Who Is Killing The South African Restaurant Industry?
Chapter One: Identifying the suspects
By Michael Said
Like all good crime writers, let me begin by introducing our lead character, the victim! The restaurant industry has always been a difficult industry, with a number of factors that unsuspecting entrants are often not aware of. For one thing it is a factory. You have to turn raw material into finished goods in little or no time at all. Secondly it is retail with a twist. Your clients sample the product in front of you and not once they have arrived home. Thirdly, customers are only expected to pay for their purchase after they have enjoyed it. Combine these factors with a few others like cash, alcohol and ego and you quickly realise why an owner’s visit to any table is fraught with danger.
Despite these challenges, margins were acceptable to high if you managed your business properly and the restaurant industry remained an attractive and seemingly lucrative pursuit. Alas, all that has changed over the past three years. Restaurant profitability, or retention as it is often referred to, is at an all-time low. Whereas in the past a restaurant owner could expect to retain 18-24% of his turnover, this figure is now down to between 7-14%, something on par with what the waiters are earning in tips and often less than the landlord is receiving in rent.
There are a number of key factors that have contributed to the drop in retention. First and foremost is the considerably slower than anticipated growth. The impact of this is a significant increase in the rental to turnover ratio that should ideally be sitting at 11% or less. Then there is the increased input costs as food prices climb and a budget conscious clientele continues to put pressure on restaurants not to increase their prices. I would be remiss in not mentioning the owners, franchisors and other industry role-players who are contributing to the decline, either through total apathy and neglect, or in some cases, sheer stupidity.
So the picture is not a pretty one and the casualties are mounting. Who is to blame and what can be done about it?
It is with great sadness and regret that we note the passing of yet another of Johannesburg’s restaurants. Last month, the Linger Longer Restaurant in Sandton joined the growing list of casualties and although the cause of death is yet to be determined, you can be certain that at least one, if not all, of our suspects were to blame.
Surely there must be warning signs to spur you into instituting a program of action to save the business? What are the indicators of failing health and increased risk that you can look out for in your own business? Here are a number of red flags to look out for in your own establishment and please, if you recognise any, take action now. Remember, you can always sell a restaurant a little too early, but you can’t sell it one second too late!
• The absence of a well-organized and implemented accounting system
• Key operating expenses that are too high, relative to gross sales
• Menu items that are not accurately documented, costed and updated
• Food and beverage inventory levels not counted, costed and recorded at the end of each chosen period
• Food and beverage inventory levels that are too high, relative to corresponding sales
• Daily and weekly financial operating data not collected, reviewed or acted upon
• Inaccurate posting of financial information to your accounting system
• Current liabilities sufficiently greater than current assets as to impair your future ability to pay accounts
• An owner relying on his online bank balance to determine the cash available for account payments
• An overall lack of understanding as to how to read and interpret period ending financial statements
You will see from the above that monitoring the health of your business relies less on tracking turnover or foot counts, but rather on your ability to control the financial aspects of your restaurant. If your mouth was getting a little dry or your pulse started to race as you read through the list - seek help now! Of course the best time to start putting these things in place was last year, but the second best time is now.
“To want to own a restaurant can be a strange and terrible affliction. What causes such a destructive urge in so many otherwise sensible people? Why would anyone who has worked hard, saved money, and often been successful in other fields, want to pump their hard earned cash down a hole that, statistically at least, will almost surely prove dry? Why venture into an industry with enormous fixed expenses (rent, electricity, gas, water, linen, maintenance, insurance, license fees, trash removal, etc), a notoriously transient and unstable workforce and highly perishable inventory? The chances of ever seeing a return on your investment are about one in five. What insidious spongiform bacteria so riddles the brain of men and women that they stand there on the tracks, watching the lights of the oncoming locomotive, knowing full well it will eventually run them over? After all these years in the business, I still don’t know!”
So wrote Anthony Bourdain in the now legendary Kitchen Confidential and it certainly makes a fine introduction to The Suspects. While this investigation reveals more suspects than food critics at a free lunch, I have tried to narrow it down to six. Over the next few chapters I shall state the case against each one and allow you, the jury, to make up your minds. Who can forget the board-game Cluedo with its rooms, weapons and suspects and the plain brown envelope that sat in the middle of the board waiting to reveal the mystery.
Our Suspect Six, in no particular order, are as follows…
Was it The Customer with No Spending Power in South Africa?
Was it The Supplier with No Concept Of How The Industry Functions behind his Desk?
Was it The Staff with Total Indifference in The Restaurant?
Was it The Franchisor with His Eye On The Joining Fee at the First Meeting?
Was it The Owner with No Clue Or Conception in La La Land?
Besides our six suspects, I am certain there are others that have contributed along the way, from The Banks to The Legislators and Previous Owners who sold their restaurants under false pretexts… the list goes on and on.
And what of our poor victim, how is he fairing at the moment? He is on life support, meagrely trying to eke out an existence until the December season or until the election or until the next world cup or until the government changes or doesn’t, until interest rates come down, until sentiment goes up, until… until… until…
Brand StrategyEmail: info@mikesaid.co.za
Phone: +27 82 449 7367
Web: http://www.brandstrategy.co.za/
Twitter: mike_said_whatWas it The Landlord with his Lease in the Shopping Centre?Crime thrillers are all the rage right now and while I am no James Patterson or Lincoln Child, the slow and painful death of the South African Restaurant Industry makes for some pretty interesting reading. “Death?” you ask, am I not being a little too dramatic, a little too severe? I think not! Restaurants are closing down weekly and those that manage to keep their doors open are doing so against great odds. Of course there are the exceptions to this statement and over the next few months I hope to uncover some of the suspects and hopefully, aid some of the survivors.
By Michael Said
Like all good crime writers, let me begin by introducing our lead character, the victim! The restaurant industry has always been a difficult industry, with a number of factors that unsuspecting entrants are often not aware of. For one thing it is a factory. You have to turn raw material into finished goods in little or no time at all. Secondly it is retail with a twist. Your clients sample the product in front of you and not once they have arrived home. Thirdly, customers are only expected to pay for their purchase after they have enjoyed it. Combine these factors with a few others like cash, alcohol and ego and you quickly realise why an owner’s visit to any table is fraught with danger.
Despite these challenges, margins were acceptable to high if you managed your business properly and the restaurant industry remained an attractive and seemingly lucrative pursuit. Alas, all that has changed over the past three years. Restaurant profitability, or retention as it is often referred to, is at an all-time low. Whereas in the past a restaurant owner could expect to retain 18-24% of his turnover, this figure is now down to between 7-14%, something on par with what the waiters are earning in tips and often less than the landlord is receiving in rent.
There are a number of key factors that have contributed to the drop in retention. First and foremost is the considerably slower than anticipated growth. The impact of this is a significant increase in the rental to turnover ratio that should ideally be sitting at 11% or less. Then there is the increased input costs as food prices climb and a budget conscious clientele continues to put pressure on restaurants not to increase their prices. I would be remiss in not mentioning the owners, franchisors and other industry role-players who are contributing to the decline, either through total apathy and neglect, or in some cases, sheer stupidity.
So the picture is not a pretty one and the casualties are mounting. Who is to blame and what can be done about it?
It is with great sadness and regret that we note the passing of yet another of Johannesburg’s restaurants. Last month, the Linger Longer Restaurant in Sandton joined the growing list of casualties and although the cause of death is yet to be determined, you can be certain that at least one, if not all, of our suspects were to blame.
Surely there must be warning signs to spur you into instituting a program of action to save the business? What are the indicators of failing health and increased risk that you can look out for in your own business? Here are a number of red flags to look out for in your own establishment and please, if you recognise any, take action now. Remember, you can always sell a restaurant a little too early, but you can’t sell it one second too late!
• The absence of a well-organized and implemented accounting system
• Key operating expenses that are too high, relative to gross sales
• Menu items that are not accurately documented, costed and updated
• Food and beverage inventory levels not counted, costed and recorded at the end of each chosen period
• Food and beverage inventory levels that are too high, relative to corresponding sales
• Daily and weekly financial operating data not collected, reviewed or acted upon
• Inaccurate posting of financial information to your accounting system
• Current liabilities sufficiently greater than current assets as to impair your future ability to pay accounts
• An owner relying on his online bank balance to determine the cash available for account payments
• An overall lack of understanding as to how to read and interpret period ending financial statements
You will see from the above that monitoring the health of your business relies less on tracking turnover or foot counts, but rather on your ability to control the financial aspects of your restaurant. If your mouth was getting a little dry or your pulse started to race as you read through the list - seek help now! Of course the best time to start putting these things in place was last year, but the second best time is now.
“To want to own a restaurant can be a strange and terrible affliction. What causes such a destructive urge in so many otherwise sensible people? Why would anyone who has worked hard, saved money, and often been successful in other fields, want to pump their hard earned cash down a hole that, statistically at least, will almost surely prove dry? Why venture into an industry with enormous fixed expenses (rent, electricity, gas, water, linen, maintenance, insurance, license fees, trash removal, etc), a notoriously transient and unstable workforce and highly perishable inventory? The chances of ever seeing a return on your investment are about one in five. What insidious spongiform bacteria so riddles the brain of men and women that they stand there on the tracks, watching the lights of the oncoming locomotive, knowing full well it will eventually run them over? After all these years in the business, I still don’t know!”
So wrote Anthony Bourdain in the now legendary Kitchen Confidential and it certainly makes a fine introduction to The Suspects. While this investigation reveals more suspects than food critics at a free lunch, I have tried to narrow it down to six. Over the next few chapters I shall state the case against each one and allow you, the jury, to make up your minds. Who can forget the board-game Cluedo with its rooms, weapons and suspects and the plain brown envelope that sat in the middle of the board waiting to reveal the mystery.
Our Suspect Six, in no particular order, are as follows…
Was it The Customer with No Spending Power in South Africa?
Was it The Supplier with No Concept Of How The Industry Functions behind his Desk?
Was it The Staff with Total Indifference in The Restaurant?
Was it The Franchisor with His Eye On The Joining Fee at the First Meeting?
Was it The Owner with No Clue Or Conception in La La Land?
Besides our six suspects, I am certain there are others that have contributed along the way, from The Banks to The Legislators and Previous Owners who sold their restaurants under false pretexts… the list goes on and on.
And what of our poor victim, how is he fairing at the moment? He is on life support, meagrely trying to eke out an existence until the December season or until the election or until the next world cup or until the government changes or doesn’t, until interest rates come down, until sentiment goes up, until… until… until…
Brand StrategyEmail: info@mikesaid.co.za
Phone: +27 82 449 7367
Web: http://www.brandstrategy.co.za/
Twitter: mike_said_whatWas it The Landlord with his Lease in the Shopping Centre?Crime thrillers are all the rage right now and while I am no James Patterson or Lincoln Child, the slow and painful death of the South African Restaurant Industry makes for some pretty interesting reading. “Death?” you ask, am I not being a little too dramatic, a little too severe? I think not! Restaurants are closing down weekly and those that manage to keep their doors open are doing so against great odds. Of course there are the exceptions to this statement and over the next few months I hope to uncover some of the suspects and hopefully, aid some of the survivors.
In this days south African restaurant industries was going in the loss. The people are not interesting to invest their money in restaurant business.
ReplyDeleteMiller Haus B and B