So, you’ve put your prices up but your costs are still too high

If a business finds itself in the predicament of high cost of goods sold, elevated wage expenses, and towering overheads, it’s a sign that their selling prices are too low. The straightforward solution might appear to be raising prices across the board, but this often poses a risk of pricing the business out of its market. In most cases, the more viable approaches involve increasing the average customer spend or reducing operational costs.

Raising the average customer spend, though appealing for its potential to bolster the bottom line, is not always easy to execute. Some businesses face challenges such as inappropriate staff recruitment and training, as well as a lack of merchandising expertise that hinder this endeavor.

If that’s the case, cost reduction becomes the primary recourse, despite the potential disruption it can cause to established routines. This process often requires challenging conventional practices and making radical changes in how the business operates.

To illustrate this, consider the cost of goods sold. It necessitates a meticulous review of recipes, suppliers, goods receipt processes, production systems, waste management, staff meals, and more. Incremental savings are made by fine-tuning various aspects of these processes, as there is rarely a single ‘magic bullet’ solution that significantly reduces costs in one hit.

When addressing wage cost reduction, the challenges intensify. A thorough evaluation of production and service systems becomes essential, with the aim of minimising staff time while maintaining customer satisfaction. This may involve discussions about eliminating table service or transitioning to pre-prepared or semi-finished products to enhance efficiency, despite resistance from some owners and staff.

Beyond production and service, other wage-related issues, such as staff productivity, pay rates, rostering efficiency, staff turnover, and absenteeism, must be thoroughly examined. In essence, the management and supervision of human resources within the business needs to be reviewed.

Finally, overhead costs, especially rent, pose a significant challenge. Ideally, rent for a hospitality business should not exceed 8% of the business’s turnover unless it is situated in a high-traffic area, where higher rent could be justified by reduced marketing costs. If rent costs are prohibitively high, the options are daunting: either negotiate lower rent (a formidable task) or revisit the option of increasing the business’s revenue through a higher customer average spend to automatically lower the rent percentage.

When faced with these challenges, some business owners might contemplate selling up, but they must accept that the true value of their business is contingent on its actual profit. Minimal profit leads to a diminished selling price. It may become evident that the path forward is neither simple nor easy, and business owners often find themselves grappling with a tough decision.

Chris Lambert