When is a restaurant a factory?

Recently, I called on a restaurant owner who was losing a ton of money – to the tune of 2% of sales per month – losing $1300 per month on a fine business of $800,000 in annual revenues.  The owner was almost in tears as he told me that he had contacted a bankruptcy lawyer.  As with many restaurants, this was a family business.  The owner tends bar and handles the purchasing tasks, the owner’s wife waits tables, the owners son, a recent graduate from a renowned gourmet cooking college, is the chef, and the owner’s daughter buses the tables and does the dishes.  The owner was deeply saddened because not only was his dream slipping away, but the family’s nest egg too.  The owner took the meeting because he wanted to talk about marketing activities to drive his business.  He showed me ads he placed in local papers, discussed billboards, the value of coupons, and other traditional advertising options.  We also talked about teaming with local hotels and golf courses.  These were not fresh ideas – he had tried them all before.  

The owner had been in business for 15 years and had been profitable until 9/11/02.  Then, the business took a hit on sales.  Sales had come up since and the restaurant hit its former peak last year.  However, costs have also increased.  The owner showed me his income statement from his accountant.  The accountant was very good and included such things as average food sales, average beverage sales, and average costs per order.  The owner discussed with me his customer targeting – mid to high end customers.  To do this, he wanted his average price per plate to be $15.  His financial records showed that this was the average price per plate he sold – he was right on.  His cost per plate was right at 40% or $6 per plate.  His food sales made up 65% of his monthly sales, or $43,000 per month.  So he sold roughly 2900 plates per month.

When I looked at this situation, it became clear to me that the owner didn’t have cash for advertising.  His line of credit was tapped out.  And he was bleeding money.  The owner reviewed with me his fixed costs and his actions to reduce these…not all of which would come through – and even if they did, he couldn’t get to breakeven.  

Then it occurred to me that perhaps this wasn’t a marketing issue so much as a “production” issue.  I explored with him reducing the cost of each plate by just $1.  This would turn his present situation from a $1300 lose per month to a $1600 profit.  We looked at his menu and saw that he had 20 choices.  I suggested he target 10 dishes on the menu at a price of $15 and a cost of $5.  He could have five below that price with a margin target of 67% and five above that price with a target margin of 67%.  He went to work on his menu and found ways to reduce each plate cost by a dollar and created a profitable business.  Two months later, he was making a profit and was able to invest in an integrated marketing program – radio, newspaper, etc – and within four months, he had increased his sales by 10% and was bringing in a profit each month of $1300 per month after adding marketing expenses of $500 per month.

Looking at this problem from a “restaurant” perspective leads to solutions centered around fixed cost reduction and marketing for increasing sales.  Adding the “production” perspective of a factory, the impact can be larger and quicker.