Before learning how to reduce expenses in a restaurant, let’s first understand the concept of expenses in the restaurant industry.
Generally, a restaurant’s expenses can be divided into 2 parts: Fixed expenses & Variable expenses.
Fixed expenses are those periodic expenses that are bound to be incurred irrespective of the level of sales or operation.
Examples of fixed expenses:
- Depreciation etc.
Whereas, variable expenses are those expenses that are incurred only when a business event is triggered.
Examples of variable expenses:
- Food cost
- Electricity or power etc.
Comparatively, it’s easier to control variable expenses than fixed expenses. Example: You need a good location for your restaurant to be visible. But, with good location comes high fixed expenses (rent).
Let’s face it. As far as numbers are concerned, a restaurant is one of the most difficult businesses to be in. Why?. Because of the high costs or expenses.
In fact, as per a study by Ohio state university, a whopping 60% of the newly started restaurants fail in the first year. And, I bet the number 2 reason (number 1 being sales of course) why most of them fail is high expenses.
So, a restaurant business may look glamorous to an outsider. But as a restaurant owner, you know the pain.
Apart from expenses, the following factors can also make or break a restaurant:
- Service & Ambience etc.
Now, let’s dive in & explore some of the strategies to reduce expenses in a restaurant.
HOW TO REDUCE EXPENSES IN A RESTAURANT BUSINESS
1. Streamline The Menu Items
The more the food menu items, the more will be the cost. Why?. Because more variety of food items will require hiring specialized chefs.
More chefs mean more salary. And, more salary means more fixed expenses.
Further, a diversified food menu will require stocking of some rarely used vegetables or fruits.
More food stock means more chances of food wastage (in case of weak demand). And, more wastage means more cost.
Therefore, you should strive for a streamlined menu with limited items.
Now, you may question like “Will this strategy hurt my sales?”. No! It won’t if you carefully strategize & craft your food menu. Generally, your highest selling items should be included in the streamlined menu.
2. Reward The Home-Delivery Customers
At the outset, if you aren’t ‘home delivering’ then start doing it right now. It’s an awesome way to increase the revenue of your restaurant.
In home-delivery, you should always aim to reward your customers with freebies.
Because it will help you to reduce huge fixed expenses like rent. How?.
Dine-in customers will be lured by freebies & may choose home delivery as their preferred option. This will result in low real estate requirement (less rent).
Therefore, ensure that a large majority of your sales come from home-delivery customers. This is what Dominos does & is successful at.
Also, unlike dine-in, home-delivery business is extremely scalable.
Under this strategy, you may choose to reward the home-delivery customers will freebies like:
- Free home delivery
- Cash discount
- Loyalty points etc.
3. Automate The Ordering Process
This is one of the easiest ways to reduce expenses in a restaurant.
All that you have to do is to automate the ordering process using technology. Example: Place a tablet at each dine-in table & let the customers order directly without interacting with a waiter. (There are some cool apps to do this. Google them out.)
This strategy helps to reduce headcount (thereby reducing the salary expenses).
Likewise, a lot of other areas in a restaurant (like the kitchen) can be automated.
For home-delivery customers, you may have a website for taking orders & feeding it to your RMS (Restaurant management system).
4. Switch To Self-Service Model
The self-service model requires customers to self-serve their orders. Just like what you experience in fast food chains.
Self-service model eliminates to the need to have waiters which in turn reduces your salary bill.
While this strategy may not suit well for everybody, it’s something that can be tried on a pilot basis.
The self-service model has various advantages like (Explain these to your customers):
- Quicker service turnaround
- Improved privacy
5. Encourage Outdoor Light & Air
Outdoor light & air ensure minimum installation of lighting & air conditioning equipment.
Lesser the number of electric equipment, lesser will be the power consumption. So, that means fewer expenses!
Electricity expense is one of the major indirect expenses in a restaurant business. Once reduced, you are going to have lesser variable expenses.
6. Reward Variable Pay To Employees
Why not convert a part of the fixed salary (paid to employees) into variable pay?. Such variable pay should be linked to performance parameters like sales or efficiency.
Variable pay ensures that overall salary expenses remain under control (no sales or performance means no pay). Apart from reducing expenses, variable pay also motivates the employees to give their best.
Needless to say, variable pay helps to increase revenue as well.
7. Tweak Purchase Model (To Control Food Cost)
Food cost is the most significant element of variable expenses. Therefore, you need to control the same on priority.
Start doing the following to reduce food cost:
- Invite quotes from multiple food suppliers or agents
- Buy in bulk quantity (trade discount)
- Buy in cash (cash discount)
Saving money on food cost will not only result in reducing expenses but also an increase in gross profit margin.
8. Reward Sales Incentive To Landlord
Rent is the most significant part of the fixed expense of any restaurant. So, is there a way to convert a part of the rent into variable pay?.
Why not offer sales incentive to the landlord in lieu of rent?. This will ensure that the landlord only gets paid when sales happen.
Yes, in such an arrangement, the burden of fixed monthly rent gets reduced considerably. Also, it’s a win situation for the landlord(more money if sales increase).
It may be noted that this strategy is successfully being implemented by many reputed real estate companies.
So, we have our 8 unique ideas on how to save money in a restaurant business covered. As a restaurant owner, each of the aforesaid ideas will help you save some serious money.
As can be seen, reducing expenses is not just about reducing food cost. The whole exercise involves identifying & analyzing the key elements in fixed & variable expenses. Based on the analysis, you need to chalk out a plan to control costs.
What do you think of the aforesaid ways to reduce expenses in a restaurant?. Please comment below.