FOOD RETAILERS, BEWARE. BIG SALES DON’T ALWAYS MEAN BIG MONEY
Modern-day entrepreneurs who venture into the food retailing business, be it a restaurant, food boutique, coffee shop, fast-food location or even a small kiosk, usually possess highly desirable traits and skills. Generally, they are capable individuals, optimistic and creative, highly motivated and not afraid of working hard for long hours to reach their goals.
The business person with these attributes stands a pretty good chance of making a go in the food preparation and serving trade. But do big sales in this industry mean that the business will be successful? According to experts, not necessarily.
Often, owners of food retail operations open their businesses before they have analyzed or even questioned how the venture will sustain itself. It is only when they begin to notice that things are not going as planned, and unpaid bills begin piling up at the end of each month, that they step back and try to figure out what is going right, and what isn’t.
To consider only the gross income and ignore the net revenue generated by a dining operation has led to a high mortality rate among efforts today. Like a patient needs assistance from a physician to diagnose an illness and prescribe a cure, restaurants from time to time also need special “doctors” to salve their operational ailments.
These foodie physicians often arrived in the form of an experienced consultant or “coach,” whose sole purpose is locate the financial leaks and plug them before it’s too late and the operation goes under.
The coach hired to bring some “rah-rah” to a faltering dining spot, or even to one that’s just not doing very well, should already know by heart the four pillars supporting a successful food industry operation:
- Balancing the cost of goods with prices charged to patrons to guarantee a profit for the business.
- Meeting (or exceeding) a customer’s expectation for service and pricing food items in such a way as to match the patron’s purchasing power. A customer should be highly satisfied with both.
- Weighing the cost of labor, not only against fixed costs, but in light of the need for personnel during the hours the dining location is open.
- Guarding the financial success and satisfaction of business partners and/or investors.
It’s easy to find examples of food retailer spots where the owner and investors have carefully chosen a highly desirable location and have been serving quality products, but without pricing them properly. The fear of selling at a “higher” price and possibly scaring customers away ends up throwing off the fine balance of income versus expenditures. Business failure is almost inevitable.
The appropriate scenario is to create a situation that does not necessarily reflect what the owner wants, but rather what the customer wants, that is, quality and tasty food served at a price they can afford. The menu (product mix and prices) is the place where the balance of the four basic pillars of success can be determined. It is the place where operational costs, customer satisfaction, the impact of labor costs and investors’ rate of return can all be reflected and pondered.
It is extremely important that the person acting as the food and beverage manager understand and control the cost of purchasing goods and assist in the preparation of menus and the prices for various items shown on the bill of fare. The cost of labor is also a major contributor to the overall financial picture and the monetary health of that particular dining operation.
The food and beverage manager will have to balance such items as the costs of goods bought and sold, payroll, rent and other accounts, which may vary according to the restaurant’s specialization and location. To this end, it is crucial that he or she have the capacity to adjust these numbers to help him or her make decisions that more accurately reflect what is happening at that specific dining site.
Charles Telles, the food and beverage businesses consultant for Restaurant Pros, a specialized company based in Boca Raton, Florida, suggests leaving pride and predilection aside and working with the real monetary indicators. “When the managers can record the actual total cost of each dish — whether that item sells a lot or not – they can see the true return on the investment that has been made in the operation. This information is valuable when putting together a lucrative promotion, offering products with higher margins and taking off menu items that do not generate income.”
“Knowing how to record, through numbers, the costs of the products that your customers most desire, food sales trends and real profitability is the way to make money in this business,” Telles adds. “That is why consultants are increasingly providing services to calculate the real business costs, such as menu development with appropriate pricing, financial and tax advice, methods standardization, equipment replacement and usage training, among many other things. To count on consultant with specialized knowledge of successful food retail operations is crucial not only for those who already have their businesses in the industry, but mostly, those intent on joining it.”
According to economist and business manager, Carlo Barbieri, president of Boca Raton-based Oxford Group, a consulting firm that has been operating for 25 years in the U.S., the need to specialize in proper restaurant operation has been building up naturally, due to the demand from area residents who enjoy eating out, whether at a dress-up luxury locale or a small, neighborhood pub.
“There is a great need in the market for specialized personnel to assist restaurants,” Barbieri says. “This necessity, alongside the misinformation investors have been told about their businesses, ends up causing the premature death of an incredible number of food retail ideas,” he states.
“We have extensive experience in advising both new and traditional restaurants, and unfortunately, we have witnessed the opening and closing of several high-potential operations. This is often the result of a lack of knowledge of cost estimates, investment in businesses without expert advice or training and, worse yet, taking cost-reduction actions where they may not be necessary, thus hurting the operation in the long run.”
“We know it’s hard to start a corporate culture change, especially in food retailing businesses where the owners and operators take great pride in their menus and the products they serve,” he says. “But this financial and cultural adaptation is critical to the success of a food retail business.”
Furthermore, says Barbieri, “One should not evaluate any entity, especially one in the food retail industry, based solely on revenues and profitability. Companies that have high profits should continue to offer certain products on their menu, even with solid and above average sales. Technical knowledge of the food industry is a critical factor for survival. Managers who do not have access to these numbers are unequivocally doomed to work hard, in the usual hectic pace of food operations, and yet risk reaching the end of the month with their cash registers empty.”
Although restaurant owners consistently display positive characteristics, it’s no secret that many new dining businesses find themselves faced with moderate and even severe challenges in turning their restaurants into successful businesses. There’s a lot of truth in the statement: “Opening a restaurant is the easy part. The real challenge is making money at it.”