If we look at the biggest challenges facing hospitality operators at present, the control of costs would have to come close to the top of the list. Reducing your major costs — particularly wages and cost of goods sold (commonly referred to as food and beverage costs) — will present you with some of your biggest headaches.

Ten years ago most hospitality businesses didn’t have to worry about strict cost control. Back then profit margins were high and you could run a food business by the seat of your pants or with very rudimentary control systems and still come out smelling like roses at the end of the month (or year). Those were the days!

Since then all your costs have risen steadily and your prices have stayed relatively stagnant. The net effect has been a steady erosion of the profit margin you used to enjoy. To restore this margin you have two choices: increase your prices (which I wrote about last month), or decrease your costs. How can you go about decreasing your costs?

Lets look at wage costs first. If I ask most managers what they can do to reduce wage costs they usually focus on their rosters and look for ways to reduce staffing. This can have a very negative effect on your business.

Wage costs can be divided into two separate categories: productive wages, which are the wages you pay out that are directly involved in a customer transaction; and non-productive wages, which are all the wages you pay out to do administrative duties, marketing, recruiting, training, etc.

A high proportion of businesses that have high wage costs have then because of high staff turnover. It doesn’t matter if they are turning over permanent or casual staff, they still have to be recruited and trained. In other words if you have high staff turnover your non-productive wage costs will become too high, because you are constantly having to find and settle new staff.

If you then go and cut your rosters you will probably reduce your productive labour and damage you business by negatively affecting your ability to service your customers. I find only the very well trained managers understand this. So, we always look at staff turnover first when we are reducing wage costs.

The other major factors that inflate wage costs are a lack of sales skills, high average rates of pay and poor productivity. These are a lot simpler to understand.

A lack of sales skills will mean that you are not extracting the contents of wallets and purses efficiently and not maximising revenue from your existing customer base. Do a bit of maths to fully explore this issue: add 20% to your current monthly sales and work out you wage percentage using your current wage cost figures — you will see a significant decrease in your wage percentage and a proportionate increase in your bottom line. This is what selling skills will do for you.

Next, take your weekly figures and extract your total wage cost (all staff and management) and divide it by your total labour hours. This will give you your average rate of pay per hour. The figure may give you severe heartburn. High salaries paid to key staff are usually the culprit. Are you getting your money’s worth from these people?

The next issue — poor productivity — is a symptom, and not the root problem in itself. It is the symptom of one, or all, of three issues that form a chain in your business: poor recruitment, poor training or poor leadership. The crux of good wage cost control lies at the supervisory level in your business, not the management level. Your supervisors are in control of your staff on a day to day basis. They should be equipped with an understanding of the issues that erode productivity and made responsible for controlling those things. If you try to control productivity from a management level, you will likely fail.

Now, for the issue of cost of goods sold. In a nutshell, the big issues are: your purchasing efficiency, your menu structure and costing, and your control of wastage.

Improving your purchasing efficiency is often just a matter of making the time to re-evaluate your existing suppliers against other available suppliers. If you have settled into a comfortable relationship you are probably paying too much for too little. Look around; especially at the moment when suppliers are lean and hungry.

Your menu structure is a big issue at present. This is best illustrated using restaurants as an example. Those that still cling to the traditional European entree, main and dessert menu structure have little room to manoeuver with pricing. Contrast this with say, Indian or Thai restaurants that use a leggo set approach to dining with a succession of smaller dishes — and generally make a significantly higher margin.

I shouldn’t have to say much about menu costing, but I’m still dismayed at the operators who haven’t got this one yet. If you do not cost your dishes and menu range properly and ensure you are making a reasonable margin on each, you are likely to shoot yourself in the foot.

Reducing wastage, the final issue, is all about stock reconciliation — comparing what you’ve used with what you’ve sold on either a weekly or a monthly basis, then tracking back to eliminate problems. This requires proper stock counting, which in turn requires systematic, secure and organised storage.

In the end, profit in today’s economy requires a systematic approach, a deeper understanding of hospitality economics, and a willingness to abandon the old ways of doing things.

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© Eldred Hospitality Pty Ltd 2009