By Rene Artz
Combine low-profit margin with price sensitive goods, demanding schedules and complexity from payroll to point of sales and you will begin to uncover why hospitality businesses change hands.
Hospitality is attractive whether for the love of food and drink, or the adrenaline and atmosphere. Many enter the industry driven by a concept, others because they feel they can do better.
However, once a concept is established, or a business purchased, both come face-to-face with the reality of running a complex business – just look at the chaos in Hell’s Kitchen for half the story.
Let’s break it down.
The following pie chart illustrates yardstick costs for every dollar of industry sales. How many cents in the dollar can you make by investing in a café-restaurant?
It will vary based on the concept and location. For example, a pizza takeaway operating from a small footprint can provide a better marginal sales return than a full-service pizzeria.
Let’s say the graphic best illustrates a quick-service cafe, where a yardstick for a great one would be a return of $0.10c from every $1 in sales before debt servicing. In other words, a well located, well-run concept with $500,000 in annual sales may return $50,000 per annum to the owner.
When faced with ‘average’ margins the industry often returns far less to shareholders. The way to win in hospitality is not just through great concept and location, that is a given. It is through systems for consistent customer experience and through weekly measurement. In an industry with low margins, every cent must count. Afterall, a bustling café operating with insufficient margin will go out of business just as quickly as a café with few customers.
Try asking team members or those new to the industry how much profit on sales hospitality owners make and you are likely to get answers from 20% to 35%.
Now without disclosing profit & loss, communicate where every cent in the dollar can end up by using the illustrative pie chart. Just keep in mind getting a 10% return is a high-performing business.
If you are in the industry, stick the graphic on your staff room wall and refer it to improve awareness. You should find it focuses attention when you talk with your team about labour scheduling, cross training, recipe costs, purchasing, stock management and waste – to name a few.
Food/Drink and Payroll including management salary can easily take up $0.65 of every $1 in sales. Nearly two-thirds of revenue will be spent in these two areas.
Next, we add in rent. Lease costs inclusive of outgoings can be around $0.07 for every dollar in sales. If lease costs get toward $0.10 then profitability tends to struggle, regardless of location.
With $0.72 of every dollar gone, we are left with direct operating expense taking up $0.05. These expenses cover the cost of other products from packaging, to cutlery and cleaning. Another $0.05 goes to administration, this includes point of sales systems, bank merchant and payment processing fees to software and accounting.
We have utilities such as power and gas taking $0.03, marketing and sales at $0.03 followed by repairs & maintenance at $0.01 and depreciation at $0.01. Repairs and depreciation cover equipment from chillers to dishwashers, tables to chairs.
We have managed to spend $0.90 for every dollar of sales before finance costs. There will be exceptions, though the exceptional independent owner may see $0.10 in the dollar.
So why do it? After all, if you want to get into hospitality you could choose a simpler business, like a bed & breakfast or motel.
Many will follow their passion for food and people to express themselves creatively through concept and service. For seasoned owner operators, it can be the adrenaline and atmosphere.
For most, it is simply to be their own boss.
Whatever your motivation – get industry knowledge, measure sales, benchmark weekly prime costs; and be prepared to make changes.
Want freedom of mind operating your hospitality business? Contact Rene Artz, Business Development Manager at Mathieson Chartered Accountants Ltd on 027 66 44 943 or email@example.com
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