By Melvin Gitler
Open any newspaper and it is quickly apparent that we are being bombarded with signs of an economy in peril. While these predictions have sometimes become self-fulfilling prophecies as publicized economic fears have fueled consumer behavior, there are certainly economic signals that indicate a struggling economy.
Consultants, manufacturers and vendors have provided us a plethora of reasons for the rising costs in our industry. Oil, of course, seems to be driving this sharper increase in the cost of goods. Oil prices have driven shipping costs upwards, caused increased price pressures on the corn market due to ethanol production, reduced the supply of other vegetables as farmers shift production to corn, created a rise in vegetable oils and shortenings, and raised the costs of products that require animals fed from these high-priced grains, such as eggs, poultry, dairy, beef, pork, etc. Operators, however, don’t need to look at economic signals to realize that the cost of operating restaurants has risen more sharply of the past year.
The problem of the current situation is being compounded by the fact that consumers are being more cautious about spending, as they see their disposable income shrinking and confidence in their own jobs dwindling. These are, of course, generalizations. The two-fold nature of the current situation, the rising cost of goods coupled with slowing revenue growth, creates difficulties for restaurants seeking to maintain a consistent bottom line.
Under a scenario where the cost of goods remains the same, but revenue slips, it is easier for operators to offer discounts and promotions to drive revenue. The additional expenses associated with discounts and promotions can be absorbed in the P&L due to the stability of cost of goods and the increased revenue these expenses will generate. Conversely, a scenario of rising cost of goods, but consistent revenue can be off-set, at least in the short term, through strategic price increases. In our current situation of both sharply rising cost of goods and decreasing revenue, however, operators are caught in a catch-22. Raise prices to off-set the rising cost of goods and operators risk driving revenue levels down even further. Lower prices or offer promotions and discounts to try and maintain revenue levels and operators will see profitability diminish as a result of shrinking margins.
As we know, however, maintaining profitability is not impossible during difficult economic periods. In fact, these difficult environments can be used to an organization's benefit. Obviously, we all prefer times of prosperity, as prosperous economies enable operators to utilize improved cash flow to expand operations, invest in growth strategies and benefit from increased profits. During these periods of prosperity, time and capital is spent on increasing market share through the opening of restaurants, improved advertising and marketing, new product launches, store remodels, facility and equipment upgrades, outside training and consulting, etc.
The nature of a free market economy, however, means that we can expect both periods of economic growth, as well as recession. A strong business can not only survive economic downturns, but use these periods to add value to the organization and strengthen its position. While periods of prosperity tend to result in expansion and strategic risks taken to capture market share, they also represent periods when businesses pay less attention to productivity, efficiency and cost control. Therefore, it is imperative that while companies use prosperous times to increase their market share, it is just as critical that operators stay mindful of the fundamentals of restaurant cost control basics. This can be achieved through the creation of "cost control muscle memory." Like a golfer's swing, the muscles of an organization must remember to exercise the basic fundamentals of restaurant cost control in all endeavors and in any economic environment. Of course, successful businesses incorporate cost control procedures into their culture and training programs for the outset. However, cost control systems are not hard-wired into a restaurant along with the electric and plumbing—though this would be great! Rather, cost control systems are an organic process, affected by changes in management and personnel, as well as corporate priorities and initiatives. In short, even the best companies can find themselves losing focus on some of the basic cost control systems as focus is diverted in other areas.
Therefore, operators can use economic downturns as a way to re-focus the corporate body on restaurant cost control fundamentals, such as portion control, receiving standards, product bids, labor pro formas, risk and loss prevention, menu analysis and planning, vendor negotiation, staff productivity metrics, utility conservation, etc. Of course, for this re-focus to be successful, these fundamentals must have already been part of the corporate culture and training. However, using down cycles can be a great time to re-examine corporate effectiveness with respect to executing these basics and fundamentals. Using this time to focus on the basics will create the corporate cost control muscle memory that will last beyond these slumps and into periods of growth.
Nobody likes economic slumps. But economics 101 teaches us that these slumps are a natural correction by the market resulting from bad decisions or actions we have taken in the past, such as charging too much on our credit cards, paying too much for a house, speculating in risky markets and buying gas guzzling SUVs. Therefore, let’s take advantage of the slump and learn its lesson by focusing on restaurant cost control fundamentals so that we can position ourselves to be more prosperous as the economic tides turn.
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