Another story that I hate to tell. I recently ran across an article in a The Ledger a Florida newspaper about yet another independent restaurant closure. I would encourage all independent restaurants to take a quick look at the article. What was most compelling to me about all of these articles is that so many references are made to external forces like the economy. Even more disturbing is the fact that in virtually every article like this that I have read about another independent restaurant going out of business there are always comparisons made to chain restaurants. Many state that independent restaurants lack the purchasing power or the marketing power. Let’s break that down a little…
- Purchasing Power – it is certainly true that chain restaurants have significant purchasing agreements with major manufacturers that offer them a price contracted over time. All one has to do is look on their menus and you will generally see many manufacturer logos displayed on the menu. But what about commodity costs? Does anyone believe that every chain restaurant in America can buy commodities for less? Although it is true that chain purchasing will try to lock in pricing for extended periods of time the reality is that when “act of God” situations arise that price is many times lost. Most importantly is the fact that virtually all commodity prices are published daily in various commodity markets. Chain restaurants do tightly control and limit their deliveries and in most cases are subjected to a sliding scale fuel surcharge. Simple fact: Chain Restaurants do not have a significantly lower food cost than independents. Take a look at virtuall any public traded restaurant company’s earnings statement and you will see that their COGS (cost of goods sold) ranges from 35% – 45% which is not significantly different from that of independents. Looking at Bloomin Brands (Outback, Flemings, Carrabas, Bonefish Grill) has an Operating Margin of 4.91% and Buffalo Wild Wings has an Operating margin of 8.97% according to Yahoo Finance As to the reasons why the two are significantly different, I would suggest that menu mix, and ratios of beverages are different, and in the case of Bloomin’ Brands their numbers are a blend of multiple concepts while BW3 is predominantly one.
- Marketing Power – National chain restaurants that are franchised pay royalties and advertising expenses to the parent corporation at rates of 8%, 9%, 10% . Also most franchises charge franchise fees up front before the owner ever opens the door and what they get for their money is name brand recognition and national marketing and promotions, although not all are effective, some are not profitable, and in most cases they are not local. Chains do a good job of creating brand awareness at multiple levels and by and large are often considered “safe” choices by consumers.
But lets get back to this restaurant closing, admittedly they did not update menu pricing to reflect the increases coming through the back door. In the case of chicken wings the owner said the price had doubled but none of that increase was reflected in the menu price. Here is a direct quote from the restaurant posted on their Facebook Page.
“It is with a heavy heart that I tell all of you that this Sunday is the last day for our dream, Natalie’s Sports Bar & Grill. As a Mom-n-Pop, it’s just too hard to ride out the economy with no buying power. Food keeps going up and up, and wings will have doubled in price in a year, come football season. We can’t double our menu prices, so we keep eating it and eating it. If I won Lotto, I would keep Lakeland’s own “Cheers” open forever, as I do love our employees and customers like family. I am so grateful for all of the support you have given us in the last 3 1/2 (almost) years. I have loved reconnecting with old friends, making new ones, and having a smile on my face and a song in my heart every day.”
I hate seeing these messages and I have great sympathy for the owner of this restaurant who no doubt worked very hard to build this business. What is most compelling to me is the fact that many independent restaurants don’t think that they can raise prices without ever raising their menu prices. It is true that if they raise prices they risk losing business, especially in cases where they simply raise prices without any menu engineering techniques applied. What is needed is a POS system that tracks all item sales so that the least profitable items can be subordinated to the more profitable ones on the menu. The menu is the primary marketing device for any restaurant and lack of proper menu engineering does not create an opportunity for guests to discover and buy new items that are potentially more profitable.
It is not surprising to me that most of these articles that are written about independent restaurant closures continue to focus on rising costs. They do not understand the dynamics of the restaurant business and like to focus on the economy, purchasing power, and increasing costs. Restaurants that are not closing understand that this business is very intricate and those that focus on providing the best guest experiences are the ones that are not only raising prices to reflect higher costs but the ones that will stay in business.