By Rick Braa, CHAE
Q: I’ve heard plenty of restaurateurs complaining about poor sales and margin compression. While I empathize with them, and our business is performing well and I’m planning on expanding, what are the key areas of focus we need to either continue or strive to meet?
A: The restaurant business is continually changing. What worked 10 years ago may or may not work today. A business that loses focus on financial discipline, developing its people, growing its guest base and dominating its market position will slowly deteriorate. Below are some of the areas of focus to continue to grow unit or profit growth:
[expander_maker id=”1″ more=”Read more” less=”Read less”]
Target sales to investment ratio of 3:1 or more. Whatever the cost to build a location, sales need to be triple to quadruple per year. Be cautious if a landlord offers high tenant improvements and be leery of new construction sites. Unless the brand is highly desirable, high TI’s indicate a risky location that a landlord may be having trouble filling with quality tenants. History shows a high failure rate by following high landlord TI’s. Keep ego in check. Usually by the fourth location a founder tends to believe the brand deserves more. Attention has been paid to the brand, perhaps even some awards, so ego kicks in and build-out costs escalate. Keep true to the brand that brought success; don’t be swayed by a shinier version of what built the brand in the first place. When sales don’t meet the sales to investment ratio, growth is slowed by years or stalled out altogether.
Drive sales per square foot to $1,000 per square foot or above. High sales per square foot leads to lower overall percentage of costs to the restaurant from increased productivity, higher inventory turnover reducing waste, more optimal staffing levels, and a better overall feel to the restaurant. Guests love a busy restaurant, they feel like a winner having chosen the right spot to dine and they’ll refer their friends. High sales per square foot will return higher profit if managed correctly.
New Locations deliver 40 percent cash on cash return. If a restaurant costs $1 million to build out, the cash return needs to be $400,000 or more per year. If this ratio is met, investors receive returns, banks have debt easily covered, risk is minimized and growth accelerates.
Keep infrastructure light. Focus all infrastructure on operations. Add operations bench strength to further development of employees. Concentrate on the best players and develop a system to replicate and retain them. The business will be able to expand as planned rather than fighting staffing constraints that limit growth. Outsource everything until you must have it in-house. Many companies have stalled growth by adding fixed salaries, but then having a location or two fall short of expectations. Marketing, accounting and IT are prime examples to keep outsourced.
Be diligent about great culture. One of the most important factors in growing a company is a great culture. A vibrant culture has a clearly articulated purpose that everyone buys into and values that are verbs in action. Strong culture attracts A players and provides a venue where performance is rewarded and soars.
Know critical data about guests. Install a guest tracking system that can report how many guests are repeat, new or infrequent diners. This information can come through a table management system, which may or may not have a reservation system embedded, a loyalty system or a POS system. Information from credit card companies may also be purchased. Ensure the distance from the restaurant guests live and zip code is known. Information can be cross tabulated, and marketing and promotions can be targeted to guests most likely to respond. An active social media feed will also be helpful in knowing your guests and their desires. There are several other benefits of knowing your guests. Measuring and increasing frequency exponentially improves efficiency, marketing expenditures, sales and profit. Having plenty of information about your guests will aid in selecting future sites.
Growing a company is a both art and science. A blend of great culture and scientific metrics results in thriving employees, guests, investors and owners.
For a more information on improving profitability and driving sales, contact AMP Services at . Rick Braa is the founder of AMP Services, an accounting and consulting firm specializing in helping companies grow profitability.
Note: This article was originally published in Washington Business Magazine’s February 2019 issue.