What Gives? Why D.C.’s First “Philanthropub” Hasn’t Made the Profits It Hopes to Give Away
Raj Ratwani and Nick Vilelle knew from the beginning that there’d be skeptics. Not only did they have zero restaurant or bar experience when they opened their Shaw “philanthropub” Cause last October, but they also planned to do something unheard of in the hospitality industry: give away all the profits.
On the surface, Cause operates like any other restaurant. Diners buy food and drinks, and the restaurant pays its staff and its bills. No one is asked to donate anything. But the money that remains in the margins? It goes right out the door, to charities that the restaurant’s advisory board has vetted.
To help on the operational end, Ratwani and Vilelle teamed up with restaurant veterans John Jarecki and Dave Pressley, who also run The Light Horse in Alexandria. Together, they laid out some bold goals. They projected that in the first year they’d have profit margins of 10 to 20 percent, allowing them to give at least $100,000 to charity.
Although Cause is not a nonprofit, it aimed to emulate the transparency legally required of one. Initially, the team planned to release information about the restaurant’s income and expenses every quarter. Just as a nonprofit is accountable to its donors, Ratwani and Vilelle wanted to reassure anyone who might think they were using charity as a gimmick or taking unreasonably large salaries.
But it wasn’t until last week, slightly more than nine months after the restaurant’s opening, that Cause finally disclosed information about its finances—and only for the first quarter of the year. Those projected profits? It turns out there were none to give. The financial summary, which will be posted on Cause’s website and in the restaurant this week, reveals the business earned more than $220,000 in revenue but lost $8,745.95 overall in the first quarter of 2013. Ratwani says slightly reduced losses continue. (The restaurant plans to release its second- and third-quarter numbers in October.) Nevertheless, in its first quarter the restaurant gave $8,445 in small direct donations and through sponsored events to four charities: Agora Partnerships, Common Good Farm City, Higher Achievement, and Martha's Table.
While Cause reached into its reserves to keep good on its promise to give to charity, it also reached out to the public to help raise $11,000 to overhaul its air-conditioning system via the crowdfunding site Indiegogo. The campaign yielded some blowback, with critics on social media attacking the restaurant for asking for more money when it wasn’t yet disclosing its finances. DCist compared the appeal for funds to a government bailout.
Ratwani says the financial documents had been ready for release for “quite some time” but were a lower priority. “To be honest, we were spread unbelievably thin. And I think that’s something we did not anticipate early on,” says Ratwani, who has a full-time job as a senior research scientist for MedStar Health.
Even though the restaurant has exhausted most of its reserves, Ratwani defends the decision to give to charity even without profits. “What we’ve really been trying to do is stick with the spirit of Cause,” Ratwani says. “The only reason we started this bar and restaurant was to get money to the organizations and to give them exposure.”
Ratwani says roughly 80 percent of the money given to charity during the first quarter came from sponsored events. For example, Cause held cocktail mixers where 100 percent of the ticket sales went to featured organizations, and outside sponsors matched the ticket sales in donations. Meanwhile, food vendors offered lower costs and donated items.
But plenty of restaurants stage or contribute to charity events—and without trumpeting their do-goodery. Half of the $10 cover for Graffiato’s monthly Industry Takeover Nights now goes to different charities, and The Source is hosting cooking classes next month at which $25 of the $75 ticket costs will go to the American Cancer Society.
Ratwani admits that raising money through sponsored events was not the intent of Cause’s model, which aims to fund charities through the restaurant’s everyday profits. But because there aren’t any profits yet, they came up with a strategy they felt stuck to the spirit of the restaurant’s mission.
Ratwani is quick to admit the team made some miscalculations about the profits they’d be able to make from the get-go, but he also points out that Cause’s financials are on par with other restaurants in their first year. And he’s not wrong. The majority of restaurants operate in the red in their first 12 months, says Financial Foods co-founder Adam Williamowsky, who consults with D.C.-area restaurants on development and investment and is unaffiliated with Cause. Making a 10 to 20 percent percent profit in year one is “pretty, pretty tough,” Williamowsky says.
The main reasons are employees and training. Williamowsky says restaurants experience their highest employee turnover in their opening months, so they overstaff to compensate. They also have to make a staff-wide investment in training. “You’re practicing with more food and getting them to learn, and you’re giving away more food to guests, so your overall costs with everything is usually a lot higher in your first year than once you’re settled in,” he says. More than half of Cause’s expenses came from payroll. The four founders took no compensation of any kind. The general manager had the highest salary at $50,000.
It often takes six to 12 months for restaurants to get into the black, Williamowsky says, and if they’re operated by first-timers, probably longer. He says the fact that Cause had revenues of slightly more than $220,000 in its first quarter is “not great, but it’s not horrible” for a neighborhood place. “If they manage their labor better and bring that down significantly, then they should be able to make money it looks like, based off of these numbers,” Williamowsky says. It should help that diners generally like the place and its eclectic menu, which has items like fried oysters with kimchee, a lamb bacon burger, and African chicken groundnut stew. The restaurant has four stars on Yelp and a respectable two-star review from the Washington Post.
Ratwani blames higher-than-anticipated start-up costs and maintenance of the building, which Cause investors own. Electrical problems have plagued the building, along with air-conditioning issues. He says the Cause team has received emails from people since its opening asking how to help, so they thought it made sense to mount a crowdfunding campaign for the A.C. overhaul. Ultimately, Cause raised only $1,238 of its $11,000 goal. Nonetheless, Ratwani says that because of the public campaign, people with air-conditioning expertise offered to help with temporary repairs at no cost. The restaurant still hasn’t found a long-term solution for its A.C. woes.
What Ratwani didn’t expect were some of the negative reactions. He takes particular issue with comparisons of the air-conditioner campaign to a bailout. He points out that the campaign was completely voluntary, and those who gave money will receive incentive gifts in return, such as cocktails, dinner, or T-shirts.
Aside from the material challenges, Ratwani says one of Cause’s biggest obstacles is getting diners to understand the restaurant’s mission and model.
“For some folks, there can be a lot of disbelief in what we’re doing. This really is for real. We really are trying to give away all of our profits and make this model work, and sometimes there are folks who are really sarcastic around that, just sort of disbelievers,” Ratwani says. “I’m happy to entertain skeptics, but sometimes that can get a little out of control.”
Ratwani is reluctant to share his projections going forward. He’s learned how difficult it is to get them right. Still, he says he and his co-founders are in it for the long haul. And even if they didn’t bring in the initial profits they sought, they’re not giving up any time soon.
“I don’t know that we have it 100 percent right...This is sort of experimental and this is new,” Ratwani says. “And we’re not exactly sure what’s going to happen.”
Photo by Darrow Montgomery