How to change your thinking and keep wage costs low forever?
This is an extremely common issue. Many of our own clients whinge about it and have significant wage cost control issues in their kitchens. Restaurants seem to be the most affected. It has grown to epidemic proportions, in such a way that most restaurant accountants fear it is simply unsustainable. It will be catastrophic for many, across multiple segments of our industry.
The problem is simple enough, but the solution is complex at best. Hospitality has grown like it is on steroids, persisting through these dark times. Restaurant numbers have multiplied, targeting all sorts of niches and the broader customer bases too. This offers so many high-value and quality alternatives – whereas before there was that one place everyone wanted. However, the situation changed really quickly, catching everyone unawares and many are still reeling from it.
The pressure on margins has quickly become unsurmountable, driving the prices on menus through the roof. Owners of these businesses have seemingly had no choice in the matter. There is now widespread protest from customers when it comes to pricing. Their outrage is often voiced in a very public manner. If you recall, the mark-up on wine was actually in the news!
With COVID, many a dining experience has met an untimely death, high end restaurants have maxed out their price elasticity, with nowhere to go but down. Having effectively priced themselves out of their ideal market, these businesses are lost at sea, beyond the safety of any financial shores. Compounded by an endless horde of nimble contenders, with newer business models, it was only a matter of time that customers said “no more price increases” – and took their business elsewhere.
A sort of warped education is choking the industry as well. Most customers, after watching a few Iron Chef re-runs, suddenly think they are gourmet connoisseurs grading the perfect meal – at a discount, of course. Their expectations may be grossly unreasonable, but they are there nonetheless. Unfortunately, a paying customer is mostly king in hospitality.
Talk about being caught between a rock and a hard place! It is actually a catch twenty-two for most. If you provide that level of quality, they cannot possibly afford you. But if you don’t, you lose market share to new entrants, in areas of the market you cannot even ever win. It is inevitable that many restaurants are closing forever with COVID and never coming back to this untenable position.
The intelligent business owner knows there are only two meaningful variables here. One, you reduce your cost of production in a significant manner. Two, you find pleasing ways to increase the customer average spend. Beyond that, any other change only presents a temporary and useless win. That’s not to say these former changes are easy to achieve either.
But, why do customers not spend enough?
It comes to engineering the right sales process. This is comprised of establishing a killer recruitment stage for the best staff possible; followed by maximising training and skillful management. Not to forget a marketing strategy that is completely aligned with your sales process i.e. getting the right people through the door with razor-sharp marketing. Please dump the antiquated printed menu full of sales obstacles e.g. undecipherable words, phrases, and setups that don’t facilitate the purchase of more and more, making spending more grind instead of fun.
As I am sure you have found out, just talking about doing all the above, is not going to cut it. Not when many are now actually walking that talk. Yes, there are winners out there, even today – who have seen the light. They are doing so through dramatically re-thinking how they do business and their goal is simply to take market share from everyone else. For example, they are recruiting better “sales-minded” staff that are emotionally intelligent enough to not be “too pushy” and still increase customer average spend at the same time.
Funnily enough, part of this puzzle is a personal preference. A few years ago, times were not this competitive. The traditional business owner developed certain habits about activities that happen in the business. For instance, those that felt creative and liked marketing decided they would spend more time doing just that. Instead of hiring a niche marketing expert that already knows what is working. Others wanted to focus on their numbers and did not hire a café bookkeeper, restaurant bookkeeper, or the like. Or even a restaurant accountant, missing out on best practice or even the right benchmark.
From my experience, most owners fail at setting targets and achieving them. That is because the target in itself is only an indicator of what could happen or what is already happening. You actually have to change the underlying process. And no one is willing to change until the pain is intolerable. Any other restaurant accountant would say the same thing too. Forcing your wage cost to conform to some calculated percentage is not likely to succeed. However, you may get away with giving management set budgets and enforcing compliance too.
Similarly, many café bookkeepers are reporting that traditional ways of running a business are running businesses into the ground. The large restaurant bookkeeper feels the same way. As a restaurant accountant, I see many businesses go through the same challenges. Some of them come to me when it is already too late and the damage has been already done.
Unsurprisingly, these businesses are hyper innovative when it comes to their menu and will take risks when pushed. However, this innovation needs to percolate through to their operations and beyond too. Change is in the air and it was bound to happen. It just happened earlier than it was supposed to. That is because the same traditional practices that ensured success a few years ago – now seem to only spell the doom of the industry on a wider scale. It is time to change.