Introduction to Restaurant Revenue Management

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Introduction to Restaurant Revenue Management

  1. 1. 16 CORNELLHOTELANDRESTAURANTADMINISTRATIONQUARTERLY16 CORNELLHOTELANDRESTAURANTADMINISTRATIONQUARTERLY T SherylE.Kimes,Ph.D.,isan associateprofessorattheCornell UniversitySchoolofHotelAdministra- tion«sek6@cornell.edu». ©1999,CornellUniversity Implementing Restaurant RevenueManagement AFive-stepApproach bySherylE.Kimes Revenuemanagementforrestaurantshingesonanappropriatemeasure of revenue. Here’s the basis of one such measure—revenue per available seat-hour. hegoalofrestaurantrevenue management (RRM) is to maxi- mizerevenueperavailableseat-hour bymanipulatingpriceandmeal duration. AnearlierCornellQuarterly articlediscussedthetheorybehind RRM,1 but the application of RRM has not been explored. In a seriesofarticlesontheapplication of RRM, of which this is the first, I will discuss how to develop a RRM system,demonstratehowRRMwas 1 Sheryl E. Kimes, Richard B. Chase, Sunmee Choi, Elizabeth N. Ngonzi, and Philip Y. Lee, “Restaurant Revenue Management,”Cornell HotelandRestaurant AdministrationQuarterly, Vol. 39, No. 3 (June 1998), pp. 32–39.
  2. 2. June 1999 • 17 F O C U S O N F O O D S E R V I C E appliedtoapilotrestaurant,and developguidelinesthatrestaurant operatorscanusetoincreasetheir revenueperavailableseathour. InthispaperIdiscussthefunda- mentalsofrestaurantrevenueman- agement,examinemethodsofmea- suringrevenue-managementsuccess, explainhowthosemeasuresare differentfromthetraditionalgauges ofrestaurants’success,andoutlinea five-stepapproachtoestablishinga revenue-managementsystem. OverviewofRestaurantRevenue Management Restaurantrevenuemanagement canbedefinedassellingtheright seattotherightcustomeratthe right price and for the right dura- tion. The determination of “right” entailsachievingboththemostrev- enuepossiblefortherestaurantand alsodeliveringthegreatestvalueor utility to the customer. Without that balance, RM-type practices will in thelongtermalienatethosecus- tomers who will feel that the restau- ranthastakenadvantageofthem. Revenuemanagement,oryield management,iscommonlypracticed inthehotelandairlineindustries. Companiesimplementingrevenue managementreportincreasesin revenueof2to5percentoverthe resultsofpriorprocedures.Revenue managementrequiresafocusonthe revenueperavailableinventoryunit. Forexample,hotelsmeasurerevenue peravailableroom-night(com- monlyreferredtoasRevPAR), airlinesmeasurerevenueperavail- ableseat-mile(RPSM),andcruise linesmeasurerevenueperavailable cabin. Whenrestaurantoperators applyrevenuemanagementtotheir restaurants,Irecommendthatthey measuretheirresultsintermsof revenueperavailableseathour (RevPASH). ConcentratingonRevPASHhas major implications for the way in whicharestaurantisoperatedand evaluated.Manymanagerscurrently measuretheirrestaurant’ssuccessby tallyingtheaveragecheckorby maintainingcertainlabor-and food-costpercentages. Whilesuch measuresarevaluableformanypur- poses,theydonotexplicitlyreflect arestaurant’srevenue-(orprofit-) producingperformance.RevPASH, ontheotherhand,combinesinfor- mationfromtheaveragecheckand seatuse(oroccupancy)toprovidea measureoftheflowofrevenue throughthesystemandtoindicate howeffectivelyarestaurantisusing itsproductivecapacity. Restaurantoperatorshavetwo mainstrategicleversthattheycan usetomanagerevenue:namely, priceandmealduration.2 Priceisa fairly obvious target for manipula- tion,andmanyoperatorsalready offer price-related promotions to augmentorshiftpeak-periodde- mand(e.g.,earlybirdspecials,spe- cialmenupromotions).Moreso- phisticatedmanipulationsofprice include day-part pricing, day-of- weekpricing,andpricepremiums ordiscountsfordifferenttypesof partysize,tables,andcustomers. Managingmealdurationisabit morecomplicated.Ontheproduc- tionside,managersmuststreamline andcontroltheirservice-delivery process,aswellasunderstand customer-arrivalpatternsandde- terminewaysofinfluencingmeal duration.3 One of the things that makesimplementingrevenueman- agementsodifficultinrestaurantsis the fact that their explicit unit of saleisameal(orevent)ratherthan anamountoftime—althoughone couldarguethatthetruemeasureof therestaurant’sproductistime.4 Whileonecanestimatealikely meanlengthforthatmeal,theac- tual duration is not set. By compari- son,implementingrevenuemanage- mentismucheasierforthehotel, airline,cruise-line,andcar-rental businesses,becausetheyselltheir serviceforanexplicitlycontracted amountoftime.Restaurantsrarely selltablesforafixedamountof time,andinmostwesterncultures arereluctanttobroachthistopic with customers. Moreover, North Americanrestaurateurscannoteven rely on the practice common in somecountriesofchargingforthe cover. One of the stumbling blocks to successfulimplementationofrestau- rantrevenuemanagementisthe strugglethatrestaurantoperators haveindevelopinginternalmethods ofmanagingmealduration.Inthe contextofmanagingmealduration, one should not think only of reduc- ingdiners’averagemeallength. Quite often the factor interfering withrevenuemanagementisthe variabilityinmeallengths,andnot justtheirduration.Someofthe waysinwhichmanagerscaninflu- encemealdurationincludechang- ingreservationpolicies,redesigning menus,andpacingserviceproce- duresandmakingthemmoreeffi- cient.Managerscanalsotrainem- ployeestorespondtocustomers’ apparentwishesregardingthelength ofthemeal. Whilesomecustomers maywishtolingerovercoffee,for instance,managersmightbesur- prised at how often the holdup in turningatableistherestaurant’s ownlackadaisicalapproachtoser- viceandservers’inattentiontocus- tomers’needs. 2 Kimesetal.,June1998;seealso:SherylE. Kimes and Richard B. Chase, “The Strategic LeversofYieldManagement,”JournalofService Research, Vol.1,No.2(Nov.1998),pp.156–166. 3 For a discussion of the effects of altering the service-cycle time, see: Christopher C. Muller, “ASimple Measure of Restaurant Efficiency,” on pages 31–37 of thisCornell Quarterly; for an analysis of arrival times, see: Brian Sill and Rob- ert Decker, “Applying Capacity-management Science: TheCaseofBrownsRestaurants,” on pages22–30ofthisCornellQuarterly. 4 An argument made by: Daryl Ansel and Chris Dyer, “AFramework for Restaurant Information Technology,” on pages 74–84 of this issue.
  3. 3. 18 CORNELLHOTELANDRESTAURANTADMINISTRATIONQUARTERLY MeasuringSuccess Restaurantmanagersaretypically evaluatedbythecheckaveragesand by the food- and labor-cost per- centagesthattheyhavebeenable tomaintain. AsIindicatedbefore, noneofthosemeasurescaptures sufficient information about the revenue-(orprofit-)generating performanceoftherestaurant.Some measureoftherevenue-generating potentialandperformanceofthe restaurantmustbedeveloped. Forarestaurantmanagertocon- centrateonlyonahighaverage check,forinstance,isequivalentto ahotel’sfocusingsolelyonahigh averageroomrate.5 Withoutinfor- mationonthepercentageofcapac- ityuseoroccupancyoftherestau- rant,revenueperformancecannot beevaluated. Ahighaveragecheck mayevenbedetrimentalintimesof strongdemandif,forexample,cus- tomers linger over their meal while otherpartieswaitforatable. Similarly,amanager’sachieving specifiedfood-costandlabor-cost percentagesislaudable,butthatdoes not tell the entire story. In particular, themarginisnotameasureofprof- itableuseofcapacity. Arestaurant managercandoagoodjobof maintainingmarginsandstillbe unprofitable. Anoveremphasison marginscanleadtoapropensityto focusundulyonminimizingcosts. Again,reducingcostisfine,butnot whenthatcausesreducedrevenue duetodisgruntledcustomers. Theextenttowhichavailable seatsareoccupiedisanothercom- monlyappliedmeasureofsuccess, sinceabusyrestaurantisgenerallya revenue-producingrestaurant.Reli- anceonseatoccupancyasameasure ofsuccesssuffersfromthesame problemasrelianceonhotel-room occupancy(intheabsenceofcon- siderationof ADR),becausehigh usedoesnotnecessarilymeanhigh Exhibit1 VariouscalculationsofRevPASH Restaurant Capacity use Average check RevPASH A 40% $18.00 $7.20 B 60% $12.00 $7.20 C 80% $9.00 $7.20 D 90% $8.00 $7.20 Exhibit2 Revenueeffectsofmeal-durationreduction Meal duration Percentage Cumulative (minutes) Turns Revenue RevPASH increase increase 60 4.00 $6,000 $15.00 59 4.07 $6,102 $15.25 1.69% 1.69% 58 4.14 $6,207 $15.52 1.72% 3.45% 57 4.21 $6,316 $15.79 1.75% 5.26% 56 4.29 $6,429 $16.07 1.79% 7.14% 55 4.36 $6,545 $16.36 1.82% 9.09% 54 4.44 $6,667 $16.67 1.85% 11.11% 53 4.53 $6,792 $16.98 1.89% 13.21% 52 4.62 $6,923 $17.31 1.92% 15.38% 51 4.71 $7,059 $17.65 1.96% 17.65% 50 4.80 $7,200 $18.00 2.00% 20.00% 49 4.90 $7,347 $18.37 2.04% 22.45% 48 5.00 $7,500 $18.75 2.08% 25.00% 47 5.11 $7,660 $19.15 2.13% 27.66% 46 5.22 $7,826 $19.57 17.00% 30.43% 45 5.33 $8,000 $20.00 2.22% 33.33% 44 5.45 $8,182 $20.45 2.27% 36.36% 43 5.58 $8,372 $20.93 2.33% 39.53% 42 5.71 $8,571 $21.43 2.38% 42.86% 41 5.85 $8,780 $21.95 2.44% 46.34% 40 6.00 $9,000 $22.50 2.50% 50.00% 5 See: Kimeset al.(June1998),pp.32–39. — —
  4. 4. June 1999 • 19 F O C U S O N F O O D S E R V I C E revenue. Arestaurantcanrunat 90-percentofcapacityandstillnot makemoneyifmenuitemsaresold at too low a price, for example. Becauseitembracescapacityuse, checkaverages,andcostmargins, revenueperavailableseat-hour (RevPASH) is a much better indica- toroftherevenuegeneratingper- formanceofarestaurantthanthe commonlyusedmeasuresthatIjust discussed.RevPASHindicatesthe rateatwhichrevenueisgenerated andcapturesthetrade-offbetween averagecheckandfacilityuse.If occupancypercentagesincrease evenastheaveragecheckdecreases, forinstance,arestaurantcanstill achievethesameRevPASH.Con- versely,ifarestaurantcanincrease theaveragecheck,itcanmaintaina similar RevPASH with a slightly lowerfacilityuse. Exhibit1givesahypothetical illustration of this principle. The fourrestaurantsintheexhibitall havethesameRevPASH($7.20), buteachachievesitinadifferent manner.Restaurant Ahasafacility useof40percentandanaverage checkof$18.00,whileRestaurant Dhasauseratioof90percentbut anaveragecheckof$8.00.Restau- rantsBandCalsoachieveda RevPASH of $7.20, but with vary- ingfacility-useandaverage-check statistics. Theeasiestwaytocalculate RevPASH is to divide revenue (or profit) for the desired time period (e.g.,daypart,day,month)bythe numberofseat-hoursavailabledur- ingthatinterval.Forexample,as- sumea100-seatrestaurantmakes $1,500onFridaysbetween6:00and 7:00 PM. Its RevPASH would be $15($1,500÷100seats¥1hour). Similarly,ifthatsame100-seatres- taurantmade$5,000overafour- hour meal period, its RevPASH wouldbe$12.50($5,000÷100 seats¥4hours,or$5,000÷400 availableseat-hours). RevPASHiscloselyrelatedto thenumberofturnsandthelength ofthemeal,orservicecycle. Asthe numberofturnsincreasesandmeal lengthdecreases,theRevPASH increases.Justaone-minutereduc- tion in meal time during a high- demandperiodcanleadtoanin- creaseinRevPASHof1.5to2.0 percent. Returning to our hypo- thetical100-seatrestaurantwithits four-hourdinner,saythatitsaver- ageservicecycleis60minutes.In thatcase,therestaurantcanpoten- tiallyhandle400customersper night.Iftheaveragecheckis$15, itsmaximumnightlyrevenueis $6,000,anditspotentialRevPASH is $15. If the meal time can be re- ducedto59minutes,therestaurant canhandleanadditional6.8cus- tomers.Iftheaveragecheckre- mainsat$15,itspotentialnightly revenueincreasesto$6,102and itspotentialRevPASHincreases to$15.26(a1.7-percentincrease). Withtheincreasedvolume,the checkaveragecouldevendrop by$0.20,andrevenuewouldstill increase. Reducedmealtimescanbe achievedbychangingtheservice process,alteringstaffinglevels,or altering the menu. Thefirstfew minutesofreductionarenotthat difficultorexpensivetoachieve,for example,bypickingupthepaceof greeting,seating,andchecksettle- ment.Deepreductions,however, mayrequiresubstantialinvestment— forexample,byaddingkitchen equipmentormoreemployees. A return-on-investmentanalysisthat considerstheeffectsofservice-cycle changesonRevPASHcanhelpop- eratorsdecidewhetheraprospective investment is worthwhile. In making theirplansmanagersshouldremem- berthatcustomerpreferencesand expectations limit the minimum feasiblemealdurationandwillset atheoreticalminimumacceptable RevPASH. RevPASH-basedStrategies Onceoperatorsunderstandtheir RevPASHpatterns,theycande- velopstrategiesfordealingwith highandlowRevPASHperiods. A full discussion of the RRM strate- giesavailablewillbepresentedina subsequentpaperofthisseries.Dur- inglowRevPASHperiods,manag- ers can either try to attract more customersandincreaseuseorrely onsuggestivesellingtoincreasethe averagecheck.Duringthoseperiods withhighRevPASH,operators shouldconsiderraisingmenuprices or try to reduce meal duration so thattherestaurantcanincreaseits turn rate. RevPASHcanbeusedatdiffer- entlevelsofanalysisandfordifferent purposes. Attheindividualrestau- rantlevel,managersmaychooseto develop hourly or quarter-hourly RevPASHfigurestohelpdevelopa Exhibit3 HourlyRevPASHforSeptember 5:00 PM 6:00 PM 7:00 PM 8:00 PM 9:00 PM Sunday $2.39 $6.72 $6.43 $6.36 $3.63 Monday $0.19 $2.91 $2.92 $3.52 $2.95 Tuesday $0.61 $2.96 $5.46 $4.61 $5.47 Wednesday $0.75 $2.70 $3.92 $4.29 $2.26 Thursday $0.22 $1.47 $4.86 $3.37 $2.84 Friday $1.49 $6.04 $8.76 $8.17 $9.21 Saturday $2.72 $6.22 $11.89 $12.60 $11.59
  5. 5. 20 CORNELLHOTELANDRESTAURANTADMINISTRATIONQUARTERLY revenue-managementstrategybest suitedtotheirrestaurant.RevPASH canalsobeusedtoevaluatethe effectivenessofanoperation’sserv- ersandmanagers. Saythatthemanagerofourhy- pothetical100-seatrestaurant wantedtounderstandherhourly RevPASHpatternsforSeptember. Obtainingdatafromtherestaurant’s POSsystem,themanagerfound thatherhighestRevPASHperiods wereonFridaysandSaturdaysfrom 6:00to10:00PM andonSundays from6:00to9:00 PM. Themanager canusethisinformationtohelp developrevenue-managementtac- tics specific to high and low RevPASHperiods.Forexample, duringhigh-RevPASHperiods,she mayfocusonreducingthemeal timebyhavingtableserversskip suggestionsofdessertsorafter- dinner drinks. On the other hand, at low-RevPASHtimesshemayde- cidetoincreasetheuseofsuggestive sellingorevenreducemenuprices toboosttraffic. ComparativeRevPASH Regionalornationalmanagers coulduseRevPASHtocompare performanceofdifferentrestaurant units. One would want to adjust the unit RevPASH according to an area’s cost of living, but a unit-by- unit comparison of RevPASH would give a good indication of the relativeperformanceofdifferent restaurantsinanarea,region,or nation. Consider a city with six restau- rantsfranchisedbyaparticular chain,asshowninExhibit4.Res- taurant4enjoyedthehighestaver- agecheck($12.10)ofthesixunits, butitalsohasthelowestRevPASH ($4.25).Ontheotherhand,restau- rant5hasthelowestaveragecheck ($9.45),butthesecond-highest RevPASH($6.25).Relativeperfor- mancemeasurementscanbecalcu- latedbydividingonerestaurant’s performancebytheaverageperfor- manceofalltheunits. Thus,the checkperformanceofrestaurant 4isaboveaverage(1.14),butits RevPASHperformanceisonly0.83 ($4.25÷$5.20).Byusingrelative- performancemeasurementslike these,regionalmanagerscanbetter evaluatetherevenuegenerationof therestaurantstheyoversee. Onecouldalsocalculateand comparecompetitors’RevPASHto getasenseofhowwellarestaurant, aregion,orachainisperforming. Forexample,theRevPASHofa particularrestaurantcouldbecom- paredwiththeaverageRevPASHof thecompetitivesettoevaluateper- formance(seeExhibit5). Thistype ofcalculationisdoneforhotels,for example,bySmith TravelResearch reports.6 While competitive infor- mationisnotreadilyavailable,one Exhibit4 HypotheticalcomparisonofcheckandRevPASHperformance Average Check RevPASH Restaurant check RevPASH performance performance 1 $10.50 $6.45 0.99 1.24 2 9.75 4.50 0.92 0.87 3 11.25 5.25 1.06 1.01 4 12.10 4.25 1.14 0.82 5 9.45 6.25 0.89 1.20 6 10.60 4.50 1.00 0.87 Average $10.61 $5.20 1.00 1.00 Exhibit5 CompetitiveRevPASHperformance Unit Average check RevPASH Check ratio RevPASH ratio Your restaurant $12.50 $5.60 0.89 1.12 Competitive set (mean) $14.00 $5.00 — — Note: The two ratios compare the subject restaurant’s performance to its competitive set. 6 See: «http://str-online.com/products/ star.html».
  6. 6. June 1999 • 21 F O C U S O N F O O D S E R V I C E maybeabletodevelopinformation toperformsuchananalysis. TheFiveStepstoRRM Whendeveloping anRRMsystema restaurantoperatormustfirstunder- standcurrentconditionsandperfor- mance.Followingthis,theoperator mustevaluatethepossibledriversof thatperformance. Thisunderstand- ingwillhelpmanagersdetermine howtoimproveRevPASHstatistics. Finally,themanagermustmonitor theimpactofimplementedchanges onrevenueperformance.Idescribe eachofthesestepsbelow. (1) Establishthebaseline.Mostman- agersknowtheiraveragecheck andtheirlabor-andfood-cost percentages,butfewcanaccu- ratelyestimatethecapacityuse or RevPASH of their restau- rants. To develop a RRM pro- gram,operatorsmustcollect detailed information on arrival patterns,mealtimes,RevPASH patterns,andcustomerprefer- ences. Thisinformationcanbe collected from a variety of sources,includingthePOS system,guestchecks,andme- thodicalobservation.Once collected,thedatamustbe analyzedtodeterminethe meananddeviationofdining time and daily and hourly RevPASHpatterns. (2) Understandthedrivers.Once thebaselinedatahavebeen collected,managersshould analyzethefactorsthataffect mealdurationandRevPASH performance.Simpletoolssuch asprocessanalysis,7 service blueprints,8 andfishbonedia- grams9 canbeusedtobetter understandthepossiblereasons forwhymealslastaslongas they do and to help identify the mostimportantproblemsin controlling meal duration. (3) Makerecommendations.After identifyingthecausesofthe mostimportantproblemsaf- fectingtheservicecycle,man- agersshoulddevelopdetailed recommendationsonhowto correctthoseproblems.Some solutionsmaydealwithreduc- ingtheoverallmealduration, while others may deal with reducing variability in particu- larservicesteps(e.g.,order- taking,bussing),andstillothers mayinvolvetablemanagement orcustomer-arrivalmanage- ment. Themanagershould analyzepotentialreturnon investmentforeachrecommen- dationtoensureprudentdeci- sionmaking. Alaterarticle willpresentasimplemodel for evaluating the ROI of RevPASHimprovements. (4) Implementthechanges.ForRRM tobesuccessful,restaurantop- eratorsmustensurethatmanag- ers,servers,bussers,andother employeesclearlycomprehend thepurposeandpracticeof RRM. This requires a position- specifictrainingprogramthat helpsemployeesunderstand their role in RRM and how RRM can benefit both the restaurantandemployees.Addi- tionally,operatorsshouldalign anyemployee-incentivepro- grams to coincide with the objectives of RRM. (5) Monitoroutcomes.Aswithany businesspractice,thesuccessof RRMcannotbeensured without measurement of im- provement. Afterestablishing thebaselineandimplementing RRM,operatorsmustdevelop asystemtomeasureRRM performance.Oneshould,for instance,monitorRevPASH andtheaverageandstandard deviation of dining time and comparethosefiguresto baselineperformance. FuturePapers Thisarticleisthefirstofaseries onrestaurantrevenuemanagement. In future articles I will discuss spe- cifically how to develop an RRM systemandestablishabaseline— includingthetypesofdatato gather,thepossiblesourcesofdata, andtheanalysisandinterpretation oftheinformationcollected. These andtheotherrestaurantrevenue managementpointswillbeillus- tratedwiththeactualexperience ofa100-seatrestaurantinIthaca, New York. Theserieswillreviewmethods foranalyzingthepossiblecausesof problems,includingserviceblue- prints,fishbonediagrams,andpro- cessanalysis,anditwillexamine restaurantrevenue-management strategyandtactics.Iwillalsodis- cuss how to combine the informa- tionobtainedfromthebaselineand causalanalysistodevelopspecific strategiesforincreasingRevPASH. Finally,thepaperswillexamine issues surrounding RRM imple- mentationanddiscussmethodsof establishingappropriateincentive andtrainingprogramsforservers, managers,andbussers,alongwith suggestionsonhowtomonitorthe successoftherevenue-management system.Bytheendoftheseries, I hope to have drawn an outline ofhowtoimplementrevenue managementinyourrestaurantand therebyimproveitsrevenue- generatingperformance. CQ 7 For example, see: Sheryl E. Kimes and Stephen A. Mutkoski, “The Express Guest Check:SavingsStepswithProcessDesign,” CornellHotelandRestaurant AdministrationQuar- terly, Vol. 30, No. 2 (August 1989), pp. 21–25. 8 G.Lynn Shostack, “Designing Services That Deliver,”HarvardBusinessReview,January– February 1984, pp. 133–139. 9 D. Daryl Wyckoff, “New Tools for Achieving Service Quality,”CornellHotelandRestaurant AdministrationQuarterly, Vol. 25, No. 3 (November 1984), pp. 78–91; and U. Apte and C. Reynolds, “Quality Management at Kentucky Fried Chicken,”Interfaces, Vol.25,No.3(1995),pp.6–21.

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