No property ownership, lose the business. (If the business does well)

No property ownership, lose the business. (If the business does well)

Two units down to one unit because rental was increased

This has happened again and again and well, this morning, my wife shared with me about one particular restaurant which used to have two units is now down to just 1 unit. Why? The owner increased the rental A LOT. Frankly, this restaurant is lucky because it is still at the same spot, just one less unit. Its customers would still patronize its famous stalls. Maybe tighter space but for good food, no one would mind.

If it moved elsewhere, then it could lose some customers because the new location may not be convenient for most of its customers. They can be informed you are moving but the question is always, would they visit the new place if it’s inconvenient for them…

Greed kicks in; maximise profits

What if the owner of the two units felt that the business was too good and they increased the rental so much that the tenant moved away to some other places super far away and now the owner gets most of the customers from the restaurant that used to operate there? Whether this owner is successful or not, this tells us the reality on the ground. If we do not own the unit we operate in and we are very successful in the restaurant business, chances are that the owner is greedy and may seek to maximize profits.

By the way, this does not apply just to restaurants yeah. If we operate any other business where it’s easier to duplicate, then the high likelihood that the property owner duplicates what we do or increasing the rental to maximize their rental is even more likely to happen. At least with restaurants, the taste must be good, thus a lot more considerations too.

Example of a very popular restaurant?

A good friend who owns many shop units told me that his best tenants are Nasi Kandar restaurants. He can easily increase the rental many hundreds of Ringgit or even one thousand Ringgit if the nasi bandar restaurant is doing very well. Let me share to you the calculation part.

If the rental is increased by RM1,000 per month. This is roughly RM33.33 per day of increase. We assume every day, this popular chain only have an average 100 customers from morning till late evening supper time. This is not a lot and really popular places could even have easily higher number of customers. We also imagine these customers will order one food and one drink. Nothing more. Just one of each.

RM33.33 per day divided by 100 people is 33 cents per person. One food and one drink means 33 cents divided by 2. Means the food which can be RM8.50 just need to be increased to RM8.70 (20 sen increase) and the drink increased from RM2.60 to RM2.70 (10 sen increase) to cover for this increase.

Tell me frankly, just compared to 5 years ago, do we have the same food and drink prices…?

Owners… landlords… popular places… things will repeat

Happy understanding why property owners will always win in the end because they are the owners… they are the landLORDs and they have a lot more bargaining power when the business which operate from their shop is doing extremely well. If it’s not doing well, then there’s nothing to say, whether for the owner or the restaurant operator yeah. Only when things do well, everyone would want a piece and only then people would feel the pinch.

Should we buy the place we operate our restaurant in then??

I cannot decide for you yeah. No one can predict with any accuracy that the restaurant would be successful… If it’s successful, then maybe it’s perfectly fine to just pay higher rentals every year? Just let the property owner enjoy a small increase every year while the restaurant owner also enjoys from people willing to pay the extra 20 sen increase per year per time that they visit?

If the restaurant is not successful, then it’s double whammy, paying for property installment and yet the business is not doing well. This is why some people may be more suitable for a monthly salaried job. Nothing wrong too and in fact these are the customers for businesses yeah. So, go and do whatever we like to do but if we do have the financial resources, perhaps owning that unit we operate our restaurant in will be a smarter option.

Oh yeah, I need to also show you the calculation if you own that place you operate in and you like to sell the whole business and the property… but that’s the next article.

Cheers.

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