Challenges & Opportunities: Operating Costs


The Challenge

In an industry with notably low margins, inflation and added expenses have a significant impact on profitability. And, given revenues have been negatively impacted by the ongoing crisis, increased costs weigh heavy on operators.

As, Nick Di Donato, president & CEO of Toronto-based Liberty Entertainment Group, explains, efforts to pivot to different revenue streams weren’t enough to make up for restrictions. “There’s no way anybody can be profitable under those circumstances, where you still have to pay rent, taxes, hydro and so on, in large spaces, and your sales were minimal.”

fsSTRATEGY Inc.’s 2020 C-Suite Survey indicates the majority of industry leaders (68 per cent) expect the cost of sales as a percentage of revenues to change in 2021 (up from 60 per cent in 2019). And, 16 per cent of respondents anticipate cost of goods sold will increase by more than two per cent this year.

In terms of food costs, the 11th edition of Canada’s Food Price Report predicts an overall food-price increase of three to five per cent for 2021. The report forecasts meat and vegetables will see some of the most significant increases, with expected increases of 4.5 to 6.5 per cent for both categories.

Most C-Suite Survey respondents (60 per cent) also indicated they expected other operating costs (such as utilities, repair and maintenance, advertising and promotion) as a percentage of revenues will increase in 2021. And, an increase of 0.1 to 1.5 per cent is anticipated by about half (48 per cent) of those surveyed.

Continuous efforts to adapt to ongoing restrictions and requirements have also proved taxing. In fact, a recent survey of The Fifteen Group’s Canadian restaurant clients found the businesses had spent an average of $15,000 on pandemic-specific operational changes. David Hopkins, president of the Toronto-based consulting agency, points to items such as personal protective equipment, enhanced cleaning supplies, air-filtration units and patio improvements as additional expenses restaurants have taken on.
“In terms of long-term [challenges], certainly the biggest one we’re trying to model out for our clients is the overall, long-term impact of takeout and delivery service,” says Hopkins. As he points out, when third-party services cannibalize direct/on-site sales, it takes a real toll. “If you’re a $2-million restaurant and $100,000 of that revenue pivots to ordering from [third-party delivery] instead of either picking it up themselves or going to your restaurant, then that’s costing you $30,000 in straight profit that you would have had otherwise,” he explains.

And, he adds, increased demand for takeout also results in an increased need for packaging supplies, which, as we approach a national ban on many single-use plastics, represent a greater expense than in the past. “Restaurants are going to have to start factoring that into their entire pricing model,” adds Hopkins.

The Opportunity

The residual effects of the pandemic are expected to present some opportunities and relief on certain operating-cost fronts. “Probably the biggest one we’re expecting, and we’re already seeing, is with the labour market,” shares Hopkins, noting the current environment has shifted this to an employer market — at least for the short term.

Similarly, restaurant closures have made the rent market more favourable. Hopkins notes this almost exclusively impacts new openings, but there may be room for established restaurants to negotiate better deals.

And, while increased food costs present a challenge, as Hopkins explains, coping with challenges around meat pricing over the last five years has dwarfed recent changes in this category. Having weathered this on-going problem, he is confident operators are well equipped to pivot their menus and pricing to accommodate increases.

“As restaurants plan for recovery, a consistent supply of fresh, local food can help minimize costs and ensure availability of key ingredients. Focusing on staples will help draw in guests by satisfying their craving for comfort in uncertain times,” Sarah Caron, director, Marketing and Nutrition, Egg Farmers of Canada, stated in Restaurants Canada’s Foodservice Facts 2020.

Through this time, restaurateurs have been forced to adapt and, in many cases, become more agile in order to run their businesses as efficiently as possible. “The restaurant industry, as a whole, has demonstrated just how resilient, creative and innovative it is,” Brian Deck, CEO of Smooth Commerce, said during the Canadian Restaurant Investment & Leadership Summit in November.
For example, Oakville, Ont.-based The WORKS Craft Burgers & Beer took the pandemic as an opportunity to re-create and evolve the brand. Changes included reducing the brand’s menu by about 20 per cent to help streamline operations. However, as part of the re-design, the brand also introduced a wider selection of craft beer, new craft poutines and added successful LTOs such as The Tragically Maple burger to the permanent menu.

As the brand’s president, Bruce Miller explains, these efforts were made “to make sure that, when we come out of the pandemic, that we are set up for success.”

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