Who is killing the South African restaurant industry?
Chapter 3: Investigating the suspects – Señor Supplier
In order to establish a clear motive and opportunity for our next suspect, Señor Supplier, it is necessary that we understand the circumstances in which both the victim and the suspect, operate.
By Michael Said
It was after all only a few short years ago that the local restaurant industry was operating on a retention rate of 18 to 24 percent, way in excess of returns in the US, making businesses in this industry highly sought after. In fact, every man and his dog who could get their hands on a few rands were gobbling up sites and franchises. Most restaurants were able to show year on year growth in excess of annual rental and product cost increases and all appeared to be well in the South African restaurant industry.
So, exactly how do restaurants make their money? Selling food and drink of course, but what are the percentages and how have they changed? For the purposes of this exercise I am going to show current retention of a franchise operation averaging a monthly turnover of R500,000.
At least 37 percent of that turnover is expended on food cost, with some restaurants only achieving 40 to 42 percent. That is money left on the table. Food cost is one of the last controllable expenses and if you are not controlling that, well…
From stock control systems to spreadsheets and manual books, there are many methods through which effective stock control can be achieved, but whatever system you use, use it properly. My personal favourite is www.idealstockcontrol.com, as I did have a hand in its early development.
After accounting for your food cost it leaves a gross profit of 63 percent. That is quickly gobbled up by…
• 11.00% Occupancy costs
This covers the basic rental and building operations cost, as well as any payments to the landlord in respect of the leased premises. Rentals vary greatly from place to place and in some operations may exceed the 10% level, but may be compensated for in volumes generated. (If you have read chapter two, The Landlord, you will know how difficult it is to achieve this.)
• 19.56 % Salaries and wages bill
This takes into account salaries and wages for all staff including managers, whether permanent or casual. All salaries, wages and even waiters commission should be applied at market related rates. Even the franchisee/owner should be paid a market related salary. If he is fulfilling the role of manager, he should be paid accordingly. Anything over and above this is effectively drawings.
• 6.00% Management services or franchise fee
This is the monthly levy payable to the franchisor, as agreed in the franchise agreement, and is typically calculated as a percentage of net turnover.
• 2.00% Marketing
The marketing expense should cover both the marketing levy paid to the franchisor, as agreed in the franchise agreement, and any ad-hoc monies spent on local advertising and promotions.
• 0.50% Administration costs
This includes the cost of producing management reports, VAT returns, PAYE returns and audited year-end financials. FYI, PAYE does not stand for Planes, Automobiles, Yachts, Etc. so stop buying toys before you have paid off the business.
• 1.20% Bank charges
This includes bank and credit card charges, but specifically excludes interest on loans and loan repayments.
• 1.00% Cleaning materials
Here we include all cleaning equipment, detergents, disposable uniforms, tidy mats and cleaning contracts.
• 1.30% Repairs and maintenance
This covers maintenance contracts, equipment repairs and replacement parts.
• 1.20% Replacements
Rather than capital goods such as fridges, stoves and furniture, this covers the cost of replacing crockery, cutlery and glassware breakages as well as cooking and baking utensils.
• 1.00% General
This should cover all costs directly related to operations including telephone, legal, printing and menus.
• 0.65% Insurance
All insurance relating to the leased premises.
• 4.00% Utilities
Consider your electricity, water and gas bills.
After all that it leaves a little under 11 percent to take away from the business… BUT, you haven’t paid interest, borrowings or tax.
Now, I realize that not all my readers are members of a franchise group, and that means the 6 percent management and 2 percent marketing fees may find their way to the bottom line, but as the Bard said “herein lies the rub!” If you are not paying franchise fees, a fair portion of that should be going to marketing, product engineering, research, human resources and other services that you otherwise ‘should’ be getting from your franchisor. (We will cover all that in a later chapter.)
That was rather a lengthy introduction, but in the context of understanding how suppliers are contributing to the death of the franchise industry it is necessary to understand these figures. In fact, I will be referring to these same figures in future chapters as well.
While there are many ethical suppliers, some who are ex-restaurant owners themselves with a sound understanding of the industry and who are willing to go the extra mile for their clients, regrettably there are many who do not fall into this category. How many of your suppliers have visited your restaurant and taken a walk through your fridges or dry goods stores to understand your space limitations? How many of them understand that delivering during a Friday lunch is not practical? And most importantly, how many of them realize the true impact of a price increase on your bottom line?
Amongst the many difficulties restaurants currently face, one of the greatest is balancing the increasing input costs with price points placed by the customers. Most customers come with a number in mind, an amount they would expect to pay for a type of product. As a customer you may feel that R30 is the most you should pay for a toasted cheese, R120 for a 300g fillet, R49 for a margarita pizza and so on… The moment the restaurant exceeds that number… POW they are perceived, and worse, described as expensive. Now, of course expensive is relative, but customers don’t consider this when scrutinizing price.
Many suppliers do not appreciate the fact that as they push up the price of raw goods, the restaurant owner cannot simply follow suit and pass the cost onto their customers. “Yes, but” says the supplier “why should I absorb the price increase passed onto me by my supplier?” A fair point, but let’s consider the following two scenarios…
1. You purchase an international product that is imported from the USA. Suddenly the rand takes a dive and you receive the dreaded “sorry to inform you of our price increase” letter. Well, the rand is at an all-time high, yet not a single restaurant I have canvassed has received a price reduction. Perhaps the time has come for all restaurant owners to revisit their files, find all the suppliers who increased their prices according to Forex rates and insist on a price reduction.
2. The same is true for the price of fuel. As petrol prices increase, you can bet that suppliers will be pushing up prices to cover ‘transport’ costs. Yet when the price of fuel goes down, prices remain the same… Please explain!
How many of your suppliers are aware of when exactly you change menu prices? Do they realize that a price increase one week after you printed new menus means that you will be operating on reduced margins for up to six months? It is recommended that fixed prices for a guaranteed period be negotiated with suppliers. However, doing so requires commitment from your side, you cannot suddenly jump ship on a supplier because someone else has offered you a few cents discount. Quid pro quo, as they say.
Groups and franchise operations should have no difficulty negotiating such terms, but they are often sideswiped by franchisees who then buy off-spec products. This brings me to yet another matter. My father, a mine of useless information by his own description, would often tell us “you can always buy oats cheaper if you buy it AFTER it has passed through the horse”. That is to say you will get exactly what you pay for. Squeeze a soap supplier for a few rand discount an you may find your concentrate diluted. Squeeze your butcher and he may stop aging his meat as long, so as not to lose the interest, and so it goes on.
The relationship between restaurants, in fact all businesses I am sure, and their suppliers is a difficult balancing act, but if both parties can adopt a policy of fair profit, both could benefit greatly. Now get on the phone, call your suppliers personally and schedule a ‘getting to know me’ meeting. Speak to them about the challenges, explain restaurant margins to them, give them a tour of your business and make them a partner… you will both be richer for it!□
Brand Strategy
Email: info@mikesaid.co.za
Phone: +27 82 449 7367
Web: www.brandstrategy.co.za
Twitter: mike_said_what
In order to establish a clear motive and opportunity for our next suspect, Señor Supplier, it is necessary that we understand the circumstances in which both the victim and the suspect, operate.
By Michael Said
It was after all only a few short years ago that the local restaurant industry was operating on a retention rate of 18 to 24 percent, way in excess of returns in the US, making businesses in this industry highly sought after. In fact, every man and his dog who could get their hands on a few rands were gobbling up sites and franchises. Most restaurants were able to show year on year growth in excess of annual rental and product cost increases and all appeared to be well in the South African restaurant industry.
So, exactly how do restaurants make their money? Selling food and drink of course, but what are the percentages and how have they changed? For the purposes of this exercise I am going to show current retention of a franchise operation averaging a monthly turnover of R500,000.
At least 37 percent of that turnover is expended on food cost, with some restaurants only achieving 40 to 42 percent. That is money left on the table. Food cost is one of the last controllable expenses and if you are not controlling that, well…
From stock control systems to spreadsheets and manual books, there are many methods through which effective stock control can be achieved, but whatever system you use, use it properly. My personal favourite is www.idealstockcontrol.com, as I did have a hand in its early development.
After accounting for your food cost it leaves a gross profit of 63 percent. That is quickly gobbled up by…
• 11.00% Occupancy costs
This covers the basic rental and building operations cost, as well as any payments to the landlord in respect of the leased premises. Rentals vary greatly from place to place and in some operations may exceed the 10% level, but may be compensated for in volumes generated. (If you have read chapter two, The Landlord, you will know how difficult it is to achieve this.)
• 19.56 % Salaries and wages bill
This takes into account salaries and wages for all staff including managers, whether permanent or casual. All salaries, wages and even waiters commission should be applied at market related rates. Even the franchisee/owner should be paid a market related salary. If he is fulfilling the role of manager, he should be paid accordingly. Anything over and above this is effectively drawings.
• 6.00% Management services or franchise fee
This is the monthly levy payable to the franchisor, as agreed in the franchise agreement, and is typically calculated as a percentage of net turnover.
• 2.00% Marketing
The marketing expense should cover both the marketing levy paid to the franchisor, as agreed in the franchise agreement, and any ad-hoc monies spent on local advertising and promotions.
• 0.50% Administration costs
This includes the cost of producing management reports, VAT returns, PAYE returns and audited year-end financials. FYI, PAYE does not stand for Planes, Automobiles, Yachts, Etc. so stop buying toys before you have paid off the business.
• 1.20% Bank charges
This includes bank and credit card charges, but specifically excludes interest on loans and loan repayments.
• 1.00% Cleaning materials
Here we include all cleaning equipment, detergents, disposable uniforms, tidy mats and cleaning contracts.
• 1.30% Repairs and maintenance
This covers maintenance contracts, equipment repairs and replacement parts.
• 1.20% Replacements
Rather than capital goods such as fridges, stoves and furniture, this covers the cost of replacing crockery, cutlery and glassware breakages as well as cooking and baking utensils.
• 1.00% General
This should cover all costs directly related to operations including telephone, legal, printing and menus.
• 0.65% Insurance
All insurance relating to the leased premises.
• 4.00% Utilities
Consider your electricity, water and gas bills.
After all that it leaves a little under 11 percent to take away from the business… BUT, you haven’t paid interest, borrowings or tax.
Now, I realize that not all my readers are members of a franchise group, and that means the 6 percent management and 2 percent marketing fees may find their way to the bottom line, but as the Bard said “herein lies the rub!” If you are not paying franchise fees, a fair portion of that should be going to marketing, product engineering, research, human resources and other services that you otherwise ‘should’ be getting from your franchisor. (We will cover all that in a later chapter.)
That was rather a lengthy introduction, but in the context of understanding how suppliers are contributing to the death of the franchise industry it is necessary to understand these figures. In fact, I will be referring to these same figures in future chapters as well.
While there are many ethical suppliers, some who are ex-restaurant owners themselves with a sound understanding of the industry and who are willing to go the extra mile for their clients, regrettably there are many who do not fall into this category. How many of your suppliers have visited your restaurant and taken a walk through your fridges or dry goods stores to understand your space limitations? How many of them understand that delivering during a Friday lunch is not practical? And most importantly, how many of them realize the true impact of a price increase on your bottom line?
Amongst the many difficulties restaurants currently face, one of the greatest is balancing the increasing input costs with price points placed by the customers. Most customers come with a number in mind, an amount they would expect to pay for a type of product. As a customer you may feel that R30 is the most you should pay for a toasted cheese, R120 for a 300g fillet, R49 for a margarita pizza and so on… The moment the restaurant exceeds that number… POW they are perceived, and worse, described as expensive. Now, of course expensive is relative, but customers don’t consider this when scrutinizing price.
Many suppliers do not appreciate the fact that as they push up the price of raw goods, the restaurant owner cannot simply follow suit and pass the cost onto their customers. “Yes, but” says the supplier “why should I absorb the price increase passed onto me by my supplier?” A fair point, but let’s consider the following two scenarios…
1. You purchase an international product that is imported from the USA. Suddenly the rand takes a dive and you receive the dreaded “sorry to inform you of our price increase” letter. Well, the rand is at an all-time high, yet not a single restaurant I have canvassed has received a price reduction. Perhaps the time has come for all restaurant owners to revisit their files, find all the suppliers who increased their prices according to Forex rates and insist on a price reduction.
2. The same is true for the price of fuel. As petrol prices increase, you can bet that suppliers will be pushing up prices to cover ‘transport’ costs. Yet when the price of fuel goes down, prices remain the same… Please explain!
How many of your suppliers are aware of when exactly you change menu prices? Do they realize that a price increase one week after you printed new menus means that you will be operating on reduced margins for up to six months? It is recommended that fixed prices for a guaranteed period be negotiated with suppliers. However, doing so requires commitment from your side, you cannot suddenly jump ship on a supplier because someone else has offered you a few cents discount. Quid pro quo, as they say.
Groups and franchise operations should have no difficulty negotiating such terms, but they are often sideswiped by franchisees who then buy off-spec products. This brings me to yet another matter. My father, a mine of useless information by his own description, would often tell us “you can always buy oats cheaper if you buy it AFTER it has passed through the horse”. That is to say you will get exactly what you pay for. Squeeze a soap supplier for a few rand discount an you may find your concentrate diluted. Squeeze your butcher and he may stop aging his meat as long, so as not to lose the interest, and so it goes on.
The relationship between restaurants, in fact all businesses I am sure, and their suppliers is a difficult balancing act, but if both parties can adopt a policy of fair profit, both could benefit greatly. Now get on the phone, call your suppliers personally and schedule a ‘getting to know me’ meeting. Speak to them about the challenges, explain restaurant margins to them, give them a tour of your business and make them a partner… you will both be richer for it!□
Brand Strategy
Email: info@mikesaid.co.za
Phone: +27 82 449 7367
Web: www.brandstrategy.co.za
Twitter: mike_said_what
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