Restaurant Cost Cutting Tips

Blogger Mohan Patel is a marketing grad student based in India. I am not affiliated with Aaron Allen or his consulting firm but recommend him as a restaurant consultant to any company seeking restaurant marketing strategy and business improvement ideas.

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A penny saved is a penny earned and for every way there is to spend money on your restaurant, you can find as many ways to save money for your restaurant.

The recession of 2009 continues to siphon spirits from the beleaguered restaurant industry in 2010. After decades of positive consecutive sales growth, the restaurant industry has had two back-to-back years of overall sales declines. It’s clear that to survive, restaurateurs must implement both restaurant cost cutting and revenue-building programs.

Here are ten things you should do (followed by ten things you shouldn’t do) to save cut costs for your restaurant:

1. Sell, Sell, Sell – You can’t operate yourself to a profit. The top line cures all that ails you. A 2% increase in sales is equivalent to a 10% reduction in food costs. The surest way to quickly reduce costs is to build the top line revenue. Even though the industry is down, it is only down by a few percentage points. Meanwhile, some restaurant companies are down double digit percentages. What this says is some restaurant companies are way up. There are sales to be had, but in this market it won’t happen on its own. As the saying goes, “you eat what you kill”, so this is the time to get out there on the offense.

2. Reengineer – The tectonic plates of the restaurant industry have shifted irrevocably. There are still many billion dollar restaurant chains sitting on the fault lines thinking their woes are just temporary and due to the downturn. Fact is, the industry has changed and the pace of change is only speeding up. Fast Casual is growing much faster than the rate of the industry overall. That means there is cannibalization. Home Meal Replacement, which is at $70 billion annually, is the new battle ground between restaurants and grocery stores. Grocery stores steadily lost market share to the restaurant industry every year for decades and now they’ve had enough. They are fighting back and operating more like restaurants. The industry has begun to fragment and splinter and the winners are the ones who are specializing. Restaurant groups like Chili’s and TGIFriday’s meanwhile continue to operate on the systems and approaches of the restaurant industry of the 1980’s and 1990’s. We saw how that worked for the Bennigans (they went bankrupt). Many restaurant companies are holding on with sophisticated financing schemes, but their focus should be on reengineering for the future of the industry, not trying to force yesterday’s approaches to continue working. When you reengineer, you naturally cut costs as you find more efficient methods and approaches to doing business.

3. Invent – There’s nothing like a recession to get the industry dusting off tired old promotions. The happy hour and all sorts of other state-of-the-art-1989 programs are being re-introduced and, to the dismay of those pushing them, the results just aren’t there. Times have changed. It took the radio 38 years to reach a market audience of 50m people. It took the television 13 years to reach 50m. Facebook reached 50m in just 2 years. Meanwhile, tired restaurant chains are pushing happy hour promotions via mass media advertising and taking a “wait and see” approach with social media. Social media isn’t just for Millenials. Even if it were though, there are now more Millenials in America than Baby Boomers. Fact is, the rest of the world and other businesses/industries are having to speed up their rate of change and reduce cycle times. The real winners – companies like Apple – are winning through invention. We just experienced the worst financial period since the Great Depression yet Apple’s iPhone is the fastest selling product in history and sales only continued to climb in the recession. How did they do that without discounts? Invention. The more you innovate and invent, the less you have to discount.

4. Furlough – Make sure you keep your top people. Before you terminate any of the good ones, ask them to consider a furlough or reduced hours. The National Restaurant Association estimated that for each average hourly employee you hire, you spend $1500 training them. Meanwhile, many restaurants have a 100% or higher turnover rate of employees. If you have a staff of 100, that means $150,000 per year in training new employees! Since this ‘training’ cost is often just rolled in to payroll and not accounted for separately, many restaurant executives don’t know the true cost of their training programs. Retention is key (and so is a modern day approach to training systems, but that’s another article for another day).

5. Inventory Utilization – When I took over operations for a $4m Caribbean themed restaurant, I focused in on the bar. We generated nearly 30% of revenues from the bar and were running bar costs in the high 20’s (cost as a percentage of sales). When I studied our purchasing and inventory, I saw we had stacked up cases and cases of a product that wasn’t moving. Canadian Club had been running a promotion for their new Canadian Club Citrus and so they were giving bottles of it away with purchases of other faster-moving product. Our competitors up and down the beach had amassed mountains of this product too. They started trying to unload it with $2 shots. Then $1. Then $.50. No one bought it. They had never heard of Canadian Club Citrus and figured if they were selling it for $.50 it couldn’t be too good. So, I took a different approach. I invented a drink called the “Cayman Curse” and said we couldn’t tell you what goes in it or you will get the curse of the Cayman’s. We sold them for $8 and built appeal by putting dry ice in (which makes the drink smoke) and supporting it with a suggestive selling program. Results? It became our top seller. We started trading a bottle of Crown Royal with other restaurants for a case at a time of the product they weren’t moving. Our cost in the drink was so low that – coupled with the huge volume – it brought our overall bar costs down to 16% of revenue. That’s half what it was! Just one innovative idea and new approach to inventory utilization made a big impact on the bottom line. You don’t have to have a bar though, similar approaches can be taken with fish species, for example, and you’re not only reducing costs but taking pressure off other species.

6. Marketing – The average restaurant in the USA spends 3% of revenues on advertising and marketing. This is a variable and controllable cost that many cut from their budgets when the going gets tough. This is a good time to stop with the mass media advertising. No billboards, radio, television, bench, yellow pages or other antiquated approaches to connecting to your customers. However, it’s not a good time to stop marketing. Not in a recession. It is counter-intuitive, but now is the time to invest in marketing. You will find that some of the biggest swings in market share happen in a recession as some businesses stop marketing and others turn up the heat. The goal isn’t just to spend though, it’s to invest. Now is the time to invest in innovative new marketing programs like social media, mobile marketing and a host of other new approaches advocated throughout many of my other blog posts and articles found at www.aaronallen.com.

7. Ask your vendors for help – Landlords will give grace, broad-line distributors will give extended payment terms, and in general, your vendors want you to succeed. Your destinies are sort of intertwined in that regard – the better you do, the better they do. It is short sighted to price shop vendors in such a way that you bounce from deal-to-deal with no loyalty to a vendor. When you are loyal and ask for help, generally you get it. Often, those vendors that steal you away with a lower price are lacking on the service side and sometimes, the service you lose is worth more than the discount you gained.

8. Focus on Majors – The 80/20 rule should be applied to cutting costs. Many operators attempt to improve 100 areas at once. The key is to find key leverage points. One of my clients has food costs that have run as high as 47%. Every percentage point reduction in food costs is equivalent to $100,000 in net profit improvement. Our approach isn’t to tackle every one of the 350+ inventory SKU’s they have. Our approach is to focus on the top 5 SKU’s. Focus on the big stuff first. Work your way down your profit and loss statement or inventory working on no more than 5 items at a time.

9. Purchasing Cooperatives – We have introduced many of our clients to purchasing cooperatives. A cooperative is a buying group that gives independent operators and regional chains buying power like the mega chains. Whether you’re buying food or marketing, when you buy in bulk you always get a better deal and better service. If you don’t have the buying muscle you need, join or start a cooperative. We have seen one operation go from paying $48 for a bag-in-the-box of soda to paying $42 and less. That’s a 20% savings just for purchasing in a group. It adds up quickly when you’re pouring 100,000 gallons per year as they were.

10. Set a Good Example – You’ll notice many CEO’s these days setting examples for their other employees by tightening their own belt too. The CEO of General Motors worked for $1 per year. The CEO of Land O’ Lakes (a $12b company) fly’s only coach like his employees. The CEO of Wal-Mart stays in 3 star hotels and often shares a room with another executive. When the head of the company demonstrates a willingness to put the company above his own comfort, it trickles down to the rest of the company and inspires them to do the same. You can’t show up to work in a brand new Mercedes though and expect your employees to think cash is tight.

Here are then things you shouldn’t do when looking for restaurant cost cutting ideas:

1. Lower Quality – Whatever you do, don’t trade your reputation for a short-term and incremental decrease in your costs. Customer can tell when a restaurant lowers quality. One restaurant I used to love stopped putting pancetta and fresh parmesan on their Cesar Salad. They may have saved a few pennies, but I stopped going. The Cesar was the best I’d had in the US but it wasn’t the same without the original ingredients. I spent $200 a week or more at that restaurant – I’ll bet their switch didn’t make up for loosing even one customer with that kind of frequency.

2. Skimp – Another trick we see implemented in hard times is to skimp. Let’s say you have a pizza restaurant and the manager gets a bonus for maintaining a 32% food cost. What happens next week if he misses his bonus because he ran a 34% food cost? Yep, you guessed it, the next week he comes in at 30%. Now, the owner may be happy because it balanced out, and the manager is happy because he got the bonus, but the reality is there were customers that last week that got fewer mushrooms and less cheese on their pizza. They notice the skimping and go to a competitor. You lose more in life time customer value with customer defect than gained by cheating them by skimping.

3. Overstock – When the recession hit, manufacturing took a dive as businesses began depleting existing inventory rather than ordering new inventory. Par-levels were reduced to get more in line with reduced demand. When you get your inventory levels in check with demand, you perform at a healthier level in terms of cash flow and liquidity. This is a balancing act though. If you run inventory down too low, you run the risk of running out. Your inventory levels are important to keep an eye on when you’re cutting costs.

4. Close Too Early – When you close early, it can become a self-fulfilling prophecy. No matter what, you’re last hour will be slower than your peak hour. When you close earlier and earlier, you will notice a shorter peak period. You may feel you are saving a few hundred dollars by closing, but here again you come out worse off in the long-run. As I write this I am in Seaside, Florida (www.seasidefl.com). The local restaurant keeps closing before 9PM. Last night the kitchen closed at 8:25 and earlier this week the restaurant closed by 7:30 (they don’t even open until 5:30 PM). The overhead of having a sprawling restaurant on the Gulf of Mexico is fixed. When you close too early, you train your customers to expect you to be closed and to circumvent you altogether the next time they think of going out. You end up converting them to your competitors and, for the few hundred dollars you saved closing early, you lose untold thousands in ‘life time value’ of the customers who defect to your competitors that maintain later hours.

5. Destroy Morale – It is impossible for you alone to cut your costs. You have to have the support of an entire network of people from vendors to employees. If you beat them up too hard, you may get your short-term results at the cost of your long-term partners. No one wants to work for a tyrant and they’re even less likely to go out of their way to save you money if they fell stepped on for the benefit of corporate profit.

6. Cut Maintenance – Maintenance seems to be another of those areas that gets cut when times are lean. Even if it means borrowing money, you can’t cut maintenance. When lights get burned out and not replaced, bathrooms fall in to disrepair, hood systems get clogged, fryer oil is replaced less often – when these things happen you run the risk of causing long-term and expensive damage to your equipment, your staff and your customer perceptions.

7. Carry Dead Weight – Cull through your ranks. Evaluate who is with you based on tenure, seniority or nepotism and who is there because they are loyal, committed and high-performance contributors. Turnover of staff is costly, but keeping bad employees and dead weight can be even more costly.

8. Fragment or Splinter – You can find a cheaper price on nearly any individual item you stock or service you hire. When you start fragmenting your purchasing across several vendors, you lose leverage and often get hit with hidden costs you weren’t expecting (such as delivery costs, accounting work, unredeemed rebates, etc).

9. Be Penny-Wise and Pound-Foolish – This goes hand in hand with many of the other suggestions above, but keep in mind the negative impact that can happen in terms of reduced focus or decreased morale with penny-wise approaches. For instance, getting rid of free coffee for staff may save a bit of money each week, but have a demoralizing affect on the staff. Don’t let the pressure lead you astray from your values and the moral principles your brand stands on.

10. Spend more time in the back-office than the front of house – A downturn can cause stress, depression, anxiety and frustration. These emotions can wear you down and sap your happiness and passion. If you feel this start to happen, get a break. When you worry and get run down, it will invariably impact staff morale and the levels of hospitality your restaurant delivers which will only make matters worse. Remember, you’re in the hospitality business. Yes, it’s a business and that means tending to the numbers, but it can’t be done at the loss of the customer experience and levels of passion, professionalism and hospitality you deliver.

The recession has forced every business to look at their spending more closely. Even the world’s largest governments are facing shortfalls and having to make hard choices. Use this time as an opportunity for innovative new approaches though, not just penny-pinching. As the saying goes, “Necessity is the mother of all invention”. Be thankful for the downturn – if you use it correctly, it will force you in to newer and better ways of doing things.

I hope you have found this article helpful. Please share your comments and suggestions on other ideas you have for restaurant cost cutting using the reply form below. We’d love to hear from you and share your insights with other readers.