I recently did an interview with Laurie from the Small Business Developement Center in Lansing Michigan on how to do a feasibility study and what it covers. Below is the transcript from that podcast. You can either read it here or go to the podcast page and listen to it. I hope you enjoy it.
John Kinnunen: Hey, everybody. It's John from restaurantmastering.com. How are you doing? Hope everybody had a great couple of weeks. This week, in this podcast, we're going to be covering a topic that I cover on restaurantmastering.com called How to Start a Restaurant. On restaurantmastering.com I have a whole section dedicated on how to start a restaurant.
One of the very first lessons is doing a demographical study. How many people have ever heard of doing a demographical study? How many people have done one before? Exactly. I had never done one before until I got into this business, and I was starting to think about expanding further beyond the two stores that we already had. One store performed very well, the other one was not performing as well. So I knew that doing a demographical study to pick a third location is something I wanted to do.
It's very important and in this podcast episode we go through how to do it. I talked to a friend of mine, her name is Laura, from the Small Business Center here in Michigan. I call her a friend because I talk to her a few times a year now that I own my own business, just bounce ideas off of her and she has a lot of resources available to her. And I suggest if you're going to be opening up a business of any kind, if it's a restaurant business or if it's a clothing store what it is, I suggest you get in contact with your local Small Business Center.
When you're starting a restaurant or any kind of business, it's very important that you do a lot of research at the beginning. The more research you do at the beginning, the better the chance you have at making it work. You're going to be spending a lot of money and a lot of time into this, and you want to make sure it's going to work. There's a saying by Pat Flynn he says, "Fail fast. Fail quick." So if your idea's going to fail or if your restaurant's going to fail, you want to know at the beginning that it's going to fail.
So I suggest you pay attention. Go to my website, click on "How to Start a Restaurant," and follow along with all those lessons and you are definitely going to increase your chances of succeeding. So without … furthermore, enjoy.
Show Intro: I'd like to welcome you to restaurantmastering.com podcast, brought to you by someone who lives in the Northwest and wears shorts all year long, John Kinnunen.
John Kinnunen: All right, hello. This is John Kinnunen with restaurantmastering.com. I'm here today with Lori from the Small Business Development Center here in Michigan. This is going to go along with my unit on How to Start a Restaurant. One of the very first things you want to do is you want to start with a demographic study. I came to her before, when we were going to open up our third store, and she helped me out. And so I thought that this would be a great resource to pass on to you guys. And without further adieu, here's Lori.
Lori: Hi, John. It's great to be here. So you and I were talking a little bit about when you are starting a restaurant. The first thing you want to know is, is this a good idea, right?
John Kinnunen: Right. Definitely.
Lori: And I think … let's even back up a little bit, maybe not call it demographic study yet, let's call it just a feasibility study. Is this a feasible idea? And we're going to use market research to answer that question.
John Kinnunen: Correct. That's probably one of the smartest things you can do when you're about to start a restaurant is you want to see if this idea's going to work in the area that you're thinking about opening up your restaurant. Otherwise, you're going to be wasting a bunch of money, a bunch of time, and you're just going to end up with closed doors. So the more research you do at the beginning, the more likely you are to succeed. It may be the longer road, it might not be the quickest way you want to do things, but from experience this is the right way to do things. So what was the first thing you want to look at when you're doing a feasibility study when you're about to open up a restaurant?
Lori: The first thing is to find out who is your target customer, who's your target market, we might say. If you're opening a second restaurant, you already know who your customer is pretty well. You know their tastes, right?
John Kinnunen: Right.
Lori: You know maybe their age, or an age range. You know when anybody comes to our offices and says, "Oh everyone's my customer." You've heard that one before?
John Kinnunen: Oh I definitely have heard that before. You think everybody's your customer, but really that's not true. You have a target market that you want to make sure is located near or around your restaurant.
Lori: Yeah so we're looking at a few characteristics and yeah we would call these demographics. Demographics are statistics that may come from census data and they describe things like our age, our income, our occupations, and they're going to help us really define who's our customer. So who would you define as your target customer?
John Kinnunen: With our restaurant that we have, we have a pizzeria, and so we're really targeting households that eat pizza: small families, large families, single men who like to eat a lot of pizza. So that's kind of our target area. It's not everybody's target area but that's where we started.
Lori: Okay so what do you do if you're opening for the first time and you're just guessing at your target market? Well there's a couple things you can do. I'm going to name some market research resources throughout our interview. I realize you have a national audience, so at the end I'll kind of point to some places where people can find some of these resources.
First thing, if you don't know who your customer is, your target market is, you might look for something that describes your best customer. There's a report called Best Customer. And … I know right?
John Kinnunen: Yeah. Who would have thought?
Lori: Yeah. So the Best Customer Report can't actually say, well let's say you want to open a bakery and it can't say who goes to bakeries, but it can say who buys baked goods. So, it's not going to say who goes to pizzerias, but it'll say who buys pizza. So we have kind of an idea in terms of income, age, gender, who our best customer might be. If you can't find this report, you might have to do your own market research. And you could do that by doing a survey tool. SurveyMonkey is a free one. And you might post something on social media. You want to find out who likes pizza. How many times they eat it. How close they are to X location.
John Kinnunen: Right. Definitely. That's a great place to start, great way to start. There's a mile radius around your restaurant that you want to look at. What mile radius do you start with?
Lori: Most of the reports we use you can actually just plug in like three different points. You can start with … you can do either a county, but if you're looking at specific addresses. So now we know our customer. Now let's look at the location and do a location analysis. We use the actual addresses of different buildings. You know we've been out driving around, working with a realtor maybe, and we have kind of our hit list of best potentials. And so I'd say pretty common is doing a one-, three-, and five-mile analysis of all of these.
Depending on the type of restaurant you're opening this can be really key. I'm pulling something in front of you and this is an infographic. I found this recently, and it's titled Driving Times to Local Businesses. And they're all types of different businesses that are on here, but I see two that might jump out that might be of interest to your people. I see a pub and it looks like people only want to drive 14 minutes to this location. It's a little closer to home, probably your favorite pub you've been going to. And then if they're going to a restaurant, they'll drive about 17 minutes. So we don't have to analyze everything in our city. We want to really just look within sort of a ring and that's why we call it a ring, a radius of one, three, or five miles.
John Kinnunen: Mm-hmm (affirmative). Definitely. I did not know that there was this graphic available to you. This is awesome. This is one of the reasons why you want to do a feasibility study and really talk to an expert like Lori, from the Small Business Development Center, because they do have these kind of resources available. And it's going to really probably blow your mind, actually, because I remember it blew my mind the first time we sat down together, at all the information there is available really out there that you probably don't know, if you're like I was. So, that right there is awesome.
Lori: Yeah I found that on my own. A firm had done this nationally, and I like to go out and look for resources. I'll Google resources often, and then you just have to really ensure the credibility of the resource. So this was a firm and they described their sample target market and how many people took the survey and where they were from. And so I could see it was a credible resource.
So maybe let's think about what's the information we want to get in order to create this location analysis. Well we're going to look at some of that census data, those demographics. We have like average household income. We might look at population. We might look at number of households. We might look at age. Those are all great things to look at in terms of describing the locations. And so, John, we're looking at a grid here that compares several potential locations on those. What do you see when you look at household income?
John Kinnunen: You see a huge range from city to city. It starts off with one of them at $78,000, average household income. That's probably per year. Then it goes all the way down to, the lowest one is probably $52,000 a year as your average household income. So if you're really looking at average household income to see how much money people really have to spend when they're going out to eat, this is going to a big factor.
Lori: Yeah, again, it goes back to what your concept is, right?
John Kinnunen: Right.
Lori: And so for pizza, people may spend more on pizza or have the ability because it's not as high priced as your higher-end restaurants.
John Kinnunen: Correct.
Lori: We also see the age. We see average household size and then we're also looking at how many people are in the household. And so we put some of this data together and created our own analysis from that. So this is one thing that working with a consultant can do because you can run reports 'til the cows come home.
John Kinnunen: Literally, yes you can.
Lori: But if you don't know what the data means it's not really helpful. So, access to the data is one thing but having somebody to kind of guide you through a structure of comparison can be key as well.
John Kinnunen: Yeah. Somebody that's done it before really is key. If you were trying to open up your first restaurant, you may not have a clue as to what to look for, but if you go to a consultant or you find a local business like what I found at the Small Business Development Center, this is what they do. This is what they do. They help businesses get started, and they will guide you through the feasibility study. And you'll eventually find a great location as long as you have a few picked out. Because the one you love and you think is going to be great, coming from experience, it might not be the greatest. So, yeah it's definitely worth it to have some kind of consulting firm help you out.
Looking this over, I mean you can get detailed numbers even like on who eats frozen pizza or how much they spend on dinners or how much they spend on lunch, the number of businesses in the area. That might be big if you're starting a pizza place. The number of businesses in the area might determine if you're going to have a great lunch crowd, depending on how much competition there is around you. But that's all stuff that can be determined from the feasibility study.
Lori: Let me describe a little bit about some of these reports that we got some of this information from. So when we're looking at the average spend on a dinner or a lunch, these are average annual spends. And we're getting these from Consumer Expenditure Reports. You can get them on everything from … oh gosh, you can find out what people spend on broccoli to tires to clothing. I know, it's amazing. There's so much stuff out there.
John Kinnunen: Yeah you wouldn't believe it actually.
Lori: What this does, it gives up an indication you know do people closer to that one-mile area, are they spending more on lunch? Or are people further out? And this gives you a good idea of what's sort of the sentiment of the population there. Do they want to spend money at lunch? And you're opening a lunch place.
John Kinnunen: Right.
Lori: One other kind of report that I wanted to suggest, I don't believe we ran it, but it's called Traffic Count. And this is key to find out if people are driving by. Sometimes you might fall in love with a location but there's not enough traffic. You can run the cross streets by any Department of Transportation.
John Kinnunen: It's funny you say that because the interview I did recently with Dave from BIGGBY® COFFEE, he just opened up a BIGGBY® COFFEE, and he said one of the things they had him do is they had him go and stand at the corner of basically an intersection near him and just, with a little clicker, just click how many cars went by in, I think an hour, he was supposed to do it for. He said he was completely amazed. I mean he is the only coffee shop around so he's probably going to do pretty good. But when you said that, that reminded me of that. You definitely want to know the car count going by your location.
Lori: Yeah, and I think observation is, that's your own kind of market research as well. And you might want to stand out, is there another place down the street or across the street where you can kind of station yourself for the day and do your count and see how many people go into another location. So you actually see what kind of foot traffic is on the street. That can be key.
John Kinnunen: Right. Yeah.
Lori: Okay so once we've really dug into some of the demographics, we want to think about a competitive analysis. This is huge.
John Kinnunen: Key.
Lori: Yeah. So there are a couple of ways to do this. Before we jump into the reports and do it, you want to do your own because, wow, in the restaurant business it's so easy to run your own competitive analysis. You can go to any of these restaurants and there are lots of things you can do. You want to look at location and convenience. What about concept? How does that compare to what you're trying to launch. How's the customer service? How does the menu stack up? What's the pricing? What's the quality like? You know these are all things, you can create your own analysis.
John Kinnunen: Yes you can and just by driving around your area and seeing what other pizza places there are. Say you're opening up a steakhouse, what other kind of steak restaurants there are out there? A good way to do this also is just by Googling restaurants in you know Lapeer, Michigan, or whatever city you're in, and seeing what comes up. That's a great way to do it, too.
Lori: I've got a report for you though.
John Kinnunen: I bet. I bet.
Lori: So one of the tools we have used is Reference USA. There are also some others available out there. Again, I'll point you to some locations where you can find some of these. But they really list all of the businesses in the US and you can run a report, again by location, and you can run it by industry. We use industry codes and sometimes you can even drill down a little more. I believe we were able to find one that was pizza and you can see how close competition is. Is there somebody that you aren't seeing that isn't just down the street, but within that one-, that three-, that five-mile radius. What's your competition like? Did you learn something on that?
John Kinnunen: Yeah, I learned a painful, painful thing like that actually. There ending up being 25 other pizza places within a one-mile radius of the location where we were opening. Well we weren't even opening, we were just taking over another pizza place really, and I had just fallen in love with the area. It was my first restaurant that I've worked at and so I kind of wanted that location for mine so I could be like, this is where I started. And I made the mistake of falling in love with it before I did a feasibility study really. And when I was talking about expanding to a third restaurant is when I contacting this firm, and I really should have contacted them from the beginning. It was an expensive lesson but a lesson learned nonetheless.
Lori: So one of the things we also want to see is, if we're looking at pizza restaurants we're looking at direct competition. But we also want to see just restaurants in general, so we also looked at the number of limited service you know fast food, quick service, and the number of full-service restaurants. Because people have the option to spend their money multiple ways. You are going to be operating with blinders on if you think, well there's no other pizza joint. Well okay, you know great for some days but there are many, many other options possibly for them to spend their money. So that's something you want to be aware of as well.
So you want to talk about some other areas of market research? We've got some psychographics. And I don't know if I've used that term with you, but it's kind of cool.
John Kinnunen: It's a new phrase to me. Customer segmentation I guess is what it is referred to as. I wasn't too familiar with customer segmentation until I met with you. So I'm going to let you describe it a little and tell our audience really what it is.
Lori: Great. First of all psychographics is more about classifying people according to their attitudes, their interests, their aspirations. So this is really sort of touchy-feely, squishy stuff, and it can be a little creepy sometimes because what we can find out in research reports is really amazing. It's not just data. But it's really what are people doing and what do they like to do? And then we want to figure out what sort of meaning can we glean from that.
So a customer segmentation report, and there are several companies that do this, you might look for a Tapestry Report or a Mosaic® or LandScape. Those are three different names of reports that all do very similar things. And across the country there are roughly 60 or so customer segmentation groups, and so these are residential groups, they're looking at different residential areas. All three of these reports have defined each segment group with a cute little name that kind of identifies something about who they are. I recall one Metropolitans, they think they're very urbane and they love French food and foreign travel. And so we're discovering all kinds of things about these potential customers.
And so I've got a couple here. This is from a different report called LandScape. It's one that I've used many times and I have one customer segment here called Doublewides. What does that name descript say to you, John?
John Kinnunen: Well Doublewides, immediately, when you hear it you think of a trailer park really. That's what I think of because double-wide, that's what they're called.
Lori: You're right on. And you know we were talking a little earlier and I said, it's not that we're stereotyping people, really what we're trying to do is find people who have specific lifestyles and interests, and we want to match them up with the right kind of business, especially when we're starting a restaurant. And so, yeah, these are people who often live in mobile homes and you know for many reasons. They love the mobility or the low-cost housing. But they're typically in a median age of 30s, married, and their household income is thirty to fifty thousand dollars. And they're a mix of both white- and blue-collar. Now not every location's going to have this customer group.
John Kinnunen: Mm-hmm (affirmative).
Lori: And what we do is we plug in that address and we run our one-, three-, and five-mile radius, and I think this one popped up on yours, actually. Yeah there we go. So one of the cities you were looking at was a Doublewide. And what's really interesting is it can tell us a lot about the customer and actually some food purchases. You're going to be surprised. They like to buy canned meats, no-bake cakes and pies. They like to eat at Cracker Barrel, at Hardee's® fast food. This is getting a little creepy, right?
John Kinnunen: Right.
Lori: They're telling us exactly the types of things that they-
John Kinnunen: NASCAR TV.
Lori: … Country Music Channel, daytime television. They read fishing, hunting, and automotive magazines. They like going freshwater fishing. So if we're opening that fine dining restaurant, we're not going to locate near this neighborhood are we?
John Kinnunen: Right. Definitely not. Looking at this report, it's really cool because it tells you what kind of activities they like. They like fishing. They like to watch fishing shows. They like to watch fishing freshwater shows, specifically. They don't even like to watch saltwater shows. So they can narrow it down no matter what type of business you're really trying to open. Says on here they like NASCAR TV. So in the media solutions it says, magazines: fishing and hunting, automotive magazines. Speed Channel, daytime TV, and country radio, like you said. And you can get all that information just from … where did you find this information again?
Lori: This was a report called LandScape, but as I mentioned there are several out on the market, different ones, and they all do something very similarly. I mean I'm looking at a different report and this group they're called Managing Business, which isn't as indicative a title, but we know they buy pasta machines, espresso makers. They like imported wines. So suddenly we're in a very different customer group and maybe this is where we want to locate that upscale restaurant. But we also learned a few things about them. It sounds like they really like convenience, and they like grab-and-go fast food restaurants that are kind of above your average grocery convenience purchase. They like ready-to-eat muffins, energy bars, bottled coffee drinks, but they are still family oriented. They eat at Friendly's All-American Burger & Ice Cream Restaurant chain.
So we get some clear information about what they like. Oh they also like foreign travel, and they spend three to six thousand dollars on their travel excursions, so that says a lot you know. And they make up to $70,000. So we have a good idea of who this customer is.
John Kinnunen: Right. Yes you do. Wow there's a nice thunderstorm going on outside. I don't know if you guys could hear that or not, but that was pretty loud. But getting back to that report, what I found interesting about it is, it even tells you they like foreign travel and they'll spend three to six thousand dollars on it. So if you're any kind of business like say you were Disney World, they probably look at this same exact kind of reports when they're trying to target where they're going to send out their social media advertising to or things like that. I mean it's crazy that we have all the same resources now that big businesses had back in the '80s and the '90s. Now little mom-and-pop restaurants can get the same kind of information and we can be successful. We just have to do the research, and we can't go into it blind like we used to have to in the '80s and '90s. Now you find a firm, they're not all super expensive, and some of them are even free.
So I'm just going to list some of the other segment groups here. You got Suburban Singles. You got Kindred Spirits is another group type, Sublime Suburbia, Urban Moms. These are all different segment groups, just like the two that we talked about: We had Doublewides and we covered Managing Business is the second type. So yeah that's part of it. What's the next part?
Lori: Let me make one more point about looking at these customer segments. One of the things is we can use them to kind of associate interests. So depending on the different type of business, we've got that the Doublewides and they like the NASCAR and the blue-collar and they might be great for, you know, I was joking earlier about a gizzard shop, you know.
John Kinnunen: Right.
Lori: Or really it is that family restaurant or the pizza shop. Oh my gosh, what if you're looking to open a vegan restaurant? Well what's something … you know I don't think in our report we're going to see vegan because it's pretty small.
John Kinnunen: Mm-hmm (affirmative).
Lori: But we can find something similar. We can find anything that mentions healthy lifestyle. Or how about yoga, you know? Look for some of these associated activities and interests to better align what you want to do in the location and the interests of that customer group.
John Kinnunen: Mm-hmm (affirmative). I did see earlier, too, on one of these reports something about yoga that said, you know you can break it down even to what kind of activities they like to do. So that's going to help you narrow down your group a little bit further when you're doing your demographical study for your new restaurant. What is the next step that really happens next?
Lori: Well that's everything that we did. But really now we have a whole report of data and we have to create some meaning out of it. I'm going to give a plug for my organization-
John Kinnunen: Definitely.
Lori: … I'm with the Small Business Development Center and we're a federally-funded group and you can find us all the way throughout the country. We provide free consulting services for business owners who are starting their businesses, growing, expanding who need assistance almost of every kind. We provide a lot of advice. Most of us are former business owners or we've run businesses, so we've been where you are. And even though my experience wasn't restaurant, I understand completely how tough it is to run a small business.
So we provide information to business owners for free. One of the things we can do is help make sense out of this data. I ran all these reports for John and then I started pulling information here and there and then provided analysis, so we could kind of put all of these different potential locations sort of head-to-head and compare them. And I think it gave you some clarity as to what had potential and what didn't.
John Kinnunen: It definitely did. In fact, it made me realize that really none of the locations that I had chosen for a third restaurant were really going to be good. So I didn't go ahead and expand at the time, and I just took a step back and just concentrated on my one restaurant. I'm not saying that we're not going to expand more, but I'm just saying right now the spots I had chosen weren't going to work, and I'm not going to waste my money on those spots. It doesn't mean I'm not going to find a spot that works later on. But that's one of the reasons why I started this restaurantmastering.com website, was so that I can help other restaurant owners, or soon-to-be owners, figure out if the restaurant location is going to work and help them walk through the whole process from start to finish.
Because this is just the beginning. This is probably one of the very first things you want to do after you talk to a real estate agent and find a couple different locations, like I said. And don't get discouraged if one of the locations isn't what you thought it was going to be and you know none of them are going to work like that. It doesn't mean you're not going to find one that works. It just means take a step back, relax, continue looking, and eventually you will find a place that will work for you.
Lori: That's great advice. Don't fall in love with the wrong place and don't jump into something that isn't going to work. Really analyze it, make sure you're making the right step. So where can you find some of the data, some of these reports I've been talking about? Well some of them you can go to and get yourself and they're free. Census.gov, I mentioned that a lot of the data is derived from the census and there is a website where the information is available and you can look up a lot of the geographic, population sort of information.
There's a website that's sort of related to what I do, it's called sbdcnet.org. You can get a lot of industry reports there. You can find something sort of on the restaurant industry. You can also, they have a page with already prepared consumer reports. So you're not running your own but there are some already ready for you. So that's sort of canned and ready to go. If you work with our organization and I am guessing that many of the SBDCs around the country have access to reports like we do. And actually we're getting a lot of them through the libraries.
I want to say the library is one of the most amazing resources. They are staying relevant and trying to provide information that business owners need. And so the ReferenceUSA, where you can find the different competitive research, the business listings, that's where we access that. Our Michigan library we get to a lot of the demographic information and some of the psychographic information through them, that's the Tapestry, the LandScape, Mosaic®. Those are the customer segment reports.
Also universities. You know if you are an alum of a nearby university, go to their business library and see if you can access some of the reports that they're subscribing to. IBISWorld is one and again that's some in-depth industry reporting and can be really key, not just if you're looking to find a location, but maybe taking the next step and going to the bank. And so they'll want to see some of that.
Where can you find an SBDC? America's Small Business Development Centers the website is: americassbdc.org, and find a consultant.
John Kinnunen: I definitely would suggest taking advantage of this resource because they are amazing. They helped me out a ton and I'm sure they'll help you out a ton. So thank you for tuning in and we will talk to you next time.
Hey guys, it's John again. I hope you guys enjoyed that episode as much as I did, and thank you for tuning in. Be sure to visit: restaurantmastering.com. And if you're opening up a restaurant, again, click on "How to Start a Restaurant." A lot of your resources that you're going to need and a lot of the steps you're going to need to take are going to be right there. Also, go ahead and visit the "Services" as well, you will see a couple of different packages that I offer. I hope to see you again in another two weeks. Talk you soon. Thanks. Bye.