
To get a small-business loan, Shadle enlisted his parents as co-signers, and they put up their house as collateral. His family will lose the house as a result of Pesto’s closure, but he says the situation has made the family closer than ever and has given him invaluable perspective in business and in life.
“I don’t regret trying, and I’m so glad I just went for it,” Shadle says. “Despite it not working, every lesson has more than paid for itself. The biggest lesson I learned: The team you build is everything.… Without having the right people around you, it’s never going to work. Toward the end, I surrounded myself with the right people who’d do anything for me, but it took years to get to that point.”
Another Columbus-based entrepreneur, Cameron Mitchell, also places considerable importance on the needs of his employees and partners when making plans for his proprietary restaurant concepts. Mitchell, president and founder of Cameron Mitchell Restaurants LLC, last November orchestrated the sale of 22 restaurants under the Mitchell’s Fish Market, Columbus Fish Market, Cameron’s Steakhouse and Mitchell’s Steakhouse brands to Ruth’s Chris Steak House. The $94 million sale price was a multiple of about 10 times trailing earnings before interest, taxes, depreciation and amortization — one of the higher multiples among foodservice industry deals in 2007.
Mitchell says the time was right to sell the mature seafood and steak concepts and that the deal will allow his company to further develop its growth concepts, such as Marcella’s Ristorante and Rusty Bucket Corner Tavern.
“We felt we might be at the end of the window of higher multiples being paid for restaurant concepts,” Mitchell says. “We also felt we’re in the lowest tax rates in 54 years, so we had to get a deal done in 2008. I wanted to take some chips off the table, so to speak, and secure my family. The Fish Market was ready to build another eight to 10 restaurants a year, and we didn’t have the manpower to do eight to 10 Fish Markets and six to eight of our other restaurants. It was the right thing to do for our people.”
Mitchell, who built his restaurant group from a single unit in 1993 to 33 restaurants under nine brands operating in eight states, says the ability to develop concepts improves the longer an operator stays at it.
“I have learned a tremendous amount of concept development,” he says. “We’ve done 10 concepts now, and Nos. 7, 8, 9 and 10 are better than Nos. 1, 2, 3 and 4. We’re getting better all the time at developing concepts. Not every one of them is going to be a winner, but for some, we might build 100 of them. You can’t tell, though, until you open them and get down the line with them.”
Given the uncertainty and difficulty of developing a business, many would-be restaurateurs elect to own a franchise of an established concept. Franchising appeals to businesspeople because much of the groundwork is already laid, which allows them to focus on operating a business model that’s been proven, says Matthew Shay, president of the Washington, D.C.-based International Franchise Association .
“There are significant advantages to franchises because they remove a certain level of risk and investment in time and capital that otherwise an independent operator would have to assume on his or her own,” Shay says. “There are risks in franchising just like any other business, and there’s no greater guarantee of success, but the advantages are significant, and that’s why we see it growing at a steady pace in new markets.”
The IFA is bullish about franchise growth in 2008, Shay says, even though the economy as a whole may continue to suffer.
“Certainly there will be some impact because of the uncertainty of the overall economic picture,” Shay says, “but franchising tends to do well in down markets in terms of growth. It tends to outperform the market. When there’s uncertainty about the stock market or the real estate markets, the capital that is usually invested in those areas has to go somewhere, and it frequently goes into franchise businesses.”
Even Shadle, the once-and-perhaps-future restaurateur, has recouped and started working as a consultant with
“One of my biggest selling points with a client,” he says, “is that I can say, ‘Hey, I know what it’s like to have a dream, go for it and lose it,’ and I can help them bypass those mistakes.”