By Doug Radkey
You already know the majority of restaurants run their business on extremely thin margins, and in the the time of COVID-19, the financial health of the industry has become all the more precarious. In fact, a recent (U.S.) National Bureau of Economic Research paper gave restaurants a 30 per cent chance of reopening if the pandemic lasts four months; this estimate drops to 15 per cent if it lasts six months.
The average restaurant, it found, had enough cash on hand to last approximately two weeks. Why such little time? Because the 3- to 5-per cent profit margin of the average restaurant or bar simply can’t cut it in this environment.
Here’s the thing – we can’t continue down this doom and gloom route. The industry will prevail, and some will come out even stronger – if they push forward now. Restaurants must operate with the mindset of achieving 12- to 15-per cent profit margins – and the secret is, it is possible.
The new normal
As people have increasingly been cooking at home during the pandemic, their appreciation for quality food and the work that goes behind it is expected to rise. This will put pressure on restaurants to execute at an even higher level with their prices, quality of food, and the overall experience they are offering.
However, I personally believe consumers will not be as willing to go out to eat as they were before the pandemic, unless the overall restaurant experience is worth the effort and provides a safe haven for guests.
Strategic planning still holds the key to success; however, the same old thinking will result in the same old results. Because of this, the bar and restaurant model should ideally be much better post-pandemic.
Making a business plan
Let’s cut to the chase: Many restaurants operating today haven’t undergone the correct methods of planning and execution. The market has been oversaturated, and at one point, starting one’s dream restaurant was, quite honestly, fairly easy.
Moving forward, however, the fundamentals of starting a business in this space will include many additional steps, including:
- Market feasibility studies
- Concept development plans
- Test drawings with space analysis
- Strategic business and operation plans
- Guest profiles and guest journey maps
- Marketing and advertising plans
- Brand identity and activation guides
- Financial projections, assessments, and contingency plans
These are elements that should be planned out and will become more important than ever before. The reality is, whether you’ve been operating for one year, five years, or 20 years, you need a new business plan.
Why? Because the new business model will be different.
The revenue and menu mix will be different. The average size of kitchens, bars, and dining areas, in addition to seating alignments, will be different. The traditional flow and service sequence we were accustomed to seeing when entering a favourite bar, restaurant, or hotel will likely be different. Having a solid plan will position you for scalable, sustainable, profitable, memorable, and consistent success.
Identifying cost savings
Restaurant operators and leaders will need to first figure out how to pay rent, employ staff, purchase product, sell food, sell drinks, and sell experiences, both in the short-term and in the long-term. This could require a reinvention of the industry – not necessarily a bad thing.
But before you begin changing your operations, cutting costs, and making plans to run your entire business in a new manner, it is crucial that you know what is the least amount of money you need to take in to at least break even. In turn, recognizing your break-even point will help you better understand how to identify cost savings. To start:
- Organize and analyze all cost categories for your restaurant. Go through all expenditures and determine must-haves versus nice-to-haves; adjust, postpone, and cancel as needed.
- Minimize or hard-stop certain services. Can you hold off on expenses such as cable TV subscriptions, window cleaning, linen cleaning, gardening, and so on? Bars, for example, may find thousands of dollars in cable expenses they can reduce.
- Explore all fixed costs that could be adjusted, beyond reducing staff or hours of operation. Turn off extra lights in the dining rooms, adjust HVAC zones if possible, and turn other forms of equipment on only when they are needed.
- Review all utility, equipment lease, and supplier contracts. Can you negotiate invoices that still need to be paid? Can you negotiate new terms? This is where building a strong relationship with your vendors is extremely important.
- Examine your rent, a hot topic in today’s landscape. There are various options that, while not guaranteed, can be explored. These include utilizing government programs; paying partial rent and taxes, maintenance, and insurance (TMI); paying TMI only; negotiating a rent deferral plan; requesting a rent-free grace period; and reviewing your security deposit.
- Remember that every scenario is different, and it is important to speak with legal counsel regarding your lease. Though it may be a difficult task, it is crucial in building a positive relationship with your landlord – and the same goes for negotiations with your suppliers.
Other areas of consideration
Food and beverage programs will need to be significantly reduced moving forward, especially as properties reopen. A menu that includes a brand’s top 10 food and signature drink items – the ones that are the most profitable, flavourful, and exciting and that also repurpose raw ingredients – will be key to keeping inventory costs low and controlled.
Lower inventory levels will also help with immediate cash flow. It also helps to understand and accept that, in many instances and in many regions, the supply chain is hanging on by a thread – there will be shortages and delays. Look locally and regionally for food and beverage vendors that can support your reduced menu.
Next, shift your attention to your delivery program and take the time to review all options. Consider setting up online ordering directly through your own website or app and POS system, offering first-party delivery versus the use of third-party delivery companies. You may be able to reduce this typically 25- to 30-per cent cost down to 10 to 12 per cent.
Reaching out to the community is another a great way to bring attention to your brand while saving money – after all, we’re all in this together. Collaborate with local restaurants, chefs, and mixologists to share kitchen space, delivery costs, resources, staff, and supplies. There are no competitors right now, only partners.
Forecasting the future
Once you have identified areas for potential savings, you can begin to develop forecasts and key performance indicator (KPI) goals.
When completing forecasts for each day, week, and month in terms of traffic, sales, revenue per guest, and a list of all expenses, you need to create what is referred to as a ‘sensitivity analysis’ that includes a minimum of two or three variations of your forecast based on a 20, 40 and 60 per cent drop in traffic. How will your brand perform and strategically scale downward in these situations? How will your operations and cash flow be affected? Knowing your numbers, your prime costs, and your KPIs will position you to make quick, educated decisions.
(Re)start-up costs
You may be asking why you need to first perform a cost assessment and forecast. Whether you were closed for 8 weeks or operating with limited hours, staff, and resources, when gearing up for a scaled reopening there will be immediate costs to consider, similar to when you opened your bar or restaurant for the first time.
Unless you have deep pockets or you were making the noted 12- to 15-per cent margins and setting aside funds for emergencies, the truth is it is going to be difficult to fund those first few weeks – but you have to find a way.
Keep these costs in mind when approaching your reopening date:
- Rent payment(s)
- Interior/exterior adjustments (layout, tables, chairs, plexiglass, signage, etc.)
- Equipment leases
- Food and beverage restock
- To-go packaging and new plate/glassware (if applicable)
- Deep clean services and cleaning supplies
- Personal protective equipment (PPE)
- Staff hiring, training, and retraining
- Technology (POS, online ordering systems, inventory, digital menus, reservation systems, etc.)
- Marketing and advertising fees
- Other costs such as pest control and insurance
For some owners, it will be a steep mountain to climb. It is critical to have a plan in place, know your priorities, and scale your reopening accordingly.
Identifying revenue
The pandemic has taught us that the most successful brands are the ones able to pivot quickly.
With takeout and delivery as the only means of business for most restaurants and bars throughout North America and much of the world, a light has been shone on the potential future of our business.
Will dine-in concepts become extinct? No, but how they are laid out and how they are a part of the revenue mix will change for the foreseeable future.
This can be applied to other business models as well. If you rely on tourism and sporting events for revenue, how will you pivot? Or, if you rely on business professionals and conventions, what segments will you work with in the future?
One thing we know about this industry is that every piece of real estate is unique in its own way; a 1,000-square-foot location will have different needs than another 1,000-square-foot location just two blocks away. However, one commonality is that restaurants and bars will move toward contact-free or limited-contact environments, and flexible models that can quickly adapt to the changing needs of both staff and guests will emerge stronger with larger percentages of profit.
Mixing it up
Post-pandemic, don’t shift your focus away from takeout, curbside pickup, or delivery. Remember – it’s going to take people a long time to adjust, and these methods have become somewhat of a norm for consumers today.
This means your revenue mix is likely going to be different than it was before. For example, if you were a restaurant with 60 per cent revenue coming from dine-in, 20 per cent from takeout, 10 per cent from catering, and 10 per cent from delivery, expect to fluctuate to around 20 per cent from delivery, 40 per cent from takeout or curbside pickup, 20 per cent from catering, and 20 per cent from dine-in. Every business will be different, but this illustrates the possible financial changes you’re going to have to adapt to and forecast for.
With that in mind, your menu mix will also be different. Using a small, targeted menu to control food cost and waste, you can adjust your offering to accommodate your new revenue mix. This means a balance of meal kits, cocktail kits, family meal deals, to-go combos, catering spreads, and dine-in options.
Building a bright future
In summary, it doesn’t necessarily take a lot of effort to get your business finances under control, set aside funds, and detect any issues before they grow out of control – if you have the knowledge, the systems, and a supportive cast working both for you and with you.
The good news is we have the time, resources, and the know-how to come out of this stronger. When faced with financial adversity, those who get creative and adapt to change always seem to come out of a crisis even more profitable. Will you be ready?
About the author:
Doug Radkey is the president of KRG Hospitality Inc., the author of the book Bar Hacks, and an international keynote speaker on all things restaurants, bars, and boutique hotels. Being in the hospitality industry for over 20 years has allowed him to become a leading voice in the development of detailed feasibility studies, award-winning concepts, strategic business plans, unique menus, memorable guest experiences, and financial management systems. Continue the conversation with Doug on Twitter, Facebook, and LinkedIn, or by visiting krghospitality.com
