As hospitality industry professionals enter one of the busiest trading periods of the year, having a good grasp of financial performance and a keen eye on how they measure up to competition will ensure that improvements in revenue also mean improvements in profits and increased business value. Failing to take advantage of an uplift in the market and monitoring key performance indicators precisely, could result in a sluggish start to the summer trading season.
The industry has seen significant change over recent years and following a decline in the market between 2011 and 2016, the industry is projecting strong growth over the next five years. In order to capitalise on expected buoyant conditions, business owners should be aware of how they match up to current industry benchmarks including their sales mix, profitability, rent and rates, to identify where efficiencies can be made.
Making adjustments now will help improve business performance well into the future.
Understanding average spend by customer is key and motivating staff to help increase revenue will help improve business performance. Implementing incentive schemes for upselling and cross-selling can help reward employees, in exchange for increased profits. Educating staff about which items have the largest margins can help focus the sales efforts on products with the largest gains to be made.
Assessing industry sales benchmarks can help business owners set targets to reach or exceed. The average turnover split for the restaurant industry falls into the following categories: meals – 66.2%; alcoholic drinks – 27.2%; non-alcoholic drinks – 4%; and private functions 2.6%.
Not all aspects of running a business are profitable and knowing which areas yield the greatest gains will help business owners concentrate on the most fruitful activities. One of the hardest decisions facing owners is coming to terms with an area of the business that isn’t making the desired profit. Instead of allowing it to haemorrhage money, owners should act quickly, possibly making significant changes or stopping the activity altogether.
Although the average profit generated in the restaurant industry is currently 11% of turnover, experts are expecting this to decrease as businesses come to terms with recent price hikes such as national living/minimum wage and increases in food prices for example.
Cost of Sales/Gross Profit Margin
Throughout the industry, purchases of food and beverages account for 39% of revenue, giving an average industry gross profit margin of 61%. This has reduced in recent years due to a focus on quality produce and general cost increases of food.
Costs must be closely controlled by planning and costing menus, reducing waste, portion control and stock management. Setting bonus-related targets for staff to reach can ensure everyone takes ownership, while keeping an eye on costs and waste.
Wages typically make up 26.9% of revenue in the restaurant sector, which is mirrored throughout the hospitality and leisure industry. Previous reductions in wages due to the industry slowdown, have since been overshadowed by regulatory increases in costs such as the national living/minimum wage and auto-enrolment pension costs.
Seasonality of trade means that the industry often sees high staff turnover and a relatively low wage bill and controlling staff changes will be key to managing costs effectively. With Brexit looming and limited access to overseas labour in future, wage costs are likely to increase over the coming months. Conducting scenario plans of the current workforce, including the reliance on overseas staff will help identify future gaps and give employers time to think creatively about how to fill any potential gaps.
Maintaining profits is crucial. Business owners should regularly review customer numbers to ensure that staff capacity levels are at the optimum. Careful planning should be undertaken for known increases to wages and pensions, for example, to ensure that profits and margins can be maintained.
Rents and rates
Where a restaurant is located is crucial to its success but this often means paying a premium. The industry rent charge is often higher than others, at 7.7% of turnover.
Business rates in England and Wales have been recently updated to account for the changes in property values, causing widespread concern for the hospitality and leisure sector. According to the Association for Licensed Multiple Retailers (ALMR), such increases will result in a 15% average increase in costs for pubs and 23% increase for restaurants.
It is key that business owners continually review their business and stay up-to-date with market developments and demands, whilst keeping costs under control. By monitoring industry benchmarks and making improvements now, businesses in the sector will be well-equipped to take advantage of the busy summer season and the predicted lift in trading over the coming years.