Closed Case

Written by Amanda Kippert Category: Valley News Issue: October 2013
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The plight of Scratch owners Duc and Noelle Liao highlights the risks taken by Valley restaurateurs.

Back in March, Chef Duc Liao was a gregarious restaurant owner, politely excusing himself from our interview several times to get up and shake the hands of people who came to wish him well in his new endeavor, a Downtown Phoenix sister location to his Scottsdale eatery, Scratch, which he opened in 2008. He waxed poetic in his thick French accent about exploring new frontiers of French pastries. His excitement was palpable, his enthusiasm infectious.

But just three months later in June, Duc Liao and his business partner/wife, Noelle, shut the doors on both Scratch locations. The pair’s entrepreneurial efforts were seemingly wiped out overnight, their small restaurant empire the apparent victim of steep startup costs, the unfulfilled promise of nearby new developments, an ongoing recession, and a soured investor relationship.

The Liaos aren’t alone. For each new restaurateur to don a chef hat and swing open the front doors to the applause of Valley foodies, it seems like another crates up the silverware. In the past year, several high-profile Valley restaurants have closed, including Cheuvront on Central Avenue, Modern Steak at Scottsdale Fashion Square, and Big Earl’s BBQ in Old Town.

To be sure, opening a restaurant is a risky enterprise. According to a 2005 study published in the Cornell Hotel and Restaurant Administration Quarterly, about 60 percent of restaurant startups fail in the first three years of business. And though industry journal FSR magazine listed Arizona as one of its top ten states for restaurant growth, with an expected population gain of 17.7 percent by 2020, opening a restaurant in the Valley remains a daunting calculus of timing, money and product – even for a stylish, appealing operation like Scratch, a French bakery-gastropub concept that was unlike anything else in the Valley.

The corner at Third and Roosevelt Streets where the Downtown Scratch was located remains in flux. The multi-building space, formerly an arts studio called Canvas, had been vacant for years when Scratch and an Asian bistro called Pallets opened in the complex this past spring. Across the street, the newly constructed, towering Roosevelt Pointe apartments, with its potential of hundreds of hungry residents, didn’t open until the fall.

Photo by Sam Nalven

The Liaos stand by their decision to open the second Scratch months before Roosevelt Pointe was finished. “Traffic at Scratch was amazing. The downtown community came and stood by our side day after day,” Duc says. But he admits his focus on the new location left his Scottsdale restaurant neglected. “Scottsdale Scratch was a bit behind. The spirit was not there, and I am still feeling bad about that.”

As for the success or failure of restaurants, Arizona Restaurant Association President and CEO Steve Chucri says there’s no rhyme or reason. “In many ways, restaurants are unfairly compared to businesses succeeding or failing. With any small business, it’s hard to succeed.” One potential stopper is skyrocketing overhead costs. “Lawyers, staff, food, renovations, things like glasses, silverware, plates, the POS system that manages your reservations, licenses,” Chucri says. “And you have to have enough cash flow to set aside for the emergencies and surprises that inevitably arise.”

Inc. magazine estimates the startup costs for new restaurants can total more than $500,000, with expenses like building a custom kitchen at $250,000, tables and chairs for $40,000 and menus costing another $1,500. Chucri says if a new restaurant owner can’t successfully negotiate great rates on things like labor, real estate costs and food costs, “you might not be able to make it a year.”

Still, Chucri believes restaurants have a brighter-than-average outlook in Arizona. “This year alone, restaurant sales [in Arizona] were $10.5 to $10.6 billion – a $500 million increase over last year.”

According to the Liaos, debt to an investor was what scratched Scratch. To open their Downtown location, the couple received a loan from an unnamed investor, after they were turned down by the bank. But Noelle Liao says the investor demanded immediate profit, and she admits they defaulted on the loan.

The Liaos tried to sell their Scottsdale location “at a ridiculously low price” to pay back the investor immediately, but they ran out of time, according to Duc. The couple tried to find another investor but, Noelle says, “Nobody wanted to help. It was almost like [other businesses] didn’t want us Downtown.”

And so the Liaos closed both of their restaurants, rented out their Arcadia home, and moved with their three kids into a small two-bedroom apartment. “It was six years of experience and a year of planning, and our doors were open for two months,” Noelle says. “We literally had nothing left at the end. I think I’m still coming out of it. If we hadn’t opened Roosevelt, this probably wouldn’t have happened. We thought about what mistakes we made along the way and it’s really hard to say. ”

Noelle says she and Duc still have angry ex-employees, confused Scratch fans, and a few negative Yelp reviews to contemplate, but the French couple isn’t deporting their American restaurant dreams just yet. “We invested everything we had in America and we really believe in our life here,” Noelle says. “Unfortunately, the financial problems were way over our heads.”

To help support his family, Duc Liao took a position as pastry chef at Lon’s at the Hermosa Inn. Without missing a beat, he returns to waxing poetic about his passion. “Desserts on plate can be an expression of an idea, geography, politics or simply poetry,” he says. “They can be a song to eat, a sculpture to savor.”

Opening for Business?
Arizona Restaurant Association President and CEO Steve Chucri’s three keys to restaurant success:

Do your homework
. “You have to know the ins and outs of the industry. You have to understand [what] your real estate costs and your labor costs will be. You need to be certain that you have those key cost structures under control and understood or else they’ll drown you right out of the gate.”

Cash a reality check. “You have to know what you’re getting yourself into. For some people, [opening a restaurant] is a post-secondary career. They take their retirement savings and think it’s going to be a fun life. It’s not. It’s not something... for the faint of heart.”

Find your selling point. “How is your restaurant going to be any different? If you’re introducing something ‘off the rail,’ then you have to make sure you’re going in the right area. There has to be a demand for it.”