We are huge fans of the South West region and with the 'Eat, Drink Bristol Fashion' coming up later this month, it's great to see local food festivals bringing food communities together at a local level. Headlining the event is Josh Eggleton of The Pony & Trap (see CC review here), and Jonray and Peter Sanchez-Iglesias of Casamia (CC reveiw here) so the biggest names in the region are cooking there.
The event runs between Tuesday 14th May and Monday 27th May though tickets have already been on sale for a few weeks now (so hurry!). The event timetable is shown below and full details of the event can be found on their website:
Fancy a great night out while making a difference to thousands of famine stricken children around the world? Of course you do, but where can you find such a thing? Well, the answer is a big party taking place at Shoreditch House, the one with a swimming pool on the roof. The date for this event is Tuesday 7th May 2013.
The event is a big party to support Action Against Hunger, but more than just a party, more than just a champagne reception, more than complimentary beer and wine all evening, more than food from Dirty Burger and Chicken Shop, there will also be an auction with some amazing prizes, stuff that you simply can't buy. Fancy a day deer stalking with Brett Graham? Simply bid, and it could be yours. What else? How about this:
· The chance to dine with critic Jay Rayner while he reviews a restaurant
· A decadent supper for you and eight guests cooked by Michelin-starred Angela Hartnett in your home
· Salmon fishing in Ireland with eminent chef and restaurateur Mark Hix
· A day and night at the Waterside Inn, Bray, including time in the kitchen with the legendary Alain Roux and dinner at the three Michelin star restaurant
· An exclusive behind the scenes experience at Michelin-starred Alyn Williams at The Westbury, with a table for four set up in the kitchen during the buzz and drama of service and a bespoke seven-course tasting menu.
And I'm pretty sure there's going to be quite a few more items, and all legendary stuff. Cunningly titled Auction Against Hunger, you can follow them on twitter @auctionhunger
If you want to but a ticket (and read everything I've just copied from their website again), visit the Auction Against Hunger page where you can buy directly. Ticket price is £75, which has to be worth it for a fabulous one off night and all the good that will arise from your donation. And who knows what you might take away from the auction.
When I have a week's holiday, I like nothing more than jumping in the car and driving round the country, visiting places I've never been before and trying new restaurants, hoping to find a gem. Last week, I had that opportunity again, and here is my route, 620 miles, leave on Sunday, back Friday afternoon, six great restaurants. You don't need to travel abroad to explore great food and original cooking, it's all right here on our doorstep.
'There is only one thing in the world worse than being talked about, and that is not being talked about' quipped Oscar Wilde in The Picture of Dorian Gray. Some chefs, it would seem, are increasingly upset on account of being talked about if that involves Twitter, Facebook and pictures of their food. But this article is most definitely NOT going to hash through all those 'camera in restaurant' arguments, rather, in a light hearted way, we will look at some unexplored facts around the public's fascination with food and see if it explains why the internet's plumbing is so heavily clogged with food picture debris.
Restaurants really are more popular than the internet
Given how much interesting stuff there is on the internet, surfing government websites is probably not high on most people's list of things to do on their day off, but amongst the bureaucratic rough, there is the odd diamond, and I would include for this the Office for National Statistics which has data on just about everything you could imagine. In particular, the biennial report Lifestyles and Social Participation focusses on social trends, and one has to go no further than page three of the most recent issue before the question of what people do in their free time is addressed. Since I am sure you can't wait to know the answer, we have summarised the data in a convenient chart below.
Selected activities performed in free time 2009/10
We can see from the above that the most popular free time activity of people in the UK is watching television, which is undertaken by 89% of the population (aged 16 and over). Spending time with friends and family comes second with 84%, though I find even the inclusion of this answer strange, effectively being a reciprocal question to 'are you a hermit?' (or I guess, do you have no friends?). Listening to music rates 76% and shopping 71%... and then it's eating out at restaurants, which 69% of all people over the age of 16 said they like to do.
This is big news, eating out at restaurants is the fifth most popular thing people do in their free time!
It is more popular than reading (67%), days out (63%), gardening (49%), and going to the pub (48%). And while we all use the internet, the number of people who said they choose to spend their free time on it is 59%. According to most recent data then, restaurants are 17% more popular than the internet as a way to spend free time.
For restaurants, this is clearly good news, but the news gets better yet. If we compare the 2009/10 survey (published in 2011) with the 2007/08 survey, we can see how these trends are developing in time. If we look at the absolute percentage point increase in people choosing to eat out at restaurants as a leisure activity, the two year on two year change is six percentage points making it the activity (tied with cinema) that has shown the largest absolute growth amongst all traditional activities. So not only are restaurants hugely popular, they are becoming even more popular still.
We should point out that the internet was not included in the 2008/09 survey (odd because it was included in 2006/07 survey at around 42%), so its growth rate cannot be exactly determined but it would probably be fair to assume it is higher, possibly eight percentage points if the improvement is linear during that four year period. If the trend continues in this fashion in the latest survey (to be published later this year), eating out would still then rate as a more popular pastime than the internet.
Change in selected activity (likes) performed in free time, 2007 - 2010
The six point improvement in cinema also comes off a lower base (cinema slumped as low as 40% in 2006), so percentage wise, its growth rate for the same period to 2010 is higher (14.5%). But it takes nothing away from eating out: if relative rather than absolute growth rates are considered, restaurants, with 9.5% growth come second in terms of the improvement in popularity across all major traditional pastimes.
Simply put, eating out is popular, and becoming more popular at a rate faster than almost any other pastime.
So that photo thing....?
Polaroid (remember them) recently put out a press release (click here) that estimated that 1.5 billion pictures are now taken every day due to the popularity of smartphone cameras. Whether this is a sustainable trend or not, who cares, but right now, people love taking pictures with their iPhone or Galaxy and are of course going to take pictures of what they do. And what are their favourite things to do? Well, we've already considered this:
2) time with friends
3) listening to music
5) eating out at restaurants
You will quickly see that the most popular pastime, TV, does not lend itself it taking pictures with a smartphone. Nor does listening to music, and shopping. So of the five things that people most like to do in their free time, only two activities can you genuinely capture with a smartphone camera, your friends and your food. Should anyone be surprised therefore that cameras are now used so extensively in restaurants?
While some people (or more usually trolls) enjoy taunting those who like eating in restaurants, these statistics prove that naysayers, who so often claim to speak for the majority, are in fact simply a vocal minority, and if you like restaurants, you can include yourself amongst the 40 million people in this country who share that hobby with you.
Half of all people in this country are estimated to use a smartphone while 64% of internet users are believed to be on Facebook. Such people are part of a budding photography pool who globally take 547,500,000,000 pictures every year with their phone (which works out at 17,000 smartphone pictures every second).
For those of you who half remember with terror Venn diagrams from your school days, why people are using cameras in restaurants becomes too facile a question to ask, but if it does need pointing out, it is this: what do you get if you cross the country's fifth most popular pastime with a public who take 17,000 photos every second? Pictures of food of course, lots of them, thousands, millions. But in reality, you get pictures of everything, a taxonomy of people's every waking moment, weighted by their favourite activities.
It is far too clumsy a sentence, so apologies to Wilde, but our message to chefs would be this: the only thing worse than customers wanting to take pictures of food in your restaurant, is customers not wanting to take pictures of your food. Well, either that, or having no customers at all.
Yesterday we posted an article which suggested that the chef-owner of a restaurant will generally contribute both labour and capital and therefore should be aware that (s)he should be financially rewarded for both, being an appropriate salary (for the labour) and an adequate return on capital by way of profit (we estimated 20% per annum). The most common push-back to the post was that we had not taken into account the fact that at some point in the future, the owner might sell the restaurant, making a gain on sale, and this would potentially compensate for a shortfall in adequate returns in earlier years.
This follow on post considers whether gains on sale should in fact be factored into business plans as an acceptable alternative to earlier cash distributions to the owner. We strongly believe the answer is no, they shouldn't, and that if a gain on sale is achieved, it should be considered an unexpected bonus.
What's a business worth?
If you are are to factor into your restaurant business plan a sale at a later date, you need to have some idea how to value the business. It is our view that a sensible valuation can be derived by considering that the ratio of the value of the restaurant to the equity in the restaurant is in direct proportion to the return on that equity versus the cost of equity.
Mathematically, that is represented by the formula Sale Price/Equity = ROE/cost of equity
For those interested in where this comes from, we include our derivation of this formula here and note that it is a widely accepted valuation tool in the world of finance. Things are now quite easy. At the outset of a potential investment, we stated previously that the cost of equity was (most probably) at least 20%. Very simply then, if the business itself makes a 20% return on capital, then the value of the business (potential sale price) is equivalent to its equity value so there is no gain on sale.
Is this, an estimated 20% ROE, reasonable? For most restaurants, the profits they make are private, so it's hard to provide hard data about the industry in general, but we can still find examples where profits are disclosed. Smiths of Smithfield trades through a limited company (Smiths of Smithfield Ltd) and so files accounts with Companies House which are available to the public for the sum of £1. SOS would have to be considered a very successful restaurant in our view and in their most recently filed accounts (for the year to 31 May 2011), they made post tax profits of £183,812 on an equity base of £1,054,967 (at the start of their year). Approximately then, they achieved a 17.4% ROE. Unless there has been a meaningful uptick in trading performance subsequently, we might reasonably say that Smiths of Smithfield, if it were to be sold, might come to the market at a price of £1.0 - 1.2mn with no real capital gains for the owners.
Put another way, without some kind of financial engineering, you have to believe that a restaurant is going to be a huge success financially to anticipate a gain on sale.
But assuming you do get a gain...
If significant debt is utilised however, it might be possible to use leverage to achieve superior returns (compared to the cost of capital), and that in turn would give you a potential gain on sale, so is that the answer? A simple model below considers this particular example.
Here, the initial restaurant opening capital of £500,000 is now only 50% equity with a further 50% bank debt. Return on total capital is 20% giving £100,000 of profit. However, debt costs must now be deducted from that, which we charge at 10%, leading to a very respectable profitability of 30% Return on Equity (75,000/250,000 x 100%). Each year then, for the first five years, we assume a salary paid to the owner of £30,000 post tax, and a dividend from profits of £75,000. This is without doubt a very good business for the owner, with £105,000 extracted each year as cash paid to him/her.
At the end of year five, we assume an immediate sale. In line with our above formula, the business sells at 1.5x the equity value (30% ROE/20% cost of equity), and that means a capital gain of £125,000 (50% x £250,000) for the owner. However, at the planning stage, all of these cash flows are between one and five years in the future and need to be discounted back at the appropriate cost of risk.
When this is done, the net present value (NPV) of future cash flows is £419, 468, while the gain on sale five years down the line is worth in today's money £66,200, so just 15.8% of the overall value of the business. Note that without that gain, the business would have enjoyed a NPV of £353,268 for an initial investment of £250,000 so would still have been worthwhile and the gain on sale comes as a nice bonus but is not the deciding factor in whether this business should be undertaken.
The conclusion must surely be that actually, you simply can't get away from the benefit of modelling the cash flows with sensible assumptions in order to make a good decision, but beyond that, the capital gain should not in our mind be the decisive factor for three reasons:
1) the restaurant needs to be excessively profitable to make a gain in the first place, and deciding to start a profitable business is an easy decision so it will never hinge on the gain.
2) the gain on sale is the very last cash flow you receive from the business and therefore enjoys the largest discount factor reducing its relative contribution to the total (even if nominally it seems a large number), and
3) the uncertainty surrounding any forecast that is at least five years out means that it is your least reliable assumption within your whole business plan. Do you really want the decision to invest, or not, to be decided on your least reliable assumption?
This is clearly a complex area but we hope the above discussion clearly illustrates why the key factor in making an initial investment needs to be an ongoing profitable business, and not an indeterminate capital gain that might otherwise trick you into an incorrect financial decision.
Read the previous article: Is your restaurant making enough money?
If you own a restaurant and it's making money, you are probably, and justifiably, quite pleased about that fact. But while profits are clearly better than losses, is the restaurant making enough money and is there actually a correct answer about how much that is? This article investigates.
Can a restaurant with profits of £100,000 be considered unsuccessful?
We recently came across a situation of a couple who bought a restaurant for £400,000, who then both worked hard to make it a success and, in their partnership accounts, showed a profit of £100,000 a year. A chef friend thought that this was quite an achievement, noting that each partner was taking away £50,000 a year from the business and asked our view. On the face of it, it does look good and also suggests that the payback period on the initial investment is just four years. A closer look at the situation however suggests this is not in fact anywhere near as good as it looks.
The issue at the heart of the problem, and one that is almost universally missed, is that the £50,000 the partners draw from the business each year has to cover two expenses, not one. In no particular order, the £50,000 has to compensate each partner for both the initial investment they made in the business (£200,000 each) and the time they spend each week working to ensure it's a success. Put another way, each partner has committed capital and labour; the reward for capital is profit, and the reward for labour is (usually) salary. Does the £50,000 adequately reward both their labour and capital investment?
How much money should a restaurant make?
Consider the idea that you have £100,000 to invest and two competing ideas. First up, your financial advisor suggests you invest it in the stock market, a traditional home for long term savings. However, a friend is opening up multiple restaurants and wants you to help fund the investment. Which should you do? We'll consider both investments on a ten year time horizon.
First off, how much might a stock market investment make you? Jeremy Siegel (professor of finance at Wharton) showed in his book Stocks for the Long Run that in the period 1871 - 2001, stocks returned 8.8% (gross) per annum to investors. On this basis, after 10 years, your £100,000 investment becomes £232,428 with returns reinvested.
The investment in the restaurant option is superior to the stock market if the return at the end of 10 years provides for a higher sum than the £232,428 calculated above, but we all 'know' that restaurants are more risky. In April 2007, an article in Bloomberg Businessweek reported that in a study of 2,500 new restaurants in Ohio, over a three year period, three in five restaurants failed. Assuming this is correct, we obviously need to factor this in to our calculation. Of the initial £100,000 invested in restaurants then, 60% can be expected to be lost in restaurant failings so your pot of savings will only grow based upon returns achieved on just £40,000 of the initial investment.
It then becomes a simple matter to show that on £40,000 of productive capital, returns of 19.24% per annum are needed to build a sum equivalent to the size of the expected pot if the money were invested in the stock market. If the restaurants that do succeed generate in excess of a 19% return on capital, the investment in the restaurant venture might be the better of the two options.
It is somewhat oversimplifying to say this (but this is a blog post not a book), but depositing your money in a bank is essentially risk free and will deliver returns of 1-2%, investing in the stock market is risky but not too risky and can therefore be expected to deliver 9% per annum, while investing in a restaurant is significantly higher risk and should therefore deliver at least 19% to compensate for that extra risk. There are a number of arguments that suggest the required return should be even higher than this, but those are for another time.
Returning to the case study
Back to our original case study, we noted that the initial cost to buy the restaurant was £200,000 per partner. If this money had been invested in the stock market, it would have made each partner (theoretically) 9% so £18,000 per annum. However, if the reward for capital should be higher for the additional risk of investing in a restaurant, the required return on capital for their chosen investment (that of the restaurant) should be 19% x £200,000 = £38,000.
If we ignore the effect of taxes to keep it simple, for the £50,000 of cash/profit received by each partner, if £38,000 is considered the adequate return on their capital investment, it leaves just £12,000 to compensate them for their labour, clearly not a big wage. Assuming they work a 60 hour week, their hourly rate of pay is just £3.84, substantially less even than the national minimum wage which is currently set at £6.19 an hour. The partners in this restaurant are paradoxically exploiting themselves, working for less than four pounds an hour, and less than any of their employed staff.
The outcome for the partners is by no means the worst one possible of course, but they are actually under compensated for the dual commitment of hour worked and capital committed. Financially, they would be better advised to an alternative route.
For sure, there are plenty of counter arguments to be made, for example, that they are investing in themselves, not a generic restaurant risk, that they are their own boss etc, but these are arguments from the heart and neither will translate well to a spreadsheet or your bank manager. It's not wrong to make these arguments or to proceed with the investment on that basis, but one should always be aware of the hard arguments.
The key conclusion of this short article is that two things are needed to make any business successful: labour and capital. Labour is rewarded by a salary, capital is rewarded by profit. Capital is more risky and sees fluctuating returns; it is also possible that capital can be lost in its entirety and because restaurants are risky, returns to financial investors need to be commensurably higher to compensate for that risk, with our basic calculation suggesting that a 20% return is probably the minimum.
Chef patrons that have invested capital in the business and who commit daily labour to that business should be rewarded for both, but many often fail to spot the fact. We take it as a given that most business owners want to create wealth for themselves from their business and build an adequate pension pot for retirement, but to do so, a clear understanding is needed on the returns being delivered on both invested capital and labour. Without that understanding, maximising wealth ceases to be a matter of analysis, simply falling into the realm of guesswork and luck.
Turkey, chocolate and booze, the true meaning of Christmas. This and more is on show at Taste of Christmas show at ExCel which was opened today by Jamie Oliver and runs through till Sunday. The event boasts 250 market stalls with a full range of Christmas food and related items. This event will be enjoyed by lovers of sweet treats especially and there's a host of cakes and chocolate stands ranging from the average to the very impressive. Cheese too is well represented while Christmas wouldn't be Christmas without substantial space given over to wine, champagne and whisky. But while there are some turkey information stands and others selling preserved meats like hams, there's less space given over to meat products, most likely as dead animals in ExCel probably breach a hundred health and safety rules (so don't expect to be heading home with a pheasant under your arm).
What is most impressive however is the line up of chefs that you'll have access to at the show. There's cook-alongs, demonstrations and Q&A, and chefs participating include the great names of food in the UK such as Simon Rogan, Simon Hulstone, Sat Bains, Tom Kitchin, Michel Roux Jnr, Bruno Loubet and quite a few more. Even on the Friday, which we assume will be substantially less busy than the weekend, the events were extremely popular so if you do attend this weekend, you might want to plan your time accordingly and note that some events have limited places available.
And there's of course some eating to be done with Jamie Oliver's food well represented (naturally), Lima, Comptoir Gascon, Salt Yard, Hix and Cinnamon Soho. Currency within the event to buy food is, like the Taste of London festival, 'Crowns' though outside of the 'restaurant' bits, most stalls are charging in good old fashioned pounds.
With entry priced at £18.50, this is not a cheap event by any stretch, though getting to cook-along with the likes of Sat Bains will certainly justify the price for some. There's often samples to be had on the market stalls but not enough to stop you getting hungry, yet despite the festival name, you're not overwhelmed with options for a proper feed. There's an official 'Taste of Christmas Restaurant' though we didn't try it so can't comment on the quality.
Being in the mighty ExCel, it can never feel cosy like a proper Christmas market, but there's a lot of amusing things on display (including one stand dedicated to hangover cures) and if you're preparing a Christmas feast or just looking for presents for your foodie friends, you'll likely find something here that will take your interest.
Full details can be found at the website: Taste of Christmas
Disclosure: we attended the press launch
Rumble in the Kitchen really was a night of blood, sweat and tears. The punches were real and emotions high. Over three rounds of two minutes, all the fighters gave every ounce of what they had and then, like true champions, every one of them then reached deep and gave some more. More remarkable still, the fighters at Rumble were not pros but instead were drawn from restaurants across London, giving their time, energy and sometimes a bloody nose to support the event, a charity spectacular at the RAC Club to support the work of Galvin's Chance. If you don't know Galvin's Chance, it is a remarkable charity pioneered by Fred Sirieix, GM at Galvin at Windows, that seeks to give disadvantaged young adults an alternative to a life of benefits or crime by providing training and real job opportunities in the hospitality industry. It has a track record of success and has already changed many lives.
Overall the night raised a fabulous £55,000 for Galvin's Chance, making a huge difference to what Galvin's Chance will be able to accomplish over the coming year, for there is much planned including extending the reach of Galvin's Chance outside of London giving even more people their first real opportunity.
The boxing may be over but there is still much to be done. From fund raising events to providing job opportunities for the kids on the program, can you help? If you want to know more, contact Fred (on Twitter @fredsirieix1) or even drop us a line.
Read more about Galvin's Chance on the Galvin's Chance website. And then do something to help.
Most people who eat out a lot, or eat at the same restaurant a lot, or even who just let the restaurant know that one of the guests has a birthday have probably been given at one time or another a glass of champagne 'on the house' at the beginning of the meal. It's certainly a nice thing to receive and I certainly don't wish to discourage people giving me free champagne but in our recent blog piece, why do we remember a restaurant as being good? we used the work of Nobel prize winning psychologist Daniel Kahneman to explain that people remember the pleasure of experiences (such as eating out at a restaurant) as being being the average of the peak of pleasure and the feelings at the end of the experience, allowing Kahneman to develop what is called the 'peak end rule'.
We're constantly told in life however that first impressions count but taking the peak end rule at face value, they don't in fact seem to count at all when we seek to remember how good a time we had. Accordingly, we might ask if there is any benefit at all for a restaurant to giving anybody a free glass of champagne at the start of the meal, birthday or not?
The answer is of course yes. We use a glass of champagne in the examples below as it is an obvious and tangible thing that a restaurant might do, but even a smile, a warm welcome, and an extra nice table can have the same effect.
Life is better with a glass of champagne.
Think of the answer to the question 'how happy are you with your life?' Not how happy are you today, or this week, but rather, the totality of your life: who you are, your job, your spouse, maybe your children, everything. You would think that would be kind of fixed really, hardly changing day to day and certainly not hour to hour. You'd be wrong.
Psychologist Norbert Schwarz invited participants to his lab to answer the question of how happy they were with their lives, but before answering, he asked them each to photocopy a sheet of paper for him. Deliberately placed on the photocopier, half the participants found a dime (the experiment was done some time ago) while half did not. Guess what? Those who found a dime then reported significantly higher levels of happiness at the totality of their own life than those who did not.
If people can increase the positivity about their own entire life by simply finding a dime, something nice at the start of a restaurant experience, like a free glass of champagne, must surely alter people's moods positively such that they will enjoy the meal more. That in fact seems like common sense. How though does this influence the memory of the restaurant according to the peak end rule? One obvious mechanism is that the peak pleasure will appear to be increased, that is, a dish that a diner might have scored (even doing this unconsciously) at say 7 out of 10 may get bumped up to an 8 simply because they are in a better mood when they score.
Everything seems better when you are happy, even average cooking.
The Halo Effect
Second, the halo effect. Here, your early action of giving a free glass of champagne creates an emotional bias in favour of the restaurant that will make other characteristics of the restaurant and meal also seem more favourable as a result. Again referring to Kahneman's recent book (Thinking, Fast and Slow), he reports that:
The sequence in which we observe characteristics of a person is often determined by chance. Sequence matters, however, because the halo effect increases the weight of first impressions, sometimes to the point that subsequent information is mostly wasted.
By giving a guest a free glass of champagne early on, you take random chance out the sequence and seize the initiative so that you guarantee the order of observed characteristics. The early gift deliberately sets up the Halo Effect to work in favour of the restaurant and so achieved, allows a better impression of later events that the diner would have been otherwise less enthusiastic about.
Again, thinking of the peak end rule, if the last experience of the evening was a poor one, perhaps a mistake on the bill, the positively primed customer will be substantially more understanding and forgiving of the mistake. When applying the peak-end rule in remembering the meal, they might even ignore the mishap fully, whereas those not under the influence of the Halo Effect might mark the restaurant down despite an otherwise flawless meal.
The final point is a read across from the work of Robert B Cialdini, a professor of both marketing and psychology, a leading expert on the subject of influence and the author of a book of that name. Cialdini describes it simply as this:
The rule says that we should try to repay, in kind, what another person has provided for us.
Cialdini describes it as 'one of the most potent of the weapons of influence around us'. It's why if someone sends you a Christmas card, you feel obliged to send one back (who hasn't said of Christmas cards: I'm only sending them to people who send me one this year). He believes it is innate across all human cultures. He goes on to say that:
By virtues of the reciprocity rule, then, we are obligated to the future repayment of favours, gifts, invitations, and the like.
Accordingly, if you 'give' a glass of champagne to a guest, they need to find a basis to reciprocate. If you then shortly after hand them the wine list, their obligation to repayment will often see them buy a more expensive bottle of wine than they otherwise would have, even producing a net profit for the restaurant on the exchange.
The reciprocation rule might or might not influence the peak end rule for the guest remembering their experience, but that doesn't in fact matter for the positive mood bias and halo effect will take care of that anyway. The reciprocation rule does however mean that the cost of giving away a free glass of champagne will in fact be refunded to you by the customer, with the result being that they themselves have paid up to have (and remember having) a better time.
Everyone wins it seems: the customer is put in a better mood, experiences a better time and remembers a better time. The restaurant meanwhile has a happy customer who is more likely to return, more likely to recommend the restaurant to friends and a customer who at a minimum refunds the restaurant for the 'generous' gift of the champagne through reciprocation.
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Why do we remember a restaurant as being good?