By David Hopkins
With the announcement of minimum wage increasing to $15 by 2019, restaurant owners in Ontario, Alberta and potentially British Columbia will not only see higher rent and utility costs, but also increases in meat prices. The surge in meat prices will add yet another level to profit challenge, making it harder for the restaurant industry to achieve a positive bottom line.
In recent years, rising meat prices have become the norm. As the chart below indicates, the industry saw a large number of the meat pricing categories rise by over 40 per cent in a five-year period at the start of this decade:
After hitting record highs in 2015 and the first half of 2016, we saw a bit of a reprieve at the beginning of 2017. However, after a number of provincial governments announced a large minimum wage increase, the industry will see double-digit percentage gains in meat prices, which may be too quick of a return for consumers to bear.
In this industry, we rarely see meat prices go down and it is crucial for restaurant owners to know how to adapt to the quick change if they want to survive. At The Fifteen Group, one of our missions is to help our clients adjust to the changes and provide them with recommendations on what they can do to prepare for the impact of price hikes. Some suggestions include:
- Understand your profit model and be strategic in engineering your concept:
This is important in any business, but even more important when profits are at a huge premium. Understanding where your profit is coming from and how to properly engineer your business to maximize that profit is essential.
- Get creative with your product selection:
Utilizing creative cooking techniques can sometimes allow you to use “lesser” cuts of meat with great results for the guest. Challenge your chef to not just create a great menu but to create one that will make you more money.
- Control your costs:
Now even more so than ever, it is important for any business to control their costs. Approximately 70 per cent of sales revenue these days is absorbed by labour costs and product costs – any inefficiency in those areas is magnified with the anticipated rising expenses. With the proposed minimum wage lift in Ontario and Alberta, wages will go up by 30 per cent while food price increases could result in product costs going up by 15 per cent. Those cost hikes are magnified by inefficiencies. As an example, a 10 per cent inefficiency in these cost centres will reduce your profit by an additional 1.5 per cent of sales (above and beyond the cost hikes themselves). These approaching expense increases will cost an inefficiently-managed $2 million restaurant, $30,000 more in profit than the efficiently-managed restaurant – and that is a big hit!
- Don’t be afraid to raise your prices:
At the end of the day, expenses are rising and the guest is going to have to bear the brunt of price increases. Increasing your menu prices, however, needs to be done strategically as you don’t want to scare off customers. A price increase strategy can be implemented in two or three phases and it definitely needs to be done as part of a larger menu engineering process to minimize guest “sticker shock”. It is hard to compete with the restaurant down the street that is undercutting you by 20 per cent. However, keep in mind: that restaurant may close its doors in six months because they are priced too cheaply to make any money to survive.
About the author:
David Hopkins started his career in restaurant management in 1990. He has held various senior management positions in the industry, including within some of Toronto’s top restaurant companies. In 1997, David joined SIR Corp. to head-up the financial/accounting department of one of their most profitable divisions, Signature Restaurants. In 2001, David formed The Fifteen Group Inc., a consulting company dedicated to maximizing restaurant profits through effective sales generation and disciplined cost control management. The Fifteen Group’s clients range from owner/operated establishments to multi-unit restaurant corporations. You can reach David at firstname.lastname@example.org.