In this episode of The Committed Innovator, restaurateur John McDonald, the founder and CEO of Mercer Street Hospitality, speaks with McKinsey senior partner and innovation leader Erik Roth about maintaining success and equilibrium in the notoriously difficult hospitality industry. This is an edited transcript of their conversation. For more discussions on the strategy issues that matter, follow the series on your preferred podcast platform.
Erik Roth, McKinsey: Why did you get into the hospitality industry? What were you trying to accomplish?
John McDonald, Mercer Street Hospitality: It’s a complicated journey, but it started with being in college. I was good friends with the guys who were building the Mercer Hotel down in SoHo in New York City. They were about ten or 12 years older than I was, and I watched them. It was André Balazs, Campion Platt, and a number of other characters in their ecosystem. It taught me that there was a creative way to go about business. When I graduated from college, instead of going to Wall Street, which is where I was headed, I took a page out of their book and started thinking, “What could I do?” And that’s how I started MercBar, my first business, on Mercer Street in lower Manhattan, close to the hotel.
Erik Roth: How did you get that started?
John McDonald: Essentially, I had been down there every day; I was what I would call a soft intern for those guys. They were parking their cars in the garage that became the bar, and they weren’t doing anything with it. So I just naively thought I could do the bar. I had a weird sense of confidence that made sense to me, and I had no fear at that age. So I pieced together money from friends and family. The guys helped me tremendously; the hotel was my landlord for a long time. And I just moved forward every day. I don’t really know the explanation. It just happened.
Erik Roth: And what does this all look like today? You own and run a range of properties now.
John McDonald: Currently, Mercer Street is a collection of about eight or nine restaurants, including Lure Fishbar, Bowery Meat Company, Smyth Tavern, Bar Mercer, and recently Cha Cha Tang. I’m getting ready to relaunch the restaurant in the W Union Square. We have a Lure Fishbar in Chicago. It’s a small to medium-size hospitality company.
Erik Roth: Tell us a bit about your early challenges. I know your philosophy is to be very hands-on, to be around, near your home, and to make it feel like a local presence that is meaningful for people who dine in your establishments.
John McDonald: I’m fortunate, because most of the restaurants are within a very easy walking distance from where I live. I would argue there’s a benefit to that. You don’t let things get out of control if you’re always around. When it comes to pushing through trouble, I think it’s just attention and having that level of endurance to not take your foot off the gas.
Erik Roth: I know being a father is important to you. How has that changed the way you think of yourself as an entrepreneur?
John McDonald: I had kids in my forties, and I think it gave me a skill I didn’t have, which was eliminating things in my life that don’t really matter [but] that I probably convinced myself were important or had meaning. It gave me total clarity as to the ability to not waste time.
Erik Roth: What are the things you do focus on? I think a lot of entrepreneurs struggle with time allocation and focus.
John McDonald: I’ve learned to delegate a lot better. And I’ve learned to focus on singular things and accomplish those goals without getting overwhelmed by the mass of stuff that exists. Restaurants are so chaotic. It can feel like an insurmountable “trouble forest” every day. Erik Roth: How did you build your team? What was it that you were looking for?
John McDonald: It’s been an organic process. When I started, I had one bar. Then it went from one bar to one restaurant, then slowly additional businesses. Some go away; you have successes and failures. I’ve been very lucky. Some of the senior people have worked for me ten to 20 years. You’ve got to find people who are like-minded and stay with you. And it’s rare. When you have that, they are the number-one reason you can be successful. Because outside of a mom-and-pop shop, there’s zero chance you can maintain three, four, five, six, seven restaurants without competent leadership.
Erik Roth: Let’s spend a couple minutes on Lure Fishbar, one of your better-known restaurants. Where is it in its life cycle? And what are the opportunities and challenges going on with it today?
John McDonald: Lure is my oldest restaurant. It’s in its 21st year now and is definitely the flagship. Anything that old that has endured the test of time is pretty special. That goes back to the team—the chef and the various managers who have participated in the process to keep the restaurant relevant. It’s one thing to be relevant, or popular, or busy for three years, five years, seven years, ten years even. But to go to 15 or 20 years and not feel tired or like it’s at the tail end, that’s what has driven Lure to be unique. Right now, I’m in a bit of a precarious position because my lease is potentially at risk. There’s been a pretty substantial media uproar about the fact that Lure could disappear. People feel strongly that it is part of the soul of SoHo. I’m optimistic things will work out.
You’ve got to find people who are like-minded and stay with you. And it’s rare. When you have that, they are the number-one reason you can be successful.
John McDonald, founder and CEO, Mercer Street Hospitality
Erik Roth: SoHo is a very special part of New York City. And your restaurant happens to be at the heart, almost geographically and culturally, of that part of town. How did you get there? How do you get into the ethos of the local neighborhood and the culture of that part of the city?
John McDonald: I opened my first business having never been employed or had a real job. I was lucky enough to be in the right place at the right time, which was Mercer Street. I’ve been on that block for 30 years. After 30 years of walking up and down a cobblestone street in SoHo, every corner, every nook, you know the businesses. You know everything about it. It’s not just living in New York City for 30-plus years, it’s living on one block.
Erik Roth: How do you start and then maintain something that’s really going to stick?
John McDonald: I don’t think there’s a real, definitive, linear answer to that. And it’s one of the industries that, because it’s consumer facing, everybody lives in your business, and they just have an insight into it that makes it feel more difficult. I tell people all the time that their local restaurant that seems to be quite busy is probably breaking even or losing money. It’s just a matter of time—whether it’s three years, five years, six years, seven years—before someone loses the heart and the energy to keep it going.
Erik Roth: You’ve had offers to bring your restaurants to other cities. You’ve chosen to remain local. There are other restaurant groups and chefs who have chosen the opposite. What gets you to that decision? Do you ever think, “Gee, if I’d only opened that one in LA” or wherever it might be? Entrepreneurs face these kinds of choices all the time with people coming at them maybe with cash or an offer. How have you dealt with that?
John McDonald: Fifteen years ago, I thought I was going to be more interested in doing that kind of strategy. We had a Lure Fishbar for 11 years in Miami, which was a great relationship. We closed that coming out of the pandemic. Then we opened in Chicago. But for me, it just became about quality of life and being excessively intentional about the hours of the day I have. Some of that is related to my own personal happiness, and then my two boys, realizing that I have a very short window of opportunity to be with them. Maybe it sounds a little corny, but if I have to go to LA five times a year, how many days away from young kids is that, and is it worth it? And my answer is no.
Erik Roth: Hospitality was one of the industries that I think got affected disproportionately by the pandemic. How did you pull through and come out so successful on the other side?
John McDonald: There were stages. At the very earliest stage, when everybody closed, it was so unknown, and obviously no one knew what was going to happen. I was thinking [that] if I was going to lose all my businesses and everything was going to close, it was OK because I couldn’t control it and everybody was going to be in the same boat. It was my way of protecting my mental health. Then, quickly, the process began of opening outdoors. We just went back to focusing on survival. Once you’re in it, you’re in the game. And I felt like the clock was running. I looked at it like, “Let’s employ as many people as we can, do as much as we can, and don’t look back.”
Erik Roth: As you describe that, you have a calm objectivity that is not always the case in many entrepreneurs. How do you have your philosophy of life and look at the business as what it is and not something to overly stress about? Where does that come from?
John McDonald: It has to be my parents. I remember how consistent and hardworking they were, and I never witnessed them on any occasion for the most part behave that way. Poise and consistent focus and not letting yourself go crazy when things go wrong were definitely a part of that.
Erik Roth: Do you think those attributes are even more important in the restaurant business, where many experience so much churn and uncertainty?
John McDonald: Definitely. I’ve learned a lot. I don’t think I was that way in the early years. But I’m not sure what would have to happen to make me negatively react. I feel like I’ve seen enough to where the best reaction is just to process it and immediately move to “Well, what’s next?” Like someone’s going to quit. Well, what’s next? Someone’s going to do this. What’s next?
Erik Roth: As you move to either working with a large hotel chain or perhaps other adventures, what do you look for in terms of what has to be true in order to be successful?
John McDonald: In the case of our new hotel project, it’s a really unique and special landmark project, which is why I wanted to do it. That W Union Square is an amazing building, the former Guardian Life Building, right on Union Square Park. That opportunity was unique, and the people at Marriott and W are very good at giving restaurateurs their autonomy to give the restaurant its own identity. So that’s part of the appeal.
What has to be true, I would say, starts with the script, the idea, the concept. And if that is good enough, then you’ve got a shot. And then you’ve got to hope it executes. I always say it’s similar to a movie. You could have a great movie script and a great lead actor, and yet the movie still gets it wrong. Sometimes things just go wrong. Some of my favorite restaurants that I had didn’t work long term.
Erik Roth: How do you know what a good concept is?
John McDonald: It’s always been a little bit of a personal extension of what I like to eat and then what I feel might be missing in different instances. In a recent project, I ended up converting a restaurant I had for more than 12 years. Now it’s called Cha Cha Tang, which is a Cantonese-Chinese restaurant with Wilson Tang, a real Chinatown New Yorker. It’s giving him the real estate to do something with his skills and knowledge. It’s less about me and more about being a facilitator of a project. It was unique in that sense.
Erik Roth: What advice would you give an entrepreneur trying to do a restaurant?
John McDonald: A lot of people who work in the industry—chefs, managers—talk about owning their own restaurant. And my first question is, “Well, what is your restaurant?” And they say, “What do you mean? I just want to own a restaurant.” My advice would be to have a laser-focused ability to articulate what it is—even if it’s a hybrid of Spanish and Thai food, and the walls are going to be painted purple, and we’re going to do bar stools and no chairs. If they can’t answer that question, it’s a big red flag, and most people can’t.
Erik Roth: In the broader landscape of entrepreneurship, if you can’t articulate your value proposition, you’ve got a lower probability of success. What about an entrepreneur looking to start a business—whether it’s in hospitality or not—given the reality of today’s funding world, real estate world, and business context, et cetera? What’s your advice on that?
John McDonald: Only do it if you are truly confident you’ve got the commitment. The delta between just working hard and getting to the next level, that last 10 percent, is what I’ve personally seen get everybody over the hump. A lot of it comes down to just that level of commitment and do you have it in you. If you don’t—I think most people know in their heart if they don’t have it—you’re not going to make it very long.
Erik Roth: How does a young entrepreneur think about funding in the early days when they’re starting up a new restaurant?
John McDonald: Restaurant funding is tricky because it’s not very sophisticated. Most people in the early days are getting people to invest for ego. It’s rare to be investing in more of a big business where it’s sophisticated money and they’re looking at the ROI. In the early days, it’s probably a small amount of money. You’re going out to friends, family, and connections and using your network to piece it together. For an entrepreneur, that’s tricky because you might end up not owning a lot of your business.
Down the line, your credibility and track record are going to be the number-one factor in raising money. And you can’t hide anymore. In the 1980s, 1990s, or even the early 2000s, you could say that other people did things wrong or were bad operators. But with today’s transparency factor, there’s zero chance of that. If you burn an investor, that investor has the ability to spread the word like wildfire. It goes both ways—good or bad.
Erik Roth: How do these thousands of restaurants in New York City get funded and scale?
John McDonald: The bigger businesses get funded by sophisticated, big investors for the most part. But the small ones, people just want to be involved. They want to feel like they’re an owner. They can go to dinner parties and talk about it. It’s also important to have a community of people who are promoting your business. If somebody is your investor and they go out and tell people that I work for them and they’re the owner, I have no problem with that. If you’re going to promote the business, you can be whatever you want—the founder, the creator—just as long as I get more bodies through the door.
Erik Roth: That’s probably true of any business. If your customers are your biggest promoters, that’s a great place to be.
John McDonald: We talk about the whole net promoter effect. I take that and try to apply it to the restaurant business. We tell our staff all the time, “What do you have to do to make somebody come back?” That’s the number-one goal when I open a restaurant. I say to my whole team—even a server, a busser, a runner, a bartender—the goal is not to be a successful restaurant. That’s way too big of a goal. The initial goal should be how do I make that customer come back. It’s hard. I go to restaurants all the time, and mostly I don’t go back.
Erik Roth: How do you train the staff to be able to execute every day on that mission?
John McDonald: You hope you train well. It’s repeat, repeat. It’s pre-meals. It’s talking about everything you do. You hope to hire and appeal to like-minded people. And when it works and all of a sudden you have eight captains on a team, on a floor, and they’re all in sync, and they all know they’re rock stars, that’s when it clicks.
Erik Roth: What’s next for Mercer Street Hospitality? You’ve got a big project with a hotel coming up. Anything else on the horizon?
John McDonald: That will be my focus for at least the next year and change. But a lot of what I work on comes out of the blue. For every time I’ve said I’m not going to do another restaurant, something comes up that really, creatively and from an entrepreneurial perspective, gets my energy going.
Erik Roth: Thank you so, so much for joining us today.
John McDonald: Thank you. I enjoyed it.
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