The term revenue management is heard in association with hotels and airlines but rarely in the context of restaurants. Canadian restaurants have been remarkably slow to change in response to economic challenges and, as food and labour costs climb and margins get squeezed, operators need to be more proactive and creative in generating and managing revenue. Although there is no one-size-fits-all approach, there are general areas that operators can consider based on specific conditions at their locations. As an industry, discussion needs to happen while operators determine what will work in their businesses because, whether it’s a revolution or an evolution, change is coming.
Reservations
The biggest question about reservations has always been whether or not to take them. Reservations create value for customers or they wouldn’t ask for them — the industry just needs to find a way to reduce no-shows and late arrivals. Operators across the U.S. are starting to experiment with alternatives to the standard practice of booking a table at an assigned time via a phone call or email. A handful of restaurants, such as Alinea in Chicago and Lazy Bear in San Francisco, have replaced traditional reservation practices with a pre-paid ticketing system which, for those whose demand is strong, offers a solution to no-shows while benefiting from having payment up front.
The perceived value of a reservation has recently been reinforced by the launch of apps such as Reserve, Resy and Seat Me, which allow diners to book a table — for a fee. Some restaurants are even selling “last minute” reservations with the option of crediting some, or all, of the cost of the reservation to the bill, again generating value for customers while providing insurance against lost revenue for no-shows.
Dynamic Pricing
Dynamic pricing has existed for years — seniors’ discounts, kids’ meals and happy hours are forms of this. But, there are opportunities to be increasingly sophisticated. For example, some days of the week are more popular than others for restaurants and these days have value to customers. Hotels and airlines have been charging higher rates during busy times for decades. It may be time for restaurants to do the same — or to at least have the discussion. If a seat on Friday is in higher demand, the argument could be made that operators should make more from that seat on Friday versus a traditionally slower Monday. Operators have always been quick to discount during slow times so it stands to reason that increasing menu prices marginally across the board on Fridays when demand is high makes good business sense. Operators need to stop shying away from discussing the idea because they think consumer backlash would be too strong.
Capacity Management
Revenue management is not just about getting as much out of the cover as you can, it’s also about recognizing unprofitable business such as closing when not busy or shortening hours. Restaurant operators often feel the need to be open whenever anyone wants to eat, which can compromise an otherwise profitable business by maintaining unprofitable operating hours. Customers are sending a message when it’s slow. Operators go to great lengths to try and build business during slow times, whether it is Saturday lunch or late night bar business, spending money and time looking for a marketing panacea that will bring in the guests needed just to break even.
A recent case study (conducted by Bruce McAdams and Mike von Massow) showed an operator that the money he was making on Friday and Saturday nights was going towards covering the losses he was incurring for opening at lunch. When asked if he would consider closing during these meal periods his answer was a predictable ‘no’, but he couldn’t explain why. The restaurant industry can learn from airlines — West Jet does not continue to fly a route if it continually has a low load factor and loses money. Restaurant operators need to realize that they can make more money on less sales.
While scrutinizing hours of operation is of crucial importance in determining profitability, so too are other issues of capacity management, such as seating and length of visit. As such, they need to be part of the discussion. For example, when the first two guests of the night are seated at a table only to request they be moved to a booth that can accommodate four guests, this leads to lost revenue opportunities that restaurants can’t afford. Is it then time to start discussing whether a seat charge should be levied for such a request?
The practice of limiting time for diners during high-demand periods has been experimented with by some fine-dining restaurants. Gordon Ramsay tried it in several of his London restaurants but pulled it after complaints. New York-based restaurants M Wells and Roberta’s are also doing it. With so few dayparts boasting demand exceeding supply, putting realistic and reasonable time limits on guests to ensure operators can maximize table turns and therefore revenue may be worth exploring. It comes down to the question of whether restaurants exist to cater to the needs of customers or to make a profit. Great points can be made on both sides of the argument.
Tipping
The issue of tipping is the elephant in the room today. Servers often make more money than chefs and managers, and in some cases, even more than the restaurant owners. The move by iconic New York restauranteur Danny Meyer committing to increasing prices and moving away from tipping may be the catalyst for broader industry change. Meyer will have total control over how revenue is distributed and has stated he will give more to the back of house — and maybe even more to the bottom line. Change won’t be immediate but there are real operational benefits to moving away from tipping — including improved service quality and consistency. It’s also a strategy to gain control of revenue. Consider the average tip in Canada to be at least 15 per cent: this is a substantial amount of the total price a customer is willing to pay. Other industries don’t give such control of revenue distribution to the consumer, why should restaurants?
The industry cannot continue to do things the way it always has. Smart operators will be innovative in creating and extracting customer value; customers understand this and will accept it — as long as it is done well. Taking a strategic approach to revenue will help this industry sustain and thrive in an increasingly competitive environment. How this looks is yet to be determined, what is certain is it’s time to move the discussion forward.
Assistant professor Bruce McAdams and associate professor Mike von Massow are co-directors of the University of Guelph Sustainable Restaurant Project.
Volume 48, Number 10
