It’s quite interesting tracing the way changing economics over the last forty years have forced change in the hospitality industry. It’s probably worth retracing these changes for the benefit of those who are battling with the current financial turmoil — it may help you to plan a strategy to cope with the future.
When I first entered the hospitality industry way back in 1968, profitability wasn’t much of an issue; all we had to worry about was good food and competent service. The margins on everything were quite fat and costs were very low in comparison to today, and there were far fewer hospitality businesses competing in the marketplace. A major contributor to these good times was that unlike today, restaurant entertainment was a legitimate tax deduction and the industry was awash with money.
We had a minor recession in 1975 and that killed the table service and wiped out a number of the older businesses that didn’t move with the times. Cost control started to become an issue that managers had to concern themselves with. At the same time, wave after wave of European migration had forever changed our eating habits and provided cheap and interesting alternatives to the ubiquitous Chinese café. Globalisation was upon us with a vengeance.
Our economy started to pick-up momentum again in the early 80’s and our industry should have done well but the Federal Government decided that tax deductibility for meals was being rorted too much (which it was), and in 1983 they changed the tax laws. The effect was like someone turned off a tap; money dried up overnight and we lost about a third of the industry in an eighteen month period. The need for good strategic management became apparent as those who were too bogged in their businesses and not looking ahead went out of business at an alarming rate.
Things settled down in the mid to late 80’s as we had an economic boom (or more accurately a bubble, much smaller than today’s) and the survivors did well until the bubble burst with in 1989. Hospitality revenue went into freefall right across the country, as disposable income dried-up and companies went into ‘don’t spend’ mode.
The need for strict cost reductions led to the introduction of nouvelle cuisine (translation: really, really small portions arranged artfully) and a move away from prime cuts of meat, fish and poultry to offal and cheaper cuts like shanks, and belly meat. Clever operators ceased putting protein on a plate in one piece and sliced smaller portions and piled them on lesser ingredients in order to provide a perception of good value, and it worked — for a while.
We then entered 17 years of fairly constant growth, driven largely by property development where the industry in Australia expanded nearly 400%, while our population only grew by about 17%. This massive expansion of industry capacity effectively caused selling prices to stagnate and fall seriously behind inflation. Meanwhile costs, particularly the biggies — food and wage costs — have risen way faster than inflation, causing a sharp decline in profitability.
As margins have gradually dwindled, clever operators have reacted in several ways to counter their deteriorating financial position. First, they have sought to introduce management skills to their businesses that were not deemed necessary in the past — particularly skills like strict, proactive wage cost control, dynamic food cost control, and sales management systems. In reflection of this need for strict control we have found it necessary to train supervisors to the same standard we were training managers fifteen years ago.
Going further, they have dredged the abattoirs and food processors for those forlorn bits that were overlooked in the last austerity campaign. Hello cheeks and sphincters! Where do we go from here? Unless we work out how to soften hoofs and horns to make them palatable we’ve pretty much reached the end of the road with cheap meat and poultry, and seafood is not far behind.
The other reaction to dwindling margins is the slow demise of the traditional entrée, main, dessert meal structure, in favour of the tasting dish or tapas concept. This is a neat way to restore margins by disallowing us to compare apples to apples. While the public are averse to $50 main courses, they seem quite happy to pay the equivalent for the same thing spread over several plates. Perception is all there is.
Perhaps the most profound recent change we’ve seen is the rise of the necessity for a sales and merchandising culture to become the default in the industry, rather than the passive attitude we’ve all had in the past, where we wait for a customer to ask for something and then give it to them. If you run a restaurant like this today, you probably won’t survive. Would you like still or mineral water with your meal, sir?
The last profound change we’re seeing is the relentless trend for quantity production tasks to be transferred outside commercial kitchens to specialist subcontractors who can supply cheaper and more reliably than most chefs can provide within their own operations. Yes, there is still a great deal of resistance to going down this path this, especially by chefs in middle and up-market restaurants, but if it’s the choice between doing this and being out of work, most will come around and see sense, as uncomfortable as it might be.
Where to from here? Well I believe the operators who will prosper in the foreseeable future are those who accept that the world is changing rapidly and that the traditional way of operating is failing. What ultimately matters is customer perception. In my opinion they see good selling as service and they don’t seem to care how something was made as long as it looks and tastes good.