Lessons From Owning a Budget Deli

Between 2021 and 2023, I co-owned a budget deli in Saudi Arabia. I thought it might be useful to write about the experience and to explain why I don’t plan to own a restaurant again.

That said, I don’t regret it. The lessons I walked away with were worth the cost.

In early 2021, I was working at Ernst & Young (EY). I sat down with two colleagues to discuss starting a business. We wanted to open a premium salad restaurant in Saudi Arabia. The concept was similar to Sweetgreens in the U.S. But we didn’t want to take on debt and, after some research, realized that the equity requirements were too high for us.

A few months later, one of my colleague's quit his job and began searching for a small business to acquire. I saw that as a call to action and committed both capital and some time. He started roaming the streets of Jeddah, speaking with small business owners, from carpet cleaners to laundromats. Eventually, he met Ali, a former 'general manager' of one of the largest buffiyah chains in Jeddah.

(A buffiyah is a budget deli-style eatery that serves Arabic street food in a brick-and-mortar format.)

Ali convinced my former colleague to acquire a buffiyah, which he would then operate. Ali had an extensive network and experience in the field, which was comforting to us.

We knew that acquiring one single buffiyah wouldn’t be lucrative proposition. But we believed a roll-up strategy could work.

A roll-up would involve buying up more buffiyahs over time, consolidating operating expenses at the HQ level, and benefiting from the discounts provided to bulk buyers.

After several weeks, they found a seemingly promising shop in Ubruq Al-Raghama, a low-income, high-density neighborhood on the southeast edge of Jeddah. 

Why We Thought It Was a Good Idea: Our Thesis

In late 2021, my former EY colleague and I took the leap. We bought the buffiyah and became business partners.

Buying a buffiyah was far cheaper than starting a Sweetgreen-style concept in a more upscale area. The location was in a densely populated area with tall residential buildings.

Also, a main road connecting Ubruq to another densely populated neighborhood was under construction. We assumed that would bring even more traffic past the shop.

The buffiyah was already operating and had a regular customer base. Although buffiyah was not well-run, but we saw that as an opportunity rather than a problem.

There were recurring fines and frequent customer complaints. The previous owner claimed monthly profits amounted to SAR 4,000 to 6,000. The problem was that there were no financial records, and most of the business was cash-based.

(Side note: One night, I came home carrying a bag stuffed with a week’s worth of cash from the branch’s till and safe. My lawyer father was visibly alarmed.)

Our thesis was simple. 

Improve operations, promote locally, install a POS system, refine the menu, raise prices slightly, and expand to more branches under a single brand.

I built a financial model using our thesis to estimate monthly profits of SAR 8,000 to 12,000. With those numbers, we figured we could buy a new buffiyah every 6–8 months. By year six, we expected the network to yield hundreds of thousands in monthly profit.

We bought the shop for SAR 75,000. On paper, this price gave us a 64%+ return in year one, even if we changed nothing.

Why It Wasn’t a Good Idea: Our Experience

We quickly realized the claimed profit numbers were pretty much fabricated.

Average profits hovered around SAR 1,000 (and sometimes negative) due to maintenance expenses and fines. We underestimated equipment costs, too. Our SAR 25,000 CapEx budget ballooned well beyond that, more than doubling our total investment into the branch. 

The timing was also poor.

The post-COVID inflation and the Russia-Ukraine conflict drove up the prices of staples like chicken and eggs.

Meanwhile, our branch still kept getting fined even after fixing it up and making all the necessary changes. I was told that the Saudi government outsourced restaurant inspections to a private firm which appeared to be incentivized to issue more fines.

We were fined almost every other Monday, often for strange reasons.

Once, we were fined for having large bags of flour on the floor. When we bought a rack, we were fined for having the bags of flour (now on racks) leaning against the wall.

We couldn't get a detailed list of all the potential things we could get fined for, and there was limited guidance. 

Once, we appealed to the government about a fine we received, which was accepted. Two days later, the guy who had given us the fine came in and started threatening everyone and promising that he would make our lives difficult. (He kept his promise).

We also didn’t realize that the buffiyah business effectively operated on 11 months of revenue, not 12.

During the holy month of Ramadan, business dropped sharply by over 70%. By the end of the first week of Ramadan 2022, we launched a campaign to feed the less fortunate, which ended up salvaging the month. We designed flyers promoting a meal deal and sold subsidized meals that were distributed to those in need.

It worked well enough that we repeated the campaign during the Ramadan of 2023.

The business model itself, however, was the bigger issue.

Buffiyahs serve the lowest-income workers.

Our average order value (AOV) was SAR 8, which is around $2. Many people spent SAR 6 riyals only. 

Our contribution margin (not even gross margin) was just 19%.

This was one of THE most valuable lessons. Never underestimate the significance of gross margins and AOVs. 

Restaurants are also extremely constrained by geography. Your customer base is limited to people within walking or driving distance. A single roadwork project or bad weather can materially impact revenue.

Restaurants also face capacity constraints: you can only serve so many people per hour. To grow your capacity, you need more staff and more space. This increases your fixed costs.

Let me explain why this is important with an example.

Consider two restaurants selling 100 meals a day:

• A low-end restaurant (Restaurant A) sells meals at SAR 6 with a 20% margin = SAR 3,600/month gross profit.

• A higher-end one (Restaurant B) sells at SAR 15 with the same margin = SAR 9,000/month.

At the end of the month high-end shop has SAR 5,400 more in gross profit to cover rent, labor, and absorb shocks. Our buffiyah was super fragile because of the restaurant business model and the market we served. 

We tried raising prices, which backfired spectacularly.

The day after we raised prices customers were shouting at our staff. People bought food, but reluctantly.

They also hurled insults at "the owners." (We weren’t there but were told).

Our markups amounted to half a riyal in most cases. A few items were marked up to three riyals. But our new prices still triggered a pushback.

This was a lesson in pricing power and knowing your market.

My partner and I eventually opened another branch, which did better than the first. This was probably because the location was more affluent.

Instead of catering to industrial and construction workers, we catered to lower-income people who have what I call "A/C jobs." These are not necessarily desk jobs but those who perform manual labor in air-conditioned environments.

By 2023, we sold the first location for SAR 50,000. We locked in our losses and walked away with lessons far more valuable than our capital return.

TL;DR:

When my partner and I bought a buffiyah (which is a small, budget Arabic deli) we had a clear thesis.

We believed that:

• Risks were less because operations were already running: The shop had staff, equipment, and a regular stream of customers. Entering through an acquisition seemed safer than starting from scratch.

• The acquisition price was relatively low: At SAR 75,000, the entry point was low. The former owner claimed that the branch generated  SAR 4,000–6,000/month in profit. That implied a 63%+ return on capital (on paper).

• The location made sense: It was in a densely populated, working-class neighborhood with strong foot traffic.

• There were easy wins: Service quality was poor, and the shop was poorly managed. We figured we could fix the basics, implement a POS system, and raise prices slightly.

• It could scale: If we could turn this one branch around, we’d roll up more buffiyahs and build a network of cash-generating businesses.

Here’s what actually happened:

1. There were many unexpected operational challenges

• Operations were messy: Food service is unforgiving. We had to manage suppliers, staff, inspections, regulations, and perishable inventory. Also, inflation took a toll on us.

• The profits were made up: There were no proper books. Most transactions were in cash. We couldn’t verify anything, and didn’t push hard enough on diligence because… we couldn’t.

• Capex blew up: We budgeted SAR 20K for equipment. It wasn’t close. We ended up spending far more because the equipment was missing or kept breaking down.

2. The biggest issue was that we had an inferior business model

• Bad market and low Average Order Values (AOVs): Our average order value was SAR 8. We had to serve hundreds of customers daily to break even. That’s a tough game to play.

• Margins were razor thin: Our contribution margin (not even gross margin) was only 19%. That left us almost no cushion to absorb inflation, spoilage, or the steady stream of fines from inspections.

• Fixed costs were high: Rent, staff, and utilities had to be paid regardless of outcomes.

• The revenue ceiling was low: Restaurants are constrained by geography. Your customer base is limited to those who are nearby. And your kitchen can only output so much. A restaurant’s revenue is capped relative to its fixed costs.

A Note on Financial Models

I built a model before we bought the business. It showed that, with modest improvements, we could make SAR 8,000–12,000 per month in profit. That model looked great.

It was also so wrong.

Lesson learned.

A financial model is only as good as the assumptions you feed it.

It is more important to understand the economics of the business (and the qualitative information about an industry or business) than to rely on numbers that may be precise but inaccurate or misleading.

When building financials, discount heavily and build in a worst-case scenario.

I wrote this so you could learn from my (costly) mistakes without having to make them yourself.

If you found this story useful or interesting, share it with someone who's thinking about starting a small business.

I’m always happy to talk about business. You can reach me on LinkedIn.