Rowe: How Restaurants Can Maximize Profitability in the Face of Food Inflation
With food costs soaring, one might assume restaurant franchises are feeling the pinch. While some are, savvy restaurant franchises are thriving. A report released late last year by Bank of America Merrill Lynch Global Research showed that the cost of eating at home was increasing at a faster rate (6%) than the cost of restaurant meals (2.5%).
For the first time in history, it may be considered frugal to eat out!
While both grocers and restaurants have been hit by rising commodity prices, grocers tend to pass the cost directly to consumers. Restaurants meanwhile have a more flexible business model to adapt to food inflation. My company Fransmart works with a portfolio of high growth, restaurant franchise concepts that employ unique strategies to drive profitability in the face of food inflation.
Utilize Group Purchasing Power and Other Supply Chain Tactics to Drive Down Food Cost: One of the prime benefits of investing in a franchise versus opening an independent restaurant is the enormous cost benefit found in group purchasing. Franchisors know the tips and tricks to consolidate suppliers, to buy in bulk, and to negotiate deals on overstock. One of our franchises, Elevation Burger, has used group purchasing power to negotiate extremely competitive food costs, otherwise known as COGS (cost of goods sold). As we open more Elevation stores, purchasing power increases. Our COGS are comparable to Chipotle , who uses a natural, as opposed to Elevation’s organic product. Chipotle has more than 1,000 restaurants open; we have 30. Our suppliers are confident we will be the next big chain.
Promote Quality Limited-Time-Offers with High Margins: Restaurants can also optimize profit margins with promotional offers. Our culinary team at Freshii, another one of our brands, does a great job of assembling healthy, delicious meals that appeal to our customer base, but that also appeal to our bottom line. We formulate specials around low cost food products with very high margins. It’s a win-win; our customers love the flavor profiles, and our franchisees love the margins.
Drive Profitability through Menu Innovation: Restaurant franchises must stay in tune with commodity pressures and adjust menu offerings accordingly. When commodity pricessoar, you can expand your menu. For example, at Freshii we expanded our menu to include healthy, broth based soups; water is a pretty low cost commodity, but we are still able to keep our soups health conscious.
Evaluate Your Labor Costs and Focus on Tight Operational Controls: Restaurant owners must maintain tight controls on prime costs (food/beverage, paper, and labor) to ensure a healthy profit-and-loss statement (P&L). Prime cost is one of the best indicators of restaurant profitability, and as a rule of thumb, should be no more than 55% of total sales or less. Elevation Burger’s first corporate restaurant in Falls Church, VA enjoys extremely competitive prime costs of 51.8% based on gross sales of $1.18M. As commodity prices go up, restaurant owners must offset the increase by trimming labor costs. But how? We don’t recommend across the board layoffs. Such measures impair food quality, consistency and customer service. Rather, analyze your labor costs by day-part sales. Do you do high volume lunches, but slow dinner sales? Evaluate your staffing numbers accordingly. Also, ensure you have super-star managers and reward them accordingly. A well-managed, tight-knit crew is always more efficient than an over-staffed, poorly managed one.
Increase Prices Year-to-Year to Keep Up with Inflation: At a minimum, restaurant franchises should raise prices 5% each year to keep up with rising food costs, distribution and new “surcharges.” At another of our restaurants, Freshii, we don’t increase a set percentage across the board. We think about it from a consumer perspective. We know that our customers want to get change from their purchase, so we are more likely to increase a $9.59 entree to say $9.93, instead of a full 5% raise to $10.07. It’s a psychological benefit; customers want to get change back from a $10 dollar bill, instead of having to grab an extra dollar. We might though increase a $7.00 entrée up 10% to $7.70. We strategically balance maintaining our margins while ensuring positive customer perception.
Protein prices have also been surging, due to a variety of factors such as the drought in Texas, increasing exports and global demand. Last year, at Elevation Burger, we were slow to raise our prices as a way of helping our guests. As a result, our original corporate had a drop in profit of 1.5%.
Remember that the Value is in the Plate, not the Price: We feel our brands are competitively positioned to weather increased commodity prices. The value to consumers is seen in the high quality of the food and not in price alone. Restaurant franchises positioned as “value” plays are getting hid the hardest in the economic slumps. These concepts have customers who search for a lower price and not a better experience. Premium positioned, fast casual brands have been the fastest growing, most profitable segment of the restaurant industry for the past five years.
Tune In: Watch CNBC’s “Closing Bell,” and “Street Signs” on Friday, April 13th for “Food Fight” special reports on food inflation, focusing on products like beef and milk and the impact of China on the price of food.
Dan Rowe, Founder and CEO of Fransmart, has turned dozens of emerging restaurant concepts into national and global chains. Mr. Rowe is a franchisee, master franchisee, franchisor, consultant, strategist, and private equity investor. He has published several expert opinion articles and spoken at numerous restaurant and franchise industry conferences
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