Lean and Mean — Ways to Reduce Costs

Times will get tough. When your bank account is dwindling because revenue has decreased, the next task becomes cutting costs. It’s a decision riddled with failure points. The goal is to cut costs without slicing your nose to spite your face. Any cost-cutting decision should be for the greatest good of the restaurant based on the wisest decision, not the quickest or easiest. Getting shifty on your taxes, loose with payroll, and destroying your menu program will cut costs, but it will send your restaurant into peril.

Another foolish decision is to cut marketing as a knee jerk reaction for the first thing to go. The smarter decision is to reduce any marketing without return on investment (ROI). This evaluation requires you to evaluate all aspects of each marketing campaign to see which ones have ROI worth investing in. Yes, when times are tough, you need to invest in marketing. You can’t harvest crops without planting seeds, and you can’t dig your way out of a hole with a shovel.

Some marketing efforts have a distinguishable return on investment. A coupon with a code attached can show you definably how much return it produced. A top-of-mind awareness ad won’t. That doesn’t mean it doesn’t hold value or should be abandoned.

For example, let’s evaluate a $75 ad in a high school musical program. No, you’re not going to make a ton of money off this investment. No, the audience members who see this black and white ad in the corner of a play’s program aren’t going to be the factor that saves your business. Before you pull the plug on the ad, realize this marketing isn’t for the people in the audience, it’s for the kids in the play. If you’ve endeared yourself to this school and by default, their families, then they are now potentially loyal to you. They might not be, depends on how much they care about businesses that support their program. Are these high school kids and their families coming in as a result of this effort, and will they stop coming in if you don’t buy this ad? If that’s the case, then this ad is working in a roundabout way. Before you abandon something, evaluate the scenario and decide, will this investment pay itself back times five in the next 365 days. If so, it’s worth keeping. That’s the long-sighted as opposed to the shortsighted viewpoint you need to take before you start reducing costs.

That’s my marketing metric. Will this investment yield five times its cost? Revenue I would not have seen had I not spent the money. If so, KEEP IT. I say five times because if I spend $100 bucks, and it yields $101 it’s a loss. You’re out the food cost and labor cost it took to get you to that $101 in revenue. At five times revenue you are in the profit zone.

In the case of a superfluous monthly charge for something that has yet to produce an ROI, that needs to get reevaluated that and potentially cut. But then those dollars need to be reinvested into things that are working. Do this because you need revenue and reducing your marketing budget is not the way to procure it.

Food Cost & Labor

Your two most substantial expenses in a restaurant are your food cost and your labor cost. For food cost, can you cut the price you pay to acquire certain items? If you negotiate a better rate with your vendors, then yes. But, if you decide to short change the customer, give fewer toppings, or buy a lesser quality item, it will be a shortsighted gain that hurts you in the long run. Cutting quality is not the answer. Reducing spend on existing products is the answer.

You can increase menu prices, but that might not be an option for you. To reduce costs correctly, you can buy something in larger quantities or renegotiate your price structure on big mover items. For example: Ask your primary vendor to lock in your price on flour for six months with a guarantee that you will only buy from them. If your primary vendor isn’t playing ball, this may be the time to entertain other vendors. Find the vendor willing to lock in deals and value your relationship.

Bad labor cost-cutting can create an immediate morale dip that tanks your restaurant. Reducing hours of your core team or worse, taking down their salary, will immediately destroy their will to work. If you remove extraneous employees and cut hours to those who have performance issues, yes, this will have an effect that’s positive. It might even be appreciated by those of your staff who are working harder than most. If you invest more time in training new employees along with cross-training existing employees, you will get more value out of them all. That will, in turn, reduce costs.

If your blanket statement becomes, “No one’s getting a raise no matter what this year,” your staff will grow a sense of antipathy. Instead, switch to a performance pay model where when you win, they win, which will solve both purposes.

Fixed and variable expenses round out the rest of your purchasing. Fixed cost is fixed, so not a lot of wiggle room there. The variable cost is where you want to spend your time and effort to reduce your monthly output and streamline your cash flow. Start with the most substantial items and initiate a negotiation, regardless if you have a contract or not. Speak with that vendor and air your concerns. If everything’s going great, you still have the right to say, “Is this the best possible price we could be getting, or are there any other changes that could get us a better rate?” These are fair, ethical questions you should and need to ask at a minimum yearly. Cell phone, laundry and insurance are all variable items that need a meeting with your rep from that vendor. Go through every company that you spend money with and have an honest and open dialogue about their cost-effectiveness. Before switching every vendor to the shiny new vendor promising savings, remember the idiom, “Better the devil you know than the devil you don’t.”

Tax write-offs are a painless, effective way to save money. There are several CPA firms across America whose sole purpose is evaluating your tax implication. They find nuanced ways to reduce your tax exposure. These are not people who file your yearly tax return but rather people who game restaurant tax codes. The beauty of companies like this is they typically take a portion of the money they save you, so you’re out zero cash. Meanwhile, you’re getting the money that you would not have been able to find otherwise. They accomplish this via, depreciating your equipment differently to employee hiring incentives that you might not have been aware of.

If you believe your brand and menu is right, don’t hurt it for the sake of cost savings. Change your back-end purchasing as a first recourse.

Ideally, you change nothing of your menu. For your staff, your goal is for morale to increase along with revenue via smart decisions and a thoughtful approach to your cost reduction.

Mike Bausch is the owner of Andolini’s Pizzeria in Tulsa, Oklahoma. Instagram: @mikeybausch