In the UK hospitality sector, an unforeseen trend has begun to emerge. Despite average spend on eating out being higher than ever before, many restaurant owners have disclosed they are increasingly struggling to turn a profit. How has this happened and how can restaurants ensure they have the necessary tools to succeed and drive value in this very competitive industry?
Rising cost is a pain in the pocket
The most significant issue for restauranteurs is rising cost base. Increases in costs which are out of the control of businesses, such as the national minimum wage and national living wage, as well as the introduction in auto-enrolment pension contributions, increases in rates and food costs are making it trickier for restaurant owners to balance the books. In some cases, simply the increase in staff costs can cause profits to slump despite consistently healthy turnover.
Cost control financial analysis
For all restaurants, regardless of size, target market or whether they are a chain or independent, the most vital element is to control costs carefully. They should start by preparing a detailed analysis of the financials to determine where they are making and losing money in order to take the necessary steps to improve the cash position. The process is likely to involve performing a health check of the business to develop a detailed understanding of why the profit margins may be low.
Part of this process could include an analysis of wage costs as a percentage of turnover, review of stock control, looking at average spend per customer and covers per time of day, per week etc. If there are consistent quiet periods at certain times of day or days per week then restauranteurs should consider reducing costs during these times or not opening.
Where other unnecessary or excessive costs are present, quick actions should be taken to address these. Where savings can be made, business owners should consider opportunities to re-invest these savings in areas that would improve customer experience.
By taking a realistic and analytical approach to cost management, at the same time as developing a distinctive proposition, restaurateurs can create a better and more sustainable business.
Restauranteurs have been hit hard
Some restaurants have been hit harder than others over the past few years and the financial struggles of casual dining chains have been splashed across the headlines. In 2018 alone, well known chains Carluccio’s, Prezzo and Byron Burger have had to close restaurants in order to try and reduce their overheads and stabilise their costs.
One reason for the trend could be increased consumer preference for personalised one-off experiences. Recent research has confirmed only 23 per cent of millennials would value material possessions over experiences.
The movement in public opinion has developed largely due to the level of competition present in the restaurant sector. In the past decade, an enormous number of new eateries have had to vie for the business of customers. It was inevitable the bubble would burst, the endless amount of choice in the marketplace making it harder for businesses to survive.
Importance of good customer service
One area that is key for restaurants to focus on is to ensure excellent customer service. However this sector has changed significantly over the years, the need for good customer service to secure repeat business, customer loyalty and excellent reviews is still as crucial as ever.
This is therefore in the hands of your staff, making staff development important for your restaurants success. Although a number of businesses in the sector spend no resources in developing staff, due to them not seeing it as a career opportunity for their staff. Your team is key to the success of your business, thus both time and money should be invested in them via training and career development. Incentivising staff and giving them the training to become better at delivering your customer service will help your business a lot, owners should also consider sharing sales targets, booking summaries and financial results with them.
Interestingly, a restaurant business on Radio 4’s Today programme stated that his restaurant sales were at its highest when they invested time and money into staff development, proving that investing in your teams effectively can increase the output of your restaurant.
Large firms using vouchers are eroding their margins
Larger restaurants chains and franchises often lose out as they tend to offer vouchers and deals to get customers in through the doors. While they are successful in bringing in customers, they can significantly erode margins in today’s economic climate. Similar to the issue surrounding delivery apps, any decision will vary on a restaurant by restaurant basis.
New entrants must endeavour to create a USP for themselves and build a clear understanding of their consumer preferences. If they focus on innovation then they can develop a niche position which should encourage consumer loyalty.
Rebrand or reposition?
For established restaurants struggling to retain customers, now may be a time to reposition itself in the market. This could involve increased marketing activities, a redesign of the restaurant itself or a complete rebrand of the business to refresh its identity. To continue to do nothing whilst losing customers is simply not an option.
For independent and smaller restaurants, to rebrand or refurbish the restaurant is not such a formidable task as it might be for a larger, multi-site chain. Smaller businesses can use the opportunity to adapt to new trends by changing menus, modernising interiors and adapting the look and feel of their outlets.
For the larger restaurant chains and those that operate on a franchise model, these decisions are made at the top and are more likely to be costly. For these businesses, it is potentially more realistic to look at cost reduction as the primary target. One approach to this is to review each restaurant in the chain and determine those performing best. Analysing data in relation to restaurant performance and to determine those which are delivering value on a weekly basis or those struggling to make a profit at all, will allow a business to make informed decisions about which outlets should be considered for closure. Having access to accurate data is one thing, however, it is essential that management then follow through on this with appropriate business improvement activities and that it is done in a timely fashion as opposed to six months later when perhaps the data is not so relevant.
Impact of delivery apps
The growth of on-demand delivery services such as Just Eat and Deliveroo have contributed to the tough trading conditions across the industry. For some restaurants these can provide a significant additional revenue stream however for other individual restaurants, business owners must give thought as to whether these platforms could benefit them. For example, some businesses may find offering their meals on these platforms erodes margins and results in reduced profitability for the business.
Could delivery be beneficial to your restaurant?
For those who do not offer their own delivery service but where food is the major selling point, as opposed to alcoholic drinks, delivery apps may be beneficial to the restaurant. They must consider how it might affect the day to day output of the restaurant and how it could impact the wait-time of their in-house customers. Restauranteurs should also consider the volume of meals purchased via apps and how these impact the overall margins.