When running a restaurant, cost cutting is never the answer to long-term success

It takes more than owning or running a restaurant to be a restaurateur. And those who once were or still are in the business can attest to this. Sustaining a smoothly operating restaurant requires a set of skills you never knew you had and lots of patience and understanding when dealing with a cast of crazy characters. As these true stories will show, even a silent investor can make roaring mistakes.

The case of the quick fix

Judy managed a chain of fast casual franchises. For three years, her business enjoyed sustained growth. But when the fourth year came in, she suddenly found her business dropping. To arrest the slide, she developed monthly promotions, which focused on discounting prices, introducing new products, and creating value-added initiatives. This all worked in the first four months of implementation, but then her efforts lost steam over time and in her fifth year, the establishments were still performing poorly compared to their glory days.

She hired the help of a professional consultant and discovered that in the middle of her third year, her average check had risen by 15 percent due to a new menu and adjustment of prices. And in the second year, she had three months when performance spiked because there were specific events near her establishment that brought in customers who would normally not be in those locations. These were found using a trend analysis.

Cost cutting is never the answer to long-term success. It is a reaction to drastic market forces that are out of your control, which happen once in 10 to 20 years.

Further studies revealed that the sharp rise in menu price had scared her target market and this was not noticed until the mid-section of the fourth year. Guests did not disappear immediately, but after a 10-month period, it became more obvious because the change caused a drop in covers. Her promotions improved the figures for four months, but they had no impact on the trend curve as four good months could not make up for eight bad ones.

Industry notes

1. Do not use traditional analysis methods. Reach out to other industries and learn how they analyze their business, as some of these work in the restaurant field.

2. There is never a short-term fix to a core problem. A short-term fix is like paint hiding the cracks in your wall. It works, but eventually, it will cause greater headaches.

3. Adjustments to product, price, and strategies need to be made in a calculated and educated manner. You can never overanalyze your business and your figures because numbers do not lie, but the wrong analysis can make them distorted.

4. Cost cutting is never the answer to long-term success. It is a reaction to drastic market forces that are out of your control, which happen once in 10 to 20 years.

5. When it comes to analysis, it must all be measurable. Even customer feedback needs to have a system in place that can measure the feedback in numeric forms since this will give you facts rather than hearsay.

The case of the three disillusioned restaurateurs

Restaurant owner 1

John was a great chef who had been in the industry for over 13 years. He became tired of working for others, therefore he did what most chefs do today and opened his own restaurant. John had the basic capital to open his dream and the experience in creating, costing, and developing menus. He developed his establishment, hired a team, and was ready to operate. But in the process of setting up shop, he realized that good food alone would not make him successful. Six months into the operation, he ran out of capital and faced a dilemma to find more money or cut his losses.

Business is never and should never be personal. Passion for your job is personal but in the end, running a foodservice establishment is about being profitable and trying to translate a product that the market responds to.

John lacked the front-of-house know-how and the skill in marketing, presenting, and managing all the business aspects of a restaurant. He opened a restaurant targeted at the A and B market in a predominantly C market area. He did not allocate enough money to survive the first year and did not have a plan for how to promote and market his establishment. Consequently, the overhead killed his business.

Restaurant owner 2

David was not making any profit. He would boast to all his friends and family about how well his restaurant was doing, but in reality it was bleeding money. He had been signing off over $2,500 per week on entertaining friends, family, and celebrities, which equated to $130,000 per year. On top of that, he wanted his establishment to be fancy and contemporary but his food was not good. Each dish had 15 different ingredients and most of them tried to be modern but ended up being superficial. The third problem was that his food and beverage was about everything that he liked and not what the market was actually looking for.

Further investigation revealed that he was not objective about his product and that he was usually not involved in the day-to-day operations of his establishment. When something failed, he would easily place blame on his team. He fired people fast and hired even faster, hoping this would solve just about any problem.

Restaurant owner 3

Sam had a silent partner invest in his restaurant business. He maintained 50 percent ownership. One day, this investor needed money. To resolve his personal financial problems, he took money out of the business without going through the proper procedure and documentation. So as not to be taken advantage of, Sam started taking money out of the business also. For every dollar taken out of the business by the investor, Sam would also take out the same amount, otherwise he would lose the lot. This eventually created war between the two. In the end, they lost the lot and the business saw its dirty demise.

Industry notes

1. Know your category and establish a clear picture of why you’re going into the restaurant business.
2. Just because you are a good cook does not mean you are a good restaurateur.
3. If you do not have the skills to manage all aspects of the business, get people around you who can cover for your weaknesses.
4. Establish clear rules, regulations, and contracts when getting into partnerships or getting silent investors.
5. Business is never and should never be personal. Passion for your job is personal but in the end, running a foodservice establishment is about being profitable and trying to translate a product that the market responds to. It is not about what you like (that may be the groundwork but it cannot and should not be the be-all and end-all) but about what the market likes and adjusting your vision to find the right balance for success.
6. Be honest with yourself and your partners. The best work is done when all parties can speak freely without taking things personally.

Originally published in F&B Report Vol. 13 No. 4