Revenue is down, the market is challenged and we have to make something happen quickly. What should we do? Mark Dickinson of DONE! Hospitality Training Solutions says cut costs, but carefully
This is a harsh reality for many as markets change and geo-politics influence business, but where should we make the changes that will have a positive impact on cash flow and where should we focus our attention? Products and services, payroll, cost of goods, location rents, training costs, marketing costs, maintenance costs, replacement costs. Any cost seems like a good place to start.
1. Products and services
We can reduce our products and services, but this will have a direct impact on our customers. The question is how many customers will be affected? What will be the impact and what will be the outcome? Products and services are the core of what started the business. If a major rethink of the products and services is required, then it should be entered into with full commitment, but if we are facing a short-term cost challenge in a market downturn, and our products anvd services have been good and loved by customers, then this is probably not the best place to begin the exercise of cutting costs.
Typically, the first focus is to reduce the payroll, which may seem logical as it is a big variable expense that can be quickly influenced. Many operators immediately reduce the number of frontline employees to the bare minimum. But what is the possible impact on customers? Let’s evaluate together:
Effects: It’s a fact that if you disturb someone’s life situation, they are compelled to talk to someone else about it; it’s a pressure release, a natural way for people to react when managing the trauma of what they have just experienced. For those who remain employed, they will constantly ask themselves the question: “What about me? Am I next?” and so the cost-cutting exercise builds up negative energy in the business, and that negativity overflows. Where do your employees spend the vast majority of their time? Serving customers. Employees have to release their stress, so where do they do it? You got it, they are talking with customers about what they have been traumatized by and customers are listening. What are the consequences of payroll cutting? Negative talk with customers. Should we do this as our first line of defense? Probably not.
3. Cost of goods
Cutting on the cost of goods is often another line of saving. Here you are playing with fire. Customers are very sensitive to the products that they are used to having. Cut the cost of the cheese in a pizza and your customers know. You may think they will not notice, but they do. You have customers who come to your store for each dish on the menu. What is critical is to know which dishes sell the most and have the most followers, and which are inconsequential menu fillers.
Changing the menu items is a better line of thinking than changing the ingredients in the items that you sell. Once you lose your reputation it is insanely difficult to get it back. Guard it and protect your menu items. Cut costs that are unseen; wasted electricity, turn off lights, turn off ACs, reduce wasted water, fix leaking taps, control the number of garbage bags, get into the smallest costs and make detailed reductions, cleaning contracts, external auditing – bring it in-house. Renegotiate prices with existing suppliers.
Should we reduce the cost of goods by substituting products in existing menu items for lower cost ones? Probably not. Avoid negative impact on customers’ food experience. Focus in detail on all other back-of-house costs.
4. Location rents
Negotiate, negotiate, negotiate! Most locations would rather renegotiate with you than endure the burden of not having a tenant for a while or having to take the risks that come with new tenants. Losing your location will massively impact your customers unless you are moving to an even better one or it is perceived by customers as better.
5. Training investment
So often one of the first costs to be cut. But is training a cost or an investment? It’s hard to say. When cash is tight, invest in sales training and focus on building up sales. Put every effort into building up the sales abilities of your team and hold off on other training expenses until times are better. Investing in sales training always has a return and if done well, the return on investment (ROI) will surpass the investment. Investing in sales training will improve the customer experience and help grow the business, while cutting on theoretical training and development will slow things down in the long term, but not immediately impact the customer experience. Reduce the investment in training? Yes, everything but sales training.
6. Marketing spend
Marketing spend seems like an instant win in the cost-saving world. Frequently the marketing budget covers the branding agency, advertising and social media spend. This expense presents a particularly difficult area. Should we reduce the marketing expense and how?
Costs that directly influence customers to return to the restaurant are a must. Rebranding is an expensive exercise and for restaurants that have been around for a while, this can be postponed. Most of the deadlines around rebranding are self-imposed and have little to no impact on customers. Once they know your logo and your design and your services, they come back to you for what they have experienced the first time. Keep focused on delivering that and deliver it well. Build up your cash, then invest in branding. Branding is rarely the problem.
Getting your message out to more customers can be achieved with smart thinking. Hold the branding agency, hold the social media agency and engage your team in doing it. Get existing team members to post and set up guidelines and give them access. Stop trying to control every second of your social media; anyway, almost nothing in the restaurant social media world lasts longer than a day or so.
Create in-house events that attract more of the people who already come to your place. Avoid discounts and concentrate on adding value and keeping cash in-house. Use influencers rather than advertising and focus exclusively on things that the customers experience and that will encourage them to return. Zero negative impact on customers.
7. Maintenance and replacement costs
In many cases it is smarter to maintain equipment and premises than it is to replace them. However, in the cost-cutting mode, take the zero-cost approach. Justify why we should do this or that, or don’t do it. If it is desirable, then put it on hold. If it is essential, get it done. The challenge is in determining the difference. Essential means absolutely necessary, extremely important; in other words, we can’t do business and serve customers without it. Everything else can wait.
There are some cases where machinery reaches the end of its life and it is better to replace than to repair. Even though the initial cost of buying the new machine will be higher than fixing the old one, the benefits of efficiency, reduced energy consumption and ease of use will have a positive impact on business, therefore replace. Impact on customers must always be zero. Maintain your place for the safety of every customer. Always.
A powerful positive outlook in times of crisis will encourage you to see more positive solutions rather than focus on the negativity of the situation. Profitability can be achieved in many ways.