The building blocks of setting up and operating a successful restaurant
To me, the restaurant Business Model, is the foundation of any good restaurant business, but unfortunately, it is where most seem to fall short. There are myths out there that claim, 60%, 70% some even say up to 90% of restaurants fail within the first year of operation. I have yet to see concrete data on this. Regardless of whether these figures are accurate, any failure is heart-breaking and means someone’s life dream has been shattered. In most cases, this mainly happens because of one or a combination of missteps in the Business Model building blocks.
A Numbers Business
Over the years, I have dealt with various types of operators from the so called “mom and pop shops”, to hotel operators, and industrial caterers. While I acknowledge the pitfalls of generalisation, for the sake of this context, I will segregate restaurant owners / operators into two categories: corporates and entrepreneurs. I will do a more in-depth analysis of the differences between the two in a separate article.
In this series of articles, I will consider I am talking to the entrepreneurs. Many of the “corporate operators” have an elaborate support functions setup in place and have the tools and resources necessary to handle that aspect of the business. With that said, many can find value in this text and linked articles that can help them optimise their businesses and achieve their set targets. If corporate operators run their businesses like entrepreneurs, they will find themselves more competitive, current, and profitable. Entrepreneurs can benefit a lot from fully grasping the business side of their restaurants, which unfortunately most associate with “numbers”.
I cannot tell you how many people I have come across that say “I’m not a numbers person”, “I’m the creative type”. The more recent one I keep hearing is “I am an entrepreneur, I don’t enjoy diving into the detail”. The bad news is, this is a numbers business and your profits lie in the details. The good news is, these numbers are not rocket science and are easily digestible, which is what I will attempt to do in this series of articles.
The Business Model not Plan
Every owner / operator should know their business through numbers, the key ones at least. Numbers are the first thing I embark on, whether I am doing a business optimisation scope for an existing client, creating a new standalone restaurant, or working on a large-scale mixed-use development. The focus here will be on standalone restaurants, whether a new venture or an existing business.
Topics I will cover make up the building blocks of a Restaurant Business Plan. There are two reasons I refer to this content as Business Model, not Plan. First, is because I also want to address this content to owners/operators who have existing restaurants who could benefit from the information being shared to help improve their businesses. Second, is that I see most Business Plans as static documents rather than adaptive and malleable tools used to run businesses. Business Models can be designed. They are the actual structure and foundation upon which everything else is built upon. I see Business Plans more as sales tools and documents.
While there are many articles written on restaurant profitability and tips on increasing profit margins, my attempt here is to give you a broader perspective on the entire Business Model. The points I will cover in this series of articles are:
P&L (Profit and Loss Statement)
Where to start ? Start with the P&L (Profit and Loss statement). The P&L tells the story of the business in numbers. It shows you opportunities for improvement.
Manage your P&L. It is not only a reporting tool. It should be a management tool to take decisions and run the business. Below are some of the key points and ratios to monitor and consider along with questions to ask yourself.
- Ideal food cost.
- Ideal beverage cost.
- Percent of food sales compared to beverage sales.
- Ratio of in-house sales versus your delivery channels.
- What are the major cost centres to control?
- HR represent as cost ratio.
- What sort of operating expenses should you expect?
- How much should you spend on new customer acquisition?
- How much should you invest in loyalty programs to increase visitation?
- What fixed costs and variable costs do you currently have?
- Elements that make up overhead costs.
- How much rent is a healthy rent to pay?
- What should you expect in terms of EBITDA (cash profits)?
- How do you handle profits and their distribution?
By asking yourself, and attempting to answer all the above questions, you set the foundations for a healthy Business Model that can yield a profitable outcome. While we are dealing with a relatively “objective” subject that relates to numbers, the answers to the above questions will vary depending on many factors. Things such as the type of restaurant you own/operate, the location within your city, the country you are based in and so on. I will share with you some broad ranges based on my observations over the years that can help you put things into context.
Know Your Customers
You will read this repeated over and over throughout these articles, put your customers at the centre of everything you do. Yes, this is obvious, although too often, operational, financial, external forces and pressures pull you away from that focus. Know your customers and build your business around them. Easier said than done.
The key is knowing your customer first. If you have an existing restaurant or are a serial restaurateur, you would probably say that you “feel” the market, or have a “gut feeling”. These are powerful tools and skills that should not be ignored. The best approach is to link this to empirical data.
I am currently doing a deep dive into customer behaviour to get a better understanding of today’s consumers. This was driven by the online shift the world has witnessed, and what we are finding out about the customers in this digital age.
When I first started my career, it was a matter of doing demographic and behavioural segregations. Using macro-economic statistics, data, and reports to better understand the consumers when coming up with a new concept. While all this is still valuable information and a source of insights, the digital landscape has altered the playing field. The tribes and mimicry behaviours show a consumer that gets easily influenced, enticed to interact, and transact. These patterns help us understand the nuances of today’s customer behaviour. I will elaborate on this further in a later article. For now, my recommendation is to know your customer. Use all information around you to understand who your client base is.
Tactics to “Observe” your Customers
In today’s world, as much as people want to express their individuality, you notice the prominence of communities and tribes. Driven by how interconnected the world has become, a large portion of people are influenced by a few. Some sectors and trends to track and observe in order to better understand your consumer are:
- Grocery shopping behaviours. Where do people buy their food from? Farmer markets, budget bulk outlets, wholefood stores, or boutique artisans.
- Pop culture
- Shows, entertainment and media (understand what people are consuming in terms of media)
- Travel sector
- Wellbeing sector
- The luxury sector. Even if you are a more fast casual / affordable offer, knowing what people associate with luxury will give you insights on what they assign value to.
Basic CRM (customer relationship marketing)
From a Business Model perspective, besides knowing your customers, and placing them at the centre of everything you do, it is important to monitor your existing ones closely. Without diving too deep into the world of CRM (customer relationship marketing), the basic information to track is new versus repeat customers. It is essential to identify what portion of your customers are your regulars and what percentage comprises first-time visitors. It is important to learn about your returning loyal customers and their buying behaviour. This will enable you to make them feel special by rewarding and thanking them. As for your new visitors, you will benefit from knowing how they heard about you to help you improve your communication strategy.
The type of restaurant you operate defines the customers you attract. That is why it is important to have clarity when it comes to your market positioning.
Numbers to Consider
Positioning (understand your place in the market)
This is one of the most essential steps in creating a new F&B business that I have seen overlooked frequently. Clarity regarding positioning is vital. It is all about where you stand in the market, both compared to your competition, but more importantly, in your customer’s mind share. What triggers their choice to come to your venue? Are you a convenience based restaurant or a destinational one? A special occasions place or a regular weekend spot? Are you fit for lone diners or are you a social place? A place to bring the family and kids to? Or a place to conduct business meetings in?
It is important to differentiate between destination driven and convenience customers. Are you a restaurant that people pre-plan the visits to? A place for which customers commute long distances and make an event out of the experience? Or are you a convenience driven restaurant? A place that is at proximity, visited frequently, fills a specific need, an impulse, or requirement?
While many have heard the advice, “you cannot be everything for everyone”, many owners / operators stretch themselves trying to do so. You will read me say that you need to maximise your revenue streams to increase your chances of running a successful business. From trading on digital platforms and improving in-house “physical” dining experiences, to meal period optimization. However, it is crucial to understand your position in the market along with who you are targeting. This will enable you to better compete within your defined category and maximise the share of mind you occupy with your target audience.
The key to have a competitive advantage in the market is to focus on experience delivered, not price. I elaborate further on this in my Experience Economy article. To gain a competitive edge, you need to have a thorough understanding of the building blocks that make up an experience and what today’s consumer assigns value to. Based on the below chart, for example, if you are priced at a similar bracket as others in the market with similar positioning, your aim is to push yourself to the right and focus on delivering a better experience. The equation when it comes to your bottom line is straight forward. A better experience at similar price point equals higher value proposition. A higher value proposition equals more loyal customers and repeat visitation. Repeat visitation equals healthy revenue streams and profit margins.
I constantly highlight the importance of optimization through: understanding your cost centres, improving operational efficiencies, lowering your break-even points, and maximising your profits. However, there is a limit to all the cost saving initiatives and their benefits. Simply put, there are no profits when there are no sales. You can become the most lean and efficient operation, but without healthy revenue streams all your efforts will go in vain.
Perhaps the most important aspect of running a profitable restaurant is to maximise your revenue streams. A good approach to help you focus on the various opportunities is to segregate them into different categories. This will make it more attainable to devise effective strategies and dedicate the required resources to achieve these targets.
Here are some ideas to consider. This list is meant to only show you the various avenues you can explore.Your revenue opportunities are limited only by your imagination.
- Various meal periods (break up your days into 5, maybe even 6 meal periods)
- Typical channels : In-house, Delivery, Takeaway
- Co-work space for business customers
- Classes and workshops
- Co-branding and pop-up stores
- Vertical diversification (growing selling produce)
- Horizontal diversification (selling custom designed operating equipment and furniture found in your restaurant)
I am a big fan of takeaway sales. They are almost just like delivery sales, but more profitable. Minus the biggest cost which is the logistics of delivery. They help you trade beyond your physical capacity of seats, as long as your kitchen is set up to handle them. They also help you trade beyond your front of house resource capacity (fewer waiters needed for higher transactions). This also falls in line with the neighbourhood focus and strategy I outline below.
You could explore your brand having a temporary pop-up stint somewhere for special nights or occasions / opportunities. Another option is to have other brands collaborate with you in your own space. This could be in the form of other chefs or complimentary brands such as desserts or non industry related. The latter can be in the form of craftspeople and makers that have products that align with the same brand values as yours.
Think of collaboration more than competition. Don’t obsess about who is competing with you in the market. Focus more attention on who you can collaborate with. Some of these would be for financial gains and opportunities and others to reinforce your brand and story you want to tell.
When devising a sales strategy, it is important to always bear in mind the profit margins you can expect per revenue stream. A typical example would be the ratio of food to beverage sales. Assuming your food cost is higher than your beverage cost, by increasing your beverage sales mix (proportion of beverage sales to food sales) you decrease your COGS (Cost of Good Sold) ratio.
Nowadays you need to consider this when devising your online and delivery strategy. Your delivery method along with the costs entailed to fulfill the orders affect your profit margins. This will impact your business depending how reliant you are on this revenue stream versus in house dining (the sales ratio).
In the above example, you see that “Revenue Source Two” has the highest profit margin. If you simply increase its sales ratio, you increase your overall profitability. Having such a macro view on your business can help you take informed strategic decisions. These will guide where to dedicate your resources and energy in order to reap the most financial rewards.
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