A Simple Guide to Restaurant Business Success

Why franchises succeed
Remember, although one out of three restaurants fails in the first year, only 10 percent of franchises go under in the first twelve months. Why are franchises so much more successful than independent restaurants? The answer is simple. Franchise operators put a lot of research into site selection and concept development, and they can rely on the 'lessons'' learned by earlier franchises in the same chain. '

Why restaurants fail
'Consider the most common reasons why independent restaurants fail:

Unrealistically high rent and occupancy costs: All too often, inexperienced restaurateurs take on rent and other occupancy costs that are too high for their budget, making it difficult to sustain viable operations.
Undercapitalization and lack of working capital.

Frequently, concepts that would have otherwise been viable fail because of lack of sufficient funds and working capital to keep the restaurant going until turning the corner to profitability.

'•Lack of attention to details in managing financial resources. Maintaining proper controls over cash management and handling, controlling portion sizes, controlling food and beverage costs, managing inventory and shrinkage due to theft, and managing spoilage and waste are essential to an operation's success.

'Poor operational management. Having a well-trained and happy staff plays an important role in the success of any business. Good management policies help to set the tone, influence employee attitudes and
performance, and encourage repeat customer visits.'

'Excessive investment in construction, equipment, renovation, and acquisition costs. Too many first-time restaurateurs take on too much debt to build or buy their dream restaurant, which results in debt repayments that are too high for their restaurant to be profitable.

- Poor choice of location. The right location is very important. It is not unusual for a mediocre business to succeed simply by having a good location, while another well-run operation may fail because of a poor location.

- Poor choice of concept. A poor concept for a particular location, or a concept without a unique selling proposition (USP), often fails to attract enough customers to make a restaurant profitable.

- Poor or inconsistent food and service. Reliably good food and service are very important to most restaurant guests. Inconsistent food and service negatively impact the overall dining experience and discourage repeat business.

- Lack of a value proposition. Customers instinctively seek value, and when they do not get good value for their money, they do not return. They seek it elsewhere. Lacking this understanding, many operators unwittingly price themselves out of their market.

- Poor business acumen. Many first timers 'simply lack the ability to run any business, not just a restaurant.'

'Whatever the motif, there are now four basic choices for a restaurant/food-service format
:
- Fast food with no table service. Just as its name suggests, fast food means quick preparation and quick counter service. Parts of most fast-food menu items are prepared in advance and then kept warm or cold until it's time to finish them to order. These establishments use many disposable items—paper napkins, food containers, plastic knives, forks, spoons, and so on—whose costs add up quickly.

- Takeout and delivery. In these restaurants, customers order food to eat elsewhere, so space requirements for customers and décor costs are not critical. But you'll have to leave room in the budget for storage and purchase of extra disposable items, delivery staff wages, and whatever you use for delivery—carts, bicycles, scooters, cars, or mileage reimbursement.

- Food trucks. A mobile food service that can also handle catering jobs.

- Table service à la carte. In this type of restaurant, wait staff take individual food orders, give them to the kitchen (where the food is prepared and plated), and then deliver food to the table. This level of service is generally found in upscale restaurants, diners, coffee shops, and[...]'

food truck costs
'The important point to realize here is that, in addition to buying a truck, there can be significant ongoing fixed costs of running a food truck operation, some of which are: cost of diesel, cost of rental of a commissary/kitchen for food prep, rental of parking for the truck when not in use, cost of employees to help with food prep, and cost of permits to operate in some cities'

Table service restaurants offer a variety of styles of service:
' plate service, platter service, cart service, or a combination of the three. Floor space needs vary for each style. In plate service, the food is plated in the kitchen, and wait staff deliver it to the tables. This requires the least amount of tabletop and dining room floor space. Platter service, in which the food is delivered to the tables on platters and served in front of the diner, generally requires larger tables and more floor space. Cart service, which is common in Chinese restaurants that serve dim sum, requires the most space, since carts must be maneuvered in and around the dining room. (See chapter 8 for more on designing your restaurant space.)'

restaurants during downturns
'The perception of a restaurant's value is especially important during economic downturns; restaurants perceived as offering good value for the customer's money are more likely to survive a slump.'

purpose of the concept
'The lesson? Your restaurant's concept—its menu range, cuisine, atmosphere, and price structure—should be selected to attract the particular type or types of customers who are most likely to patronize your restaurant

forecasting sales volume
With your head firmly on your shoulders, the first step in preparing your financial plan is to forecast sales volume. Use the information you gathered when researching your target market: your competitors' prices, your USP, market saturation of concepts similar to yours, the spending habits of your target customers, and your seating capacity. Need to know '1 The days of the week that you will open for business 2 Your hours of operation and the meals you will serve: breakfast only; breakfast and lunch; lunch only; lunch and dinner; dinner only; or breakfast, lunch, and dinner 3 Your estimated average food and beverage check size per customer per meal period 4 Your restaurant's seating capacity or number of seats 5 Your estimated number of customers, or seat turns, per meal period 6 Measurement periods: daily, weekly, monthly, and yearly'

break even restaurants
'As you might suspect, break-even is the point at which your total sales and expenses are equal, meaning there is no profit or loss. By doing a break-even analysis, you will be able to determine the daily sales level your restaurant would need to achieve to break even or, put another way, before you can make your first dollar of profit. A break-even analysis will also help you to make 'what if' decisions without having to redo your entire pro forma statement.'

'but what if projected sales are lower than break-even sales? If that were the case, it could mean any of the following:
- Your prices are too low
- Your fixed costs are too high
- Your variable costs are too high
- Your concept may not be a fit for the market'

budgeting for contingencies
'Your goal is to prepare a realistic capital budget that will allow you to open your restaurant on time with a minimum of heartaches and hassles. The best way to avoid early cash flow problems is to include a contingency or allowance in your budget to cover capital cost overruns and/or construction delays. The budgeted amount for contingencies will depend on the size of your restaurant and the scope of the work to be done.'

cost of sales
'cost of sales is the cost of the ingredients, that is, the groceries in your freezer and on your storage shelves that you will use to make your menu items. In order to measure and compare costs to sales, costs of sales is usually expressed as a percentage of sales and is called the cost of sales percentage. The basic formula is costs ÷ sales = cost of sales percentage.'

serving unit and cost
'Serving unit: Serving unit is the unit used to measure the amount of each ingredient. For example, the size of each burger is measured in ounces, buns by the piece or each, and mayonnaise in ounces. •Serving cost per unit: The serving cost per unit is the cost per measure divided by the number of units in each measure. For example, the serving cost per unit of ground beef = $2.25 ÷ 16 ounces or $.14 per ounce. Similarly, the cost of each bun is $4 ÷ 12 (one dozen) or $.33 and the unit cost of mayo is $10 ÷ 128 fluid ounces or $.075 per ounce.' 'Serving size: Serving size is the amount of each ingredient that will go into the recipe, for example each burger will get 6 ounces of ground beef, 1 bun, and 2 ounces of mayo.
- Serving cost: The serving cost is the cost per unit × the portion size.'

accounting for waste
Once the costs of a menu item are determined, you should add an additional amount to account for the unavoidable small amounts of waste that occur during the preparation process. Also provided for in waste are spices used during the cooking process, since it is almost impossible to measure a pinch of this or a pinch of that. While some owners believe that making a provision for waste can encourage employee theft equal to the amount of the waste, I think that not making a provision for waste would result in unrealistically low food costs. There is no fixed waste factor. The amount of waste will depend on the concept, preparation methods, and the skill level of your staff.'

trim and yield
'To price your menus properly, you must—I repeat you must—understand the concept of trim and yield.' 'Trim is the amount of a food item that gets lost due to butchering, trimming, or cleaning during the preparation process and shrinkage is the amount that is lost due to cooking. The yield is the actual amount left after trim and shrinkage, and is expressed as a percentage. For example, a five-pound (80 ounce) New York strip steak will not yield 10 eight-ounce servings after trim and cleaning. After trim and cleaning, the usable or actual weight may be only 64 ounces because you are probably going to lose 16 ounces or 1 pound due to trimming of excess fat.'

contribution margin
'Similarly, the fact that the targeted price of a menu item may be higher than what you think your target customers may be willing to pay does not mean that you should not sell it at a lower price. Obviously, you would not make as much as you would if you sold it for its targeted price, but you could still make a decent profit if you sold it at a slightly lower price.' 'An item's contribution margin is the amount of dollars that it will 'contribute' to the bottom line. Obviously then, the higher the contribution margin, the better! Put simply, a menu item's contribution margin is its cost minus its selling price. ' 'To illustrate the importance of contribution margin and pricing, let's assume that your restaurant's overall targeted food cost is 30 percent and that two of your menu offerings are a Caesar salad and a salmon entrée. Let's also assume that based on your market research you discovered that given your service, design, and décor elements, $6.95 was an acceptable price for the Caesar salad, but that $17.95 was the best price you could get for a salmon entrée. However, when you priced the salmon entrée using your 30 percent targeted food cost, the targeted menu price was $19.95 ($5.95 ÷ .3). Should you go ahead and sell the salmon for $17.95? The answer is yes! Table 6-4 illustrates how contribution margin works and how pricing the salmon at $17.95 could still allow you to meet your operating objectives.
From table 6-4 you can see that although the salad's food cost percentage is lower than the salmon's, its contribution margin is also lower by $6.50 ($12 - $5.50). In other words, the salad's contribution to the bottom line (profits) is $6.50 less. Note also that, while the salmon's food cost percentage is 3 percent higher than its targeted food cost

menu rule of thumb
'Whatever font you use, a good rule of thumb is to avoid using dollar signs, which tend to remind people of prices and make the menu look more expensive than it really is.'