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Can a losing restaurant become a profitable business?
Today's Restaurant Internet Exclusive
Thursday, 17 April 2014 21:55

Joe HPBy Joe Dunbar

In this month’s mail, I received an urgent request for assistance from a reader.  Normally, I follow up on these requests with a phone call.  Most of my work involves consulting projects in the U.S.  Occasionally, I work in Canada or the Caribbean.  Since the reader was from Bahrain, I decided to answer him with a blog post.

Every year, I receive a number of requests for help from failing restaurants.  It is important to keep in mind many of these operators should close the door ASAP.  They need to evaluate their business plan.  Successful restaurant startups normally complain about being under staffed, running out of food, long lines out the door, etc.

Much like real estate, the restaurant business depends on a great location.  Operators pay premium rents to locate in a high traffic space.

The letter follows:

Dear Sir,

Trust you are well & fine? This is Sanjeev from Bahrain, Arabian Gulf. 

I'm working as Cost Control Manager. We are connected through linkedin and I'm taking the privilege to write to you.

One of our board members, who is a business man here in Bahrain, runs a small restaurant which is showing a big loss. 

What could be the basic reasons for it? 

Please see the details of the restaurant below:

Seating Capacity - 12 to 15 paxAverage sale per day - $335No recipe costings or selling margins have been established.Total Staff :- Kitchen (4) & Front (2)*Kitchen cost is very high at the moment.All purchases are from local suppliers.Salary (All Staff - $2,660)Rent - $2,393

I would appreciate if you could give me some ideas or bullet points to improve this restaurant's business & making it profitable.

Thanks a lot for your valuable time. Take good care.Sincere regards & yours truly,Sanjeev

My answer follows:

Thanks for the question Sanjeev!  I know the restaurant has opened recently and I appreciate the urgency. ??At this time, costing recipes and calculating gross profit per menu item takes a back seat to marketing and promotion activities.  Sales are too far below the minimum level required to produce a profit.  This is the reason so many restaurants close in the first year.??If the monthly sales are $10,000 and the rent is $2,400, our occupancy cost is 24% of revenue.  This indicates sales need to double for the restaurant to be a going concern.  Keep in mind a 12% occupancy cost is still relatively high.  The goal is 10% or lower.??The breakfast strategy could be part of the solution.  In addition, you could create a carry out menu and search for delivery customers in the vicinity.??Keep the staff level as tight as possible.  The current 26% is good.  As your sales rise, you may be able to reduce the labor % to 25%.??Your cost of goods sold needs to stay below 35% of sales.

Summary:  In this case, the owner failed to create sufficient interest in his new restaurant.  Most restaurants have their best weeks early in their history.  Despite a small number of seats, he chose to open for one meal period.  His monthly rent requires aggressive marketing and promotion.

The decision to focus on a single meal period seems wrong given the high occupancy cost per seat.  They need to be turning tables and selling orders to take out.

Imagine paying $200 per month for each seat in a 200 seat location.  The rent would be $40,000 per month.  Very few concepts generate enough revenue in a single meal period to cover a $200 per seat monthly rent.

Dunbar Associates helps food service operators to control costs, develop business plans and budgets, implement software and integrate back office systems. If you would like to lower your food and beverage cost percentage call Joe at 800.949.3295 or fax him at 202.315.3664.

 
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