One of the companies I started was a hospitality business broking division, which I sold some years ago. At the time it was a natural adjunct to the training, consulting and recruitment work we already did. I was prompted to do this as a result of negative comments a number of my clients had made about the traditional broking industry, which is almost exclusively real estate based. There appeared to be an opportunity for a broking practice that is rooted primarily in an understanding of hospitality businesses and their potential, rather than pure property.
In involving myself with broking I have come to understand that there is a great potential for certain types of hospitality businesses to be grouped into larger entities in order to produce a much stronger bottom line than they could achieve as stand alone businesses. This is of particular interest to me right now because a substantial number of our clients, especially those based in the food and beverage sector, are presiding over steadily diminishing profit margins, despite committed management and skilled leadership.
Do you understand economy of scale?
The root problem is economy of scale. I will explain: Picture a medium sized restaurant of, say 160 seats in a CBD location. Approximately 40% of it’s floor space is taken up with kitchen, storage and administration offices. The lessee or owner is paying an eye watering rental or purchase price on a fair bit of space that is not earning income, and perhaps does not really need to be located in that location in the first place.
Imagine if you were able to expand into five of six of these businesses, in a similar market position, not too far apart as to be difficult to oversee. There are quite a few potential efficiencies to be gained if you think outside the square.
Move non-revenue processes to cheaper locations
Start with kitchen operations. A lot of kitchen activity revolves around the continual process of routine preparation for the service periods. Many of the tasks that have to be done each day are common tasks done in all the restaurants, e.g. Making stocks, preparing vegetables, portioning meat, fish, poultry, etc. What if we were able to take all these routine tasks off-site, to a large scale, efficient commissary kitchen in a much cheaper, central, convenient location? We can then set up a ‘just-in-time’ delivery process, like the manufacturing industry uses.
The commissary kitchen would be producing partly finished food for all five or six restaurants and could take advantage of bulk purchase, large scale production equipment and low cost labour to reduce food costs. The restaurant kitchens can then be reduced in size and essentially become an assembly and finishing kitchen.
An opportunity to move to a cheaper staff structure
We might also centralise menu development at the commissary kitchen and employ only one high cost artistic chef for this purpose. Once dishes are standardised and costed they can be issued to the restaurants as required. The restaurants would only need relatively cheap ‘production cooks’ and could then lower their wage costs quite dramatically. Think of the saving if we can get rid of five ‘Head Chefs’ and only carry one!
Let’s now extend this kind of thinking to the storage areas. The daily delivery cycle can also include dry goods and beverage stocks, thus greatly reducing the storage space required at the restaurants. There would also be a reduction in the cost of these items from bulk purchasing. The sort of saving could best be imagined if you think of the difference in purchase price on wines if you purchase them by the case, compared to purchasing them by the pallet. Now consider centralising administration, marketing, function sales and public relations.
Each independent restaurant is likely to be carrying at least part-time staff in each of these roles, who are likely to not be highly skilled or highly productive. By centralising these functions you could then employ dedicated full time professionals and more efficiently manage their productivity.
Think of the savings in overheads like advertising. How much lower do you think your costs would be if you were negotiating media space, printing, etc. for six restaurants instead of one?
Let’s assume you can reduce the non productive areas within each restaurant from 40% to 20% by doing all the things discussed above. We could now add another 53 seats to our restaurant with the floor space freed. Assume each seat is occupied 3 times each day at a customer average of $50. That’s a potential to take an extra $7,900 per day or $2,700,000 per year! When you are paying rents of around $1000 per square metre per year (as you would in a CBD location), you need to make money out of as much of the space as you can.
There are also other, less tangible benefits to be had such as being able to carry a spare management and supervisory team to replace people who are in training, ill or on leave, without it hurting; or carrying centralised repairs and maintenance staff. The list goes on.
So to summarise, in our example we have reduced our wages and food costs considerably, and increased our revenue by a factor of 25%. We have also made our admin and support staff a lot more cost effective and reduced the pressure of covering for absent colleagues from our management and supervisory team. Sounds too good to be true, doesn’t it?
Well, this is not theory. In a previous life I was an area manager in the fastfood industry and managed 15 fast food stores. This is exactly how they make a very healthy profit, while the independent operator struggles to make wages.