For the vast majority of business owners profit is the ultimate measure of success; sales less your costs, and you have some left over.
But for 40% of food business in FY16, this was not achieved. Either no profit at all, or a loss was recorded.
The hospitality industry is important; with over of 40,000 Cafes and Restaurants in Australia, and over 500,000 people employed, and the significant part food plays in our Australian lifestyle (we now spend more on restaurant food per household than the Americans), it is critical that food businesses are successful.
In 1998, the average Profit for Restaurants and Cafes was over 4%. According to the Restaurant and Catering Australia, it is now closer to 1%.
So how do we turn this declining Industry performance around? How do we ensure that food continues to play an important role in our lives?
For owners and operators, it starts with change. Change in the very way in which we perceive our operations, and how we achieve sustained success.
Change in our the fundamental understanding of the key operational control numbers; Cost Of Goods Sold (COGs) and Labour.
If there was one key area of our industry that contributes more to its collective failure and poor profitability it is this.
Despite our declining performance as an industry; most operations will not survive to see 4 candles on their birthday cakes, our great industry continues to be irrationally devoted to very narrowly defined COGs and Labour targets. Numbers that are the same across businesses that range from 2-100 staff, from $50,000 to $1 Million in Turnover, that range from cafes to catering companies, from pubs to fast food, from fine dining to QSR.
Do one set of operational numbers can possibly suit such a range of circumstances.
So let’s change the way we view these numbers and understand how to manage them differently.
Firstly, let’s be clear; these numbers are critical to success.
You cannot achieve a businesses true potential without them.
BUT, they must be your numbers; you can’t use those that belong to anyone else. They can’t be the average of the whole 42,000 businesses in the industry. They must be based upon each unique business alone.
These critical control numbers must be inward focusing; they reflect each unique operation, with each unique expense distribution.
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;
1. 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.
2. Cost Of Goods Sold – a familiar thing to all, it is made up collectively of wastage, freebies, 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, of that cost divided by the revenue collected due to its sale (as a percentage). It can further be separated into Food Cost, and Beverage Cost.
3. 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.
4. 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.
The original was COGs (30%) + Labour (30%) + Expenses (10%) + Profit (30%) = Sales.
But now that Expenses average just under 30% of costs, it seems to have been revised to;
Expenses (30%) + COGs (30%) + Labour (30%) + profit (10%) = Sales.
This set of operational ‘targets’ is no longer applicable to Contemporary Australian Food Businesses.
Lets delve a little more deeply;
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.
So what does this mean?
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.
A Cafe, Fast Food or Quick Service Restaurant may have counter service (reduces labour costs by pushing the labour onto the customer), lower prices (higher frequency of sales, higher COGs), high table turnover and menu based upon throughput (fast production, and/or pre-made items.
Pre-made food, where you pay for someone else’s labour and not your own means higher COGs, or add value to ingredients through labour ( lower COGs, but higher labour).
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 Australia quite high (quite outside of Capital Cities, very in them). This means that you need to adapt each operation to suit. The higher expense bit is, the more adjustment required for labour and COGs models to suit, or the only place the difference is made up is from profit!
The positioning may be Italian food, with lower Costs of Goods, and BYO with lower labour and lower inventory costs for example.
It may be a Quick Service Restaurant with have higher COGs, but low labour costs, and low prices that promote high sales turnover. Guests order at the counter, reducing labour costs, but lowering average spend.
It may be Fine Dining, which means expensive Fit-outs, slower table turn-over, lower COGs, and higher labour (in the kitchen), offset by higher average spend per customer.
It may be more biased towards Fast Food, which has a more consistent weekly revenue than restaurants and QSR, where 45% of revenue occurs in just two days (Friday and Saturday)
The menu and service, and indeed the floor plan and layout and kitchen design can be designed for minimizing fixed costs and linking those costs to revenue.
What that means is that on slower days fewer staff are needed to operate, and as revenue increases, labour is added, which is, of course, paid for by increased revenue.
Australian operations are typically very inefficient from a productivity perspective (output in relation to input), when compared to the USA. We are simply not big enough in the scale of our operations, and our weekly fluctuations in revenue are extreme.
But what are the 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 quite insane when you think about it; losing money each and every week running up to the weekend in the hope that the business will break-even and get ahead over the weekend.
And if one of those key revenue days tanks?? It rains? Footy finals? Some local event competes with you? Competitor opens causing a stir?
We as operators have complete control over our operations. Smart, and contemporary thinking can revolutionize each and every operation, and be reflected in the bank account.
So think, and look with fresh eyes, define your own unique means of achieving sustained profitability and never be a slave to the out dated ‘conventional’ wisdom you have barked at you every day, and that has fundamentally eroded our Industries profitability.