Ten ways to find internal profit in a tight economy
The current shift in consumer priorities is going to continue for the rest of the year and likely won’t settle until sometime in the new year. Until then, getting customers through the doors will be challenging at best.
Most of the high-end restaurants in the country have witnessed a decrease in sales; guests are either eating at home or have moved over to the casual sector. Casual sector clients have also traded down to family and quick-service operations. Even upscale operators in the quick-service restaurant (QSR) market, including Starbucks and Second Cup, have been hit.
While there is no magic formula to return sales to where they once were, by going back to basics, you will likely find internal revenues that you have negated in the past. Operators who can control costs can save money; and if you can save costs, you can positively affect the bottom line.
Below are 10 tactics that help reduce operating costs. Put in a little effort now and reap the rewards during the good and bad times.
1) Menu Costing, Portions & Pricing
To succeed with the menu, be sure you have standard recipes and that they are accurate. The menu and food cost are essential to producing a winning restaurant. When you’re not making money, you must pay even more attention to these issues.
It’s important that the restaurant’s standard recipes — which should be developed for every item — are properly written. Everything must be included — from the side bread and butter, to the garnishes. Each raw ingredient must be measured and priced accordingly. Once a theoretical food cost is established for each item, develop a sales mix by tracking each item sold as registered on the point-of-sales (POS) system. Then multiply each item cost against the number of items sold and add the results for each item. This results in a theoretical food cost for a certain period of time — usually a day, a week or a month. When that theoretical food cost is divided by the food sales for the same period of time, a theoretical food cost percentage can be determined. That theoretical food cost should then be compared to the actual food cost for the same period. If the cost is out by more than 1.5 per cent, investigate the problem.
2) Labour Costs
Labour costs can be a killer. It is one area we watch closely at all times. To help manage your bottom line, there are three things you should do.
When things are tight, ensure that your employees avoid signing in too early or signing out too late. To avoid this, hourly staff should punch in and out on a time clock or a POS machine. Each person should bring their card to the manager to verify and sign-off on at the beginning and end of each shift. The manager can also make adjustments to the time sheets in front of the employee. This saves money and eliminates any possible disputes later.
Next, develop staffing-to-sales criteria, where you staff according to sales levels and customer counts, thereby eliminating excess costs. To achieve the right balance, track your sales and customer counts on an hourly basis and staff according to demand. If sales are down, reduce staff loads accordingly to maintain labour costs at a desired level.
Finally, reduce regular staff requirements by modifying the menu to include items where product preparation is reduced. Do this by offering menu items such as roast beef, baked ham, lasagna or other batch-type items that can be served in simple styles and not cooked to order. This reduces time spent in preparation, reducing labour costs.
3) High-Profit Sales
Interestingly, during challenging times, operators push for the up-sell or try to get customers to buy more and bigger portions. This causes the sales to increase, the average check to inch higher and servers’ tips to increase. On the surface, it sounds great, but it’s not necessarily great for the operator. Some consultants suggest better merchandising, but the fact is guests don’t want to overspend in these tough economic times.
It’s important to avoid focusing on profit percentages and focus on what’s going into your pocket; you can’t bank percentages, only dollars. If you only had one customer, would you prefer to sell the $45 steak and make a 50 per cent ($22.50) cost and $22.50 profit, or sell the $35 steak with a 25 per cent ($8.75) cost or $26.25 profit? The server wants to sell the $45 steak, and the manager’s bonus may be based on the higher check average and increased sales, but as the owner you can make more on the lower priced item. We always recommend selling the higher profit items. Given the economy, maybe it’s time to review your menu and the dollar contributions each item provides, rather than trying to survive earning percentages.
Other items that you should carefully look at are wine costs, entrée costs, side dish costs and dessert costs. Sell the most profitable items, not the highest-priced ones. Your customers may appreciate you selling lower cost items regardless of whether or not you make the most profit on them.
4) Utility Management
With the world going green, utilities can manage themselves and ultimately reduce costs. Find a utility management consulting firm to assess your operations and determine where costs can be reduced. Basics include such initiatives as moving from electric heat and cooking elements to gas-driven equipment. Additionally, items such as lighting, automatic water for washroom sinks, automatic flush systems, low and dual flush toilets and even motion sensitive lighting can reduce costs significantly. Other cost-saving opportunities include: turning down the heat and air-conditioning when the restaurant is not in use, reducing the utility expenditure in empty rooms and covering windows with coatings to keep heat and air conditioning in and natural elements out.
At a recent conference, where Leadership in Energy and Environmental Design (LEED) requirements were discussed, it was interesting to discover that putting sides on hood systems can reduce air exchange consumption by almost 35 per cent. Automated exhaust hoods turn up when there is heavy use in the kitchen and down when there is little or no use. New fluorescent bulbs can reduce lighting consumption by 20 per cent or more, while ceiling fans can assist in circulating heat and cooling more effectively. Burners do not have to be the first thing turned on in the morning and the last off at night. All these tips could reduce your utilities by 25 per cent or more.
5) Kitchen & Restaurant Design
In one restaurant we worked with, the operator purchased an existing restaurant but didn’t see the value in modifying the kitchen layout. As such, he inherited a dishwasher area in one corner of the kitchen and a pot-washing area in the diagonally opposite corner. Though we recommended moving the pot washer next to the dishwasher space at the time of construction, the owner didn’t see the benefit of the $25,000 expense. Five years later, the owner is paying for a pot washer at a rate of $15,000 or more per year — a job that could have been eliminated.
In another restaurant, the operator chose against installing a fourth POS terminal even though it would have saved the restaurant approximately $2,500. Today, as a result, the server must walk from the tables in the front of the dining room to the back, wasting travel time, abandoning sections for long periods of time, sacrificing service and forcing an extra bus-boy to assist the customer. Had a server station been placed near the seating area, the owner could have reduced his staff requirements by one, while increasing service.
6) Marketing Expenses
While we usually struggle to encourage clients to spend the three to five per cent they should on advertising, we have run into some situations where operators spend between six to 10 per cent on advertising, which can also be a mistake. Yes, a restaurateur should spend a sufficient amount of money on advertising; but it shouldn’t be overdone. If the advertising budget is more than five per cent, take a careful look at what it generates for the business and make adjustments, focusing more directly and controlling high costs. In today’s market almost everyone has a website but only a few provide detailed marketing through direct contact with their customers — an excellent approach. Many of my clients, including the Drake Hotel, Sawmill Restaurant Group and Crush made excellent use of email marketing initiatives. Look them up on Google, sign up for the email updates, take notes and follow their lead.
7) Breakage, Theft & Tableware Waste
To reduce costs, reduce breakage, theft and tableware waste. Restaurants are notorious for breakage but with little effort, much of it can be reduced. For example, separate bus bins for plates and cutlery with a second one for glassware. The glassware bin should be partitioned for each glass to reduce glass breakage.
Purchase metal catchers for the tops of garbage bins to catch knives and forks that may drop in or be accidentally discarded. You can even buy a metal detector to examine the garbage on the way out the door. The savings are huge — just look at your last smallwares order.
Also, try not to over-use linens. Cloth napkins should not be used to clean up a mess, and are not a substitute for a kitchen towel. They are for customer usage only, not staff use. These days, many restaurants are re-imaging themselves into more casual dining spots. This creates less demand for tablecloths and makes the restaurant seem a little less formal.
8) Inventory Control
Maintaining a strong inventory control system is important and shouldn’t be ignored. Do weekly and monthly inventory on all products within your restaurant and keep variance reports on all expensive items, such as steaks and seafood. In many restaurants there are usage standards even for items such as butter. Depending on sales, your usage of a particular product will fluctuate as a percentage of sales.
As a general rule, keep inventory low to ensure you don’t tie money up in stock. Plus, when there’s less inventory on hand, it’s easier to spot missing items. Stock rotation should be such that you turn over your food inventory entirely every six to eight days or 52 times per year; beverage inventory should turn every 14 days, or 26 times per year.
9) Purchasing Controls
Purchasing controls are also paramount in maximizing profits. An operator needs to develop a system of checks and balances when making purchases. Operators can find competitive prices and services on most products except for liquor, wine and beer. Once every few months, comparison shop to see which supplier has the best price. Be sure that your suppliers aren’t increasing prices slowly over a period of time. Given the current market, value shopping can save significant costs if you get the quality you need.
Don’t forget to create a standard purchase specification for each item you use, which includes the grade, quantity, quality and other features you need. Offer those specifications to three or four suppliers in each category and ask for their prices; you will quickly find reductions and discounts. Drop the poorest offer next time you go to tender on the prices and find a new potential supplier, thus, keeping the field open. We recommend you go to tender every three months to keep suppliers aware of your business and their need to support your business with the best pricing options.
10) Wine By the Glass
In most restaurants you can earn more profit per ounce sold by the glass rather than by the bottle. Customers will actually pay a premium for a glass of good wine than for a bottle of the same wine. At the same time, the customer does not have to commit to full bottle with their meal, reducing their overall beverage cost
While this article does not focus on increasing sales, only profits, it may make more sense financially to sell two glasses of wine per customer versus one bottle of wine for two customers. This way, you are offering increased service, allowing your customer an opportunity to learn about and try more wines. You make more profit, since the selling price per ounce is usually higher when you sell by the glass rather than the bottle. You can also match wines to each course and tailor each person’s wine to his or her meal.
With the hospitality industry suffering through one of its most challenging times, there is more need then ever to provide value. We recommend providing a sense of value while increasing and maximizing profits. It’s the most effective way to ensure you remain in business until the good times start rolling again.
Doug Fisher is president of Toronto-based FHG International Inc., a leading North American restaurant, foodservice and franchise management consulting firm. FHG specializes in business and strategic planning, operations management, franchise development and litigation support among other disciplines. You can reach Doug at (416) 489-6996 or email@example.com or here.