A perfect storm for restaurants? Yes. But success depends on good management.
A recent survey suggested that 20 per cent of restaurants are facing closure, blaming higher wage and food costs and Brexit. But are these the real reasons, asks Bob Cotton. It’s how well the business is run that counts.
It’s always news when a research study comes out with findings that catch the headlines and when it’s published by an accountancy firm those headlines are taken seriously. So it was when research by accountants, Moore Stephens, showed that a total of 14,000 restaurants faced the prospect of closure as a result of rising labour and food costs, the latter caused by the weakened pound as a result of Brexit.
So, what’s new? Those of us who have laboured at the hospitality coal face for years will not find these findings surprising. Restaurants are low margin businesses, forever opening and closing; they are always under pressure to maintain margins. The rise and fall in their economic fortunes largely mirrors the economic health of the nation.
It’s certainly true is that costs are rising. Because the National Living Wage (NLW) affects probably as much as 60 per cent of the workforce, the annual hike in NLW is affecting the hospitality industry more than most industries. Far more workers are enjoying enforced pay rises. Pressure is also being put on payroll costs by those in better paid jobs as they seek to maintain the differential in their wages.
Possibly even more worrying, Brexit will result in a further rise in wage costs as any shortage of migrant workers will inevitably mean that employers can only compete for fewer staff by offering higher wages.
Increases in business rates are also hurting restaurants, situated as many are in high streets where rate values are highest. At the same time, high rents are forcing low margin restaurants to compete with high-end retail businesses, making most independent restaurant operations in the high street wholly uneconomic, though there is no shortage of branded chains willing to chance their arm. The fact that the majority succeed shows how skilful they are.
But restaurants have met similar adverse conditions many times before and the most competently run have survived and, indeed, prospered. Only the weakest have gone under – and that’s the natural order of things. The restaurant industry is no stranger to poor management and bad decision-making.
So, let’s get the 14,000 figure into perspective. With over 60,000 restaurants and casual diners, not to mention 40,000 pubs and nearly 40.000 outlets in contract catering and the leisure sector, those 14,000 outlets represent barely 10 per cent of the total food service industry. With 11,000 restaurant start ups a year, a 58 per cent survival rate after three years shows that the restaurant industry is – and always has been – highly volatile and forever in danger of dragging the unwary into failure..
It’s not an industry for the unwary amateur but even experienced restaurateurs make mistakes. Just look at the some of the big named groups currently in trouble.
However, these cost increases have come at a time when operators are fighting other pressures. The pub industry is now a major competitor; since the smoking ban, most pubs are now food-led and could not survive without increasingly sophisticated food offers. Coffee shops have opened up a new segment of the casual snacking market, while all day grazing has influenced demand for conventional meals. The significant increase in home deliveries has affected burger and pizza restaurants.
This looks like a perfect storm of business pressures on restaurants. What to do?
The restaurant industry – by far the most innovative sector of the hospitality industry – has fought back with new concepts; many succeed but quite a few do not. Restaurateurs recognise that while old favourites remain popular they begin to lose their appeal without constant replenishment and flexible, skilled management. And it’s the quality of management that will dictate success or failure, no matter how seriously the economic situation impinges on costs and demand.
Lose a couple of percentage points on the margin and the profits begin to disappear. Wise operators produce accurate, daily (weekly at most) food cost information: without that, they lose all hope of survival. But how many chefs know their daily food cost?
And wise operators continually seek to improve their business. Can prices be increased marginally – if not, should the menu be reformed to include new, cheaper (to make) dishes that can be sold for a premium? Are all the staff fully trained? How motivated are they? Are the rotas compiled so staff are employed only when they are really needed? Are they trained to upsell? That extra cup of coffee, glass of wine or dessert, multiplied over a year, can add hundreds to the bottom line. And how many staff leave during the year? What does that cost? How disruptive is it and how does it affect business? Can opening hours be extended to advantage? How often are these basic questions forgotten in the hurly burly of service?
It’s never been more important to have daily information on three key factors: the cash position of the business, its food gross profit percentage and its payroll percentage. Specialist providers can help access this vital information.
So, back to our accountant’s report. Yes, rising costs pose big problems for many restaurants. But that’s not the real reason why many fail. Most fail because they just aren’t much good. Poor menu choice. Uninspiring cooking. Wrong location. Unwelcoming service. Wrong ambiance. Poor overall value. Or just badly run. There are so many factors to get right in the restaurant business, too many to get wrong.
In the final analysis, the good, well run, high value restaurant will survive profitably. It will be the poorly run restaurant that goes under. Nothing surprising about that. That’s the restaurant industry for you.
Bob Cotton is a consultant to many leading companies and was chief executive of the British Hospitality Association for ten years after a career in contract catering.