Earlier in 2019, at the Restaurant Leadership Conference, industry leaders discussed the all-important fat bottom line. Instead of focusing on growing revenue, however, this discussion revealed important cost-cutting techniques designed to maximize savings and increase profits.
Let’s take a look at what these
leaders consider the biggest impact on overall profit.
Jason Morgan, the CEO of two
emerging fast casual concepts–Original
Chop Shop and Bellagreen—sees high rent as one of the biggest
challenges that restaurants are currently facing. He believes that this is due,
in large part, to the flood of money that hit the industry from the private
equity sector over the last five years.
While some entrepreneurs and
mega-corporations are willing to pay the price, others understand that, at a
certain point, the risk is greater than the reward. Jason is one of those—a CEO
who is willing to wait for second generation sites.
Which leads us to the solution
for this pain point that many restaurants are facing—patience. Companies are
waiting it out, allowing others to sign bad deals that will ultimately lead to
second generation space.
Third-Party Delivery Fees
Like many in the restaurant
industry, Jason sees third-party delivery fees as unsustainable. In his
business, he’s seen these costs go from 100 to 300 base points over the last
two years. The problem is that restaurants are feeling pressured into providing
this service due to consumer demand, but, considering the rising fees, delivery
using third-party services does little to fatten up the bottom line.
One solution is dispatch
operations such as Olo. Using
these dispatch companies, Jason shifted customers from third-party sites to the
restaurant’s site, paying 10 percent per order instead of the commonly charged
fee of 30 percent from third-party services. Customers simply order and pay on
a restaurant’s existing digital ordering site, and the best-matched quote from
an available delivery service provider pops up and is scheduled.
Jason Tipp, an entrepreneur in
the Food Service industry and past CEO of Florida-based Pincho, a Latin American street food
concept with 12 units, explained that the founders of this successful chain
were not from the restaurant industry. Because of this, numbers such as prime
costs and food cost were not prominent in their considerations. Once he came
onboard, he stressed the importance of these numbers and developed stronger
operations in order to reduce these costs.
One simple approach they took
was enabling the general managers to really see the operations from the bones
up in order to determine how to create a more efficient operation. They
examined how long it took to do prep in the morning, how long it took to close
a restaurant after the last guess was served, and how many employees were
needed for these activities. From there, they were able to develop clear,
cost-saving guidelines for their units.
Their other goal was to get
their food costs in order—adding up the food they sell, the food they buy, and
determining the percentage in sales, which required costing out all of the
recipes. As Jason states, “You can’t ask a general manager to hit 28% food
costs if the reality is based on input costs in your recipes that is 35%.”
Eric Sheen, CEO of Restaurant Partners
Procurement, also see’s food cost as an operational issue.
He puts it in terms of the 80/20 rule. In other words, only 20 percent is your
actual cost while 80 percent is all operation controls. Therefore, it there is
a food cost issue, the problem often lies in the operation, not the
One of their solutions is
switching recipe measurements from ounces to grams, which is a more precise
method. He also recommends investing in digital scales. Another area in
operations that accounts for an increase in costs is pricing differentiation
between the menu and the POS system. An example he uses to describe the impact
that occurs when you don’t correlate the two is this: Iced tea was increased by
20 cents which was addressed on the menu, but not in the POS. Say you sell
50,000 iced teas—that’s $10,000 missing from the bottom line.
Another common error is not
getting all the items, such as drinks, on the bill. To combat this, some POS
systems won’t let your servers send an order to the kitchen before drinks are
run up on the check. If the guests are only drinking water, you can put it in
at zero charge.
There are a thousand tiny
details that go into ensuring the highest profit margin. Another example Eric
shared comes from an organization that sells 10 million pounds of chicken wings
a year. They pulled out a couple of cases and found that the case count was at
about 200, but their spec was for a 240-wing count. The wings had gotten bigger
over the years, but the establishment sold by wing, not weight. They estimated
that, over the last four years, they had lost about 1.4 to 1.8 million dollars
Vince Purves, President of Consolidated Concepts, the
largest Group Purchasing Organization (GPO) for multi-unit operators in the
U.S., is very familiar with distribution contract negotiation. He notes that
it’s easy to negotiate your contract and then ignore it until it’s ready to
expire some three years later. It is better, however, to remain engaged with
your distributors throughout the year.
In actuality, the supply chain
is affecting your cost of goods from multiple avenues including the shortage of
drivers in the trucking industry to the price of fuel and insurance. There is
much more to rising costs than just the cost of the product itself.
The question becomes: How do
you hold distributors accountable to contract prices?
Vince finds that auditability
is a key component. “Really make sure what you have from a contract standpoint,
whether it’s your distribution or it’s your manufacturer cost contract, is
truly and accurately in the system.” Don’t assume that distribution prices are
correct. As with most data, it takes a person to key it in, and people are
human and prone to mistakes. That’s one of the roles we assume at Consolidated
Concepts, making sure our client’s systems are right, their prices are correct,
and holding them accountable.”
With increasing costs
in real estate, products, and labor, it’s clear that restaurants looking to
increase their profit margins must maintain tight operational guidelines and
develop key relationships in the distribution sector. Consolidated Concepts can
help reduce both food and distribution costs—keys to a fat bottom line.
Another avenue that restaurants are turning to is working with third-party consultants that help them develop a supply chain that can stay ahead of weather-related opportunities and challenges. Consolidated Concepts specializes in streamlining the supply chain for multiunit brands through the use of technology, partnerships, and procurement specialists.
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