Reversing Restaurant Failure

By Cihan Cobanoglu | March 10, 2008

In the summer 2003, American Express aired a commercial with celebrity chef Rocco DiSpirito purporting that "nine out of 10 restaurants fail in the first year." The commercial caught the attention of an associate professor at Ohio State University's hospitality management program, H. G. Parsa, who'd heard the stat before but, based on his 13 years of experience in the hospitality industry, was skeptical. In fact, the statistic was somewhat of an urban legend even to American Express. After prodding the credit card company for three months as to the source of their statistic, Parsa received a written response stating that, "American Express has not been able to track down a specific data source for the statistic."

In 2005, Parsa co-authored "Why Restaurants Fail," an article published in a Cornell University journal based on a study of restaurant failure. In that study, he found that restaurant failure rate during the first year is about 30 percent - still a significant number. There are many reasons for restaurant failure: lack of cash flow, poor operational controls, high turnover, poor location, ineffective advertising and sales promotion, etc. In markets where net profits margins are slim, as with many quick-service operations, there's even less room for error.

In some cases, an investment in sound technology systems can help boost a restaurant's chances for success and help them avoid becoming a statistic:

  • Cost Control Software: There are numerous cost control software options available in the market that will enable a chef and managers to make informed decisions about the cost and selling price of their menu items. For example, ChefTec (www.cheftec.com) will alert a manager if the cost of a menu item is over a certain price level. This allows for fluctuating inventory items to be kept under control. Additionally, cost control software allows the managers to play "what if" scenarios to determine the best price levels and contribution margins. Similarly, cost control software can alert a chef or manager if an inventory item is approaching the end of its shelf life. If it does, the chef can utilize the item in a special menu, eliminating waste and possibly even boosting sales.
  •  Reverse Auction Software: This solution can be used as a part of a menu-engineering or cost-control package. Eatec (www.eatec.com) and ChefTec both offer this feature, which allows the restaurant manager to determine a maximum price for purchase order items. The system then distributes the purchase order to suppliers electronically, allowing them to reverse bid on items. The software can even select the lowest bids for you. A manager has the freedom to purchase their products from any vendor regardless of their bids. Of course, logic usually dictates ordering from the lowest cost provider if the qualities are equal.This system is predicted to save restaurants about 4 percent to 9 percent on food cost. In slim margin environments, this could make a difference between success and failure.
  • Point of Sale System: Most restaurants have a point of sale system (POS), however, the majority of restaurants use only 20 percent to 30 percent of their features. Consider leveraging data from your POS system to create a menu engineering strategy: most POS systems will report the menu mix, while cost control software will report contribution margins for each menu item. The result is a menu mix analysis that will allow operators to engineer their menus for higher margins. Items can then be identified as one of the four classic menu engineering examples: "dog" items, which should be replaced; "puzzle" items, which should be repositioned on the menu; "plow horse" items, which should be re-priced; or "star" items, which should be preserved. By re-pricing plow horses and focusing on stars, restaurants can positively affect their bottom lines.
  •  Computer-Based Training: The new generation of POS systems and kitchen display systems can be used as on-going training devices. The cost of creating these training programs is minimal, with off-the-shelf screen recorder software available from such companies as Camtasia Studio (www.camtasia.com) or Adobe Captivate (www.adobe.com/captivate). Personalized training tools will ensure high service quality and safety.
  • Other Solutions: Opportunities for boosting the bottom line are available at nearly every juncture. Restaurants can work to make better use of their websites (historically among the least effective in the hospitality industry), and can tap such solutions as scheduling software, table manage-ment, HACCP alert systems, and financial management.



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