Restaurant Profitability: 101
If there was one key area of our industry that contributes more to its collective failure and poor profitability it is this; the fundamental misunderstanding of our key operational control numbers; essentially COGs and Labour.
Despite our terrible performance as an industry; 92%+ operations making 2.5% profit, 50% of operations not surviving to see 4 candles on their birthday cakes our great industry is irrationally devoted to very narrowly defined COGs and Labour targets.
In FY16 40% of Restaurants did not make money!!
We continue to do what we have always done, yet strangely hope to achieve a different result!
So let’s change, change the way we view these numbers and understand how to manage them to your operations greatest success.
Firstly, let’s be clear; these numbers are critical to your success.
You cannot achieve your true potential without them.
BUT, they must be your numbers; you can’t use those that belong to anyone else.
These critical control numbers are inward focusing; they reflect your own unique operation, with your own unique expense distribution. You cannot use the standard rule of thirds!
Let’s look at these 2 critical numbers, and their fellows, in a little more detail.
We have 4 components that make up our collective operations;
Expenses - made up of fixed and variable costs. Fixed costs are well fixed (rent for example), and variable costs in general increase and decrease in relation to revenue (the more food you cook and sell, the higher your kitchen gas bill for example). Every cost to the business that does not relate to Labour or COGs lives here.
COGs - a familiar thing to all, it is made up collectively of wastage, free bees, staff meals etc and the cost of goods sold ( the price you purchased that steak for that you sold for $35). It is the total cost of the food that is used, divided by the revenue collected due to its sale.
Labour - both fixed and variable (full-time with guaranteed hours, and casual without) and includes all add-on costs such as workers compensation fees, annual leave, super entitlements etc.
Profit - the bit that is left (all too often it has a minus sign before it)
On the other side of the equation, we have Sales.
Of these, we have 2 key operational controls; labour and COGs.
These are 2 of the 3 things we have control over that influence our daily operations. The 3rd is Price.
Expenses + COGs + Labour +/- profit = Sales
Now we as an industry are largely a slave to a very narrow and prescriptive range of 'KPI' targets.
Expenses (30%) + COGs (30%) + Labour (30%) + profit (10%) = Sales.
For anyone in business, the Profit = 10% is a bit of a laugh (the industry averages around 3% and lower).
Yep, you could make more money by putting your money in the bank and accruing interest than owning a restaurant.
The best way to explain this is to think of your total revenue as, say the number 100. The industry has us believe that the only way to arrive at 100 is by 30+30+30+10.
Which of course is crazy; we can arrive at 100 with 40+15+15+30, or 30+50+10+10, or any number of possibilities.
We have only one collective limitation, or what we call, 1 degree of freedom. 3 of these for numbers can equal almost anything, but that fourth number must make up the difference to equal 100.
It means you have to understand your operation, and then lay a plan for how to make money, as the collective industry average may say a convenient 30+30+30+10, but it is no reflection of your own operation.
And not only do individual operations vary but so do different segments.
A cafe or QSR can have counter service (reduces labour costs by pushing the labour onto the customer), lower prices (higher frequency of sales), high table turnover and menu based upon throughput.
You can buy in food pre-made (higher COGs, lower labour), or add value to it through labour ( lower COGs).
The Key is to start by understanding the nature of your expenses, and then the operational design and the segment through which you will leverage your expenses. You then design your controls.
Rent in AUS is CRAZY high. This means that you need to adapt your operation to suit. And the higher that expense bit, you must adjust your labour and COGs models to suit, or the only place the difference is made up is out of your profit!
Your positioning may be Italian food, with lower costs of goods, and BYO with lower labour and inventory costs for example.
You may be a Quick service style where you have higher COGs, but low labour costs, and low prices that promote high turnover. You may have guests order at the counter, reducing your labour costs.
Your menu and service, and indeed your very floor plan and layout and kitchen design can be designed for minimising your fixed costs and linking those costs to revenue.
What that means is that on slower days you simply don't need much staff to operate, and as you get busy, you add labour, which is, of course, paid for by increased revenue.
Australian operations are very inefficient from a productivity perspective - output in relation to input. We are simply not big enough in the scale of our operations, and our intra-week fluctuations are extreme.
In my experience, 45-50% of revenues come from 2 days trade; Friday and Saturday. That's great.
But what are your fixed operating costs (this includes baseline daily labour) on the quiet days? Routinely operators run 50%+ labour cost days on the Monday to Wednesday trading.
This is insane. You have lost money each and every week running up to the weekend in the hope that you will break-even and get ahead over the weekend. And if one of those key revenue days tanks??
We as operators have complete control over our operations. Smart, and contemporary thinking can revolutionise your operation, and your bank account. So think, and look with fresh eyes, and never be a slave to the out dated 'conventional' thought you have barked at you every day.
