We’ve been involved in doing financial feasibility studies for some new hospitality projects recently. This has caused me to focus my thinking on how to make hospitality projects viable in spite of the increasing cost of leasing good quality locations in or around our major cities.
The cost of leasing real estate is based on the rather elastic concept of ‘current market value’. Basically it’s an ongoing auction where the rates asked per square metre are based on what the general commercial world is prepared to pay for similar sites.
The problem we sometimes have to wrestle with is that most hospitality operators can’t charge high enough prices for their goods and services to bring their rent into the desired target of 6–8% of revenue. We are in a very price sensitive industry — fierce competition tends to hold prices down, and those who price themselves higher than the perceived normal levels risk a dramatic reduction in their market share.
So how can you make money while paying high rents? Here are some ideas:
1. Reduce non income earning areas of your premises to the minimum. The income earning areas of your business are those areas where customers purchase products and services. Most back of house areas in your business including the kitchen and staff areas, storerooms, office and toilets are non income earning. Why pay top dollar for these spaces if they are not going to earn you money?
What can you move out of your current location and relocate to cheaper space. Why not locate your kitchen preparation activities elsewhere? What about a clever limited menu concept, like a 5-5-5 menu (5 entrees, mains and desserts)? What about locating your accounts office elsewhere? In the past I have seen operators who have been able to increase their seating capacity (and their revenue) by as much as 35% by making more effective use of the prime space they are renting.
2. Maximise the seating capacity of your premises. This may sound basic but I still go to restaurants and cafes that have unnecessarily large tables or chairs, inefficient table placement, bulky banquettes, oversized central floral displays, oversized entrance foyers, excess space between tables and unutilised outdoor capacity.
Ultimately any of these may prove quite costly in the long run. Just do a bit of basic maths: let’s say you have the capacity for another ten seats and your customer average is $35 per head. Every Friday and Saturday night when you are full and turning people away this will cost you $350 in foregone revenue. This adds up to $700 per week or $36,400 per year. This extra money might reduce your rent by three or four percent!
3. Learn how to turn tables during busy times. Table turning is an art that some of our top head waiters and restaurateurs are masters at. To turn tables you should have some kind of holding area (normally a bar or lounge where they will spend while they are waiting), your service must be fast paced and your resetting procedures must be swift and efficient. Table turning is not for all hospitality businesses, the higher you go up-market the less customers will tolerate being hustled along.
If you can turn your tables it gives you an interesting financial effect. Let’s say you have a 100 seat restaurant or cafe — if you can turn your tables twice in a lunchtime you have effectively only paid rent on a 100 seat restaurant while getting the revenue from a 200 seat restaurant. This is a very good thing. I’ve had a few clients over the years who turn tables in excess of five times a day and manage to make startling profits from their businesses.
4. Use sales and merchandising skills to increase your average spend. Most of the businesses we deal with devote little time or money to ensuring effective sales skills, much to my eternal frustration. It defies logic: Why go to all the trouble and expense of winning customers if you are not going to handle them to the maximum benefit of your business?
Our ongoing mystery shopping survey program reveals some interesting statistics: In the last ten years of surveying hundreds of restaurants and cafes only about 50% of the sales opportunities that presented themselves were realised by the service staff. There is an opportunity to increase your revenue by 25–30% from your existing customer base if you go about it professionally. What would this do for your rent percentage? I’ll bet it would reduce it substantially.
It all really goes back to the two prime indicators used by the accommodation industry: occupancy and yield. Occupancy is the percentage of your total capacity you achieve in reality. Most restaurants and cafes achieve an occupancy of less than 40%, in other words 60% of their capacity goes to waste while they pay eye watering rent on the premises.
Yield is the amount of money you get from each customer. In the food and beverage industry this what we call the customer average sale.
So, when we look at the feasibility of proposed projects in high rent locations we have to very carefully work out the minimum occupancy and minimum yield necessary to break even. If rent is too high and ultimately we can’t get the figures to work out in an achievable range the last remaining question is: Will the location deliver enough customers so we can reduce or eliminate any expenditure on marketing? If so it still may be a viable project.
One way or another be very careful of high rents . . . you don’t want to find yourself working for your landlord.