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It’s no secret that restaurant operating costs are about to get costlier. California’s minimum wage is rising to $20 per hour in 2024, and $24 in a few years, but because few actually work for minimum wage, the real average salary will come closer to $25-$28 an hour. The elimination of tipped wage credit means that even full-serve concepts offering tips to employees will be paying $25-$28 an hour. How do restaurants thrive when wages go up by one-third?
For restaurant owners, the good news is that every day 8 billion people wake up on this planet hungry, so there is plenty of opportunity in the developed world. However, restaurateurs today are facing challenges that can affect their profitability if they don’t respond.
Choose the correct concept
Let’s be honest: the only reason to buy a franchise is to become wealthy. So, choose a concept that is so successful people will want to keep reinvesting to open more locations. But remember, that first restaurant must also be so profitable that you want to keep reinvesting profits to open more locations. And that’s not as easy as it was even a few years ago. The key is to control costs — especially labor costs — by utilizing technology to fill some roles formerly held by people, adding an extra concept to get customers in throughout the day, employing strategic leasing strategies, and creatively using social media.
Those California increases could wipe out entire business models
In any restaurant, the single biggest item on the P&L is labor. For generations, U.S. servers were usually paid minimum wage by the restaurant and relied on tips to bolster their earnings. They were used to hard work at low pay. That has changed. Restaurant employment is reaching pre-pandemic levels, but staff now want to feel safe, respected, and that they are a part of a team. Pay is a big part of that. Those California increases could wipe out entire business models, at a time when the National Restaurant Association expects one-third of all restaurants to close.
Those closed restaurants are an opportunity for franchisees with vision and the money to make it a reality. Those hungry people want to eat somewhere, and it can be at your location. You can make money doing it by pricing your food properly, and reducing the labor you must pay more. Raising menu prices to cover the increasing cost of ingredients and labor is easy. People expect prices to rise and will pay for the right concept and quality. Waiting two years to raise prices to avoid alienating the customer means you’re missing two years of potential profit. Consider Five Guys — its prices are far from the lowest in its category, but every year, its customer counts grow.
The next key is to engineer as much labor out of the restaurant while improving the customer experience. An example is at our client Rise Biscuits and Chicken Sandwiches, which replaced cashiers with an online app and in-store kiosks, and now places items ordered online in a heated locker for pickup. This eliminated a second employee (the expo person) and the need to monitor the process, and helped each restaurant downsize staff from six people per shift to four — a one-third savings. The saved wages can pay the existing staff more. Meanwhile, customer scores went up, giving the restaurant credit for faster and more accurate service: customers were in charge and food was always ready when they came in.
More sales per square foot
Sales per square foot matter because you pay rent per square foot. The more sales you do per square foot, the lower your occupancy cost percentage will be, pushing more money to the bottom line. You maximize those sales by maximizing traffic — you’re paying the same rent (ideally about 10% of sales) whether it’s busy or not. And every restaurant has busy and slow times. Subway, for example, does most of its business at lunchtime. But what about the rest of the time? What can you introduce that will bring in customers in later afternoons and after work and dinner?
The more sales you do per square foot, the lower your occupancy cost percentage will be, pushing more money to the bottom line.
One example is The Dog Haus, a Los Angeles-founded seller of gourmet hot dogs and sauces, which expanded into the Chicago area. The franchisee learned that Chicagoans have their own very strong opinions about hot dogs (no ketchup, ever!) and realized they’d need to expand the business model. Thus Bad-Ass Burritos was born, which offers breakfast and late-night burritos, also with gourmet sauces. It was so successful that Bad Ass Breakfast Burritos is now expanding as a separate concept.
Another way to optimize real estate is to outsource as much prep as possible to minimize onerous staff tasks. The Halal Guys, known for its flavors and sauces, does not prepare them on site. By co-packing (making the sauces elsewhere), its locations are cleaner, fewer staff hours are devoted to mopping up spills, and more space is available to serve customers.
Second generation locations
Personnel may be the largest item of your P&L, but your location may be the most critical. One way to keep outlay to a minimum is through conversions. Store closures are opportunities for a new owner with a fresh concept, a fresh attitude and a fresh balance sheet. It is especially advantageous to take on a space that might have served something similar, so it is laid out and equipped to minimize construction. A falafel shop can become a burger shop comparatively easily — and already has the proper ventilation in place.
Also keep in mind the probable upcoming recession in real estate. Many landlords have overfinanced their property, and with PPP and stimulus monies no longer available, may default. They may offer very favorable terms to keep their properties occupied and appealing to banks and buyers.
Technology hasn’t just affected operations. It’s opened a world of marketing opportunities. Ensure that your search engine information is fully optimized and that you utilize media such as Facebook, Instagram and TikTok to not just show the food but tell the story around it. Keep up a robust loyalty program.
As important, know that marketing also entails creating the best possible relationship with your service providers. Just as Uber ranks customers, UberEats rates restaurants for ease of parking, for example, so drivers can decide whether or not to accept the assignment.
For any franchisor, there’s one last thing to remember in 2024 and beyond: You are in business to serve your franchisees. They are paying you, and you need to make them happy. If they have an idea for layering a new concept that doesn’t compete with your business or ethos, let them try. It could be your next big