Operations analytics, looking at your establishment from a different perspective.

Many innovative companies use lean operating principles on a daily basis. At Hillstone Restaurant Group, operators of Houston’s Restaurants, every move, abbreviations, and kitchen pickup time is scrutinized under a microscope. They manage to have 3-minute pickup times for appetizers, and 8-minute pickups for entrees, without precooking anything. They accomplish this by embracing the concept of lean production.

Hillstone has a spec way of doing almost everything. They require all prospective employees to pass an extensive exam, to ensure they are smart enough to learn their systems. All abbreviations are made to ensure the quickest execution of orders (for instance, a side of sour cream is a side of c, so as to not waste valuable syllables). In turn they have created an almost unstoppable brand with some of the best service in the industry.

Iggy’s Restaurant in Singapore, utilizes lean production techniques and a prixe fix menu to keep costs low while giving impeccable service. Every step of kitchen and service operations are carefully measured in terms of value creation for their customers.

What other analysis can an operator take to his or her establishment? Analytics go deeper than just analyzing operational procedures. You can keep an eye on your barstaff by utilizing cash to total sales ratios, and if over a period of time patterns in that data will begin to arise. Any inventory management system can be scrutinized for better control. The key is to analyze a system or process from start to finish, and find ways to eliminate wasted movements.

All organizations continually evolve, start working on your business, not just in your business.

Restaurant marketing for the next century; the rise of analytics

For years, restaurant owners were told by marketing firms, spend x amount on marketing, but they were never told why. Traditional media (television, radio, and magazines) lack the capability of monitoring an ads true impact. The good news for restaurateurs is, new media (Google Adwords, social media, blogs, etc.) come equipped with analytical tools at no extra cost. The difficulty arises in finding specialists who understand that data, and then incorporating that into your organization’s decision-making processes.

Word of mouth is still the best form of marketing for your establishment, but now there is a way to track how much buzz your concept is creating in social media sites, most notably Facebook. Financial analysts can truly measure the Net Present Value and Internal Rate of Return of a web marketing campaign, especially when linking POS sales data to specials run through this media. The ability to obtain a true Return on Ad Dollars spent is a new phenomenon that even large corporate institutions have yet to catch on. According to Mark Jeffrey of the Kellogg School of Management, 80% of organizations do not use data-driven marketing. He also states that 61% of firms do not have a documented process to screen, evaluate, and prioritize marketing campaigns.

That last statistic portrays the true issue at stake; media has changed so rapidly that marketing professionals have had difficulty keeping up. Would you allow your Chef to run the kitchen without keeping track of food cost percent? In a 2009 study of internet traffic, it was estimated that Google alone controls 6-10% of global internet traffic; can your organization afford not to have a Google presence? Social media has the ability to become your online maitre de, are you prepared to capitalize on this potential?

How does the long-term economic outlook affect the restaurant industry?

The Great Recession has hit the hospitality industry especially hard. Hotel construction loans are near impossible to come by, many restaurateurs looking to sell their businesses are stuck selling at potentially less than the total asset value, and even long standing, best in class operations are running happy hour specials and cutting into profitability. Few full time owner/ operators have the time or energy to look into economic growth forecasts for the US, and their respective metropolitan region.

Historically in our economy, very sharp downturns are followed by even sharper upturns, as businesses spend on new opportunities, consumers take advantage of lower priced services, and the economy becomes flush with cash and continues to grow. In this situation, things are different. The American people borrowed their way into prosperity during the Great Boom of the early 2000’s, and are now recovering by recouping their savings.

Current American mortgages, student loans, credit card debts and other forms of debt add up to almost 120% of our annual disposable incomes. Baby boomers, the wealthiest of Americans, are now facing the stark reality that they will have to work for more years than they planned. The effect has been, in 2008 and 2009, consumer spending fell for two years in a row, the first time that has happened since the Great Depression. The majority of economic forecasts are continuing that trend into the next couple of years.

This has created a unique outlook for hospitality investors. Firstly, the fast casual sector is exploding. Americans are still busy people, not used to cooking at home, and are seeking value in quick service restaurants. Full service chains are now having to do more with less, and smart owners are realizing that this trend is probably not temporary.

In my consulting endeavors, I recommend that my clients create an action plan for the next two years, to see where they can cut the fat. Many restaurateurs have included their line managers on such a task, and are coming up with collaborative new ways to streamline menus, reduce labor, and attract new customers.

There are also opportunities for purchase or expansion, as in any changing of the guard, many quick thinking entrepreneurs see how this is true. The reality is that capital is very hard to obtain. Small business loans have almost evaporated, and equity investors are wary. Debt or equity financiers need intricate, professional financial statements, and the right due diligence to see if the opportunity is well founded. Forming the right team for such an endeavor could pay dividends for years to come.

Restaurateurs are notoriously immersed in their properties and the microeconomy directly surrounding their stores. Economic data suggests they need be more aware of the future macroeconomic outlook, or risk becoming obsolete.

What can a financial analyst do for you?

In the early 1990’s, the hotel industry experienced a major shift. As the 1992 recession ripped through the commercial real estate market, hoteliers needed more in depth analysis of their competition’s room rates, and hotel revenue management techniques began being adopted by a few intelligent firms. Twenty years later, there is not a hotel company in existence without a revenue management division. Has the Great Recession caused the same sort of major paradigm shift for the restaurant industry? What type of information is available to restaurant owners to assist them in their daily operations?

The restaurant industry has evolved very quickly in the past twenty years. The percentage of American income spent on dining out increased dramatically over the duration of that timeframe. Will that growth repeat itself in the next twenty years? If not, how can you better prepare yourself for major capital expenditure decisions?
• Are you fully utilizing the data at your disposal in your POS systems?
• What buying patterns are occurring throughout your market, and do you have systems in place to capitalize on them?
• Are you getting the most for your marketing dollars?
• Is your inventory turned as often as it should be, and can you streamline your menu to reduce labor costs?
• What data does your competition base their decisions off of?
• Are the processes you used in opening your past establishments polished enough to replicate in today’s cutthroat market?
• Are you in the process of completing a business plan, and do not fully comprehend the pro forma financial statements?
• Are your financial projections sophisticated enough to raise equity capital, or to obtain a small business loan?
• Have you used your existing financial data to see if you are utilizing your assets to their utmost efficiency?

You are intuitive, that is what has made you a successful restaurateur. Today’s market has its serious challenges, now is the time to put your business first.

Is now the time for Restaurant Revenue Management?

The concept of revenue management is relatively new in the hospitality industry; the first Cornell Quarterly article referencing it was published in 1988*. Today, every hotel company imaginable has their own revenue management department, as if their very survival depends on it. Restaurants on the other hand, seem relatively reluctant to adopt such techniques.

Revenue management is, “in essence…managing (of) customer behavior at the individual level via price and availability of constrained resources to maximize profits”**. In other words, it is the practice of revenue optimization. Hotels change their pricing consistently depending on supply and demand, yet food and beverage prices remain relatively static.

The practice of discounting during low demand periods (happy hours and early bird specials) highlight the very essence of revenue management techniques, and can have success. On the flip side, the idea of charging a premium (increasing the price of food during peak times of the day or during weekends,) remains very negatively viewed by restaurant consumers***.

Is it equitable to charge a premium for a table with a view of a landmark? Could a high end food and beverage outlet succeed by charging different amounts to different guests, depending on where they sit and what time they dine? Could this practice succeed in a wine bar in NYC, or just in a TGI Fridays at a baseball stadium? Please feel free to comment.

* Cornell Hospitality Quarterly, "Improving Hospitality Industry Sales" February 2010 55.
** Cornell Hospitality Quarterly, "Improving Hospitality Industry Sales" February 2010 54.
*** Cornell Hospitality Quarterly, "Percieved Fairness of Demand-based Pricing for Restaurants" February 2002