Is your restaurant business hitting the two most critical key performance indicators?

In recent years the restaurant industry has been subject to significant changes, all of which are having a major impact on financial results. Brexit has impacted the supply of labour to the industry and is still causing headaches for most operators. This severe lack of workforce in the sector and the resulting competition for labour, has led to increased salaries for staff.

Restaurants have also had to cope with the pandemic, dealing with long-periods of closure whilst having to fund overheads, debt costs and wages not covered by Furlough. Covid had the further impact of taking staff out of the sector which again increased competition for labour and pay rates.

Rising inflation is impacting costs and reducing discretionary spending

More recently, hospitality and leisure businesses are facing additional costs due to the recent surge in inflation, particularly in energy and food expenses, and with The Bank of England’s decision to raise interest rates as a means of addressing inflation, business owners are finding it difficult to pass on their extra costs. The resulting impact on discretionary spending has led to reductions in consumer spending in the Hospitality and Leisure sector, placing extra pressure on restaurants.

Navigating critical decision making

All of these challenges have made it difficult for restaurant owners to navigate their businesses, with every decision having critical impact on results. To achieve financial success under these circumstances, it has become even more important to measure and improve two key performance indicators, which can sometimes be neglected by business owners. By focusing on Gross Profit Margin and Employee Costs as a % of Turnover, restaurants can ensure they are giving themselves the best chance of delivering a healthy profit and weathering the current difficulties.

Improving gross profit margin

The Gross Profit Margin (GPM) will vary depending on the type of restaurant, but your business should be achieving a GPM of between 65% and 70%. If these figures are not being met, a review will be necessary with changes implemented to get your business back on track. 

  • There are a number simple measures that could be adopted, from simply increasing sale prices and reviewing portion sizes to negotiating reduced direct costs with suppliers. 
  • Other strategies include focusing on ‘menu engineering’, which involves analysing the profitability of menu items and making adjustments to optimise profits. 
  • Finally, incentives offered to customers are an excellent way of increasing turnover, but these should be reviewed to ensure they are driving the right results

Minimising employee costs as a % of turnover

The industry average for Employee Costs as a % of Turnover has increased over recent years and currently sits at approx. 35%. This has increased from the pre-Covid level of 32%.  With a challenging labour market, many businesses have struggled with this KPI; however business owners need to track and keep this measure under control, whilst executing a plan to reduce if needed.

  • One way to achieve this is by closely monitoring labour costs, including tracking hours worked, overtime, and ensuring that staff are being utilised effectively; also, by implementing a flexible staffing model, adjustments can be made to the workforce based on demand.
  • Another way to reduce employee costs whilst improving staff efficiency is to invest in technology that can streamline operations and reduce the need for manual labour. This can include implementing a point-of-sale system, automating your inventory management, and using online ordering systems to reduce the need for staff to take orders.
  • It’s also important to focus on employee retention and engagement. By providing staff with opportunities for growth and development, it is possible to reduce turnover and save on recruitment and training costs.

Making a Healthy Profit – Conclusion & Next Steps

With a number of economic factors influencing the UK restaurant industry, making the right business decisions, based on key performance indicators has never been so important. To give your business the best chance of making a healthy profit, there are a number of possible strategies available to increase Gross Profit Margin and Employee Cost as a % of turnover.

If you would like advice about monitoring and hitting your key performance indicators, please get in touch with Menzies LLP, someone in our Hospitality & Leisure team, will be happy to help you. 

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