Ask the Expert: Making Money in a Growth Economy

Ask the Expert: Making Money in a Growth Economy https://wahospitality.org/wp-content/uploads/2018/10/RickBraashutterstock_425146195.jpg

By Rick Braa, CHAE

 

Part one of a two-part series.

 

Q: With all the changes in the industry, especially with greater competition, wage growth and labor shortages, what are the characteristics of businesses that are making money?

A: This is a layered question worth a mini-series of articles. The restaurant industry is both art and science, yet some of the best restaurants and companies in the industry struggle to turn a healthy profit. Many of these companies launched before the current period of explosive growth started five years ago.

In an article last fall, The New York Times reported that “Since the early 2000s, banks, private equity firms and other financial institutions have poured billions into the restaurant industry as they sought out more tangible enterprises than the dot-com start-ups that were going belly-up…the number of restaurants is growing at about twice the rate of the population.”

Unit growth has been accelerating with the red-hot economy and has hit a saturation point in many markets. With so many choices for the consumer, the companies that will be standing long-term are those manically focused on execution of best practices and strategic decision making. The most profitable models meet or exceed the following:

High sales per square foot. If sales per square foot is below $500/sqft, making money will be difficult. To calculate, annualize sales and divide by the square footage of the restaurant. If a restaurant is running at $3,000,000 in sales per year out of a 3,000 sqft location, the sales per sqft is $1,000. Ratios at this level are terrific throughout the P&L. A target range for growth and high profitability is $800-1,000/sqft. Be open to building sales through off-site catering, special events, third-party delivery, subletting space and frequently programming the restaurant.

Beverage sales 30 percent or better. Guests go to restaurants to eat and to bars to drink. Beverage sales are the opportunity to drive incremental sales for restaurants. For casual dining restaurants, be quick to the table and sell the first drink immediately. Have the second drink on the table by the time the entrée hits. Build a solid beverage program and selling is easy, accept only perfection in this area by service staff, and track performance by servers and bartenders. Involve everyone in the restaurant to ensure beverage sales are flowing quickly and often.

Prime cost below 60 percent. With hiring pressure, wages have gone up. Nevertheless, the goal must be to keep total product and labor under 60 percent. There is simply not enough room below prime cost on the P&L to hit a healthy bottom line much above 60 percent. This is where discipline and strategic decision making come in. Engineer the menu to be simple to execute to minimize labor, interesting enough to drive repeat traffic and margin optimized for cost and profit. Treat prime cost as one unit rather than two. Measure the effect of gross margin on labor and vice versa.

Optimized business hours. For prime cost to be less than 60 percent, every hour must count. Staffing too early or too late often leads to uneven labor dollar spend when correlated to sales. The best solution is to be skinny on the shoulders of a rush and fat in the middle. Build sales when the guest is in the restaurant, and match staffing levels to 15 minutes. Using the same staff during slower and busier times results in either overspend or underservice. Protect the business first: If a meal period or day doesn’t work, close it.

Running a restaurant takes intense focus and strict discipline. It’s a fun, but serious business. Focus on the goals above and you will see profits reach new heights and lives improve.

 

For a more information on improving profitability and driving sales, contact AMP Services at rbraa@ampservices.com. Rick Braa is the co-founder of AMP Services, an accounting and consulting firm specializing in helping companies grow profitability.

 

Part two in our series on making money in a growing economy will be in our October issue.

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