Why is Your Restaurant Losing Money? Here’s What to Do About It
How are your profits? Great? Good? If you’re like most restaurants in the market, you probably know they could be better. The question you should be asking, especially if you have a restaurant losing money, is: what can you do something about it?
It boils down to whether you don’t know or don’t care. If you don’t care, then stop reading here and find something else that makes your heart sing. Life’s is too short and precious to not care about your restaurant!
If you don’t know, then we have somewhere to start. The thing about restaurants is when things are running great, and sales are pouring in, you don’t think about the nickels and the pennies. You live in a dream of ever-flowing cash streaming into your restaurant. When the harsh reality of the market slaps you in the face and those days of plenty start to disappear, you panic because you’ve never dealt with it before. You freak out, go into denial and as a result, you sit there and do nothing.
They say to take no action is an action. I’d add that ignorance isn’t bliss; it’s just ignorant. Let’s figure out where your restaurant might be bleeding profits and then talk about solutions to stop it. When things aren’t the way you want them to be, you must ask yourself, why?
Once you find the reason your restaurant is losing money, you better have a damn good action plan together to correct course, or you risk running your business right into the ground. Drop the pride. Bury the ego. It’s time to cowboy up, seek answers, and find solutions.
Bad Restaurants Don’t Know Their Costs
You’d think this one is a no-brainer right? Of course, a business needs to know the cost of everything they sell to make a profit. Common sense. That’s the funny thing about the restaurant business though. Common sense isn’t all that common.
I always ask any audience that I speak to this same question: “How many people here (and be honest) know the cost of every single item on their menu?” The results are the same no matter where I am in the world.
See for yourself:
- Las Vegas – 700 person audience – 10 people raise their hand
- Bogotá – 500 person audience- 5 people raise their hand.
- Madrid – 300 person audience – 3 people raise their hand.
- Toronto – 225 person audience – 4 people raise their hand.
- New York – 100 person audience- 0 people raise their hand.
That’s roughly only 1% of any audience knows the cost of every item on their menu. That sucks!
If this is your restaurant, you are closer to financial death than you might realize. By not knowing your costs, you can’t see the damage this creates. Oh, and don’t blame your vendor for the prices they charge! If two restaurants with identical menus were across the street from each other and one restaurant paid 3% higher from their vendor, yet they knew their cost structure and how to price out their menu correctly, they will always outperform the restaurant that doesn’t know their costs. This dynamic is guaranteed. And this is common in restaurants that lose money.
If the restaurant world was a big game of monopoly, not knowing your costs would be like not passing go to collect $200. Sadly, the only food cost police out there in the real world is the restaurant that closes its doors. The restaurant business can be gratifying. It can also be extremely harsh if you don’t treat it like a business. Stop running a hobby! A good restaurant knows their costs 100% of the time and they adjust their menu to fluctuate for inflation and price increases.
If you don’t know how to cost-out your menu, then admit it, and hire someone who can. You’re going to need to swallow your pride. It’s far better to be humble and successful, then prideful and out of business.
Bad Restaurants Don’t Fire Bad Employees
So, what do bad employees have to do with bleeding costs? Everything! Substandard workers don’t contribute to the guest experience; they destroy it, and it’s that guest experience that drives sales.
Keeping poor performing employees around causes a ripple effect throughout your brand. How? Here are some examples:
- They make frequent mistakes because they don’t care.
- They frustrate the “A players” who have to pick up the slack.
- They often call in sick since they usually have poor work ethics.
- They cause workplace drama due to their sense of entitlement.
- They deliver substandard performance due to the low standards they set for themselves.
You might still be hesitant to fire them by making excuses like:
- “I’ll be short staffed!”
- “They’re a good person deep down!
- “They need this job.”
- “I feel sorry for them.”
- “At least they show up for work.”
Understand this: If someone on your team is not contributing to the profitability and growth of your brand, they’re a liability. It’s your duty as an owner or leader to eliminate these liabilities from your restaurant. Bottom line is you must always protect the brand, as well as those around you that protect your brand. The “A players” on your team will respect and admire you if you dare to make hard decisions that improve the culture.
When you improve your company culture, you enhance your team experience, and that (as mentioned before) is what drives the guest experience. The quality of your guest experience drives the top line of your sales. And restaurants that are losing money often let this slip.
If your profits seem to be bleeding out slowly, the staff and guest experiences are where you must start. Add sales to the top line by eliminating the poor performers and improving the team experience. Then control costs by being conscious of what every item on your menu costs, and what your margins are.
Here’s the real secret many won’t tell you. Restaurant success is relatively simple: You build sales by offering a better guest experience than your competition. You keep more profits by managing the numbers daily, not when it’s convenient.
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About the Author
Donald Burns is The Restaurant Coach™, named one of The Top 50 Restaurant Experts to Follow and one of 23 Inspiring Hospitality Experts to Follow on Twitter. A restaurant consultant for a $4.2-billion-dollar company, he works with restaurants around the globe that want to build their brand, strengthen their team, and increase their profits. His first book, Your Restaurant Sucks!: Embrace the Suck. Unleash your Restaurant. Become Outstanding, is an international bestseller.