Who Is Killing The Restaurant Industry – Part 4 (The Suppliers)

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In order to establish a clear motive and opportunity for our next suspect, the supplier, it is important that we understand the circumstances in which the victim and the suspect both operate. As previously mentioned it was only a few short years ago that the restaurant industry was delivering a very acceptable retention rate of 18 to 24%. This was way in excess of returns in the USA and made the restaurant industry a much sort after business. In fact every man and his dog that could get their hands on a few Rands were gobbling up sites and franchises. Most restaurants were able to show year on year same growth in excess of annual rental and product increases and all appeared to be well in the South African Restaurant Industry.

So exactly how do restaurants make their money? Selling food and drink of course, but what are the percentages and how have they changed. For the sake of this exercise I am going to show current retention of a franchise operation doing an average monthly turnover of R500 000.

At least 37% of that goes towards food cost, with some restaurants only achieving 40-42%. That is money left on the table! Food cost is one of the last controllable expenses and if you aren’t controlling that, well… There are plenty of methods available, stock control systems to spread sheets to manual books. Whatever you use, use it properly. My personal favourite is www.idealstockcontrol.com as I did have a hand in its early development.

This leaves a gross profit of 63% that is quickly gobbled up by…

11.00% Occupancy Costs – Basic rental and building operations cost. As well as any cost paid to landlord in respect of the leased premises. Rentals vary greatly from place to place, and in some operations rent may exceed the 10% level, but may be compensated in volumes creating. (Those of you who read Chapter 3 The Landlord, know how difficult it is to achieve this!)

19.56 % All Salaries and Wages – All permanent and casual staff including managers, should the franchisee/owner draw a salary, only market related rates shall apply. All bonus, 13th checks, pensions, medical aids, staff transport, settlement packages. BOH = 8%; Waiters = 4%, Managers = 5%,Transport = 1%, Staff training = 0.7%, Uniforms = 0.03%, Bonus = 0.08%, BC = 0.06%, Service levies = 0.03%, WC = 0.16%

6.00% Management Services or Franchise Fee – Payment made to franchisor, calculated as percentage of net turnover.

2.00% Marketing – Marketing levy paid to franchisor as well as any monies paid for advertising and promotions, marketing levy to landlord and related items

0.50% Administration – All costs involved in producing management result, audit and year-end balance sheet (including audit fees, VAT and VAT returns, payroll charges, PAYE) By the way PAYE does not stand for PLANES, AUTOMOBILES, YACHTS, ETC so stop buying toys before you have paid off the business!

1.20% Bank charges – Banking charges, credit card charges. This specifically excludes interest on loans or repayments of loans.

1.00% Cleaning Materials – Detergents, all cleaning equipment, disposable uniforms, cleaning contracts, tidy mats.

1.30% Repairs and Maintenance    – Repairs to equipment, maintenance contracts, replacement parts.

1.20% Replacements – Replacement of all crockery, cutlery, glassware, cooking and baking utensils. Specifically excludes the replacement of capital goods, e.g. Fridge’s, stoves, furniture, etc.

1.00% General – Telephone, legal, human rescue and I.R.services, printing, menus, any other costs directly related to the  operation, incl Q-Pro and mystery shopper

0.65% Insurance – All insurance relating to the licensed premises

4.00% Utilities – All electricity, water, gas.

And that leaves with a little under 11% to take away from the business… BUT, you haven’t paid interest, borrowings or tax!

Now I realize that not all my readers are members of a franchise group and that means the 6% management and 2% marketing fees ‘may’ find their way to the bottom line. But as the Bard said “herein lies the rub!” If you are not paying franchise fees, a fair portion of that should be going to marketing, product engineering, research, human resources and other services that you ‘should’ be getting from your franchisee. (We will cover all that in a later chapter)

Now that is quite a lengthy introduction but it is important that you understand these figures in the light of the role the suppliers are playing in the death of the restaurant industry. (In fact, I will be referring to them in future chapters)

Now once again I must highlight that there are many ethical suppliers, many that go the extra mile for their clients and many (some of whom are ex restaurant owners themselves) who have a very good understanding of the business. BUT regrettably there are plenty that do NOT fall into this category. How many of your suppliers have visited your restaurant, walked through your fridges or dry goods stores, understand your space limitations? How many of them understand that delivering during a Friday lunch is not practical? And most importantly how many of them realize the direct effect a price increase has on your bottom line?

One of the greatest difficulties that restaurants currently face, and there are many, is balancing increasing input costs with price points placed by the customers. Most customers have a number in their mind, an amount they would expect to pay for that type of product. Maybe you feel R30 is the most you should pay for a toasted cheese, R120 for a 300g fillet, R49 for a margarita pizza and so on…

The moment the restaurant exceeds that number… POW they are perceived and worse described as expensive. Now of course expensive is relative but customers don’t consider this when scrutinizing price. Many of the suppliers do not appreciate this fact as they push up the price of raw goods the restaurant owner cannot simply follow suit and pass on the cost to the customer. “Yes but” says the supplier “why should I swallow the price increase that is passed onto me by MY supplier?” Fair point but let’s consider the following two scenarios…

1    You purchase an international product that is imported from the USA. Suddenly the rand takes a dive and you receive the dreaded “Sorry to inform you of our price increase letter”. Well the rand is at an all-time high and not a single restaurant that I have canvassed has received a price reduction. Is it not time for all restaurants to go through their files, find suppliers who have increased prices according to Forex rates and insist on a reduction.
2    The same goes for the price of fuel. As petrol prices increase you can bet your suppliers will be pushing up prices to cover ‘transport’ costs. Fuel goes down and the prices remain the same… Please explain!

How many of your suppliers are aware of exactly when you change menu prices? Do they realize that a price increase one week after you have printed your new menus will mean up to six months of reduced margins? You need to put supplier agreements in place to ensure you will receive guaranteed prices for fixed periods. But this takes commitment from your side; you cannot suddenly jump ship on a supplier because someone has offered you a few cents discount. Quid pro quo as they say.

Groups and franchise operations should have no difficulty in negotiating these terms but they are often sideswiped by franchisees who then buy off spec products. Off spec products brings me to another thing. My father, a mine of useless information by his own description would often tell us “you can always buy oats cheaper if you buy the AFTER they have passed through the horse” that is to say you will get exactly what you pay for. Squeeze a soap supplier for a few rand discount and he is sure to add more water to the concentrate. Squeeze your butcher and he may stop aging his meat as long so as not to lose the interest, and so it goes on.

The relationship between restaurant (all businesses I am sure) and their suppliers is a difficult balance, but if both parties can adopt a policy of fair profit, both could benefit greatly. Now get on the phone, call your suppliers personally and schedule a ‘getting to know me’ meeting. Speak to them about the challenges, explain restaurant margins to them, give them a tour of your business and make them a partner… you will both be richer for it!