Who Is Killing The South African Restaurant Industry

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My series on who is killing the SA Restaurant industry. Still a few more chapters to go. Best viewed if you download it

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Who Is Killing The South African Restaurant Industry

  1. 1. Michael Said On the upside there is the marketing shpeeeeeel you will surely be dealt. We bring a lot more customers to your door… You certainly do attract more customers who were never going to visit you at your regular prices. The only problem is, will they return when the price is back to “normal”? We will advertise your business for you… Granted this is a BIG plus. They have huge data bases and resources that few restaurants/ Deal or businesses could reach on their own. So if you are doing this as a brand building exercise and if the costs are right, go for it. We will help you move stock… Great, just make sure it is stock you no deal? were not moving already and try to ensure that moving all that stock isn’t actually costing you money. We will help you build relationships… Well not with a one-time deal, but what if you could structure a deal that rewarded Everything you REALLY need to know about those deals but customers if they came back a few were too afraid to ask… times in order to get the benefit of the deal? by Michael Said We generate revenue… If you have T a low cost or fixed cost business, his has been an exciting year and it has been quite a while since I put fingers this would be ideal. Let’s say to keys (used to say pen to paper in the old days), waiting for something, you owned a bowling alley with besides the terrible state of the restaurant industry, to rouse my interest. I fixed costs and overheads and a do not wish to belabour the dismal state of the industry, except to say that it product that was not being depleted has operators clutching at straws and throwing a fair amount of “Hail Mary” (besides a little extra maintenance), passes into the air. this would be fantastic. Maybe a hotel room or conference venue Enter Groupon et al and all the promises of new customers, repeat business and full that was standing empty, but if you restaurants. Groupon and other local and international deal makers have proven to be are reading this, you may own a wildly popular. What’s not to like? I can get a R500 massage for R199, I can get my hair restaurant with high input costs done at a fraction of the price, learn to use all sorts of equipment and dine out at 60% off. and possibly even turnover clauses Who wouldn’t like it? with both your landlord and your Well, apparently, some merchants aren’t too enamoured with it and before you sign on the franchisor… now things get a little dotted line there are some things you need to consider. tricky to say the least.66 www.safw.co.za SEPTEMBER 2011
  2. 2. MIKE SAID WHAT? Of course there is one other point they How a discount affects your profitability may not mention and that is “breakage”. Nope, this is not what your waiters drop, it is the term used in loyalty programs for So even the upside appears to have a downside and I haven’t even deals not redeemed. Let’s say they sell mentioned the real problems you may anticipate. 500 deals on your behalf, but only 400 people arrive to redeem within the allotted Before we take a closer look at these, the first thing you need to time, you only receive payment for the understand is exactly how a discount affects your profitability. For redeemed vouchers, less their commission the purposes of this exercise we do a simple calculation using of course. So, in fact, unclaimed vouchers the example of a restaurant. Assuming the restaurant generates are more valuable to them than claimed sales of R10, 000 at a 40% cost of sale (here’s where I hope you ones. know your cost of sale) and your overhead expenses amount to 45%, effectively this means that for every R10,000 in turnover you are paying out R8,500 and retaining R1,500 for yourself. If I am My good friend Nick from Global Wrapps erring at all, I am erring on the generous side. Quite a number of Franchising took the trouble to write to me and point out the following positive aspects restaurants are retaining a lot less. of these programs. Thank you Nick. Now if the restaurant generated R10,000 in sales at a 55% • Excellent method to create awareness discount, round about what they will explain to you “works” as a of a new brand, new location or new deal, you receive only R4,500. From this you must deduct your product range. dealmakers charges, which I have on good authority is between 20% and 50%, as well as a processing fee. • The ability to target a specific market segment. Those with internet access While overhead costs may reduce fractionally, let’s be generous and credit cards. and say by 10% to R4,050, production cost will remain at R4,000. • It is up to the store owners and staff to The deal still cost you R8,050 and if you are lucky you will get back create return customers, by providing R3,500. This little marketing exercise ONLY cost you R4,550 per excellent service and quality products. R4,500 of turnover (i.e. R10,000 turnover less your discount offer of 55%). • Voucher users are usually big talkers/ Facebookers/tweeters who tell Now the deal is over and you are waiting for all those customers everybody about their great deal thus to come back and enjoy your faire at the “normal price”. (Don’t spreading brand awareness. hold your breath). Let’s say they all do come streaming back, • All advertising costs money and the (yeah right). To recoup the money you expended on running the mathematics thereto apply to all deal, at your current retention of 15%, you will have to generate an advertising campaigns. Compare the additional R30,333 in sales. I am no accountant or rocket scientist, cost of such a voucher campaign to but basic mathematics seems to be at work here. running a radio campaign, TV ad or billboard. We know print ads are costly Aren’t you glad I got all the good news out of the way first? and the results of these campaigns are hard to measure. Undoubtedly nothing beats word of mouth advertising, butNow let’s take a look at some “challenges” (us marketers hate to say “problems”) you may Groupon style campaigns certainlyencounter. have their place and that place is certainly ahead of print campaigns andDeals are simply not good for your brand image! Now that you have offered that deal for most small traders ahead of radioat a discount price how are you going to convince everyone that the meal/product/service and TV.is still great value at the old price? Have you been fleecing them all along? Will you befleecing them now?Deals don’t generate repeat business! Chances are you will never see those “new” Of course there are many instances wherecustomers again without another voucher in hand. Research in the US shows that, on deals will work and I am not suggestingaverage, only 19% of voucher users become repeat customers, that means it takes a long for a second that you dismiss them outtime to recoup that “marketing spend”. of hand, but please go in with your eyes wide open, not like Posie Bakery & Café inDeals attract bargain hunters! The majority of voucher users are “deal seekers” and Portland Oregon (Visit http://posiescafe.bargain shoppers, translating to a low spend per head and little chance of generating com/wp/?p=316 for the details). repeat business. Also, the greater the number of vouchers redeemed the higher the costof your marketing exercise, so be sure to limit the number of vouchers sold.Deals are not profitable! While I don’t wish to belabour this point, please ensure youhave a clear grasp of exactly what is at stake. Michael Said often refers to himself as “Just a Waiter Who Got Lucky!” After 22 years in the hospitality industry Mike brings his own brand of humour and understanding to the weird and wonderful world of marketing and franchising. His company, brandStrategy, If you are a restaurant owner, please participate in the specialises in the development and implementation of social media strategy working with companies South African Restaurant Owners Survey at: and individuals from all industry segments, advising them on branding strategy, market development http://bit.ly/RestaurantSurvey and customer service. You can visit his website at www.brandstrategy.co.za and follow him on twitter at mike_said_what SEPTEMBER 2011 www.safw.co.za 67
  3. 3. MIKE SAID WHAT? Who is killing the South African restaurant industry? CHAPTER ONE: Identifying the suspects by Michael Said C you and not once they have arrived home. impact of this is a significant increase in rime thrillers are all the Thirdly, customers are only expected to the rental to turnover ratio that should rage right now and while pay for their purchase after they have ideally be sitting at 11% or less. Then I am no James Patterson enjoyed it. Combine these factors with a there is the increased input costs as food or Lincoln Child, the slow few others like cash, alcohol and ego and prices climb and a budget conscious and painful death of the you quickly realise why an owner’s visit to clientele continues to put pressure on South African Restaurant Industry makes any table is fraught with danger. restaurants not to increase their prices. for some pretty interesting reading. I would be remiss in not mentioning the “Death?” you ask, am I not being a little Despite these challenges, margins were owners, franchisors and other industry too dramatic, a little too severe? I think acceptable to high if you managed your role-players who are contributing to the not! Restaurants are closing down weekly business properly and the restaurant decline, either through total apathy and and those that manage to keep their doors industry remained an attractive and neglect, or in some cases, sheer stupidity. open are doing so against great odds. Of seemingly lucrative pursuit. Alas, all that course there are the exceptions to this has changed over the past three years. So the picture is not a pretty one and the statement and over the next few months Restaurant profitability, or retention as casualties are mounting. Who is to blame I hope to uncover some of the suspects it is often referred to, is at an all-time and what can be done about it? and hopefully, aid some of the survivors. low. Whereas in the past a restaurant owner could expect to retain 18-24% of It is with great sadness and regret that Like all good crime writers, let me begin we note the passing of yet another of his turnover, this figure is now down to by introducing our lead character, the Johannesburg’s restaurants. Last month, between 7-14%, something on par with victim! The restaurant industry has the Linger Longer Restaurant in Sandton what the waiters are earning in tips and always been a difficult industry, with a joined the growing list of casualties and often less than the landlord is receiving number of factors that unsuspecting although the cause of death is yet to be in rent. entrants are often not aware of. For one determined, you can be certain that at thing it is a factory. You have to turn raw There are a number of key factors that least one, if not all, of our suspects were material into finished goods in little or no have contributed to the drop in retention. to blame. time at all. Secondly it is retail with a twist. First and foremost is the considerably Your clients sample the product in front of slower than anticipated growth. The Surely there must be warning signs to spur you into instituting a program of6 www.safw.co.za OCTOBER 2011
  4. 4. MIKE SAID WHAT? 6action to save the business? What are theindicators of failing health and increased Our six suspects, in no particular order, are as follows…risk that you can look out for in your ownbusiness? Here are a number of red flags to • Was it The Landlord with his Lease in the Shopping Centre?look out for in your own establishment andplease, if you recognise any, take action • Was it The Customer with No Spending Power in South Africa?now. Remember, you can always sell arestaurant a little too early, but you can’t sell • Was it The Supplier with No Concept Of How The Industry Functionsit one second too late! behind his Desk? • The absence of a well-organized and • Was it The Staff with Total Indifference in The Restaurant? implemented accounting system • Was it The Franchisor with His Eye On The Joining Fee at the First • Key operating expenses that are too Meeting? high, relative to gross sales • Menu items that are not accurately • Was it The Owner with No Clue Or Conception in La La Land? documented, costed and updated • Food and beverage inventory levels not counted, costed and recorded at the end of each chosen period • Food and beverage inventory levels that are too high, relative to corresponding sales • Daily and weekly financial operating data not collected, reviewed or acted upon • Inaccurate posting of financial information to your accounting system • Current liabilities sufficiently greater than current assets as to impair your future ability to pay accounts • An owner relying on his online bank balance to determine the cash available for account payments • An overall lack of understanding as to how to read and interpret period ending financial statements down a hole that, statistically at least, will way, from The Banks to The Legislators almost surely prove dry? Why venture into and Previous Owners who sold their an industry with enormous fixed expenses restaurants under false pretexts… the list (rent, electricity, gas, water, linen, goes on and on. Monitoring the health of maintenance, insurance, license fees, trash And what of our poor victim, how is he your business relies on removal, etc), a notoriously transient and unstable workforce and highly perishable fairing at the moment? He is on life support, your ability to control the inventory? The chances of ever seeing a meagrely  trying to eke out an existence until the December season or until the return on your investment are about one financial aspects of your in five. What insidious spongiform bacteria election or until the next world cup or until the government changes or doesn’t, until restaurant so riddles the brain of men and women that they stand there on the tracks, watching the interest rates come down, until sentiment lights of the oncoming locomotive, knowing goes up, until… until… until…  full well it will eventually run them over? After all these years in the business, I stillYou will see from the above that monitoring don’t know!”the health of your business relies less ontracking turnover or foot counts, but rather So wrote Anthony Bourdain in the nowon your ability to control the financial legendary Kitchen Confidential and itaspects of your restaurant. If your mouth certainly makes a fine introduction to Thewas getting a little dry or your pulse started Suspects. While this investigation revealsto race as you read through the list - seek more suspects than food critics at a freehelp now! Of course the best time to start lunch, I have tried to narrow it down to six.putting these things in place was last year, Over the next few chapters I shall state thebut the second best time is now. case against each one and allow you, the Michael Said often refers to himself as “Just a Waiter Who Got Lucky!” After 22 years in the hospitality jury, to make up your minds. Who can forget“To want to own a restaurant can be industry Mike brings his own brand of humour and the board-game Cluedo with its rooms, understanding to the weird and wonderful world ofa strange and terrible affliction. What marketing and franchising. His company, brandStrategy, weapons and suspects and the plain browncauses such a destructive urge in so many specialises in the development and implementation envelope that sat in the middle of the board of social media strategy working with companiesotherwise sensible people? Why would and individuals from all industry segments, advising waiting to reveal the mystery.anyone who has worked hard, saved them on branding strategy, market development and customer service. You can visit his website atmoney, and often been successful in other Besides our six suspects, I am certain there www.brandstrategy.co.za and follow him on twitter atfields, want to pump their hard earned cash are others that have contributed along the mike_said_what OCTOBER 2011 www.safw.co.za 7
  5. 5. MIKE SAID WHAT? Who is killing the South African restaurant industry? ChaptER tWO: Investigating the suspects - Monsieur Landlord Our poor unsuspecting victim moved quietly about his business, opening the doors, mopping the floors, working IN his business instead of ON his business, completely oblivious to the danger lurking inside his filing cabinet. For there, in a dusty folder alongside the liquor license application he had been meaning to submit, was his lease agreement! by Michael Said10 www.safw.co.za NOVEMBER 2011
  6. 6. MIKE SAID WHAT?W hen he originally signed the document, life was soooooo good. Restaurant profitability (retention) was running at a What is required is a clear very acceptable 18-24%, there appeared to be an endless stream of customers understanding of the pitfalls, a better and certainly no shortage of buyers,should he decide to exit. How had it all gone so terribly wrong? working relationship between tenantsWell, the writing had been on the wall and the warning signs there and landlords, and proactive propertyfor all to see. Over-trading, new centres opening daily, falling foot owners who better understand thecounts, rising input costs and an increasingly selective clientele,all coupled with a world recession, but why should this worry him? challenges of their tenants/partners.After all, people have to eat, don’t they?Yes, they do, but they don’t have to eat out, they don’t have toeat out as often and they certainly don’t have to eat out at YOU!Suddenly foot count plummeted by 30% and the customers stilleating out were spending 30% less. On top of which, the retentionon the now diminishing turnover had alsodropped by well in excessof 30%.Now, in order to run a successful business, our victim understandsthat there are three key fundamentals he must adhere to. Anacceptable food cost (35-40% depending), an acceptable salary toturnover ratio (18-21%) and a rental to turnover ratio of UNDER 11%.He seems pretty confident that his food cost is correct, despite onlytaking stock once a month and only occasionally glancing throughthe pile of invoices on the spike over the hot pass. He has beenable to reduce staff to keep his wage bill ‘almost’ under control andit seems that the only matter requiring his urgent attention is theever escalating ratio between his turnover and his rental.So he wonders, if times are so tough for me, the same must betrue of my competitors, my suppliers and of course, my landlord.“It is time to renegotiate my lease or at least negotiate some kindof break until the flood subsides, after all…” he thinks “we had sucha great understanding when we first met; he seemed like such a Landlords have a tendency to play independents off againstnice chap!” franchise groups. Often, being ignorant of the pitfalls and driven by “the dream” of owning their own restaurant, independents are prepared to pay more. Landlords actually budget for an attrition rate (failures in new Mall owners are not malls) and when a shop does fail, they are merciless in enforcing compliance in meeting rental commitments. This even goes as addressing the real issue, that far as installing a new tenant in the old tenant’s place and then charging the old tenant for any shortfall in the difference of the anchors are paying next to lease amount for the balance of the lease period. Next time you are nothing for their space and are faced with a lease agreement, watch out for that personal surety clause… effectively being subsidized by One of the single biggest killers is the dreaded “Tenant Mix”. In the man on the street. the process of looking out for ways to differentiate their mall from the competition, landlords may ignore tried and tested concepts in favour of something new and fresh, often with disastrous consequences for all involved. Other times they play it safe, installing more of the same successful tenants that can be found inWell, there is an old riddle in the Restaurant Industry. Question: every mall everywhere and then they wonder why they can’t driveHow do you turn a pleasant, helpful, compassionate, approachable feet through the mall. By installing similar tenants to those alreadyand understanding landlord into a friggin monster? Answer: Just established in the mall, often without consulting existing tenants,sign the lease agreement! mall owners are effectively cannibalising the trade of existingNow I need to state that this assessment of landlords may not tenants. As a result, instead of two or three struggling stores weapply across the board, but the overriding perception is that find one or two successful stores.landlords are unapproachable and single-mindedly fixated on One only has to visit any one of the literally hundreds of mallsimmediate profit at the expense of all else. (I would welcome any around the country, to realize the only ones making money areand all comments from landlords on the subject). Certainly, more those selling the fancy paper landlords use to block the windowsand more landlords are becoming increasingly amenable to rental of empty stores. Don’t believe me? Pay a visit to Brightwaternegotiations, if the restaurant in question can prove that they have Commons, Balfour Park, Bel Air, Norwood Mall, Stoneridge… andgiven the matter serious consideration and are able to put forward the list goes on and on.a compelling case. Mall owners are not addressing the real issue, which is that anchorsHowever, to gain a true understanding of this problem we need to are paying next to nothing for their space and are effectivelylook back to the circumstances surrounding the initial signing of being subsidized by the man on the street. Restaurants are oftenthe lease agreement. expected to pay the same rental, or higher, for large premises that NOVEMBER 2011 www.safw.co.za 11
  7. 7. MIKE SAID WHAT? other tenants are paying for smaller premises on the pretext that they are not big enough to pay anchor rates. Most tenanting is done by brokers who earn a commission for each placement. Granted, when a business fails, the period until full commission is paid is extended, but then every new placement, or re-placements, also earns them a commission. To ensure that brokers are more careful about who they install as tenants, a commission clawback system and “switching” policy, as instituted for insurance and assurance brokers, should be implemented. The “Ops Costs” paid to brokers to manage and maintain the malls and turn a profit, are simply too high. In Sandton City, for example, the Ops Costs run to approximately R120/m². With at foot print of approximately 130,000m², you do the math. With inflation, these costs have increased year on year, with no downward adjustment and at a rate approximately one to two percent higher than the actual basic rental costs. Rates increases are another killer! It would be interesting to here is an e-mail forwarded to me from one of my clients… conduct a survey amongst malls and mall owners to find out who amongst them has approached their local city councils to Despite the empty stores in every mall, this is the latest OTL (offer fight these ridiculous increases on behalf of their tenants, or do to let) received from Pareto for a store in Tyger Valley SC. Besides they simply add these costs onto the rental? Then we factor in the ridiculous rental asked, they have added a NEW “availability” the increase in electricity costs and we have more blood on the charge for items that one would expect to be provided for in the streets. Sadly, with landlords adding even more costs, such as normal course of business. insurance costs, it does not stop there. Millions upon millions of rands have been poured into the set-up Basic Rental R450.00 per sqm escalating at 10% costs, hundreds of people have lost everything and thousands of Ops R64.42 per sqm escalating at 12% jobs have evaporated. Somebody has to stop the madness! I am not implying that nobody should buy or open a restaurant, or that Marketing R 26.14 per sqm escalating at 10% nobody is making money. I am suggesting that before you do, do your homework as you should for any other business. Owning a Ass Rates R 28.60 per sqm escalating at the council’s restaurant is not a dream job! Wipe the sleep from your eyes and discretion conduct a careful and thorough investigation to ensure you don’t wake up screaming from a nightmare or the sheriff banging on Refuse R 2.31 per sqm escalating at the council’s your door. discretion What is required is a clear understanding of the pitfalls, a better availability Charges !!!!! working relationship between tenants and landlords, and proactive You will still be billed for usage for each of these property owners who better understand the challenges of their tenants/partners. Air Con R8.80 per sqm (escalating) Property owners are under pressure too. Loans were secured Water R1.00 per sqm (escalating) on projected turnovers and rental increases and empty stores are hurting everyone. There is a strong case to be made that no Sewerage R2.77 per sqm (escalating) one was forced into signing the lease and “Ignorantia juris non tOtaL R597.04 per sqm excusat”, ignorance of the law, does not excuse, BUT it does kill! Before you sign the lease and launch your concept or purchase an existing business, seek professional advice. There are some great restaurant consultants out there, franchise advisory services Based on the 10% rule, this means your little take-away (start with FASA), informed and helpful brokers and banks that store must turnover R600,000 per month, before VAT, or are slowly beginning to understand the challenges of what is a based on an average transaction value of R45 you will need wonderful industry. You may well be sitting on “the next big thing”, to serve 15,200 customers a month i.e. 506 customers a but make sure you support your passion and drive for the project day. Likely? I don’t think so. with the knowledge you will surely need.  Annual escalations are driving rentals too high, whilst annual menu price increases are unable to keep pace, a situation similar to the “subprime” crisis that has virtually crippled the world economies. With everybody convinced that restaurant turnovers would continue to rise in excess of the rental clause turnover and that their value would continue to increase, banks dished out money, landlords dished out leases and restaurant owners signed ANYTHING to get the premises. In reality store growth now is in Michael Said often refers to himself as “Just a Waiter Who Got Lucky!” After 22 years in the hospitality industry Mike brings his own brand of humour and understanding to the the low single digits and inflation is ‘officially’ running at around weird and wonderful world of marketing and franchising. His company, brandStrategy, five percent, but rentals are rising at in excess of eleven percent. specialises in the development and implementation of social media strategy working with companies and individuals from all industry segments, advising them on branding In short, this is a recipe for disaster! Maybe this will be known one strategy, market development and customer service. You can visit his website at day as the Sub Prime Rib Crisis. www.brandstrategy.co.za and follow him on twitter at mike_said_what12 www.safw.co.za NOVEMBER 2011
  8. 8. MIKE SAID WHAT? Who is killing the South African restaurant industry? CHAPTER THREE: Investigating the suspects - Señor Supplier In order to establish a clear motive and opportunity for our next suspect, Señor After accounting for your food cost it leaves a gross profit of 63 percent. That is quickly gobbled up by… Supplier, it is necessary that we understand the circumstances in which both the victim 11.00% OCCUPANCY COSTS and the suspect, operate. This covers the basic rental and building operations cost, as well as any payments to the landlord in respect of the by Michael Said leased premises. Rentals vary greatly from place to place I and in some operations may exceed the 10% level, but may t was after all only a few short years ago that be compensated for in volumes generated. (If you have read the local restaurant industry was operating chapter two, The Landlord, you will know how difficult it is to on a retention rate of 18 to 24 percent, way in achieve this.) excess of returns in the US, making businesses in this industry highly sought after. In fact, every 19.56 % SALARIES AND WAGES BILL man and his dog who could get their hands on a few rands were This takes into account salaries and wages for all staff gobbling up sites and franchises. Most restaurants were able to including managers, whether permanent or casual. All show year on year growth in excess of annual rental and product salaries, wages and even waiters commission should be cost increases and all appeared to be well in the South African applied at market related rates. Even the franchisee/owner restaurant industry. should be paid a market related salary. If he is fulfilling the So, exactly how do restaurants make their money? Selling role of manager, he should be paid accordingly. Anything food and drink of course, but what are the percentages and how over and above this is effectively drawings. have they changed? For the purposes of this exercise I am going to show current retention of a franchise operation averaging a 6.00% MANAGEMENT SERVICES OR FRANCHISE monthly turnover of R500,000. FEE At least 37 percent of that turnover is expended on food cost, This is the monthly levy payable to the franchisor, as agreed with some restaurants only achieving 40 to 42 percent. That is in the franchise agreement, and is typically calculated as a money left on the table. Food cost is one of the last controllable percentage of net turnover. expenses and if you are not controlling that, well… From stock control systems to spreadsheets and manual books, 2.00% MARKETING there are many methods through which effective stock control can The marketing expense should cover both the marketing levy be achieved, but whatever system you use, use it properly. My paid to the franchisor, as agreed in the franchise agreement, personal favourite is www.idealstockcontrol.com, as I did have and any ad-hoc monies spent on local advertising and a hand in its early development. promotions.10 www.safw.co.za DECEMBER 2011
  9. 9. MIKE SAID WHAT? 0.50% ADMINISTRATION COSTS After all that it leaves a little under 11% to take away from the This includes the cost of producing management reports, business… BUT, you haven’t paid interest, borrowings or tax. VAT returns, PAYE returns and audited year-end financials. Now, I realize that not all my readers are members of a franchise FYI, PAYE does not stand for Planes, Automobiles, Yachts, group, and that means the 6% management and 2% marketing Etc. so stop buying toys before you have paid off the fees may find their way to the bottom line, but as the Bard said business. “herein lies the rub!” If you are not paying franchise fees, a fair portion of that should be going to marketing, product engineering, 1.20% BANK CHARGES research, human resources and other services that you otherwise This includes bank and credit card charges, but specifically ‘should’ be getting from your franchisor. (We will cover all that in excludes interest on loans and loan repayments. a later chapter.) 1.00% CLEANING MATERIALS That was rather a lengthy introduction, but in the context of Here we include all cleaning equipment, detergents, understanding how suppliers are contributing to the death of the disposable uniforms, tidy mats and cleaning contracts. franchise industry it is necessary to understand these figures. In fact, I will be referring to these same figures in future chapters as 1.30% REPAIRS AND MAINTENANCE  well. This covers maintenance contracts, equipment repairs and While there are many ethical suppliers, some who are ex- replacement parts. restaurant owners themselves with a sound understanding of the 1.20% REPLACEMENTS industry and who are willing to go the extra mile for their clients, Rather than capital goods such as fridges, stoves and regrettably there are many who do not fall into this category. How furniture, this covers the cost of replacing crockery, cutlery many of your suppliers have visited your restaurant and taken a and glassware breakages as well as cooking and baking utensils. 1.00% GENERAL This should cover all costs directly related to operations How many of your suppliers have including telephone, legal, printing and menus. visited your restaurant and taken a walk 0.65% INSURANCE All insurance relating to the leased premises. through your fridges or dry goods stores 4.00% UTILITIES to understand your space limitations? Consider your electricity, water and gas bills. DECEMBER 2011 www.safw.co.za 11
  10. 10. MIKE SAID WHAT? walk through your fridges or dry goods stores to understand your space limitations? How many of them understand that delivering during a Friday lunch is not practical? And most importantly, how many of them realize the true impact of a price increase on your bottom line? Amongst the many difficulties restaurants currently face, How many of your suppliers are aware of when exactly you one of the greatest is balancing the increasing input costs change menu prices? Do they realize that a price increase one with price points placed by the customers. Most customers week after you printed new menus means that you will be operating come with a number in mind, an amount they would expect on reduced margins for up to six months? It is recommended that to pay for a type of product. As a customer you may feel that fixed prices for a guaranteed period be negotiated with suppliers. R30 is the most you should pay for a toasted cheese, R120 However, doing so requires commitment from your side, you for a 300g fillet, R49 for a margarita pizza and so on… The cannot suddenly jump ship on a supplier because someone else moment the restaurant exceeds that number… POW they has offered you a few cents discount. Quid pro quo, as they say. are perceived, and worse, described as expensive. Now, of Groups and franchise operations should have no difficulty negotiating such terms, but they are often sideswiped by franchisees who then buy off-spec products. This brings me to yet another matter. My father, a mine of useless information by his own It is recommended that fixed description, would often tell us “you can always buy oats cheaper prices for a guaranteed period be if you buy it AFTER it has passed through the horse”. That is to say you will get exactly what you pay for. Squeeze a soap supplier negotiated with suppliers. for a few rand discount an you may find your concentrate diluted. Squeeze your butcher and he may stop aging his meat as long, so as not to lose the interest, and so it goes on. course expensive is relative, but customers don’t consider The relationship between restaurants, in fact all businesses this when scrutinizing price. I am sure, and their suppliers is a difficult balancing act, but if Many suppliers do not appreciate the fact that as they both parties can adopt a policy of fair profit, both could benefit push up the price of raw goods, the restaurant owner cannot greatly. Now get on the phone, call your suppliers personally and simply follow suit and pass the cost onto their customers. schedule a ‘getting to know me’ meeting. Speak to them about the “Yes, but” says the supplier “why should I absorb the price challenges, explain restaurant margins to them, give them a tour increase passed onto me by my supplier?” A fair point, but of your business and make them a partner… you will both be richer let’s consider the following two scenarios… for it!  1. You purchase an international product that is imported from the USA. Suddenly the rand takes a dive and you receive the dreaded “sorry to inform you of our price increase” letter. Well, the rand is at an all-time high, yet not a single restaurant I have canvassed has received a price reduction. Perhaps the time has come for all restaurant owners to revisit their files, find all the Michael Said often refers to himself as “Just a Waiter Who Got Lucky!” After 22 years in suppliers who increased their prices according to Forex the hospitality industry Mike brings his own brand of humour and understanding to the rates and insist on a price reduction. weird and wonderful world of marketing and franchising. His company, brandStrategy, specialises in the development and implementation of social media strategy working with companies and individuals from all industry segments, advising them on branding 2. The same is true for the price of fuel. As petrol prices strategy, market development and customer service. You can visit his website at increase, you can bet that suppliers will be pushing up www.brandstrategy.co.za and follow him on twitter at mike_said_what prices to cover ‘transport’ costs. Yet when the price of fuel goes down, prices remain the same… Please explain!12 www.safw.co.za DECEMBER 2011
  11. 11. MIKE SAID WHAT? Who is killing the South African restaurant industry? CHAPTER FOUR: Investigating the suspects - El cliente “If it wasn’t for the customers, the suppliers and the staff… this would be a great job” lamented our victim as he trawled through the complaints at hellopeter.CON, “for heaven’s sake, why couldn’t they just complain to me, instead of writing to the world about that one tiny little unreasonable by Michael Said incident?” “That’s ‘cause the customer is always right!” said a voice from his distant past. “No!” He shouted to no one in particular “He is not always right, but he is the customer and it is the customer’s right to be wrong.” Y ou may feel that all this is just then demand compensation in the form of a make a sauce, a dish or a dessert and, of semantics and merely a slightly free meal or a round of drinks for the table? course, everyone knows what good service different way of explaining the should be, even when they are unable to same thing, but in essence Are restaurants themselves to blame for deliver it in their own businesses. there is a huge difference. this monster they have created? Has our Adopting the “the customer is always right” own willingness to accept all responsibility There is no denying the fact that every philosophy is tantamount to saying “I am and to offer all manner of compensation cent that enters a restaurant, does so in always wrong” or “my staff is always wrong” come back to bite us in the rear? Strangely, the pocket of one of our customers and or “the restaurant is always wrong”, and I feel it runs a lot deeper than that, and without them there would simply be no that can’t possibly be true. is indeed a reflection of the state of the business. However, the same principle psychosis of the country. As a community applies to businesses in most industries, I recently bought a shirt at a men’s clothing we feel emasculated. Our government yet they don’t feel the need to take the pain store, it was marked medium, but when I appears to do just as they please, public and abuse that the restaurant industry is got home I discovered it was in fact a small. servants appear hell bent on making our required to put up with. Falling foot counts, Back to the store I went. I stood in line at lives miserable, we get pushed around by dwindling spending power and decreasing the ‘customer service’ counter (now there is our fellow road users and have to deal with margins mean that each customer is more a misnomer if ever there was one), waited disrespectful kids, with nowhere to vent our valuable than ever before. There is an old patiently for my turn, had to supply the frustrations… that is until we walk into a adage that says “Nothing is sacred other store with proof of purchase, two forms of restaurant. than that the customer returns and nothing ID, proof of residence and a blood sample costs more than an empty chair!” before they gave me permission to change This is the safe space, the psychologist an item they had marked incorrectly. No couch, the one place we can exert our The Americans have a term called “The free shirt, no complimentary round of authority, our chance to assert our Lifetime Value of a Customer” and a quick socks for everyone in the line, in fact not “manhood” and prove our superiority. A Google search will refer you to a number even an apology! So why is it when I enter strange phenomenon about the restaurant of different calculators you can use to a restaurant and there is the tiniest error, industry is that it is the one industry where determine this. In a nutshell, it attempts to I feel entitled to complain at the top of my there are more experts not in the industry predict what a customer may spend with voice, rant and rave if necessary, act as than in it. Everyone knows more about you over a specific period of time, and this though the error was a personal slight and meat cuts than we do, has a better way to is added to the business you will receive30 www.safw.co.za JANUARY 2012
  12. 12. from referrals from those same customers. offending dish from inWhile the numbers can appear staggering, front of the customer.I am not certain that anyone has attempted In doing so you removethe ‘other’ calculation. The one that reflects any reference to thethe damage done by ranting customers, offending dish along withthe very same customer you have tried to the customer’s ability toplacate and bribe with free meals and free poke his finger into thedrinks, who STILL leaves your restaurant food or waive a lettuceand carries on telling anyone and everyone leaf in your face. Nowthat will lend an ear, that not only is your the waiter or managerrestaurant cr@p, but that they managed to holds the dish behind their back as a signal CUSTOMER PROFILE 1:extract some compensation from you as to anyone walking past that there is awell. problem. Passing staff members can then ZIJN EN HAAR KONINKLIJKE remove the dish to the kitchen and warnIs there an answer to this conundrum? Well, them that although they don’t know the HOOGHEIDmaybe not a definitive one, but perhaps I exact nature of the complaint, that there is a (His Her Friggin Royal Highness)can offer some advice to alleviate your problem and they should be prepared. Nowsleepless nights, assured that you have at back to the table. The person taking the Easy to identify, they announce theirleast given it your best shot. Let me start complaint now begins “The Hoff’s” Three presence long before they walk in. Notby introducing you to my very own 10 – Step Process. wearing a single item of clothing that80 – 10 rule. Henceforth to be referred to doesn’t have a designer label on theas Mike’s Law, kinda like Newton’s Law of Step 1 - Look the customer squarely in the outside, his highness always walks in frontGravity or Malcolm Galdwell’s The Law of eye and say “I am terribly sorry Sir/Ma’am” of her  highness. As they are greeted by thethe Few, only much more important. Mike’s continue with Step 2 - “I am sorry for the smiling hostess, he simply walks past herlaw states that customers can be divided trouble/inconvenience/embarrassment looking for his ‘royal’ party. After not findinginto three distinct groups; the bottom 10% this has caused you” (notice how we have them, he will return, interrupt the hostesswho we would rather never seen again, personalized this) and finally Step 3 - “What who is now speaking to mere mortals andthe top 10% who we are quite prepared to can I possibly do to correct this for you?” just say “We have a booking!” assuming themove heaven and earth for, and ‘the rest’, hostess will know exactly who they are.the other 80% who come and go almost By placing the decision of recovery on thewithout notice. client you will be amazed by the calmness No matter what table you take them to it is that sweeps over them as they realize that not good enough and she will be whiningTypically we expend all our of energy the resolution is now in their hands and that on about that time in [insert exotic city here]trying to turn the bottom 10% from hating ranting and raving will not accomplish any when [insert celebrity name here] had theus and the top 10% to keep on loving us. more than a simple request. “Could you same trouble. Once seated, he will turn hisThe answer to real success actually lies please ask the chef to cook it a little more chair slightly to avoid eye contact with thein getting rid of the bottom 10% without a for me?” or “Would it be possible for you to lowly waiter. He will order one of the moremoment’s thought, maintaining a strong but replace it with another dish?” Crisis averted expensive bottles of wine on the list (andhealthy relationship with the top 10% and AND mission accomplished. Now go and probably miss pronounce it), but not theconcentrating most of our effort on a certain attend to the preparation of the meal, make most expensive, after all “no one can paysegment of the 80%. You need to find sure the cutlery has been changed and these prices!”the 10% to 20% of the middle group who keep the customer informed of the process.are almost great regulars, almost brand You are now able to enjoy the rest of your When the rest of the party arrive all theambassadors and do all you can to tip them evening, no screaming, no shouting, no girls will do the double kiss without actuallyinto the top group. Now you are on the way blame, in short, no problem. making contact and the men will all shaketo a highly successful business. By the way, hands or maybe give each other a manlyMike’s Law works with your staff too, but I Of course most customers are completely biff on the shoulder. The women will chattershall address that in a later chapter. unaware of a restaurant’s ability to sum through the specials about their kids, them up in a few seconds. Malcolm school and the trouble they are having withThe second tip I have is in ‘complaint Gladwell calls this “Thin Slicing”. It is our their domestic staff and the men will simplyhandling’ and as much as I would love to ability after years and years in the trenches ignore the waiter until he is done beforetell you I came up with this on my own, to categorize our customers without ever one of them will say… “Don’t you havethe concept was introduced to me by a life letting them know we are onto them. For any specials today?” and then make somecoach I will simply refer to as “The Hoff”. He those of you feeling a little battered and comment about how service in the countryintroduced me to a way of apologizing that I bruised by a hard year, here is a little light has gone to the dogs.believe would alleviate most of the tension relief for you…and problems you face in the restaurant. Not one of the ladies will order directlyHe explains that there is a very specific off the menu, after all it is simply a list ofthree step process to follow. (And I shall ingredients from which to choose. They willadd a forth from my own experience). discuss, Mbeki, Zuma, Zimbabwe, falling property prices and drop plenty of names , h e reFirstly, let us understand what happens r note throughout dinner. They talk a lot, say lighte p nothing and interrupt each other constantly.when a staff member is called over to a table lightly hten uto handle a complaint. In this instant there On a s to brig They then continue to order expensive e thing h yourare three major influencers at play. Cash, is som his wit cigars and cognacs, which they all hate, hare t ealcohol and ego. A lethal combination at your day, s you r notic and complain bitterly when the bill arrives.the best of times, which this is not. p os t it on (to You can expect a 10% tip on the dot! You staff, laugh have a o ne o f can thank them all you like as they leaveStep one in handling the complaint, b o ar d a nd ime but don’t expect a reply; they are too busy e ne x t tand this is my contribution, remove the elf ) th lks in . saying nothing to each other. yours s t s wa th e s e gu e JANUARY 2012 www.safw.co.za 31
  13. 13. MIKE SAID WHAT? CUSTOMER PROFILE 2: CUSTOMER PROFILE 3: CUSTOMER PROFILE 4: LE SOLITAIRE SEÑOR Y SEÑORA L’AFFAIRE (THE LONER) (MR MRS - THE MARRIED COUPLE) (THE MARRIED TO SOMEONE ELSE COUPLE) Usually found sitting at the bar, on the Oh, shoot! Chances are one of them Only found in quiet out of the way same seat, wearing the same rugby jersey, doesn’t want to be here. He would rather restaurants in a corner table near the drinking the same beer and eating the same be in the clubhouse with his mates after back. You can immediately tell they are snack he has for the past seven years. The golf today and she would rather be out with not married as they giggle and tickle each modern version can be seen at the same her personal trainer. Once seated, get them other. The meal is as close as she is going table, in the same corner, reading the same their menus quickly, they have nothing to to get to foreplay so she might as well drag newspaper, sipping the same coffee, in the say to each other and the sooner you give it out. He is in his late forties to early fifties same coffee shop, morning after morning. them something to discuss, even if it is the and she is in her twenties to early thirties exorbitant prices, the better. and may be wearing the corporate uniform. He never complains unless someone else is sitting in his chair. He knows all the staff He will be dressed in his golf clothes, sans They will listen intently to the specials, hold by name, their ages, their likes, dislikes and the shoes and probably look like a pimp. hands and whisper. They will definitely innermost thoughts. He has been hitting She in her tight jeans and sparkly top, high share the wine, share the salad, share the on the same waitress for the past three snake skin boots and excessive jewellery starter and eat off each other’s plates. Give years and is convinced she secretly has a might look like someone who works by the them lots of space to enjoy themselves, he crush on him and if it wasn’t for that stupid hour. If you ever tell her that she might just is dreaming of later and she of the day he assistant manager with the biceps and the take it as a compliment. leaves his wife and 3.4 kids… you are right, attitude, the two of them could be happy it is never going to happen, but why should together. The 26 year age difference and Don’t expect them to share a bottle of wine that stop her from dreaming?. his four ex-wives would not be an obstacle or a salad, they haven’t shared anything for to their happiness. ages and they are not about to start now If he had his way they would leave just because you’ve had some suggestive immediately, but because right now she He is happy when she serves him and selling training lately. He may have a bored is the boss, they will be the last to leave, delivers his favourite beer without asking, faraway look while you are recounting the having depleted your stock of Irish Whiskey but woes betide the day you send a new specials, but don’t let that worry you, it’s the and cream. By now all the other waiters waiter to look after him. He is friendly to same look he has had for the last 23 years. have cashed up and are enjoying a smoke a fault, bordering on harassment as the while waiting for you so that everyone can evening wears on and the drinks go down. When they order you can expect a small be on their way. When they finally leave, He becomes increasingly animated and argument to break out about his cholesterol he is so excited to be heading for his hotel loud as the evening winds down and the and although he may give in and order the room that he completely over tips you and subject switches to Super 14 or the race side salad he will inevitably eat all her chips. you get the last laugh at the other waiters. quotas in cricket. He may be running a tab She will have the side salad, no dressing, at the bar which means the chances of a the steak with no basting, a lemon diet coke Don’t expect to see them back in the same tip are pretty slim. Offer to call him a cab and finish it off with a Crème Caramel. Tip restaurant and if you ever recognise him as he stumbles out protesting that he is between 9 and 12 percent and a pleasant with someone else do not remind him of his sober, and watch as he attempts to open goodbye. last visit. the wrong car with the wrong keys. He will be back tomorrow and the next day and the next day and the…32 www.safw.co.za JANUARY 2012
  14. 14. MIKE SAID WHAT? CUSTOMER PROFILE 5: CUSTOMER PROFILE 6: THE SECOND COUSINS THE “OTHERS” Everyone’s dream customers! Second There are of course plenty of other types cousins like you, enjoy their visit, are polite and one day I may even find the inspiration to everyone and always go home. They to write about them, they include the ‘30th have been coming to the restaurant for birthday party, too much money crowd’, the ages, know everyone’s first names, and ‘new entrepreneur, let’s blow the company bring lots of friends with them. When the budget type’, the ‘we didn’t realize this was waiters see their names on the booking going to be so expensive party’, the ‘ethnic sheet they scramble to get them into their group that never tips’ (this varies from city section. to city and location to location so don’t get all defensive) and of course there is YOU, Second cousins are regularly found in most a true individual who just couldn’t find a family restaurants, or their neighbourhood group to fit into.  pizza joint. They love drinking the amusing house wine or may prefer to BYO (bring your own). They do watch the prices but would never be so rude as to discuss it at the table. They will eat plenty, enjoy the meal and leave the table a complete wreck. Their kids are always polite, know the menu backwards and love paying the bill themselves with Dad’s credit card. When things get a little crazy in the kitchen and the food is coming out slowly, they are the one table that really does understand. Do yourself a favour and move mountains to get the kids food out first, even the second S L AW MIKE’ cousins can get a little irritable when little to Johnny starts moaning. ided in be div m er s c an s .Custo g ro u p They are a steady 10 to 15 percent tip with istinct t hree d little or no hassle and plenty of laughs. Do r e neve not forget to laugh at his latest joke, even 0% w e bo ttom 1 ; if you just heard it at the table next door. 1. Th again The joke will be a little off colour which will to see want l move cause Mrs. Second Cousin to blush and we wil say “Not in front of the k-i-d-esses, Mike!” e to p 10% o r ; an d 2. Th ar th f They will leave laughing and smiling and n a nd e probably carrying the youngest daughter heave ome w ho c who fell asleep on the floor at their feet r 80% e othe ithout on a blanket he fetched from the Chrysler 3. Th os t w o, alm Voyager. a nd g . notice JANUARY 2012 www.safw.co.za 33
  15. 15. MIKE SAID WHAT? I s the franchisee to be treated as a partner? Absolutely. Without him/ her there would be no income for the franchisor and they are dependent on each other for growth and survival. Should he be treated as an employee? Well, they are expected to toe the line, to work within the constraints of the franchise agreement and are subject to certain penalties if they step out of line. Should they be treated as a customer? Well, they do pay the franchisor a monthly fee, in return for which they expect certain deliverables and they did after all, for a hefty fee in some cases, buy the rights to trade under the franchisor’s brand name. If at this stage you are feeling a little confused or unsure, we say: “Welcome to the wonderful world of franchising”. Wikipedia defines franchising as follows: ‘Franchising is the practice of using another firm’s successful business model.’ Most franchisors would describe it as: ‘the practice of using another firm’s successful business model just so that you can try and do it completely differently and then blame us when it doesn’t work!’ Who is killing the South African restaurant industry? CHAPTER FIVE: To sum up the relationship in one short Investigating the suspects - Capitán Franchisor sentence: “A happy franchisee is one who is making money.” And there are not many happy franchisees out there at the by Michael Said moment! The relationship hasn’t suddenly gone bad. Franchisors haven’t suddenly “Franchising in not a democracy”, boomed the deep voice become money grabbing lowlifes who from across the room. “This is my brand and I will protect it prey on the innocent. Some might say they have been that way for years, and at all costs!” franchisees haven’t suddenly become The statement above could conceivably have been heard independent, lazy, brand-destroying, reprobates with absolutely no foresight at any one of hundreds of franchise meetings held around or ability to understand the value of the the country each year. Only names and places have been brand. They too have been described that changed to protect the innocent. The precarious relationship way since time began. Of course I am being facetious and inappropriate, but now that exists between franchisors and franchisees has been a that we have that out of the way we can topic of debate for many years and will likely continue so for attempt to discover where things are falling years to come. short and what can be done about it.8 www.safw.co.za FEBRUARY / MARCH 2012
  16. 16. MIKE SAID WHAT? Let’s face it, as a franchisee, hiring a Next is “the joining fee”. This is the upfrontIn order for any business, Finance, Engineering, HR and Marketing money paid for the right to use the brandregardless of type, size or years department or external consultants would name and for the training and preparationin operation to be successful, you cost you considerably more than the five that a potential franchisee will undergo.need the following departments in to seven percent you are paying in royalty Unfortunately the preparation and trainingsome form or another, and if you or management fees, so perhaps you is often not forthcoming and new entrantsare a one man business you are should ‘shut up’ and get on with executing are left to sink or swim on their own, andprobably trying to do it all. your side of the deal. If, on the other hand, regrettably it is often the former. Of course you are not getting the input and the the company has a right to charge an A Finance and Accounting support you were either promised or were entry fee for joining their organisation and division. Finance plans for expecting, it is time to speak up and speak the training they will provide, but if there future growth and long term up loudly. is no support structure, the manuals and stability and Accounting takes documentation are either nonexistent or care of the day-to-day expenses So what role is the franchisor playing in the outdated and the value of the brand has and bookkeeping duties. Death of the Restaurant Industry in South been overstated, then surely somebody Africa? Well, the role is multifaceted and must be held responsible. But please An Engineering and we will start at the very beginning. remember the Latin phrase “Caveat Production division. emptor” – Let the Buyer Beware! Engineering plans ahead, developing new products and Now, if charging an upfront fee when you models and Production will The Consumer are offering little to no support seems produce these today. unreasonable, then charging it a second Protection Act, having time is surely bordering on criminal. All An HR and a Personnel division. HR is responsible shifted the burden too often the first poorly vetted, hardly trained, badly prepared and over matched for the future development of more firmly onto the franchisee fails miserably and is left to pick your workforce, ensuring that there is adequate manpower shoulders of franchisors, up the pieces of a failed venture. He is left facing financial ruin and wondering why and skills for the company to may resolve some of he failed when ‘anyone else’ would have build on while Personnel looks succeeded. Now the franchisor goes out after the day-to-day welfare and the problems, but the in search of another ‘victim’, sorry I mean attendance of the workforce. onus rests with the franchisee, and the cycle stars anew. No vetting, no training, no support and... A Marketing and a Sales potential franchisee to no chance. The problem stems from the division - and they are not the same thing! The marketing do his homework before fact that the franchisor does not have a sustainable business model for himself, department develops the signing. and not for his franchisees. Instead he strategy and the medium with relies entirely on repeat joining fees to which to take your company sustain his business. Your failure is his or product to market and your success. Sales team will go out there There is little or no doubt that a number of today and sell it to them. the concepts offered as franchises should I need to state for the record that this is not not even be operating on their own, let indicative of all franchisors and there are The common thread is that alone as a franchise. Stricter laws need plenty of excellent companies out there Finance, Engineering, HR to be in force before you can take money delivering much more than they promise. and Marketing all relate to from an unsuspecting public. While the They offer excellent support, top notch the future of the company Franchise Association of South Africa training and ongoing guidance. It is up to with the franchisor assuming (FASA) is doing a fantastic job of setting the buyer to ensure they are dealing with responsibility for these roles, controls and monitoring in place, it is such a company. If you are thinking of while Accounting, Production, not illegal to start a franchise company entering the market, do your homework; Personnel and Sales relate to without being a FASA member. The speak to existing and ex-franchisees and the now and is the responsibility Consumer Protection Act, having shifted contact FASA. of the franchisee. The problems the burden more firmly onto the shoulders in franchising arise when either of franchisors, may resolve some of the So you have signed for a store and put one or both parties are not problems, but the onus rests with the down a hefty deposit. What happens delivering on their side of the potential franchisee to do his homework next? Well, you wait for a location, and this bargain. before signing. too is often in the hands of a franchisor FEBRUARY / MARCH 2012 www.safw.co.za 9

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