Would You Lower Costs If You Could Do It without Sacrificing Quality?
Restaurant owners and managers
want need to lower costs. But they don’t want to damage their quality or turn customer off. Sound like an impossible task? As the saying goes, it’s simple but it isn’t easy.
Here’s The Plan of Attack (5 x 3 = 15)
- 5 Big Expenses
- 3 Tips to Reduce Each Expense
- 15 Total Cost Cutting Ideas
We’ll look at 5 of the biggest costs restaurants face. We’ll give you 3 ideas to lower these costs. That’s 15 cost savings ideas you may be able to use in your restaurant.
Your Restaurant Will Live or Die by This Equation
Reducing costs is important because of the following equation:
Net Profit = Revenue – Expenses
Net profit is what you, the restaurateur, get to keep after you pay all your bills. Yay! In general, the higher this number, the healthier your business.
Reducing restaurant costs all reduce to one equation. Revenue minus expenses equals net profit.
Of course, there’s always more to the story than the numbers alone reveal. But if your net profit is positive, you can operate your restaurant from a position of strength.
Before we look at way to lower costs, let’s define three terms with help from Investopedia.
Revenue: The total amount of income generated by the sale of goods or services related to the company’s primary operations.
Expenses: The economic costs that a business incurs through its operations to earn revenue.
Net Profit: The amount of income that remains after accounting for all expenses, debts, additional income streams and operating costs.
We won’t be looking at ways to increase your revenue in this article. Although we have written about ways to market your family restaurant before. Our focus in this week’s article: reducing expenses. This is one of the best ways to increase net income.
Before we jump into specifics, here’s a broad overview of a typical restaurant’s expenses. Keep in mind, these percentages vary based on numerous factors. One of the biggest differences is between full-service vs. table-service restaurants.
Prime Costs and Ways Restaurants Can Lower Them
Prime costs (sometimes called expenses) are the combination of food and labor costs. Since these two costs compose 62–68% of the expenses for a restaurant, we’ll consider them first.
Reducing Food and Beverage Costs
Food costs are one of the biggest expenses most restaurants have. The exact percentage will vary based on the type of restaurant you have, but 33% is a safe place to start.
This means that if your restaurant brings in $10,000 in a week, your food costs will be about $3,300.
Factors effecting food costs:
- Type: The types of dishes you serve (steaks vs. burgers) will play the biggest role in your food costs.
- Season and Weather: Ingredients change price every season and according to the weather. A drought in Brazil means higher coffee prices.
- Quality: Do you buy fresh vegetables every day or are you refrigerating them for a week ahead of time?
- Order Quantity: How much you buy at a time (small quantities vs. large quantities)
- Waste: Poorly prepared dishes, accidents, food that dies in the window, incorrect portioning, etc.
- Spoilage: Food spoils when it isn’t used in time or because it wasn’t stored correctly.
- Theft: It’s sad but true that your employees will steal from you.
- Over Pouring: It’s easy to do and easy to not do. Train your bar staff on the right way to pour alcohol.
Types of Food
The kind of food you serve is based on the kind of restaurant you are. If you’re a steakhouse, people expect good steaks. If you’re a breakfast concept, people expect pancakes and eggs.
If you’ve already started a steakhouse? It may be difficult to change it to a burger joint. But if you want to lower your food costs long-term, this may be a viable option.
You should also try to find less expensive vendors for your the ingredients you use all the time. With everything on your plate, this may seem like like a waste of time. But if you find a cheaper vendor for the food items you use every day, you’ll reap the rewards over and over.
Bonus: Don’t just focus on food cost. If a steak costs you twice as much as a burger, but you can sell it for twice as much, you’re coming out ahead.
Quality of Raw Ingredients
Most people have a poor palette. McDonald’s is the number one restaurant in the United States. Enough said. Replacing high-cost, low-margin ingredients with cheaper alternatives, will drastically improve your net profit.
In general, the more you order, the more you save. If you order a higher quantity, your price per unit will be lower.
But what if you’re a small family restaurant and your order size isn’t big enough to get a price cut?
Work with your vendors to secure a lower price per unit anyway. Commit to buy a larger quantity of food over time. They win because they sell more product to you. You win because you get your food at a lower price point without having to put out a lot of cash upfront.
Bonus: If you keep a lot of food on hand your staff may not be as careful with serving sizes, refills, spillage, etc. Be sure that buying large quantities to save money doesn’t end up costing more than you bargained for.
Reducing Labor Costs
Finding and hiring good workers is the hardest part of the restaurant business. Get it wrong, and there’s not much that will save you. But with the right people in place, you can survive a lot.
A restaurant that’s only 80% there, but with good people, can survive until you figure out the other 20%.
Labor costs are the single largest expense most restaurants have. A large part of your labor costs are dictated by local, state, and federal regulations.
Of course you could chose not to hire anyone, but robot powered restaurants are still a thing of the future.
Bonus: When it comes to labor costs start with your kitchen staff. Servers make just 25–35% of what a back-of-house position does. Getting the right people in place in the kitchen will have the highest impact on your labor costs. The same goes for concerns about:
- Clocking in and out on time
- Employees taking each other’s shifts
- Socializing or other time wasters
- Getting the right people in place in your kitchen will have a big impact on labor costs.
Schedule Hours Based on Hard Numbers
There’s a balancing act to scheduling employee hours. Look at the hard numbers on your POS and listen to the feedback from servers, managers, and hostesses. Sometimes this information seems like it conflicts.
For example, your servers may say that there aren’t enough people scheduled Friday nights. But when you look at the POS you can see that you’re trending down on Friday nights. Since it’s early October, you know that football season has started. That Beer & Wing joint down the street is probably picking up some of your business. You decide to go with the POS data and keep staffing levels where they are. You may even remove some hours since you know that Friday’s will be slower until Super Bowl.
You don’t want to pay employees for standing around when your restaurant is slow. On the flip side, employees don’t want to keep their schedules open just in case you call them in. They also don’t like getting dropped halfway through a shift. This is sometimes called flexible-staffing or flex-hours.
So keep an eye on your sales data. Base the hours on the numbers. It may be tempting to try to be the nice guy, but it rarely works. Remember, this is a business, not a charity. If your business fails, all your employees, customers, and investors suffer.
Many POS systems look like they were designed in the 80’s. But if you dig around under the hood, you can find features and reports to help reduce labor costs. Don’t feel like doing the digging yourself? Ask one of your tech savvy team members to learn the system and then train you.
Give More Hours to Fewer People (Prerequisite: Hire the Right People)
There’s no denying that many of the folks working in food services are transitory. They’re on their way from one job to another. Food service is just a stop in-between. This isn’t a bad thing per se. But it does make finding experienced and dedicated staff a challenge.
There are a variety of ways to keep good people around, but the bottom line is still the bottom line. The more you pay people, the better odds you have of keeping them.
Guaranteeing more hours to fewer people is one way to make sure your best team members stay with you.
Bonus: This tip is dependent on having the right people on your team. If you’re stricter about who you hire you’ll end up with a better team. A better team means fewer complaints, more satisfied customers, and a more efficient operation.
Will other staff like this arrangement? Actually, they might. You’ll inevitably hire a few folks who just aren’t cut out for the restaurant business. They’ll probably try to give away their shifts because they partied too late the night before. These shifts will gravitate to those who are willing to work the extra hours. But you’ll still want to make sure any shift changes go through you or one of your managers. This will help ensure you don’t end up paying overtime.
Here are some of the benefits to scheduling key team players with more hours:
- Better Pay: The more hours employees work, the more they make. This includes hourly wages and tips.
Increased Focus: The more hours they work the less likely they’ll have to work another job. This reduces stress leading to a better work experience overall.
- Lower Fixed Costs: Fewer employees means lower fixed costs. These expenses include things like uniforms, insurance, and training.
- More Experienced Staff: The more hours one employee gets the more experienced they’ll become. More experience means better service for your customers. Full-time employees become more experienced faster than part-time employees. So if you can figure out how to maximize your full-time employees you’ll be able to reduce your labor costs.
Be A Stickler for Clocking-In and Clocking-Out
Every industry that uses clocking-in and clocking-out has to deal with the same problems:
- Employees clocking-in before their shift is supposed to start.
- Employees clocking-out after their shift is supposed to end.
You need to be a stickler when it comes to clock management.
It’s not that people are trying to be bad (okay some of them might be). And most folks will realize that it’s best to mind the clock. Time is money.
This issue is not unique to the restaurant industry either. There’s entire online industry that match freelancers to employees. To ensure that time that’s billed is actually productive, they use screen recording technology. This also works in the employee’s favor as it guarantees that they get paid for their work.
Employees want to feel well compensated, respected, and praised for their work. Reward good work. Penalize poor work. The good people will stick around and the bad people… well, they’ll figure it out.
Non-Prime Expenses and Ways Restaurants Can Lower Them
All the other expenses in your restaurant are non-prime expenses or costs. This is where will find the next three targets of attack.
Reducing Gas/Energy/Utility Costs
Restaurants use a lot of energy. Here are just a few of the energy intensive aspect of restaurant operation:
- Heating and AC
- Cooking (Ovens and Ranges)
- Cleaning (Dishwashing Equipment)
- Lighting (Interior and Exterior)
- Water Heaters
Utilities account for 5% of the typical restaurant’s expenses. It will pay to keep an eye on your numbers from month-to-month. In the summer you’ll spend more on AC. In the winter it’s be heating.
Call Your Utility Providers for Help
Utility companies are in the business of selling energy. The more energy you use the more valuable of a customer you are to them.
Call your utility providers and ask for help.
Ask if they have any promotions or deals going on.
Ask if they’ll do an analysis of your restaurant to look for ways you can save money. They’ll look for things like:
- Better insulation
- New caulking around windows and doors (maybe new windows altogether)
- Better duct work
- New air filters
- Energy efficient light bulbs
- Off-hour pre-heating and pre-cooling
There are companies that will examine your entire building and fine-tune its energy performance. These services can reduce your energy consumption 10–15%. That could make the difference between making a profitable year or not.
The list is long and they’re the experts so give them a call and ask them for help.
Upgrade Your Equipment to More Efficient Models
You get the same magazines we do. They’re full of ads for the latest and greatest appliances. Everything from ranges, ovens, and dishwashers, to deep fryers, refrigeration units, and vent hoods. There’s no end to the new and improved models.
New equipment can be a big investment so you’ll want to do a little math before jumping in with both feet.
Will the lower energy, water, or gas, costs compensate for the price of the new equipment? Will it do so within a reasonable amount of time?
A new walk-in that gives a 5% improvement in efficiency may not pay for itself for many years.
It may be cheaper to put better insulation on the one you’ve already got. Insulation is cheap and can result in the same amount of savings for a fraction of the price.
Train Staff to Reduce Utility Costs
In the summer, my dad told us to close the front door (I’m not paying the air condition the whole neighborhood).
In the winter his lyrics changed (I’m not paying to heat the whole neighborhood). He trained us to turn off lights when we left rooms, and he practiced what he preached.
You can work with your staff to lower utility costs by training them.
For example, when things are slow turn off any appliances you only need during rush. Got two ovens revved up? Turn one off.
If you can, close off unused rooms to avoid heating and cooling more than you have to. Again, train your staff to do the same.
Bonus: Some restaurants use sensors to turn lights on and off in the restrooms. These may save power (good) but they could also lead to a worse customer experience (bad). Nobody wants to fumble around a dark restroom looking for a light switch.
Reducing Insurance Costs
Insurance? Who wants to talk about insurance? Insurance can cost a lot of money. And if you don’t have the right kind you can be paying for insurance you don’t need. Also, the law may require you to have certain types of insurance you don’t think you need.
I worked in the insurance market for over seven years. Insurance plans, pricing, and even whole insurance companies rise and fall every year.
What was a great deal a year or two ago when you first opened your doors may be way behind the times.
Of course government regulations are always changing. Make sure you’re abiding by all the latest rules. There may be exceptions, grandfathered business, and subsidies available for family and small businesses. So don’t give up without a through search.
Shop Your Business Around to Multiple Insurance Agencies
When launching a restaurant calling several insurance agencies may be way down your list. And once you have an insurance plan in place there’s a lot of inertia to just stick with what you have. After all, plans are so complex and you have so many fire to put out.
The insurance field is vicious. It’s dog-eat-dog. And while actual dog fights are illegal, they’re completely legal in the insurance business.
Take notes when you’re talking to an insurance agent. Make sure to ask lots of questions. Don’t be afraid to call back later if you think of a question you didn’t ask. You can even use those notes when you talk to the next agent to remind you of what to ask about.
One insurance salesman will help demystify the sales language of another. One will insist you need Hired and Non-Owned Vehicles Liability Insurance. The next one will point out that you only need that if you make deliveries.
And the list goes on. Taking to multiple insurance agents and shopping your business around can save you a lot of money.
Ask About Paying Annually Rather than Month-To-Month (and Bundling)
There are often fees associated with paying monthly that disappear if you pay annually. These may just be administrative fees. But you might also get a break by paying for everything up front.
You should also ask if they’ll give you buy al your insurance through them. Bundling is a very common practice. And if the salesman is worth his salt he’ll bring it up himself.
Restaurants may need multiple insurance policies:
- Umbrella Liability Insurance
- Liquor Liability Insurance
- Property Insurance
- Workers’ Compensation Insurance
- Off-Premises Insurance
- Business Owner’s Insurance
- Hired and Non-Owned Vehicles Liability Insurance (if you offer delivery)
Find Out if There Are Changes You Can Make to Reduce Your Liabilities
When an insurance company issues a homeowners policy they send out an agent to assess the risks. They look for increased risks to the home (e.g. branches hanging out over the roof)
If you don’t fix these issues you’ll end up paying a lot more for your insurance. In fact, you may not be able to get a policy at all.
If you’re locked into a contract, call your agent and ask if there are things you can do reduce your costs. A phone call doesn’t cost you anything, but the savings every month will make you smile.
Reducing Rent Costs
Rent is often one of the larger bills a restaurant has to deal with every month. Not paying rent is rarely an option. If you don’t pay you could come to work to find that they’ve changed the locks. Assets may even be seized.
So let’s look at some ways you can lower your rent costs.
Location, Location, Location… Move Your Restaurant
Did you know that McDonald’s sees itself as being in the real estate business? They buy prime, high-traffic, easy-access real estate all over the world. They understand that location can make the difference between failure and success.
Okay, so maybe you’re not McDonald’s and you don’t see yourself as a real estate mogul. But you know just as well as I do that if you’ve got a good location you’ve won half the battle.
If you can change your location to a better one, do it. Yes, your customers may not realize you’ve moved. But are they really the customers who are keeping your business afloat? If they were you wouldn’t be considering moving.
For example, my wife and I moved to get a better price on our housing. I was dreading the work involved in the move. But I also knew that the pain would be temporary but the benefits permanent.
Bonus: If you’re moving anyway you might think about smaller physical spaces or even a food truck. Maybe you don’t think your concept would work for a food truck but just imagine the savings!
Negotiate with Your Landlord
If you extend your lease you may be able to negotiate a better lease.
Your landlord may knock a little off your rent if you make improvements to the space.
The business world is full of opportunities. You just have to be creative enough to come up with them and gutsy enough to try them.
Share Your Location with Other Business or Groups
Sharing your location with another business or group may not always be an option. But with a little creativity there may be a way to share your location with other business or groups.
When I worked at a coffee shop we rented out the shop every weekend to a church. They got a great deal on rent and we got to pay our rent with someone else’s money. In fact, they paid over 25% of our rent monthly to use our location when we weren’t even open. Now that’s a win-win!
For years, restaurants have had private dining rooms and party rooms. Maybe you’re restaurant doesn’t have private rooms like this. You can still take advantage of this tactic by renting out your entire restaurant after hours.
The types of groups interested in your space is probably endless but here are some ideas to get you started:
- Fraternal Groups
- Chamber of Commerce Meetings
- Private Parties, Birthdays, Anniversaries, etc
- Small Food Businesses Looking for Commercial Kitchen Space (e.g. Caterers, Cooking Schools, and Farmer’s Market vendors)
The demand for commercial kitchen space is not insignificant. In fact, companies are starting up just to fulfill this demand.
- Reduce Food and Beverage Costs: Food costs are on of your prime costs. Some factors affecting food costs are outside your control (like the weather). But many of them you do control. (1) Talk to your vendors about getting a better deal. They may have too many carrots they’ll sell to you cheap. (2) Why buy Filet mignon if your customers are just as happy with ground chuck? (3) Commit to larger order sizes to lock in savings.
- Reduce Labor Costs: People are your biggest resource. They’re also the biggest expense for most restaurants. You can lower costs for this category by (1) Scheduling hours based off hard numbers in your POS system. (2) Give more hours to fewer people to help them gain experience. (3) Making sure your team clocks-in and out on time. Start with the kitchen.
- Reduce Utility Costs: Utility costs can add up fast in a restaurant. All those high-energy devices can make your meter spin. (1) Call your utility company and ask for help reducing your bill. (2) Do the math on new appliances to see if they’ll pay for themselves by the energy they save. (3) Train your staff to be energy conscious by turning off unused equipment. This includes, lights, ranges, ovens, and dishwashers, etc.
- Reduce Insurance Costs: Insurance plans and policies are always shifting. (1) Call your insurance agent and find out if there are new plans that have come out that could save you money. (2) Shop your business around to a variety of insurance agencies. See if they’ll give you a deal to win your business. (3) Ask your agent what you can do to reduce your liability.
- Reduce Rent Costs: Rent costs should account for no more than 7% of total sales. (1) It may seem drastic but moving your restaurant can have a significant positive effect on rent. (2) Try negotiating better terms with your landlord. (3) Think about ways you can share your location with other businesses or groups after hours.