Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: Can you describe why in your opinion there still is this view that restaurants are just bad businesses? That too often they're vanity businesses or it's like trying to make a movie or something. The economics just don't work.
· Nick Kokonas
[00:00:00] S1: What's always interesting to me is that most businesses are not great businesses. If there is a great business out there with high margins, there's something else about it that's hard to get into. So it's very interesting to me that everyone says, "Oh yeah, restaurant business is terrible." I mean, I remember when we started building Alinea, just getting a slight bit ahead but this will make sense to your question. When we started building Alinea there was a suburban restaurant in Chicago and I really liked it and the guy was a good looking chef and he seemed like he had his stuff together. And I kind of knew him a little bit and I said, "Oh by the way, I'm embarking on building a restaurant." And he said, "Well, you don't want to do that. It's a terrible business and it's all sorts of awful stuff and all that." And I said, "Why did you build four more?" If you build one and it's such a terrible business, why did you build four more? Why is it that there are some celebrity chefs that have 35? It's not because they like to get punched in the face. Clearly you can make money at it. Also, coming from a floor trader, a derivatives trader background, when I got down there all anyone told you about was how terrible it is. "Oh my god, you're going to get beat up. It's a terrible environment. People are mean. 99 out of 100 people don't make it their first year and then even the one out of 100 that makes it only 99 of 100 then fail afterwards. Only one out of a 1,000 ever becomes a millionaire or whatever." And I was like, "So you're saying there's a chance." I like businesses that are hard because if I can figure them out, whether that be a great arbitrage in derivatives or that's the restaurant business or publishing, which I think is an awesome business. I just go like, well people are full of shit. They're defending their position. And the fact of the matter is that there are a lot of people in the restaurant business that are not in business so to speak. They did it out of passion or they did it, as you said, as a vanity project or they thought that they were great entertainers at home and they knew how to throw a dinner party so they decided to open a restaurant. I was accused of all of those things when I started building Alinea with Grant. So much so I would just drill into him, this will be run as business first.
· Nick Kokonas, Patrick O'Shaughnessy
It's not an art project, it's a business. If we run it well as a business then we can invest more in the art and it becomes a virtuous cycle. I think that the barrier to entry to the restaurant business is actually relatively low compared to many other businesses, especially in terms of actual knowledge requirements. You can't just start a software company as a sole proprietor if you don't know how to program. So the barrier to entry there is fairly high. The barrier to entry to a restaurant is you sign a lease and build a kitchen and start cooking. It's a lot but it's doable. And consequently there's going to be a high failure rate. [00:00:00] S0: I should note for audience that I think the one time I did go to Alinea years ago it was literally ranked the single best restaurant in the world so I think it's very interesting that you say you and Grant agree that you would run it as a business first at its inception. In what ways did that cause your behavior or your plan to depart from the typical new high end restaurant opening?
· Nick Kokonas
[00:00:00] S1: Well, first of all we set it up in a way that the investors ... I was also the largest investor and I was on the management side. But I set up the structure of the business more like if you were setting up a startup. There was an investor group LLC, there was the restaurant itself, and there was a management company. Three different companies to start one company. And I made sure that all of the interests of all three were aligned for the long-term. Which means that 15 years later the investors in Alinea still get a really nice check every year. A lot of restaurants lure people into the investment group by saying, "Well, you'll always have a preferred table," or you'll always have this or that. And we did the opposite. We said every one of the investors will pay, including myself. If I dine there ... All of the investors get 20% off. If you send someone there and you send a friend, you pay. And that way someone who comes there 80 times a year contributes. Same as someone who comes here twice a year. How will we run it in terms of volume? If you're shooting for perfection in a Michelin three star restaurant, you do 40 to 50 to 60 people a night. And that's it. That's a lot easier than doing 120 people a night. Lot easier at that level. So we were always looking for ways to expand revenue, to grow, to come up with innovative ways of actually making it a business. And by making it a business we could then reinvest in the experience of our customers. And if anything, it gives you a giant head start. And so when I'm talking to chefs that are restaurant owners I show a picture of five artists, Picasso and Da Vinci and all these people and I'm like, four of the five of these guys died rich on their art and one of them cut off his ear. If you want to die for your art and cut off your ear, go right ahead. I'm fine with that. I just don't want to be invested in that as a business. Picasso was prolific but he was also really clever and he was a genius. So they're not mutually exclusive. And I think that's the attitude we took right at the beginning. There's an old Picasso documentary from the '20s and I didn't really know Grant very well when we started this whole thing and I dragged him over to my house and was like, "You will watch this." And it was just Picasso painting. It wasn't doing anything else.
· Nick Kokonas, Patrick O'Shaughnessy
And he was like, "Why am I watching this?" I was like, "He made that in the '20s to promote himself. Think about that." The best living artist at that time agreed to do this thing to show the process. Why? And we ran it almost like a political campaign. We had words that we would avoid every interview. [00:00:00] S0: What words would you avoid and what words would you use? That sounds very interesting.
· Nick Kokonas
[00:00:00] S1: Two words that we would avoid were Avant Garde and science. Grant considered his cooking Avant Garde. He even thought about calling the restaurant AG. I was like, "Well, you automatically eliminate 90% of people." No one wants to eat science. It's one thing to talk about the science of what everyone was calling molecular gastronomy, but even that was a misunderstood term because it was actually coined by Hervé This and it was about the component aspect. Almost like Pointillism. It wasn't about manipulating individual molecules. So we would have press call us and ask, "Oh well, you practice molecular gastronomy. You're really into science then because you're moving molecules of food around." The guy's a chef. He's not a physicist. So those two words we avoided because I think that they alienated potential customers. And then the two words that we used in every interview and still do, fun and delicious. Because it's so simple but so hard to find. Because when you go to a great restaurant, whether that be your corner bar or the best Michelin experience you've ever had while you're traveling, I guarantee you it's fun. It's not snooty. It's not someone looking down their nose at you. You feel like you're part of this pageant that's going on in fine dining. And you should be part of it. You should be one of the actors, not an audience member. And then delicious is obvious. It has to be delicious otherwise it's just a farce. Every interview you ever see of us still to this day when someone asks about the science or the process or whatnot ... And I'm doing it right now. Everything we do has to be fun and it has to be delicious or we will not do it.