Controlling Your Hospitality Labour Costs
LEARN HOW TO CUT COSTS WHILE IMPROVING SERVICE AT YOUR RESTAURANT, BAR OR PUB
1. Getting Started In The Food Business
So you want to start a food business?
Almost everyone dreams of someday owning their own restaurant, bar or coffee shop. Imagine you are at a dinner party. A friend calls everyone to attention. Herself and her husband are about to open a cafe. Oh, the buzz!
Would they generate the same excitement if they had just announced that they planned to start their own dry cleaners or hardware store? I guess not.
The prospect of setting up one’s own food business is just so exciting. But the reality is, the restaurant business is one of the toughest businesses of all. And, like any other business, the key goal must be to make money. Few businesses survive without doing so.
Starting a restaurant is an ambitious undertaking. Many restaurants fail within a few years of opening because of poor planning. But don’t fear.
This guide is the ideal resource to lead you to success. It will help you understand what it takes to succeed in the food business, and will explain in simple terms the first steps that you need to take.
2. Are You Ready For The Challenge?
Firstly, you need to be passionate about your business. If you are not passionate about coffee, don’t get into the coffee business.
There are many days when you will question why you chose this route, and you will need this passion to be able to fall back on.
Are you prepared to work harder and longer than you ever have before? During your first few years of operation you will invariably find yourself working sixteen hours per day, six or seven days per week.
Are you a multi-tasker? Few industries have as many moving parts. As a restaurateur you will have to wear many different hats. It is not just about serving great food; you will need to understand marketing, HR, finance, the law, etc.
Finally, don’t forget that the nature of the industry means that you will be providing entertainment for people on their time off, so you will find yourself working while your friends are not.
3. Franchise Or Not?
This is probably the number one question that we get asked by people thinking of entering the food business. Are you better off taking a franchise in an already proven concept or should you develop your own concept?
An Instant Business
A restaurant franchise offers you an instant business. You don’t have to worry about the name, the décor, the menu or the marketing, It’s all done for you.
A restaurant franchise comes with support from the head office. If you have questions or concerns you can always ask them. This can be very helpful for new restaurant owners who don’t always know what to do when they encounter certain problems.
Better Buying Power
Restaurant franchises have bigger buying power. Food and other inventory can often be purchased far cheaper than your local independent restaurant.
Name recognition is a huge benefit of a restaurant franchise. You don’t have to worry about the advertising and marketing cost of building brand awareness.
Money, or the lack thereof, is often a major drawback of buying a restaurant franchise. Many of the bigger restaurant chains require you to have significant assets, before they will consider letting you buy into their company.
In order to maintain a certain quality of customer service, as well as continuity at each location, franchises have many rules and regulations that must be followed.
Everything from the seating plan of the dining room, to the colour of the bathrooms can be subject to specific rules. Make sure you are okay with all the rules beforehand.
Lack Of Independence
Unfortunately, you will have to give up a lot of control if you choose to franchise. You have no say in the menu, the décor or the signage of your restaurant. You may find yourself resenting the restrictions placed upon you.
On top of the upfront franchise fee, you are also expected to pay royalties. This covers the advertising, training, and other support the restaurant corporation gives you throughout the year. Franchise royalties are usually between 3% and 8% of turnover.
When you come to sell, the franchisor will have the right to vet any potential new franchisees.
Limited Growth Potential
If you develop your own concept, perhaps it could one day be franchised itself. This is where the real money is in the industry.
Can you take an idea and not just build one location, but perhaps dozens or even more and become a franchisor yourself.
Essentially, deciding to either buy a restaurant franchise or create an independent restaurant will depend on your wallet, your experience, the time that you can commit and your personality.
If you are comfortable working with a team and being told what and how to do something, a franchise may be the right move for you.
However, if you are starting your own restaurant to get away from people telling you what to do, an independent is probably a better choice for you.
Admittedly, we are a little biased, but if you are confident that you have a good idea then you could get it up and going for less money than taking on a franchise. What’s more, it will be all yours.
4. How To Decide On A Concept
What is going to be your Unique Selling Point (USP)? Remember, niche concepts work best in bigger markets.
Avoid gimmicks and theme restaurants. Analysts say that most people often only visit theme restaurants once and don’t come back. They have a kind of “been there done that” attitude to these establishments.
See what’s hot in other markets for inspiration. Be first to market.
Explore these two great resources for a little bit of inspiration:
Springwise and its network of spotters scan the globe for smart new business ideas.
One’s To Watch is a monthly review of some of the hottest restaurant trends from US based Quick Service Magazine.
Take a look at what the big chain restaurants do, particularly because they spend a fortune on expensive market research and then implement it.
If you are just at the idea stage, why not take a grand tour. This is the fun part.
If you are thinking about opening up a BBQ Restaurant, take a trip to the southern states of America. Rent a car and drive around, see the best and get ideas, collect sample menus and memorabilia and take lots of photos.
Maybe even twin your new restaurant with one that you meet on your travels.
5. How To Decide On A Location
Location, location, location – it can make or break a restaurant.
Finding the perfect location is a time consuming and tedious process, but it’s essential that you give it all the attention it deserves.
Do not rush this decision, it is one of the most important ones that you will make. Wait until you have several prospective properties and then weigh your options carefully.
Remember, once you sign the lease and open your restaurant, the one thing that is almost impossible to change, is your location.
You need to consider the following factors when choosing a location:
– Visibility and passing traffic (Foot and car)
– Potential for outdoor seating
– Refurbishment required
– Freehold or leasehold
– Complementary businesses located close by
Don’t just get stats from the phone directories or the last census. Pound the pavement, check pricing, service, style, when are they busy and when they are not. Are there enough potential customers in the specific segment you are targeting to ensure you get your own share?
Finally, don’t be afraid to open right next door to your competitors.
In most businesses it is best to stay as far away from your competitors as possible. But in the restaurant business it is often best to stay as close as possible to your competitors, as your potential customers may have already decided that they are coming to this part of town to eat.
6. To Buy Or To Lease A Location?
A key decision is whether to buy or rent property.
For the new restaurant owner, the investment necessary to buy a property may be the deciding factor in this question. Buying a location is a major – and typically a long term – commitment, usually reserved for someone who has significant available capital.
The advantage to leasing is that it provides you with an opportunity to launch on a smaller budget. It may also offer an easier exit strategy if things don’t work out.
The major advantage to owning a location is that you will not have to worry about a rent hike. In addition, as an owner you do not have to work within the parameters as set by a landlord, giving you more freedom to do what you want with your property.
The final consideration when buying any real estate is the projected value of the property. Will the price of the property appreciate or depreciate in the coming years? While the goal of most restaurant owners is to build a successful eatery, in the past the acquisition of prime real estate made ownership very rewarding.
7. Renting A Restaurant
Before renting a location, it is critical that you consult the property experts.
A chartered surveyor will be able to advise you on the best sort of deal to suit your business needs and a solicitor will be able to advise you on legal points arising from the lease and the legal agreement between you and the landlord.
Do not sign anything unless you completely understand it and agree with it.
Here are some of the things you will need to think about:
Not only what it will be when the lease begins, but how much it could go up by.
The Length Of The Lease
How long do you want to commit yourself to renting the premises. Remember that unless your landlord agrees that you can give up your lease or transfer it to someone else, you will have to pay rent for the whole period of the lease, even if your income dries up.
Leases typically have agreements of between 1 and 25 years.
Don’t lock yourself into a long lease, at least not the first few years that you are in business. If your restaurant fails you don’t want to be locked into years of rent.
Protection When The Lease Ends
Will you have the right to renew the lease when it comes to an end?
How easily could you give up renting if you no longer need your premises or run into financial difficulties?
Will you be able to transfer the premises to someone else?
Will the landlord allow you to give up?
Do you have the opportunity to ‘break’ (end the lease) at certain intervals?
This would allow you to choose whether or not to continue renting the property.
The landlord may ask you for a financial guarantee, or may ask you to provide a guarantee for anyone who takes over your lease.
If things go wrong, a personal guarantee could mean significant financial implications that may affect your personal life.
You must take into account restrictions imposed by the local authority that may affect your business e.g. delivery or loading times, rubbish disposal, parking, noise, lighting etc.
Also, does the premises have an existing license to sell alcohol?
Is he or she someone you want to have a working relationship with?
The History Of The Property
Find out the history of the property and whether any other businesses have failed there and why. Was the property a restaurant before?
Ask neighbouring tenants for their input, will the space work for a restaurant.
Is there suitable ventilation, services, power etc?
Finally before renting a property, make sure you can get planning permission to make any changes you need to the property.
8. Designing Your Restaurant
If you have the budget, use an interior designer. Make sure they have experience designing restaurants and have a portfolio of their work to show you. Emphasise to your interior designer the need to adhere to your budget and that your restaurant should run smoothly and look good.
Create a design that facilitates the movement of your employees in and out of the kitchen. This will help create seamless service. Also, can you incorporate an open plan kitchen? The public likes to see who is preparing their meals. This design also brings chefs out of the kitchen.
Don’t just design a kitchen that works at the busy times. Make sure you can operate the kitchen just as efficiently when you are quiet and require less staff.
If you are just getting started, Smart Draw offers a really helpful free trial download program at www.smartdraw.com/downloads.
9. Designing The Menu
What Dishes Should You Offer And What Should You Skip?
The ideal restaurant menu offers a balance of unique dishes and old favourites. It also has the right food cost to maintain profits and can be easily reproduced in the kitchen during a busy dinner rush.
Avoid Food Fads On Your Restaurant Menu
You need to balance high and low food costs to for a reasonable profit margin. Unless you plan to get a Michelin Star, ensure your dishes are easy to prepare. Any menu items that have over fussy presentations can potentially bog down the kitchen staff during a lunch or dinner rush.
Items On A Restaurant Menu Should Be Versatile
Cross utilisation of menu items keeps food spoilage down and allows you to use ingredients in more than one dish.
Update Your Menu Periodically And Remove Items That Are Not Selling
Food cost, selling price and popularity of each menu item should be assessed regularly. This will help you to determine what items need to be removed or updated.
10. Costs Of Setting Up A Restaurant
What are the costs involved in setting up a restaurant?
There is no cast iron answer to this question, as each restaurant operation is different.
Here are some of the most common start-up costs associated with developing a new restaurant:
– Obtaining a lease and professional fees
– Premises refit
– Kitchen fit-out, ovens, refrigeration, etc.
– Staff recruitment and uniforms
– Furniture, crockery, table cloths, flowers, pictures, etc.
– Initial stock of food
– Launch marketing fund
– Working capital
Remember there are also a multitude of expensive ‘hidden’ costs involved with setting up a restaurant that many people do not consider.
Make sure you have sufficient funds in reserve to provide you with six months of working capital. Many restaurants fail because they are under-capitalised.
11. Equipment & Fit Out
Buying the kitchen equipment and fitting out your restaurant will probably be your biggest expense when starting up a restaurant. Look into buying second hand equipment. You may find that another entrepreneur’s misfortune will contribute to your success.
Recently failed restaurants probably left the owners needing money to bail them out of debt. One way that these entrepreneurs recover finances is to dump their equipment quickly, often for far less than they paid for it.
Use this opportunity to get the equipment you need, and only what you need, at a fraction of the price. Look in the newspaper and online on classified ad sites to find where these sell-offs are happening.
Also can you get free equipment or equipment on loan from your suppliers? For instance, you could get Grab ’n Go display fridges from your cold beverage supplier or barista machines from your coffee bean supplier.
12. Raising Finance
When writing a Business Plan, trying to convince anyone – either a bank manager or venture capitalist – to lend you the money to embark on your scheme is going to take more than a hazy idea sketched on the back of a pub napkin.
You need to be prepared, with a business plan, a presentation of your idea of how the business will work, and a realistic breakdown of costs. Only then will any investor take you seriously.
The business plan should include:
– Start-up costs
– Fixed and variable operating costs (Rent is fixed, Staff costs are variable)
– Forecasted number of covers and average spend. (Best and worst case scenario)
– Analysis of the likely gross profit on food and wine
– Analysis of your likely break-even point
– A marketing and sales plan
– A plan of source of funding
– A budgeted monthly Profit & Loss and forecasted cashflow analysis.
A business plan is also vital in securing enterprise grants, investments and loans, which you will need when starting your business.
Compiling your business plan can seem like the most difficult and the least exciting part of starting a new business, but it really is the most important.