Where has all the profit gone?

This essay looks at the trends that are eroding the profitability of hospitality businesses in our region.

I’m seeing some interesting financial reports from hospitality and foodservice businesses lately. I’m sorry to say that there’s not a lot of joy out there right now. I thought that the recent wave of optimism concerning business confidence and increased tourism and consumer spending would mean that we will all have a good year, but rising costs seem to have taken the gloss (and the expected profits) away from the increases to revenue.

The main culprits are our two old foes: food and beverage costs, and wage costs. Now, more than ever before in my career experience, these require careful management or you will find yourself with a healthy turnover, but no resulting profit. As one of my friends likes to gleefully point out — ‘Turnover is vanity, while profit is sanity’. That particular kind of vanity is going to catch up to a whole lot of operators in this industry soon.

Why are hospitality economics so difficult?

The rising costs trend has been consistent for almost 25 years now — or to be more accurate, selling prices have been relatively stagnant during this period, while costs have steadily risen due to inflation, as they always do and always will. This makes all your cost percentages look rather sick. For the uninitiated, every dollar your costs rise without a balancing increase to your revenue is a dollar directly off your profit. 

The laws of basic economics will have to kick in soon.  

economic decline
The hospitality industry has become more crowded and less profitable as time goes by . . .

Many of the businesses I’ve seen lately are showing profits of less than 5% of turnover. A disturbing percentage, when you do their accounting correctly, are making nothing, and a large number have gone to the wall. Hospitality is not a good place to put your money right now. Try borrowing money from a bank for a café or a restaurant if you really want to see how bad the industry is regarded as an investment.

Shake out inevitable

I think there will be a shakeout over the next few years as more of the weaker disappear and their places are not taken up automatically as they have been for the last ten years or so. Given a stable demand, that will leave the depleted available disposable income in the community to fewer and fewer operators who will be able to charge higher prices. Profitability will slowly return, but it’s going to take some years.

There are two reasons that I feel will result in a limit on the number of new businesses being established over the next few years. First, as I have previously mentioned, finance for hospitality businesses will become more and more difficult to procure through traditional methods. Second, I think the cost of establishing viable new businesses has risen to the point where fewer and fewer people will be in a position to finance a new business themselves.

So, will you still be here in five years time, to reap the benefit of a better hospitality economy? Who knows, but your chances will be better if you face the facts and are prepared to make a few radical changes. If you don’t change your direction you’ll end up where you’re headed — economics are moving against you.

Unfair time in hospitality history

Historically, it's been easy to run a hospitality business. Not so any more.

It’s unfair really — restaurants, cafes and hotels have operated essentially the same way now for thousands of years. It’s only in the last eighty years or so that the complexity of modern life has caught up with all of us. Go back further than this and most hospitality businesses were operated by couples or families whose main concern was making their guests comfortable. The money side of things largely took care of itself, and if it didn’t you’d just stick up your prices. 

Now, a short hop in history down the track, good financial management is really necessary for basic survival, let alone success. Things have changed immensely. We’ve got an industry that has been traditionally concerned with food and service standards which now needs to pick up sophisticated new management skills — and, by historical standards, needs to pick them up really quickly.

There is no magic bullet

The penny is finally dropping, if the steady stream of consulting clients we’ve had this year is anything to go by, but we can’t help some of them because they come wanting a magic, quick-fix solution, and are not prepared to change the way they personally manage. A quick, easy fix doesn’t exist — sorry. The solutions we’re aware of involve the adoption of a sales culture and tight management control, which can only be achieved if the principal of the business has ownership and commitment to a process that may take some time and will involve up front investment.

It’s easy to lose objectivity when all your peers are exaggerating their success at social functions and the media are making a field day out of featuring 0.0001% of the industry who seem to be doing just fine (and good luck to them, by the way). The rest of the industry is doing it in various degrees of toughness.

no quick fix
There ain't no easy way out, other than adopting a much more professional management of your business

My occupation places me in a privileged and unusual position. I see the reality, in cold hard accounting figures, of a broad cross section of hospitality businesses on an all too regular basis. Most other people have to rely on anecdotal information from people who are too proud to admit they are struggling.

The really sad observation for me is not so much the financial difficulties people are going through, but the fact that a lot of them are working 70 and 80 hour working weeks, forgoing holidays and days off, and still not making any money. Why bother?

To learn more about the topics discussed in this article please consider the following courses,

For documentation to support the management systems discussed in this article, please visit our resources website.

If you are not sure where to start, contact us now to speak with a consultant.

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