Q: I’ve been in the restaurant business for 20+ years. Over the last several years, I’ve seen our financial margins decline year-over-year, while sales have improved slightly. Other restaurant owners I speak with are losing margin as well. What is happening to our margins as an industry?

A: Not too many years ago, the profitability formula for an average restaurant was 30 percent cost of goods, 30 percent labor cost and 30 percent other costs, leaving 10 percent as the bottom line. Through the years, with a steady increase in minimum wage and a tight, competitive labor market, the most common model is now 30 percent/36 percent/30 percent. Net income of 4 percent is the average bottom-line margin. The restaurant business is difficult and a all-run, balanced business includes an intense focus on the guest, wonderful work environment, careful planning, sparkling clean facility and excellent financial results. Focus must be applied in each area with equal vigor and, most importantly, the owner must compete with him/herself to be his/her best in each area.

The journey to improving financial results begins at top-lines sales. Manage sales mix aggressively. Increase the sales mix percentage/number sold of starters and desserts to entrees. Entrees sell regardless; starters and desserts don’t. Track the last several months of the percentage of total sales and the number of starters and desserts. Coach the team on the importance of offering these options with every table, and make sure the team is proud of what they offer. Run contests to reward behavior, and track and post the results daily.

Simultaneously drive incremental sales at the table with beverage sales. Evaluate the mix between food and beverage on total sales. Examine Exhibit 1:

Sales Actual % Target %
Food 80,000 80% 80,000 76%
Beverage 20,000 20% 25,200 24%
Total 100,000 100% 105,200 100%

There are two big wins by driving the beverage sales higher. Food sales stay the same, yet overall sales grow incrementally – in this case by $5,200. Secondly, beverage sales are more profitable than food sales. Beverage typically has a better cost of good than food, and it takes no more labor to produce and sell another beverage. Drinks are sales that must be offered and carefully managed with proper pace. With safety in mind, be sure to offer to “refresh or refill” glasses when the guest is about one-third from finishing the drink. That allows the bar and the server to get the drink to the table on time.

After building a solid sales strategy, move on to the most important cost equation of the P&L. Combine cost of goods and fully loaded labor to compute prime cost. Prime cost is the most important number to manage in the restaurant. Manage it as a whole first, then break down the parts of cogs and labor. If the new “normal” is 66 percent (cogs 30 percent + labor 36 percent) set a standard of 60 percent or better (55 percent is optimal). Upon first examination, a six-point improvement may seem impossible, but it’s entirely possible. I’ve been involved in companies dropping 12 or more points out of prime cost with focused management and strategy. It’s necessary to have a strategy for the menu and labor, both of which could fill books to adequately explain. Focus on the relationship of menu items, driving sales and labor efficiency. Push cost-of-goods-sold toward 25 percent through effective pricing, menu engineering and sales mix. Target labor at 30 percent or better. Target front of the house at 8-10 percent; target the kitchen for 8 percent to 10 percent; aim for 5 percent or 8 percent for management and a 15 percent load on labor for taxes and benefits. As sales grow, allow only 5 percent more labor for front of the house, 5 percent for back of the house and zero for management for each $1 of incremental sales. This way, as sales grow, labor won’t grow at the same rate. Be sure posted schedules match labor goals, provide plenty of coverage during busy times and minimize risk to the shoulders of the rush.

Competing for margin is mindset and discipline, giving up margin is voluntary. Spend time daily challenging the status quo, and focus on changing sales mix and prime cost; yo’ll recover that margin to live better life.

For more information on improving profitability and driving sales, contact AMP Services at rbraa@ampservices.com. Rick Braa is the co-founder of AMP Services, an accounting and consulting firm specializing in helping companies grow profitability.