Tuesday, January 29th, 2008...2:02 am
Red Hot Business
The other night my too cool for school cousin Samantha, who is a freshman at the University of Michigan, shot me a near midnight text that she was heading over to Red Hot Lovers. Red Hot’s is far and away my favorite spot to grub in Ann Arbor and at that moment I was instantly jealous of her life. A mighty dog with kraut, a grand slam burger and going splitzies on a half and half may very well be my favorite meal in this world.
I think Sam knew that my friend, who for the purposes of anonymity we will call Roy, owns Red Hot’s but she still had no idea what she was about to get herself into. We texted back and forth about what she should order to eat. If that was the extent of our communication it would have been a cute little cousinly interaction.
Instead, I typed in the secret URL and password that I promised Roy I would never share and was hooked into the Red Hot’s newly installed security cams watching my cousin and her Aephi crew from eight different angles. I started texting Sam and her friends telling them what they were doing and where they were sitting and what Hermes bags they were carrying. This is where it started to get “awkward” for her.
So I threw Roy a BBM message telling him to tune into the Red Hot’s feed. Of course he was already watching as Roy is glued to the computer like an adolescent downloading porn (something Roy doesn’t dabble in for various reasons that need to be explained in person). Roy then conferenced me in as he called Red Hot’s. When the girl behind the counter told my cousin she had a call her friends erupted in giggles. Roy started yapping about cheese fries to her and then told her I was on the phone and then we got her to open the fridge in the back so we could tell her what’s in it from camera #6…..well let’s just say the burgers, my cuz, my college, the live internet and talkative Roy was about as exciting as it gets for this lonely blogger.
I wasn’t able to get Sam free Cheese Fries (Alas, roy’s trying to build a business and chedder costs chedder!) but I think I did get Roy to use his local connections to put her on the list at Studio 4 the next night!
I’m not sure if Sam has ever been to Red Hot’s but I vividly remember my first experience. I was at Michigan for college orientation. I had slacked on reserving my session and was stuck with a bad slot at the end of the summer. The group was half the size of a normal orientation and it was a pretty meegs crew I did happen to meet one solid dude named Nate from Chicago (sidenote: my random encounters running into Nate in college could be a blog post unto itself). On the first night of orientation, Nate and I walked into the cafeteria in East U, saw the midwestern slop that they served, walked out and decided to check out the Ann Arbor cuisine and then get some beers. The first place we stopped was at Red Hot’s and my reaction was that this stuff was actually pretty decent and college might be kind of cool.
Fast forward a few years to Littyhoops as an upper classman with most of his time spent in the ultra competitive and creative-draining brainwashing factory known as the B-school. Red Hot’s became my one saving grace from complete heart of darkness type misery. I could go from hearing Greenspan to Dylan in a matter of seconds! I can’t tell you how many horrendous finance lectures, group meetings, and crammed study sessions I was able to get through by counting down the time till I overdose on cholesterol and good vibes.
My goto’s were the Mightly Dog (skinless beef), the Grand Slam Burger on an onion roll, and the jerk chicken sandwich (special on the chalkboard that never was erased). I don’t think I ever saw anybody else order the Jerk but it was spiced just right and sometimes it’s just a bit hard on the heart to order burgers two days in a row. I’m a big half/half guy who doesn’t mind the occasional cheese fries. I can’t consider cheese fries as a goto because they do have a tendency to get messy and the cheese crustifies quickly turning the last ¼ of the basket into indigestion grenades inducing time-released explosions in my intestines. Finally, a cherry coke was mandatory with a few extra quarters to ensure refills. Cherry coke refills are the one antidote that has a chance of defeating the extra cheese. It seemed like every time I was in there I would run into Colby, Izzy, Rich, Joanna, Mogil, Neal, Wally or a posse of Tekk dudes. I’m sure other people ate their but in my hazy memory those were the people who dug it as much as me.
Five years later Roy bought the freaking joint.
As a so called entrepreneur one of the skills that I have honed is my eagerness to evaluate business opportunities. In fact, I believe that the key to any business or career is the ability to capitalize on new opportunities throughout one’s career. So I’m about to take a stab at evaluating Red Hot’s. I’ve spent lots of time chatting with Roy about the business so none of this will be new to him. I also don’t want to judge how he has done so far but rather discuss and dissect this business opportunity.
As I mentioned, Red Hot Lover’s is a hot dog and burger joint on East University street in Ann Arbor, Michigan. Traditionally, it has been a lunch spot and is definitely on the affordable side ($8-$10 for a full meal). People who eat their usually love the food and if there wasn’t such a thing as cholesterol or calories I could eat it everyday. The location is close to campus and gets a great amount of foot traffic from students. Word of Mouth (otherwise known as Facebook 1.0) is huge.
When Roy purchased Red Hot’s he acquired
1) rights to the lease
2) Red Hot’s brand
3) existing machinery and equipment.
The building and land is owned separately. The obvious way to evaluate Red Hot’s business would be to analyze past financial statements and run the numbers based on revenues, costs and income. This doesn’t tell the entire story. The current ownership was not maximizing revenue so it’s hard to use historical data as an accurate projection.
If you are a newcomer to the restaurant or food services business the ability to take over an already operating business is invaluable. It eliminates the necessity for start-up costs and the need to figure out equipment, food ordering and deliveries, inventory, hiring staff and adhering to town regulations.
Red Hot’s certainly has a decent amount of regular customers and name recognition. One issue is that a college town is usually transient so good customer are coming and going on a more regular pace. Finally, the Red Hot’s brand is recognizable in the Ann Arbor community and hopefully has both recognition and credibility associated with it.
The financial situation for a place like Red Hot’s seems pretty straight forward. Fixed costs including rent, utilities, supplies. Labor and food are somewhat variable. These costs should be pretty steady each month and therefore should be easy to project but hard to cut.
Now let’s look at max revenue potential. If Red Hot’s can serve one customer every 3 minutes at an average meal costs $9 than Red Hot’s can take home a maximum of $135/hour.
Therefore, on one side you have a certain fixed cost each month. On the other end you have a maximum amount of revenue potential each month. The trick is to maximize the spread and take home as much profit as possible. Now, this is a bit oversimplified as there is opportunity to expand revenues through other means (improve capacity, add more products (delivery, desserts) or run longer shifts) yet it’s safe to say that at some point revenues probably shows some kind of diminishing returns for a single location. The trick is to maximize revenue and then stay as close to maximized as possible without any big hiccups.
Future Growth & Scale
Once Red Hot’s is running at close to maximum profit than it’s only a matter of time and capital to open the next restaurant. This could be in Ann Arbor, another college town or in any location that has potential. The key is to replicate the operating process. Once a few stores are up running then the profits become more substantial while the process is more stream-lined and risk is spread against all the establishments. More time is spent managing the finances and hopefully realizing benefits of scale to decrease expenses (marketing, equipment, food providers). This model often seems to work with fast food franchises.
Red Hot’s is one of my favorite places on the planet (wow, that’s another post unto itself – La Jolla Cove!). The fact that Roy owns Red Hot’s might be the coolest thing he’s done since he played through injury (pain doesn’t phase him) in his rec tennis league. The fact that he spends his time figuring out how to make the restaurant more successful, and has an awesome connection to Ann Arbor, is a neat way to spend time. Those who love their work understand how important their passion is towards their success. No matter what you do, there are aspects of your job that you dislike and there are rough times and bumps in the road. These things are so much easier to overcome when you love what you do.
I think this is a great move. The chance to own a cool establishment in Ann Arbor that has been operating under the radar and below potential for a reasonable price is a great way to cut your teeth on a new business. In addition Roy has a partner who lives in Ann Arbor and is currently in the restaurant business so he has somebody local who knows how things work and can attend to emergencies and the daily management activities. I have no doubt Roy will turn Red Hot’s into a cash dog and then expand and turn this into a profitable business.
Now for the fun part…
As I mentioned, the key is to figure out how to maximize revenues. Roy has done some cool stuff like staying open late, building a take-out counter and he is looking into adding delivery service. He also has acquired the rights to crepe on a stick which is a gimmick he will soon unveil. This one is a head-scratcher as I always thought stick food was relegated to shish-kabob’s and popsicles . But as Roy always says, “What happens in Ebcott….”
Anyways, I’ve been thinking up marketing ideas to get more belly’s in the door. I don’t usually ask that people leave comments but please add your thoughts on marketing ideas. If Roy doesn’t pick up your next order of cheese fries, I will.
Text Message Alerts
Every night after the bar in college I reminded myself that I wanted a Chicken Roll with Ziti with a side of marinara from NYPD. My friend Lil Guy was better at Spanish than me so he got Panchy’s on the regular. But what if my trusty phone told me that I wanted Red Hot’s at 2am as I was leaving the bar? That would be amazing. Red Hot’s should start to collect cell phone numbers (give a free refill for anybody who jots down their number) and then send out messages for special deals. Within a moment’s notice after the bar or a big football game and the place will be packed!
The Red Hot Cam
The cameras are already hooked up, so get that feed on the internet for the world to witness. Shake Shack does it in NYC’s Madison Square Park and Roy can do it in Ann Arbor. Watching Red Hot’s is strangely addictive and if it wasn’t for the deep yearning in my tummy I would do it all the time. Plus, this would get alumni checking in often and also would be great when it was time to open future restaurants in other cities. Certainly, Red Hot’s needs a website better than this.
Better Than Blimpy
Yup, it’s time to go all sleezy with an advertising campaign that Red Hot’s is the greasiest joint in town. I’m not sure how the town will react if Red Hot’s puts together a schemer campaign against the other beloved burger joint but I guarantee they will react. I want to see shirts like “Blimpy Wells Sucks”or “My Blimpy is Ice Cold”
The B-school gives away enough free food between interviews, club meetings and after class ceremonies to supply a fledgling African economy. There has to be an opportunity to do some catering business for the future bankers of America. In addition, I would team up with an operations or entrepreneur class and get some of the brainiacs to do class projects on Red Hot’s figuring out how to improve capacity, release the bottleneck, eh and scout out new locations.
Free Cheese Fries
Get an A in accounting – Bring in your grade and get free cheese fries!
Just did community service – free cheese fries!
Come in with a group of five or more – free cheese fries!
Failed your blue book exam – free cheese fries!
Trade in your old glass – free cheese fries!
Rock an old school Webber jersey – free cheese fries!
College kids love free food. Give them free cheese fries and they are yours for life.
Um, like hello, facebook rules the world.
Bring Kobayashi to Ann Arbor!
That’s what I got for now. Throw down your marketing ideas in the comments section and let’s help Roy out!