How to pay more attention to costs?
Let’s take an effective look at cost controls in the food and beverages industry.
Whilst the industry is currently plagued by quite a few major challenges, cost controls are notoriously at the top of that list. Many struggles and fail at reducing their principle costs e.g. wages and food and beverages, what we call COGS (Cost of Goods Sold), which end up keeping panicked business owners awake at night.
Many years ago, this was not such an issue. Cost controls were just a tick in the box and definitely not something that many worried about. This was because less competitors and larger margins allowed business owners to take this matter rather lightly. And still, make out like a bandit! But things have changed.
As labour prices go up (Combined with some inflation) as a domino effect, most costs have actually risen regularly – when increasing competition has ensured that prices have barely increased. As a result, the profit margins in our industry have been under incessant attack and have been steadily eroded. This has left owners with one of two choices. Either increase your prices and I believe that most probably can. Or, reduce your costs. But is that easier said than done? Let’s find out how to do it.
2 types of wages & what to do about them
As soon as this comes up in a meeting with my clients, they usually run to their rosters and want to get rid of staff. Many times, they simply end up re-hiring them as the culling was too aggressive and the rosters were already maximised – long term (And even in the short term) this approach can actually backfire badly.
Staff turnover is actually very counterproductive and not warranted at all, most times. However, very few owners and managers understand this well. Most pay lip service to it, “Let’s reduce staff turnover.” But, when push comes to shove, that’s where they’ll go to reduce costs. Every single time.
Let’s delve even deeper in this wage analysis. First, let’s get some terms right. There are two types of wages. Productive wages are for activities that deal directly or very closely to customer transactions. The other category of wages is simply called non-productive wages e.g. wages paid for marketing, training new recruits, bookkeeping and other administrative tasks and so on.
Unsurprisingly, many businesses have high staff turnover, which is the number one problem that causes destructive hikes in wage costs. If you look closely at the reason why it makes sense too. Recruitment costs hide other costs. For instance, new permanent or casual staff put off profitable customers with their lack of experience.
This loss is compounded by the fact that you have to spend time and money training them. Non-productive costs soar as owners are constantly looking for new staff, often sacrificing the quality of their recruitment process, if they even have one. All of this culminates in serious and critical damage to their brand, income, and long-term viability.
I have to admit it is a rather counterintuitive measure to reduce staff turnover first, before even looking at anything else. However, if not addressed, most will reduce their productive labour in a futile attempt to reduce costs, reducing their customer service levels, causing the customers to stampede to the door and never come back. The problem is that only experienced (or well-trained) operators come to this conclusion.
There are a few other reasons why wage costs shoot up dramatically.
How to leverage sales skills
Many times this goes ignored for too long. It is a shame as it is one of the easiest things to fix. What’s the problem here? A staff member who is not proactive and trained well in the arts of sales will not maximise your profit per head (per customer). If they are not proactive, they will not be efficient. Furthermore, if they have not been trained, they will not be effective either. It takes time to find proactive ones and both time and money to train them. But it is well worth it.
Let’s do the math briefly.
If you could only add another 20% to your revenue whilst potentially reducing costs (well-trained staff stick around longer), how quickly would that transform your business?
Increasing sales skills is an almost magical solution to many financial issues. But there is something else you may be looking at the wrong way.
How much value are THEY adding?
How actually productive is your staff or do you have a proper mechanism to get to that answer?
This is easy – calculate your rate of pay per hour on an average basis. This will typically be an issue among your management or the higher-paid staff you currently employ.
Here’s how you do the calculation:
– Start with your weekly revenue
– Subtract your total wages
– Divide it by your total labour hours
A word of caution, what you find here can seriously upset you!
However, productivity may be a more complex issue. In fact, it may be an indication that something else is amiss. Something more sinister and well-hidden and management may not be to blame at all in many instances.
Let’s look at the organisational structure closely. You’ll quickly realise that it’s actually your supervisors that run the day-to-day activities and that is where you can make the biggest impact wage control-wise. The key question is:
“Are there systems in place to keep them accountable for productivity?”
Management will always be further removed from the action than your supervisors.
So, if you really want to have some influence in this matter, you have to address it at the supervisory level. This is also where the productivity upskilling and training will be more impactful. As a business owner, you need to keep an eye out for areas where you make a large impact, quickly and with little effort.
How about the actual tangible expenses? Cost of Goods?
Cost of goods
Split this in 3 areas:
– Are you efficient in your purchasing habits?
– Does your menu support your costing approach?
– Are you “Wastage control” focused?
Let’s face it. These days suppliers are falling over each other to find new customers. A business-savvy owner can definitely take advantage of this situation, within reason. Whilst you don’t want to squeeze so hard that they go out of business, you don’t want them to be too comfortable with your arrangement either. Or you will definitely end up paying too much.
How about the menu itself?
If you look at an Asian restaurant’s menu, you will see it has inbuilt structures that allow for price flexibility. Compared to a traditional European setup, customers spend more time, engaged with the dining experience. Compare it to just having an old 3-course structure i.e. entrée, main, and dessert. In the latter, there isn’t any real flexibility to adjust your pricing and benefit. Asian restaurants, therefore, end up with a higher spend per head, all the time out-laying less food.
Most restaurants make more on the beverages. Elongating the dining experience presents way more opportunities to sell drinks and capitalise on a higher margin and easier sale. Tweak your setup and find out. This may feel counterintuitive just like the next one.
Many business owners think they have figured out their menu costing, but they really don’t understand the basics. When I ask them, many can’t tell me what the margins are on individual items and are lining themselves up for a financial disaster. Once you know what they are, you need to ensure it is enough too i.e. it is not enough to just know, but you have to act on that knowledge. Sometimes, they don’t know their numbers well enough.
For example, it is costly not to understand stock control. Owners end up buying too much and wasting stock. Most of their profit ends up tied in their stock, which then gets wasted, leaving the business owner scratching his/her head wondering how come there is no profit or there is a profit, but no cash to show for it. Storage and ordering has to be extremely detailed and meticulous.
Moving forward, to be profitable, focus on having a system in place. Develop a better understanding of what financial and economic forces are at play. And be willing to try something new instead.