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While many factors influence the profitability of foodservice operations, key considerations include type of business, location, cost control, and profit margin, sales and marketing strategies, and human resources management. We’ve already examined the different types of operations and their relative profit margins. Let’s look at the other profitability considerations in more detail.
Key statistics show that operating revenues grew by 31% nationally from 2012 to 2017. Conversely, operating expenses rose by 31%, during the same period. The average pre-tax profit in 2017 was $30,370 or 4.3% of operating revenue. By many industry standards, this is a dangerously low profit as a percentage of revenues. Any number of situations could easily erode this profit including rent increases, unexpected maintenance repairs, and increased taxes. The cost of goods and the minimum wage increases were contributing factors in impacting operating expenses in all regions of the country. Economic slowdowns in Alberta and Newfoundland, directly linked to the Energy Sector were major contributors to substandard growth in these two provinces.
Full-service restaurants remain the least profitable category of food service on average. Caterers remain the most profitable sector with a pre-tax profit margin of 7.2% nationally, despite having the highest labor costs as a percentage of operating revenue (Restaurants Canada, 2019).
The selection of the correct location for a restaurant is often cited as the most critical factor in an operation’s success (or failure) in terms of profitability. Prior to opening, site analysis is required to determine the amount of traffic (foot traffic and vehicle traffic), proximity to competing businesses, visibility to patrons, accessibility, and presence (or absence) of desired patrons (Ontario Restaurant News, 1995).
According to Restaurants Canada, QSRs have the highest profit margin at 5.1%, while full-service restaurants have a margin of 3.5%. There will be significant variances from these percentages at individual locations even within the same brand (2014b).
A number of costs influence the profitability of a food and beverage operation. Key operating expenses in the restaurant business food cost are food cost, beverage cost beverage costs and payroll. These are commonly known as prime costs. Managing the prime costs primary costs. to an appropriate and agreed upon level is critical to the success of any operation. Other expenses include property rental, utilities, maintenance costs, advertising, legal fees, insurance and depreciation of equipment assets. In addition to these big-ticket items, there is the cost of reusable products operating supplies such as cutlery, glassware, china, and linen in full-service restaurants. The percentages of expenses to revenue will vary greatly by sector, location, and province.
Given that most operations have both a service side (interacting directly with the consumer) and the production side (preparing food or drink to be consumed), the primary costs incurred during these activities often determine the feasibility or success of the operation. This is especially true as the main product (e.g., food and drink) is perishable; ordering the correct amount requires skill and experience. Managing your inventory once on site is of equal importance.
Sales and Marketing
The two principal considerations for sales and marketing in this sector are market share and revenue maximization. Most F&B operations are constrained by finite time and space, so management must constantly seek ways to increase revenue from the existing operation or increase the share of the available market. Examples of revenue maximization include upselling existing consumers (e.g., asking if they want fries with their meal; offering dessert, specialty drinks pre and post-dinner), and using outdoor or patio space (even using rain covers and heaters to extend the outdoor season). Examples of increasing market share in the fast-food sector include extending special offers to new, first-time customers through social media or targeted direct mail.
In today’s cluttered marketplace, being noticed is a constant goal for most companies. Converting that awareness into patronage is a challenge for most operators. Restaurant reviews have been a part of the food and beverage sector for a long time. With the increase of online reviews by customers at sites like Yelp, Urbanspoon, and TripAdvisor, and sharing of experiences via social media, operators are becoming increasingly aware of their web presence (Kwok & Yu, 2013). For this reason, all major food and beverage operators carefully monitor their online reputation and their social media presence.
The digital marketplace for food is creating a world of ways to drive incremental business while leveraging fixed costs and creating new ways for restaurateurs to think out of the box about their business.
—Dan Park, General Manager and Head of Uber Eats Canada (Restaurants Canada Food Service Facts 2019)
One of the keys to a strong reputation, both in-person and online, is the management of human resources.
Staffing and Human Resources
Appropriately staffing an food and beverage operation involves attracting the right people, hiring them, training them, and then assigning them to the right tasks for their skills and abilities. Many businesses operate outside the traditional work-week hours; indeed, some operate on a 24-hour schedule. Creating the right team, employing them in accordance with legal guidelines, and keeping up with the demands of the businesses are challenges that can be addressed by a well-thought-out and implemented human resources plan.
People who have long-lasting careers in the sector find the fluctuating conditions appealing; no two days are the same, and the fast-paced and energetic social environment can be motivating. Many positions provide meaningful rewards and compensation that can lead to long-term careers.
One topic of discussion in food and beverage human resources is that of gratuities (tipping). In Canada, restaurants are obligated to pay staff minimum wage, and gratuities are paid by the customer as an expression of their gratitude for service. This is not the model in countries like Australia, where service staff is paid a higher professional wage and prices are raised to accommodate this.
Take a Closer Look: Tipping and Its Alternatives
In 2008, Michael Lynn and Glenn Withiam wrote a paper discussing the role of tipping and potential alternatives. While the paper focuses particularly on the United States (where wages are structured differently from Canada), it raises some good questions about consumer preference and impact on businesses (Lynn & Withiam, 2008). For instance, do tips actually improve service? These questions can apply to food and beverage businesses but also other tourism operations within the service context. It also offers some suggestions for further research. Read the paper Tipping and Its Alternatives [PDF].
In British Columbia, tips are considered income for tax purposes but are not considered wages as they are not paid by the employer to the employee. A restaurant owner cannot use tips to cover business expenses (e.g., require an employee to use his or her tips to cover the cost of broken glassware). Employers are also not permitted to charge staff for the cost of diners who do not pay (known as a dine-and-dash). They can, however, require front-of-house staff pool their gratuities, or pay individually, to ensure back-of-house staff receives a percentage of the tips (British Columbia Ministry of Jobs, Tourism and Skills Training, n.d.). This is also commonly known as a tip-out.
The Ministry of Labour’s website explains what constitutes a tip pool: “A tip pool is a collection of employees’ tips that is redistributed among some or all of the employer’s employees. This includes tip outs, which are payments from one employee to other employees because it is required by their employer’s policy. An employer may withhold, make a deduction or require an employee to give them a portion of their tips and other gratuities if the amount that is collected will be redistributed as part of a tip pool.” However, employers are prohibited from sharing in the tip pool (Restaurants Canada, 2019).
There have been experiments with gratuity models in recent years. One example is a restaurant on Vancouver Island, which tried an all-inclusive pricing model upon opening in 2014 but reverted three months later to the traditional tipping model due to consumer demand and resistance to higher prices (Duffy, 2014). While many in the industry would prefer to operate with a no-tip policy, the consumers are not prepared to pay the higher menu price required to facilitate the process.