This was originally published in the Coeur d’Alene Press and here on our blog on February 25th, 2014. We are reposting it because the information even 5 years later is still valid. Anyone in the restaurant business, or thinking about getting into the business, should be keenly aware of what is written here.
Mike Wells retired in November of 2018, but he left all of us still coaching here at the North Idaho Small Business Center with a wealth of his knowledge!
atangen | Feb 25, 2014 |
By MIKE PATRICK NIBJ writer
From Good to Bad
Mike Wells and his wife had a lunch date. They chose a local place to eat and, Wells said, had what he considered “one of the best restaurant experiences in my life.” It was so good, Wells said, that just two days later, he and his wife went back for an encore. But this time, the service was terrible; the meal, a disaster.
“It went from one of the best experiences to one of the worst, just like that,” Wells told an audience of 50 restaurant owners and managers from throughout the Inland Northwest on Feb. 11. So instead of going back two days later, Mr. and Mrs. Wells did not return to the restaurant for eight months. Two days vs. eight months.
Everybody in Wells’ classroom knew immediately which restaurant experience they wanted to replicate. The question was, how could they do it? Lucky for them, Wells had plenty of answers. As a member of the North Idaho Small Business Development Center team in Post Falls, Wells is an expert on running a restaurant.
A CPA and former restaurant owner and corporate manager — he once oversaw 10 restaurants in the Houston area alone — Wells has seen the restaurant business from every perspective imaginable. That includes unmitigated growth and success; it also includes seeing “a sure thing, a winner” turn into an absolute dud that left Wells, personally, on the hook for an $11,000 a month lease after his sure thing consistently lost $40,000 a month.
He Had Seen It All
With countless meals and a quarter of a century in the restaurant business under his belt, Wells thinks a lot of good people get into restaurants for all the wrong reasons. “’I like to cook,’” he said. “That seems to be a theme with restaurant owners. ‘I like to eat there.’” Wells paused. “’I want to make money.’ I never hear anyone say that. For some reason, restaurant people don’t say that.”
Unapologetically, Wells thinks they should. During his three-hour workshop, Wells defined the six categories of restaurants, presented statistics, and trends, and offered tips that could help owners and managers ensure theirs is not among the 67 percent of restaurants that fail within three years of opening. In fact, he wants them all to make money and live happily ever after. But Wells concedes that the road to running a successful eating establishment is paved not with gold bricks, but with pennies and nickels.
Citing 2012 national statistics, the average pre-tax profit margin for restaurants was a skimpy 3 percent to 6 percent — 3 percent for full-service restaurants, meaning those that feature fine dining and usually hold a liquor license. Putting that 3 percent into dismaying perspective, Wells noted that $1 million in sales would generate just $30,000 in pre-tax profit. “That is not good,” he said. When 80 cents of every dollar spent in a restaurant goes to food, beverage, labor, occupancy and insurance costs, that leaves just 20 cents to cover all other costs — and profit, if any. “Most industries are in the 60 percent range, not 80 percent,” he said. “When you’ve got 20 cents to cover all your other costs, there’s not much left at the end of the day.”
The name of the restaurant game, Wells said, is to reduce that 80 percent and expand the 20 percent. Here are some of the ways to do that.
How Do You Expand Your Margin
• Negotiate, negotiate, negotiate. Many of the costs that fall in that 80 percent, including insurance and leases, are negotiable. “You need to negotiate almost everything,” Wells said. “If I can squeeze a nickel out here and a penny out there, that’s what I want to do.” He said building partner-like relationships with vendors is important. “They are willing to share the pain if they’re a partner with you,” he said.
• Don’t keep too much inventory on hand. Besides spoilage, valuable cash flow can get tied up unnecessarily. “Cash is king,” Wells said. “You want to keep cash in your pocket, not on your shelves.”
• Reduce menu size. Large menus require more food inventory on hand, more equipment, and more people to prepare. “But most importantly,” Wells said, “large menus take longer to order from and for every minute your customer is not ordering, you are not making money for the seat they are occupying.”
• Train staff to upsell. Wells said the higher the average ticket, the higher the percentage of profit — not just the amount of income.
• Keep an organized accounting system and review daily and weekly financial data.
• Weigh all high priced/high volume items when they’re delivered to the receiving area of your restaurant. “We found discrepancies that add up over time,” he said. “Everybody is shaving all along that food chain, and you’re the one who ends up at the end of it.” While it takes time to weigh products and can frustrate the deliverers who want to get back on the road, Wells said it’s well worth it. “Once we started doing it, we found the discrepancies started going away.”
• Raise prices. Sorry, diners, but Wells said the post-recession days of not passing along higher costs is at or near its end. “For five years you were afraid to raise prices, but the costs of everything else kept going up,” he said. “The key now is that restaurants are finally raising their prices.”
When To Excel
While Wells spoke about several other keys to success in the restaurant business, one of the most poignant was this: Excel during your peak periods of service. According to Wells’ data, 80 percent of a restaurant’s revenue and 100 percent of its profit is made during the restaurant’s peak periods. In some cases, he suggested, that might mean reducing or eliminating a restaurant’s money-losing hours to save on food and labor costs.
Customer Service, Customer Service, Customer Service
In an interesting segment of the workshop, Wells talked about how critically important superior service — and, therefore, having a strong core of employees — is to make a restaurant profitable. Yet he also discussed a recent trend in the industry that seems antithetical to the “best service possible” mantra. On the pro-service side: Be sensitive to what the guest sees, hears, smells, feels and tastes, but “the most important experience is the service the guest receives,” he said.
In a way, it shouldn’t be hard to meet or beat customers’ service expectations. “How many of you have had an extraordinary shopping experience in the past month?” Wells asked. Nobody in the room raised a hand. “We are used to average,” he answered. “Is there an opportunity there? If you had an extraordinary experience, would you go back again? As a society, we don’t expect very much anymore. When I buy something, I don’t expect it to last.” He also said society is being trained to sacrifice in the name of convenience.
“We’re rapidly moving toward the service-less society,” he said. “Now everything is for your convenience. Winco: I get to bag my own groceries. When I fly, I get to print out my own boarding pass.” Of course, Wells said less service and “greater” convenience saves labor costs, so it’s not a coincidence. But it is a growing reality. “There are some people who have never had service in their life,” he said. “They’ve always pumped their own gas. They’ve always printed their own boarding pass. The younger people, that doesn’t bother them as much, particularly in urban areas.” Because next to food, labor is a restaurant’s highest cost, Wells said the less-service approach in certain instances might not just be inevitable, but applicable. “If the consumer doesn’t resist,” he said, “why shouldn’t I do it?”
Profitability tip: Sell gift certificates. Small business coach Mike Wells says when he was in the restaurant business, he sold about $100,000 worth of gift certificates every holiday season. And every year, only about $30,000 would be redeemed. That alone stuffed $70,000 pure profit in his restaurant stocking each year.
How to Fail
A Cornell University study of independent restaurants found the following elements were among the leading causes of business failure:
• Lack of documented strategy — no plan
• No formalized operational standards
• Inability to maintain operational standards • Underestimating the competition
• Poor choice of location
• Concept and location don’t match
• Price and product don’t match
• Lack of business/restaurant experience
• Factors outside the restaurant’s control — legislation, social and cultural changes.
• Insufficient start-up or operational capital.
“There’s only one mistake you can make in business,” said Mike Wells. “You run out of money.”
New Trends (and some are still trends) In The Restaurant Biz
• Locally grown, organic menu items
• Half portions, smaller price, senior menus
• Ethnic fast foods
• Micro-distilled/artisan liquor
• Hamburgers are back!
• Tabletop/mobile device ordering (only if used correctly)