Nov 4, 2007

7 Food Service Challenges

I've got several friends who run restaurants, and frequently entrepreneurs launching a restaurant ask my company for help with designing their logo, business cards, writing a business plan, training salespeople and, especially, raising money. Food service establishments are not the easiest to fund, because of several factors. Yet, if you can show me a business with more passionate owners, I'd like to see them!

Why is this? I'd say it is because we love to eat, and as much as we love to eat, many people love to cook good food. I even have my own dream to have a restaurant some day in the future. Why? I love food, I enjoy entertaining, and I love the dining experience - when it is done right.

Most GOOD restaurants are owned by people who love people and/or love food. Usually, both.

But, today, even the good small restaurants are running into challenges. What's going on?

I decided to take a closer look at the food service industry and open the kimono and share what I've discovered for those in other industries to gain insights from the food service industry. And, as you'll see, much of it isn't pretty. Is it all bad? No, of course not. Between 1970 and 2000, the food-service industry reported a compound annual growth rate of 7.5%, which outpaces most other businesses in America. But those statistics do not show the recent changes in business facing restaurant owners -- especially small restaurant owners -- over the past FIVE years.

I do want to illuminate the challenges facing food service operators, though, and review them here (please let me know if I've missed any):

1. Raising money. Food-service industry struggles to obtain funding. Restaurants are on a "grey" list for most banks to loan money. Why? Because restaurant owners frequently default on their loans, simple as that. According to the US Small Business Administration, 27% of restaurants fail in their first year, alone. Statistics like are a bit staggering. So, before you even get started trying to get money, the ghosts of Christmas' past, even those you weren't a part of, offer somewhat less access to money.

2. Locations. Restaurants are often slave to their location. How many times have you heard the key to a restaurant's success is "location, location, location"? I'll add to it "an excellent ambiance, lively experience, excellent food, at reasonable prices, along with great service" as also dictating success. Pick a great location, the business can thrive. Pick a poor location, God only knows how successful you'll be. High traffic, access to parking, proximity to crops and food supply, visibility, and more all determine how successful a given location will be at drawing and holding a clientele. From what I've studied, even factors like Feng Shui may influence the success of restaurant location. Besides retail, show me a business more dependent upon the RIGHT location -- I'm not sure there is a business more dependent upon location than the restaurant industry.

3. Rising costs. Prices are soaring on food products. According to Ken Burgin, the costs of dairy have SOARED in the past year: "Some dairy prices have increased 50%, soy bean and corn prices have jumped, and let's not start on seafood, beef and green vegetables. Why? Asia's rising affluence and demand, increasing use of ethanol in fuel (often made from grain products), and drought in many parts of the world. But the reasons don't help reduce the squeeze on your margins." Agreed.

If prices go up 50% and your menu only goes up 25%, guess what? You just might be upside down. According to Douglas R. Brown in The Restaurant Manager's Handbook, most restaurants must maintain a food cost between 25% to 40% in order to achieve profitability.

For example, if you sold $100,000 in food for one month, and your food cost was $40,000, then your food cost was 40% of your total revenue. Using a recipe and procedure manual, you can determine the cost of each portion or serving of food that your restaurant offers.

If you are to determine what to charge for food, according to Brown, you use this formula:

Portion Cost (Food Cost)/Menu Prices*100= 25% - 40%

If the portion costs have risen by 50% to 80% and you don't raise menu prices accordingly, then you'll lose the percentage on the right side of this formula that ensure your profitability. You might be thinking, "So, I'll just raise my prices, then." Well, with the jump in food cost happening so quickly, the consumer may boycott the restaurant that raises prices so dramatically in such a short time. In that event, the restaurant who maintains proper price adjustment MAY actually be penalized by perceived high cost of their menu.

4. Compliance issues. Compliance issues with handicap access and other compliance codes are costing restaurants, big-time. On the Central Coast, where I live, one gentleman (if you could call him that) went around suing EVERY RESTAURANT he entered, on the basis of handicap access discrimination. The result? Some restaurants closed their doors, others underwent very expensive retrofitting for their elevator and wheel-chair ramps to be compliant with the law. It's a costly endeavor, from what I've seen, often impacting the restaurant by thousands of dollars. Many restaurant owners don't have access to that type of working capital and a small restaurant, especially, will be hit hard by such a lawsuit. Additional costs in benefits with health care and sick leave benefits have also impacted the industry.

5. Labor cost. After initial studies on hiking the minimum wage stating that it would not affect the restaurant industry, nothing could be further from the truth. A recent NRA survey indicates that the hike of minimum wage indeed caused operators to raise their prices, as well.

The cost of wages has increased 35% to minimum wage and wages, in general, need to be higher than that if you are to attract and keep good health. Minimum wages alone have grown from $5.75 to $7.50 during just the past 5 years. That's a 158% jump in wage cost, per hour, per employee, that is very real money to most small restaurant owners. In a recent study by Aaronson and Eric French examined government-collected price data. In a series of studies over the last four years, Aaronson and French show that a 10 percent hike in the minimum wage increased restaurant prices on the whole by 0.7 percent, and prices at limited service (fast food) establishments by 1.6 percent. Does this labor cost reflect the whole of damage to the restaurant industry? At the least, we see higher prices, but do prices need to increase MORE than the .7 percent as a result of labor cost increases? This is the question that remains unanswered.

More than this, it is a HUGE challenge for restaurant owners to get employees to report the correct amount of money in tips to the IRS. Why does this matter? Well, in the United States, the landmark case of The United States v. Fior d'Italia, Inc, 01-463, in June of 2002, the Supreme Court ruled that the IRS can ESTIMATE the amount of cash tips based upon the amount of tips shown on credit card receipts. This ruling can impact the FICA taxes for a restaurant.

6. Impact of health reports. The cost of maintaining good health. A restaurant in Calistoga received a health report of "C" which provoked press visits, health inspections, and costs of over $1,000 for a new report. In addition, the additional preparation to raise the health report to an "A" added to thousands. Plus, we're seeing more and more food scares with products like "Mad-Cow beef," the "spinach-scare," and other health-related problems. These scares present a serious impact to food-service businesses.

7. Customer Service training costs. The cost of training employees for service. Although this cost was overlooked by most people in all of my research, it certainly is not lost to me. In San Luis Obispo County, I've noticed a significant drop-off in service from the restaurants in the San Francisco Bay Area. Why? Perhaps the standards are higher, but it just seems to me that there seems to be a small-town attitude that patrons ought to be thankful they were served at all in this county! Not good, if you ask me. It took me the better part of a year to "get used to" the poor service at various hospitality establishments. In addition, I've tended to gravitate to the establishments who I know train on service and seem to value my time. What is the cost of your service? Are your people trained on salesmanship and how to present food in a pleasurable and successful way for both guest and restaurant management? This is vital to the restaurant's success. The question I'd pose to you is "can you afford NOT to train your employees?"

What are solutions for restaurants who want to THRIVE, not merely SURVIVE?

I've put together a list of solutions for restaurants who want to go from SURVIVE to THRIVE(sales mark for ARRiiVE Business Solutions), and increase revenues and profits through intelligent responses to the challenges outlined above:

1. Cost-balance your menu. If you have high-cost items, you might suggest a sales script that pairs these items with lower-cost items to balance your overall margin. I've utilized this profit mechanism more than once in my own sales past.

2. Control Portion Costs. Make sure your estimated portion costs are matching the end-of-month portion costs. If your employees are eating all your profits, you might have to change policies. In High School, I held a job at Taco Bell. I recall a meeting one Saturday morning where the entire staff was called in for a meeting, and introduced to our new manager. The former manager had been fired. And, in that meeting, we were informed employees had been eating free and this would no longer continue. We would now be billed 50% for all of our meals. The restaurant went on to success as a result of changing their employee dining policy, which clearly had impacted their portion costs prior to this change.

3. Evaluate your supply chain. Determine if there are wasted steps or waste in food delivery throughout your supply chain. One restaurant in Calistoga was dinged on their health report from a supplier who dropped potatoes on the ground in their haste. With the cost of preparing and ordering a health report in excess of thousands for preparation and $1,000+ for the report, it is wise to eliminate anything that could cause waste.

4. Implement a Health Plan. On the subject of health reports, implement a plan that ensures health report success, and monitor it monthly. If you blow a health report it could cost you in both repair costs, a poor press review, and worse-yet: customers who read or hear about it and never return.

5. Utilize the down-sell. If someone isn't interested in a main dish, try offering them two smaller dishes and desert. The cost to the restaurant may be less, and the impact to the overall ticket minimal. Down-sells can be an effective way to keep your customers happy and offer highest profit-margin items as a contribution to your bottom line.

6. Utilize the up-sell. If your waiters give a check without suggesting a desert item, they're missing the up-sell. Most restaurants train their waiters and waitresses to ask if customers want desert. If yours doesn't, implement it immediately. However, you can go beyond desert. An excellent waiter will offer suggestions for "table-appetizers" or "starters" to build clever conversation and a more enjoyable meal. In addition, the smart waiter will maximize drink orders by suggesting fun and enjoyable beverages. Your staff ought to be trained on options for up-selling customers and presenting them in unique and entertaining ways.

7. Offer healthy-choice options. In this world of fatty foods, it still amazes me how many restaurants don't designate certain dishes as "healthy" in terms of lower cholesterol or saturated fat. I recall a restaurant in San Francisco which featured some rich Italian food ALSO offered a little heart picture by the capellini, and other lighter-fare pastas and salads. Some of these dishes can also maximize your profit margin, which, to me, makes a lot of sense.

If you're seeking additional ways to improve your sales and marketing for your restaurant, consider utilizing experts at improving sales and marketing. We take pride in helping customers improve their image, get funding, and train staff for better salesmanship. Or, if you seek to impact operational ideas to build more revenue and profit into your operation's bottom line, consider utilizing an outside agency or consulting firm to help you spot opportunity that otherwise might slip through the cracks.

We love seeing restaurants create enjoyable, entertaining, healthy, and successful dining experiences. If you have additional ideas on challenges facing the food service industry (as well as possible solutions) please either contact me directly or use our comment form, below.
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Post by Scott Andrews, CEO of ARRiiVE Business Solutions.

ARRiiVE Business Solutions helps executives improve sales, launch products and services, and build dynamic, cross-functional collaborative teams. For more information, contact info (at)ARRiiVE (dot) com, visit ARRiiVE , or call us at 1 (805) 459-6939.

Copyright © 2007 by ARRiiVE Business Solutions. All Rights Reserved. You may republish this article only if you publish in WHOLE with the COPYRIGHT and ALL ACTIVE LINKS intact.

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