Having too little money is the problem for most businesses, for a few though the opposite is the case. Overcapitalisation can be as fatal to a venture as being starved of funds.
In the dot com boom of the late 1990s we saw young companies being swamped with too much money which was squandered on flashy offices, comfortable chairs and expensive executive diversions.
Most of the businesses failed as staff didn’t have to worry about gaining and retaining customers while investors didn’t put pressure on managers or owners to perform.
The hospitality industry is particularly prone to this, with cafe and restaurant owners plunging hundred of thousands – sometimes millions – into expensive fit outs and ridiculously expensive kitchen equipment.
Most of these overcapitalised outlets fail because the owners have spent too much on setting up the business and not enough on staffing or providing for ongoing costs.
We’ve seen in the past few years many celebrity chefs teaming up with flush investors to build expensive restaurants with these ventures rarely ending well.
The story of Justin North’s chain of restaurants going into administration is a classic case of this, as the Australian Financial Review describes it;
The Norths, both in their mid-30s, don’t have a wealthy financial backer. They poured in all the cash they had and sold kitchen equipment and other assets to finance the venture.
Westfield kicked in an undisclosed amount.
Ostrich-skin leather tabletops, hand-printed wallpaper, and a huge custom-designed Fagor induction stove imported from Spain (the first of its kind in Australia) contributed to the huge fit-out cost.
In a statement to employees, the North Group said its “businesses are currently in financial difficulty”.
“The administrators are now in control of the group’s assets and affairs and intend to trade the business in the ordinary course whilst undertaking an urgent review of the financial position and explore various restructuring options,” the statement said.
For much of the Australian hospitality industry, the Norths’ problems are a glimpse of the future – the success of the Australian and Chinese stimulus packages in keeping their respective nations out of the mire the US and Europe indirectly led to a boom in restaurant spending and investment.
We saw that boom manifest itself in the opening of pretentious restaurants and the explosion of food blogs as desperate PRs flogged their clients’ venues to the media.
There’s a lot of journalists and food bloggers who are going to find a welcome improvement in their eating habits as the fine dining market now sorts itself out.
It’s going to be tough for those who’ve invested too much or the smaller suppliers to those restaurants.
An area we should be critical of journalists is with headlines like “Restaurant Group Collapses“. A business going into administration is not “a collapse”, it’s in fact the opposite where the shareholders, directors or creditors seek to find an orderly way out of trading difficulties.
Putting out the word that a business has “collapsed” makes the task of salvaging the enterprise much harder for those working to fix the problems.
The Norths have taken the honourable and sensible option. While putting a business into administration can be a brutal process – particularly for the shareholders, investors and smaller creditors – it at least shows the group’s founders have acknowledged the problems in their businesses and are looking to fix them.
All too often, we ignore the fact our businesses are going broke and don’t take the action needed to save them. Doing it early means less pain for everyone.
Having too much money is often worse than having too little money, although most of us would love to be in the position of having big money backing our ventures.
We often talk about learning from failure and not stigmatising entrepreneurs who’ve given it a go and failed, how we treat Justin and Georgia North will be a good measure of whether we are really an entrepreneurial culture.
A very informative piece thank you Paul and valid for any business model and industry.
On the food and restaurant scene however, I’m not sure about your comment “welcome improvement in their eating habits as the fine dining market now sorts itself out.” More likely what we are seeing in Australia is an unfortunate decline in the high end dining market, as people pay less and less to eat out more frequently and with changing loyalties.
What seems to be a Godsend in the proliferation of mid and lower priced eating options however, probably means that for most people, they may not gain the dining education that will help them understand nuance in service and palate and more.
We’ve got a history in Sydney that has brought us to today’s state of world wide recognition. Chefs like Justin North, his mentor Liam Tomlin, and pioneers Tony Bilson, and Stefano Manfredi who trained many of the names we recognise today. In a remote country like ours and before the instant communications of today Tony Bilson used to share an overseas food magazine (brought in by seamail with two other chefs.) Being a restaurateur (as one of the aforenamed once told me “is a mugs game.”) Take the price of a high end main course which since the heyday ’80s has not even sustained itself in Sydney to half the rise in real estate prices. We just won’t pay. And I understand as a population (with a reported interested in food – though perhaps more as voyeuristic television viewers than eaters and cooks) we still pay a lesser percentage of our income to food than the population of many other countries around the world.
Perhaps the lesson for us all is that if we want to retain Sydney as a dining destination, that we need to put our hands in our pockets and front up to the establishments that are (and have been) leading the way. The same can be said for quality produce.
On a personal note, friends Justin and Georgia North, are visionaries (with a small number of other high end restaurateurs and chefs) in taking us on a journey of provenance and local fresh seasonal (though these words are often now too lightly used.) I wish them all the best moving forward because our industry needs them.
Thanks for the comment Rebecca, I totally agree about the Norths and hope they can get their business back on an even keel.
With my comment about the eating habits of journos and bloggers, that’s more directed at the some of the ill conceived ventures we’ve seen in the food industry and the desperate attempt by investors, proprietors and their PRs to get attention in a crowded market.
I agree Australians – myself included – could spend more on good food and educate our palates (I’m the guy who can’t spot a foie gras from a Big Mac) and its going to be interesting to see how our tastes evolve given the fifty years of convenient fast food we’ve had at our fingertips, not to mention the staid duopolies right across the Australia’s production and food supply chain.
For Sydney as a dining destination, the real challenge is rents. Right now I’m seeing hospitality, retail and smaller food businesses being driven out by landlords’ unreasonable demands. In my neighbourhood even the franchises can’t survive with the local Bakers Delight and Michel’s Patisserie closing after failed lease renewal negotiations.
While I wouldn’t classify either as “fine dining” or artisan suppliers, their problems are indicative of a much bigger problem we currently have.
One of the issues is that we’ve allowed duopolies to dominate our supply chains and we’re now suffering from a lack of diversity.
Again, this is not just a hospitality industry problem and again it illustrates the structural problems that have developed in the last decade.