The Alternatives To Spiking Restaurant Costs

October 4th, 2017

Those of us in the restaurant business were initially taught to be “penny profit” managers because of the reality that a penny here or there over a large individual unit transaction base, or over a district, region or system of units, adds up. Pretty easy math. But many of us have been shocked by cost increases over the last few years. In talking to some operators, here are some recent soundings on cost shock:

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Item 
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2017 Cost
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2000  or as noted cost
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Number of years
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Chicken Wings, MI
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$2.99 pound
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$.68 pound
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16 year cycle
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Cost for a fight showing on Cable TV
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$6000/nigh

per 6K unit
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$1200 per 6K unit
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16 year cycle
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Minimum Wage, Los Angeles, CA
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$12.00 hour
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$6.25 hour
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16 year cycle
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Rent for 3K storefront, 71st and Lexington, Manhattan
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$360,000 /year plus NNN
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$18,000/year, plus NNN
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54 year cycle, 1963 to 2017
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Now, that’s a boatload of inflation. Imagine how the breakeven sales level has soared on the Manhattan operator. But these are mainly costs that we have little to no control over. The restaurant operator in question innovated by working to lower cost and mix on wings by inventing a tasty breaded chicken bites  alternative, whole breasts breaded with spicy flavors. But the cost of the fight (think: Mayfield v. McGregor<a href="#_ftn1" name="_ftnref1" title="">[1]</a>), the minimum wage (think: how it raises the overall market) and the rent is really almost out of our hands. Would the Manhattan operator do as well if he relocated to Staten Island? Probably not.

There are still matters under either somewhat under or mostly under our control that have to be given more priority to help restaurant operators under their banner (franchisees) offset the inevitable cost spikes. For franchisors, they are the brand steward and must lead the way.

<ol>
<li>While there has been some progress lately in terms of smaller prototypes seen, new restaurants, especially drive thru restaurants are still too large. Too large equals more CAPEX, higher HVAC and other operating costs. For casual dining restaurants and sports bars, it makes for a very lonely place to guests to hang out. It is understood that legacy 1970s units that are rebranded might be big, as everything was then.   But those units are going away as neighborhoods change. If a scrape and rebuild is done, why can’t it be smaller? The extra space can be repurposed into a patio or double drive thru if warranted. </li>
<li>Employee turnover reached the highest level in a decade last month, per Black Box/PeopleReport. We really still do not know how to communicate with employees. Reducing turnover is the only way to counter the effects of wage rate increases.</li>
<li>Missing upsells remains epidemic especially in fast casual operations and QSRs. Digital and online sales platforms routinely outsell human beings.</li>
<li>Penny wise, pound foolish corporate cultures.  After being part of the corporate cost culture in my first two decades, I can attest that cutting costs cannot be the sole deliverable, it’s got to be mixed with meaningful concept and product development, along with better management systems. I think about the four Metromedia brands<a href="#_ftn2" name="_ftnref2" title="">[2]</a> (Ponderosa/Bonanza/Bennigan’s, Steak N Ale), the Macaroni Grills , Real Mexs and other casual diners that eroded customer value during the lead up to the Great Recession and couldn’t recover. Portion cuts? Really ! John Hamburger will have an interesting note about Baja Sol, a 2000s era casual diner turned fast casual Mexican chain that just closed its last seven units in Minneapolis last week, in next month’s Restaurant Finance Monitor. A brand closing for good is the ultimate negative ROI. It will be a good read.  </li>
<li>Store Development Efficiency: it is very clear that we have too many restaurants in the US.  Sites are expensive and there are not enough guests or employees. Both company operated and franchise centric concepts must get international development working and fired up quickly. This includes special efforts needed to ramp up US franchisees to get their own international beachheads viable.     </li>
</ol>

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<a href="#_ftnref1" name="_ftn1" title="">[1]</a> I was as surprised as many guests were on the night of the fight that Buffalo Wild Wings (BWLD) apparently passed on the fight, at the last minute, despite website and press reports to the contrary.
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<a href="#_ftnref2" name="_ftn2" title="">[2]</a>  In reading ancient history of Metromedia Restaurants recently, I saw the report that over a billion dollars of capital was consumed in brand purchases, operating losses and CAPEX for those four brands over a thirty year period.
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The Alternatives To Spiking Restaurant Costs

john a. gordon