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Tuesday, January 26, 2010

Get the Facts Straight Before Taking Action

I'm not exactly sure when this recession will hit bottom. Most likely, the bottom will not be remarkably different (economically speaking) than today. The rate of job losses has dropped dramatically from the peak but we are still shedding jobs. Many employers have frozen wages and some have asked employees to take more days off without pay.

All of this belt tightening has made the American consumer afraid to spend money. This is not a completely negative fact of life. When Americans do not spend as much money on non-essential goods and services, the loss of demand drives prices down in the short run. If you were waiting to purchase replacement equipment, furniture, china, glassware, silverware, and kitchen utensils, you should consider making a small investment in the future now.

If you never started a customer loyalty program in the past, you are probably looking at your base clientele in your dining room this month. Patrons who have shunned the bad economy, their New Year's resolutions, volatile weather patterns and the new frugal approach to life here in the states are your fans. Get out in the dining room and say: "Hi! Thanks for joining us tonight. Would you like to join our new frequent dining club?"

January in a recession will often produce a low sales number. If you take the sales figure at the end of January and multiply by 12, you will have an excellent figure for forecasts, budgets and business plans. Could you break even if every month this year looked like this January? If you answer yes, you will make money this year and beyond. If you answer no, you have work to do.

Pretend it is never going to get better than this month. What would you do differently?

By forcing your company to confront the possibility of 2010 staying at the current levels, you will drive your team to innovate. These innovations will provide the path to the future and will create positive cash flow now.

If you are swimming in excess cash, should you open a new location? Like any recession, the market will over correct on the downside. Better days are in the future. If you wanted to open a new location in 2006 and decided to wait, today may be your lucky day. Construction costs have dropped, existing restaurant space is everywhere and experienced professionals are looking for employment.

Another Restaurant Chain Goes Chapter 11 Route

Fast Casual Magazine just issued an article Taco Del Mar files for Chapter 11 highlighting the continued woes of chain operators. In the recent 10 days, Daphne's, Pizzeria Uno and now Taco Del Mar have decided to seek protection under Chapter 11 bankruptcy rules.

Sunday, January 24, 2010

Alternative Food Cost Benchmarks

Certainly, most restaurants use food cost as a % of sales as a key performance indicator. This week, an anonymous reader asked about tracking food cost in a different environment - a health care facility. He asked if it was advisable to use cost per patient per day in lieu of a percentage. I strongly recommend using the cost per patient day over a percentage benchmark.

In the remote site feeding segment, we tracked all costs per person per day. The advantages to management are greater in labor cost analysis using this method. Food cost generally is variable while labor has both a fixed and a variable component. With long term sales prospects dampened by the recession, tight control has helped many companies survive and prosper.

Is it possible to effectively use per cover cost analysis in a restaurant environment? Many chefs prefer to track menu item performance using gross margin per plate. Since the aim is to make more dollars vs. a higher percentage, they need to take care when analyzing other costs. Direct labor, direct operating expenses and overhead costs should follow suit. If the operation sells higher priced items with relatively high food cost %, the use of cost per cover for non-food expenses is necessary.

Operators should not mix the percentage method with the cost per cover approach.

Consistent use of the per cover method would require a reasonable profit per cover. Use a forecast of covers for the entire year to spread all fixed overhead and profit. In tight economic conditions, it pays to track fixed cost coverage and profit by cover. In addition to cost control, you need to review menu item pricing policy. The popular factor method may not provide you with the edge needed to survive a price war.

The entrees are the best menu items to use for cost coverage. Your entree cost should cover the recipe cost of the item, per cover amounts for direct labor and operating expenses, fixed overhead and profit. If a competitor price war forced you to adjust prices, you would have a clear number for pricing decisions. You could calculate precisely the impact of a penny, dime or dollar move in entree prices.

Monday, January 11, 2010

Morningstar Article on Casual Restaurants

In their January 8th article The Casual Restaurant Bankruptcy Epidemic, Morningstar analyst R.J. Hottovy takes a look at the shaky casual dining segment. The article focuses on the primary risk factors and the tight credit markets. Examples of fallen chains and potential failures highlight the need to remain vigilant with cost control.

This is a sober financial analysis of this industry segment. Like any other Wall Street analysis, the analyst provides his insight into the direction of restaurant stocks publicly traded on major markets. I drilled into the data on Darden (DRI) and found the stock price has increased less than 20% in the most recent 5 year period. This is better than a loss but the 3.7% average annual appreciation probably won't go too far in attracting major investors. Mr. Hottovy expects Darden to weather the storm. He is more negative regarding the chances of Dine Equity (parent company of IHOP and Applebees). Although he would like to see Dine Equity refinance some of their debt, Morningstar rates DIN as a 3 star stock (about average return expectation for the risk level).

Wednesday, January 06, 2010

Great Advice For Any Economy

Chef Jason Sandeman is a blogger working in Montreal (my favorite city). In a recent blog post he summarizes the 7 laws of Italian Cooking which if followed will help you eat well for less.

Sunday, January 03, 2010

Outlook for 2010

Many people are pleased to see 2009 come to an end. Wall Street posted a solid 20% gain and oil prices were well below $100 per barrel. The bad news involved jobs. Month after month, companies shed employees in droves. We can expect the Federal Reserve to leave rates low until the job market turns the corner.

Increases in government spending at the federal level will be partially offset by cuts in local and state government budgets. Somewhere in the later half of 2010, I expect the job market to reverse course as employers slowly start adding people to their payrolls.

Stocks should continue the up and down motion as the Dow Jones seeks higher ground. Any increase in consumer confidence will translate into profit since companies have reigned in their fixed costs. Will restaurants start filling their dining rooms mid-week?

Look to travel indicators for signs of increased mid-week business. When airlines and hotels begin to see increased volumes, restaurants will find business travelers in their seats. Don't expect many $100 bottles of wine on business expense accounts this year. Frugal is in vogue.

I expect oil to remain below $100 per barrel.

Overall, 2010 will be better than 2009 as the long slow recovery takes root.

Restaurant Data Pros

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