In the restaurant business – adapt to survive and thrive

When the Hotel Steyne in Manly sold for the eye-watering sum of $60 million earlier this year, heads turned in the hospitality industry.

It wasn’t just because of the high sticker price – venue sale prices have increased across the board over the last decade. What is unusual is that a record sale occurred at a time when most hospitality venues are doing it tough. Within a few months of the sale of the Steyne, renowned Sydney eateries Acme, Paper Bird and Billy Kwong closed their doors citing rising fixed costs and middling sales due to a slowing economy and the increased popularity of food delivery services.

The confluence of rising asset prices, declining sales and flattening yields reminds many, myself included, of the state of the industry prior to 2006-2007. Increasing asset prices necessitated higher debt levels and resulted in highly leveraged operators going bust when the economy started to slow in 2007.

Our current economic outlook is not exactly rosy – operators have to be prepared to adapt to survive and thrive. This is what I would recommend:

Do not over-leverage yourself.

The price of debt is at historic lows and is looking to stay that way for a while. Borrowing to fund capital investments or to expand can seem tempting but I would advise against it. Banks are cognisant of increasing asset prices and flattening yields in the sector and are tightening lending requirements: a few years ago they were willing to lend at a loan to value ratio of 80 percent. Now, the ratio is under 55 percent. Additionally, nothing eats away at margins like interest payments.

Consider equity injections. With interest rates so low, there is a cloud of super fund and private investment money floating around, looking for a place to land and make returns. With asset prices so high you could get a decent injection of funds in exchange for equity. And while it may sting to have to share profits, the repayment requirements are certainly less onerous than a bank loan – and if the money is invested carefully in your venue, there will be profit to go around.

Become aware of your customers and their changing preferences.

Too often I am called in to assist venues that have lost touch with their customer base and subsequently fail. Demographic change across the country means that a venue that once did well serving up parmas and pints is feeling a pinch. Broadly speaking, Australians are drinking less and eating healthier. Beer consumption has halved per person since the 1970s and alcohol consumption nationally is at its lowest in 50 years – but craft beers, non-alcoholic beers and high-end spirits are growing in popularity. Australians are also more interested in where their food and drink are coming from. Making the effort to cultivate high-quality ingredients that are environmentally friendly or more ethical is an activity that will be rewarded by customers. Provenance of food items are now central to consumer concerns.

Protect margins through efficiencies, not by compromising on quality.

An added benefit of sourcing better quality ingredients – and charging accordingly – is that you will be able to resist participating on the basis of price to differentiate yourself. In an industry with growing fixed costs and a requirement to please the customer, trying to aggressively cut prices by skimping on the quality of your ingredients is a race to the bottom.

This is not to say that you shouldn’t look for savings. A friend of mine works in aviation logistics and has always expressed his awe at the logistic complexity of a busy kitchen: Ensuring that different products with different inputs arrive at their destination in a timely manner is complicated – but it doesn’t mean it can’t be rationalised. There are many business management systems geared towards hospitality venues that can help drive internal efficiencies, bringing the cost of doing business right down.

Also realise that prices in hospitality are sticky: People generally won’t spend more than $45 on a high-end steak, for instance. The current high cost of beef may tempt you to increase prices to maintain your margins – but you may be better off increasing the price of the wedges.

Personnel and Human Resources

Earlier this year I happened to sit next to a celebrity chef and hospitality group operator on a flight to Melbourne. We quickly got to talking about one of the biggest problems in the hospitality industry: the labour shortage. Whether you are a chef or a bartender, the chances are you learnt how to do your job on the job. Hospitality operators are constantly investing in up skilling their people who often go on to change careers – or move back overseas, as many workers are on temporary visas.

The simple solutions are to treat your employees well and to have a mind towards succession planning. The success of a venue is 90 per cent dependent on the quality of management – having good personnel who enjoy their work is key, as is having a plan to replace them when they have to move on.

So as we rush towards the end of year celebrations as 2019 comes to a close make sure you are prepared for a profitable 2020.

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