Food for Thought – Perhaps the best tip you will receive in the business
Dave Gosling – Partner
The restaurant industry has seen significant change over recent years and following a decline in the market between 2011 and 2016, the industry is projecting strong growth over the next 5 years.
This growth is arguably down to:
- Stabilised disposable income and an increased spend on leisure.
- New restaurant chains to account for changes in consumer demands.
- Focus on locally sourced, high quality products.
- Increased use of technology and online/mobile apps.
With the current and anticipated growth in the market it is key that business owners have a good grasp of their financial performance, so that improvements in revenue also mean improvements in profits and increased business value. A number of restaurant owners will regularly appraise their own financial results, but rarely do they look at key performance indicators and how they compare to industry standards.
So, how does your business compare?
Key Performance Indicators for Restaurants
The industry average turnover split is:
Alcoholic drinks 27.2%
Non Alcoholic drinks 4% and
Private functions 2.6%.
Understanding your average spend by customer is key and ensuring that staff are motivated to increase these revenues.
Cost of sales / gross profit margin
Throughout the industry, purchases of food and beverages account for 39% of revenue, giving an average industry gross profit margin of 61%. The gross profit margin has reduced in recent years due to a focus on quality produce and general increases in the cost of food.
Costs must be closely controlled by planning and costing menus, reducing waste, portion control and close stock management.
Rent & Rates
The location of a restaurant is one of the key factors to the success of the business and therefore since they are normally located in sought after locations, the rent charge is higher than other industries at 7.7% of turnover.
There has been a large amount of press on the recent changes to rates and a number of businesses have been impacted by these changes.
The average profit generated in the restaurant industry is 11% of turnover. The industry expects this to increase as businesses come to terms with recent increases in the sector as a result of national living/minimum wage, increases in food prices etc.
Wages typically make up 26.9% of revenue in the restaurant sector, which is mirrored throughout the hospitality and leisure industry. The industry did see a reduction in wages, as a result of the slowdown in the industry, however these reductions have now been overshadowed by regulatory increases in costs as a result of national living/minimum wage and auto enrolment pension costs.
The industry has a massive turnover of staff, due to the seasonality of trade and relatively low wages and keeping staff changes under control is key in controlling costs. We are still unsure as to how Brexit will impact the availability of overseas labour, but this could undoubtedly have an impact on wage costs.
Business owners should regularly review customer numbers throughout the day and week to ensure that staffing levels are at the optimum. Careful planning should be undertaken for known increases in wages, pension etc. so that profits and margins can be maintained.
The value of key performance indicators for restaurant businesses
Other costs incurred in the restaurant trade typically account for 11.9% of turnover, which would include advertising, depreciation, professional fees, repairs etc.
The importance of continual reviews
It is key that business owners continually review their business and keep up to date with market developments and demands, whilst keeping costs under control. This was evident in one of the largest UK operators – The Restaurant Group plc which operates 490 restaurants in the UK, with its principal brand names being Frankie & Benny’s, Coast to Coast and Chiquito.
The director report in their financial statements highlights 4 keys areas of focus:
- Re-establish competitiveness
- Serve our customers better and more efficiently
- Grow our business
- Build a leaner, faster and more focused organisation.
On review of their latest year-end report, we can see that turnover went up 3.7% and profit was in line with the industry average at 11.1%. Interestingly their staff costs represent 33.67% of turnover and has been highlighted in their director report as an area which needs improvement.
Menzies Hospitality and Leisure sector advice services
We advise hotels, pubs, clubs and leisure operators, as well as a number of sector-dependent clients. We work closely to find solutions to industry issues, utilising our expertise in everything from business strategy and corporate finance, to audit and tax advice.