Tight Margins Force Restaurateurs to Monitor Every Expense

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Volume 48, Issue 1

Restaurateurs could soon dole out $15 per hour to staff, at least if NDP leader Thomas Mulcair has anything to say about it. Labour, along with food, continues to be the biggest load on the bottom line.

The Challenges
Canadians love dining out, and they’ve got the cash to do so. According to the “Foodservice Facts 2014” study by Toronto-based Restaurants Canada, disposable income was expected to grow by 3.4 per cent in 2014 following a 3.6-per-cent increase the year before. But the lunchtime and dinner-hour crowds may leave landlords ravenous for a greater piece of the pie, even though pre-tax profit margins range from just 2.8 per cent (in Ontario) to 7.9 per cent (in Manitoba), with a national average of 4.2 per cent.
Scott Vivian, chef and co-owner of Beast restaurant in Toronto, will go head to head with his landlord during the next few months to find an amicable middle ground. He locked in his current rate five years ago when prices were still relatively affordable, but he’s uncertain how things will pan out when the lease expires. “Landlords can charge whatever they want for restaurant spaces,” he says. “I looked at a space not far from us, and they were asking almost $100 a square foot. It blew
me away.”

Doug Fisher, president of FHG International, a foodservice and franchise-consulting firm in Toronto, advises operators to keep their occupancy costs below eight per cent, but he’s seen rates balloon from 6.6 per cent in 1994 to the 10.5-to-12-per-cent range in the last four years. He notes that menu prices have to be raised to offset these costs but admits that’s not ideal.

Menu prices are also affected by the rising cost of ingredients. F&B prices eat up 35.6 per cent of operating budgets, according to Restaurants Canada. “Food costs have gone up, but menu pricing has not gone up adequately to compensate for that,” notes Daniel Frankel, CEO of the Daniel Group and Tap & Barrel Restaurants Ltd. in Vancouver. “It’s very difficult with increasing competition (see story on p. 32) to align those two. A lot of restaurants have been pretty smart with reducing portions slowly or increasing the prices slowly.”

Frankel confirms most of his ingredients, from poultry to dairy to produce, are more expensive now; Restaurants Canada’s “Restaurant Outlook Survey” indicates food prices increased by an average of 3.7 per cent in 2014 over the previous year. But Frankel sympathizes with his suppliers who also operate to slim margins; producers and distributors have been affected by the rising cost of grain and hops, plus unfavourable climate. But interestingly, he says the decreasing price of oil has not yet translated into lower food costs.

Meanwhile, during the last 20 or 30 years, labour prices have comprised approximately 30 per cent of overall expenditures, on par with food, says Fisher. Given that Beast restaurant seats just 36 people, it was easy for Vivian to manipulate labour costs, especially when it was just him, another chef and a business partner running the back of house. But after four-and-a-half years, he hired a chef de cuisine to assume some of the work. “Now that we have another salaried employee and the server minimum wage has gone up, you see your profit margin shrink,” says Vivian. “So then it becomes less of a business thing and more of a quality of life thing: are you willing to make less money in order not to have to work 80 hours a week for the rest of your life?”
The minimum wage currently sits between $10 and $11 per hour, depending on the province, but NDP leader Thomas Mulcair has proposed a $15 minimum wage if he’s elected prime minister. “That would put a lot of restaurants out of business,” warns Frankel. “If restaurants aren’t wise in managing their labour, service levels will go down massively.”
The Opportunities
To ensure top-notch service and reduce employee turnover, Frankel launched an ongoing training program dubbed Tap University. The leadership development program provides a transparent approach to training and discloses the specific steps needed for promotion. It also includes internal certification programs for wine and beer sommeliers, plus profiles of local suppliers and purveyors. “If we want to grow our brand and have sustainable growth with great people and great leaders, and also create a life worth living, [we have to] create a job that allows our team to live their dreams and achieve their goals,” explains Frankel. “It’s done wonders for our culture internally. Ultimately, if we have lower turnover, it’ll affect our labour costs quite positively.”

Fisher says standardizing recipes, weighing portions, counting inventory and whole-animal butchery can help control food costs. At Beast, Vivian offers whole-animal dinners and builds a six-course tasting menu around the beasts — lamb, boar, elk, goat and others — chosen by the customers. “You need someone who knows how to butcher properly,” warns Vivian. “If you make the wrong cuts then the price you’re saving by using the whole animal [is wasted]. But, if you can utilize the whole animal without any waste, then your price goes down.”

In a quest to save occupancy costs, Frankel has negotiated percentage-based rents with most of his landlords. His company pays a lower base plus up to six per cent of gross sales. It helps keep costs down in the winter, but when the patios double the seating in the summer, he pays much more. “This also turns your landlord into a partner rather than just another expense,” Frankel adds. “Now they want to see your sales go up, because they’ll get more money. If you have any civic regulations or you need permitting, they go to bat for you. We’ve done it successfully on most of our leases.”

Due to tight margins, restaurateurs must monitor every expense. “Given the low average sales, you have to watch costs, put in internal control systems, examine labour costs in relation to sales on an hourly basis and do ongoing price comparisons with suppliers,” Fisher suggests. With this advice, he’s taken marginal operators and given them 12-per-cent operating profit in short periods of time.