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BUSINESS PLANS

The Wrong Move

After enjoying a great success in one region, an entrepreneur explains how he moved into another, and failed.
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Once you have your business concept down -- and have proved that it works -- the temptation is to think you can pull it off anyplace

As an entrepreneur without an M.B.A., I've occasionally joked to friends that I was allowed $50,000 or so worth of mistakes as long as I learned something from them. When that number suddenly jumped to $1 million last year, the joke turned sour.

Our business is restaurants, and until our ill-fated adventure, we'd been on a lucky streak. In 1987 we opened our first Austin Grill, in Washington, D.C. Our basic concept played against popular expectations of a Mexican or Southwestern restaurant. We don't put sombreros on the walls (or on our waiters, for that matter). Our fajitas aren't sizzling, we don't do combo plates, and our taste runs toward the spicy. That formula was a hit from the start, and we opened a second Austin Grill, across the Potomac in Alexandria, Va., in 1991. That restaurant's success led us into yet another successful venture, a joint effort with another restaurateur to open Jaleo, an authentic Spanish tapas restaurant.

In 1993 we made a series of decisions that abruptly ended our charmed existence. I was living in Miami at the time and had just sold out of a successful partnership that had developed several restaurants in the area. When I approached my former partner in D.C. about bringing our Tex-Mex concept down to Florida, he responded enthusiastically. He was itching to grow the business again, and the prospect of opening a new market was appealing to both of us. Had we stuck to our proven formula of seeking out sophisticated urban locations, we probably would have succeeded. But a funny thing happened on the way to the real estate office.

We began to look at the growing success of other Tex-Mex chains around the country and saw an opportunity to join the stampede. We'd open lots of restaurants, go public, and live happily ever after. Our location strategy was a potential problem, however. To raise big dollars, we needed to prove that our concept would work outside urban markets. So we went off to look for the same kind of suburban locations in South Florida that the big chains were looking for.

We chose Boca Raton as the place to begin that ambitious growth phase. Boca appealed to us because it's an affluent city-suburb whose overall demographics are surprisingly young and affluent. Perhaps the absence of direct competition in terms of Mexican or Tex-Mex restaurants should have been a warning signal, especially since Chi-Chi's had failed miserably in Boca years before we arrived. We rationalized our decision by saying to ourselves that people's tastes were changing and that our food was better than what Chi-Chi's served. In fact, I think we even told ourselves that the failure of Chi-Chi's proved that the market was ready for a higher-quality product.

Of course, it all seems foolish in hindsight, but when you consider each link in our chain of logic, it's not so preposterous. At the time, Tex-Mex restaurants were succeeding everywhere they opened, and we had a track record better than most of the others. We knew that leaving our home market was a big risk, but we weighed it against the potential reward: success outside our home market would prove our concept conclusively. We chose a market that is home to some of the highest-volume restaurants of several major chains. Success alongside those flagship restaurants would open the floodgates of capital needed to finance our ambitious growth plans. It's only when you look at the chain of logic in its entirety that you begin to see the real risk: if any one of our multiple assumptions proved wrong, the game was up. Put another way, if you can't explain your strategy in 50 words or fewer, you're probably asking for trouble.

But off we went. We leased space a few doors down from one of Boca's most successful restaurants, one that catered to a younger crowd and to families, and set out to build our dream restaurant. At 250 seats, the new restaurant was 50% larger than anything we'd done before, but we justified that by saying it was comparable in size with the restaurants of our largest competitors. We also accounted for the size by decreasing our expectations of sales per seat, a commonly used restaurant benchmark. We figured we'd break even at $8,000 per seat, versus the $19,000 in sales per seat that our top D.C. restaurant was doing.

Our problems began to surface during what we call "mock service," a three-day shakedown period in which we invite guests to eat free while we practice our execution. It's generally a hectic but fun experience that builds goodwill and helps get a restaurant's name out. But some in this crowd pounced on the very things that set us apart from the big chains: the spicy salsas, the tartness of our fresh lime margaritas. (How do you explain to people that the taste they're used to comes from a powdered mix?) The differences that made our concept unique quickly became lightning rods for discontent. Sales in our first week were 50% off what we'd projected and continued at that level through our first month.

With a sinking feeling I began to realize that the failure of Chi-Chi's in this market might have a simple explanation: people in Boca don't like Mexican food. Please don't misunderstand me. I'm not going to cry that the customers were wrong or unsophisticated. They knew exactly what they wanted, and we were trying to sell them something else.

We got a crash course in financial planning and quickly learned the awful truth that the worst case can always get even worse. We were doing $20,000 a week in a location that was built to handle $60,000 and that needed $30,000 to pay its bills. A crisis mentality set in, and we began adapting with that special mixture of energy and despair. We redesigned the menu, reformulated recipes, and charged ahead with marketing and advertising to get the word out. But we couldn't shake the feeling that the initial damage would prove fatal. In our business you get only one shot to make a good impression and get word of mouth going. We'd blown that chance, and even as the monthly operating losses lessened, the aggregate losses were starting to look like the national debt.

Four months after opening our doors, we crossed the line at which holding on to Boca meant risking the whole company. That was never in our plans and never an option. In that sense, the decision to close was simple and quick. Over the next few weeks, as I sorted through the furnishings to keep what might be useful in a future restaurant, I also began the process of sorting through the experience for useful lessons. The biggest one I figured out is to know where you're going and why. Ultimately, ours is a cautionary tale about the dangers of traveling far afield into strange cultures and letting enthusiasm -- even hubris -- overpower common sense. We failed because we didn't know the market we were entering and hadn't developed the appropriate strategy for it.

These days we have a magazine cover taped to our office wall. On it is a quote in bold letters: "Take care of the downside and the upside will take care of itself." There's a million dollars' worth of advice for you.

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Scott Shaw is a principal in Austin Grill Inc., a restaurant group based in Washington, D.C.

Last updated: Aug 1, 1995




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