Restaurants rarely recover from not opening into profitability

Pubdate:2012-03-27   Hits:2706

For years I have witnessed restaurant owners open their doors intending on building a unit with healthy sales, with a solid business, an interesting product and a healthy cash flow – all at the expense of profit.  The common misconception seems to be that once open and with these cash flows, strong sales and a credible brand, the unit can be latterly “tuned” for profitability. Not so: Profitability should be a priority from day one.

The operator’s show us the glowing reviews, the positive customer feedback and the tremendous volume of business as proof that the concept must be economically viable and that the model just needs some tweaking.

Rarely do these businesses stay open long before their owner is mortgaging, selling assets or borrowing money to cover not only today’s debt but also the historic deficit that has been accumulating since the day the restaurant opened.

To those lenders, they hear the same story: “If capital can be secured, prices can be raised, payroll modified, operational efficiencies implemented and the restaurant can be brought into profitability – no problem”. To those unable to secure financing, the same attempt to correct the loss making is made albeit having to rely on the existing cash flow only.

Throughout this period, when the owner or operator knows that the venue needs ‘tweaking’, the experience suffers. Running at a loss means something needs to be compromised whether that be staff numbers or quality of the food or sequence of service – and the draws that arguably made your restaurant such a hot commodity start to fall away because a loss making restaurant is generally not a stable restaurant. Your business cannot survive or continue to be built on cash flow that is costing you more to generate than you receive. And that lack of cash infusion will eventually close your business.

This theory of fixing the venue once open seems to have merit at face value. A great venue has opened and is busy with customers: The hard part has been done and now paying attention to the economics seems a manageable next step.

The operator will be juggling dollars between payroll, cost of goods, advertising, fixed costs and in many instances, taxes. If it is costing you more than a dollar to make a dollar sheer logic dictates that there will not be enough cash in the bank to operate the business. Which again leads to that same conclusion – that the restaurant will have to close its doors quickly.

Unless the owner or operator is intending to fund the deficit on a consistent and long term basis, the only way to support the explosive growth of your restaurant and keep the doors open is to have that unit generate a profit, from every dollar earned. Furthermore, even with any extra cash reserves being used to support the venue, the lack of immediate focus on profitability means that the staff, management and others are acting oblivious to performance and commerciality from day one. Perhaps now it is clear that this is nonsensical and that profitability should always be at the top of the agenda.

The task of suddenly asking a workforce, never before judged on performance or profitability, to make this shift without impacting the customer experience is more than a challenge. The entire customer experience has been built on loss making practices. How can one then change the infrastructure and habits of the venue without changing the experience? One cannot.

We at OnSite can therefore only emphasize the importance of opening your unit with commercial principles from day one. Start with a profitable customer from day one, focus on efficiencies and profit maximization from day one. With the profits generated, invest those into your business for marketing, advertising and growth and creating an even better customer experience. Refine your margins, refine your operations, streamline your back of house but with these principles, you will be refining an already profitable model as opposed to fixing a model which operates with flawed economic foundations.

I am not suggesting that you focus only on profit at the expense of a customer. There is a fine line here and it requires providing your customers with value for money and a great experience – and in return for this you should receive not only revenue but profit. This is a business not a charity, so operate it as one with credible financial intentions.

Opening restaurant which is immediately loss making and with no clear plan as to how to reverse that immediately creates a sense of false security. Great cash flow, a busy restaurant and fantastic reviews give, as we have noted, a false impression. You are building a restaurant and a customer base that you will quickly have to disappoint. Consider this: your lack of detail on the cost of your stock, for example, may mean your customers are paying lower than market price for a meal you offer them. You may be undercharging because you are not clear how much that plate cost you.

Those customers may not be so loyal when the product or the price changes (when you realize you are not charging enough to create a viable restaurant). You have created a benchmark for your experience, service standard and product and any modification could drive such customers elsewhere. Again, this emphasizes that the ‘tweaking’ of your venue should take place before you open and not afterwards.

There is no value or point to opening a restaurant and charging your customers for an experience that loses you money. Once created it is difficult to change and often alienates your customer base. Employees benefit (salary), the landlord benefits (rent) and the vendors thrive (stock), but you’ve lost money.  This is clearly not the intention.

Busier restaurant, bigger losses. You may think you need more customers to meet the break-even point based on your existing business model so now you are turning your attention to driving revenue, turning tables and sheer volume. Unless you are a quick-serve, this will never work.

Your ability to juggle the increasing number of angry vendors calling daily takes a huge proportion of management time. However it may be that this feels manageable … until a major obstacle arises.

The “obstacle” is usually in the form of one bad weekend, a need for immediate cash for a marketing program, a sudden sales decline or a big bill that has finally become due. You will suddenly understand the need to work profitability into day one at this point. You cannot pay your ‘today bills’. The snowball effect from there can be dictated as the standard process of decline and is now too late to effectuate the change and now a cash infusion only solves yesterday but does not fix tomorrow.

With every dollar you make there are now three requirements; pay yesterday’s bills that have amassed from your time as an unprofitable restaurant, pay today’s bills and pay into growth for tomorrow’s revenues. How can you cover yesterday, cover today and build for tomorrow when you are waiting for tomorrow’s sales? The answer is simply that you can’t.

Now perhaps you will believe that grow first, profit second a recipe for failure. You must operate your business from day one with a focus on profit- irrespective of gross revenues. You must build your growth and your business on profit – not cash flow. This is not overzealous capitalism but merely sensible and practical business advice without which your restaurant will not survive.


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