Ways to reduce restaurant operating costs
Everyone knows that the key to making profit in the F&B business is high revenue while keeping operating costs low. By now you probably already know which costs are fixed (rent, for instance) and which costs you can actually control on a month-to-month basis. These are known as Prime Cost (total cost of goods sold + total labour cost) or variable costs.
If you’re unsure about what falls under your COGS, ask yourself :
- Will this be sold to customers?
- Is this item always required in order to sell something? (e.g. straws for drinks, paper to wrap sandwiches)
If the answer to both is yes, then it should be included in your COGS.
Total labour refers to salaries paid, including CPF, overtime and PH pay, any benefits/ incentives and insurance.
Ways to keep prime cost low:
1. Reduce food costs
- Developing relationships with suppliers (e.g. always paying on time) gives you currency to negotiate for more credit terms or better costs.
- Make use of economy of scale: buying in bulk gets you better prices and is great for businesses with more than one outlet.
- Reduce portion size but don’t compromise on quality. Instead, you can replace a side with something more economical and offer something else (that is cheap of course) to compensate e.g. a free drink.
2. Rework your menu
- Downsize your menu to include only popular and profitable items. Smaller menus are associated with better quality, and service will be faster too. Use your POS system to determine what's most popular and which items are frequently ordered together.
- Regular costing of menu items: rises in ingredient cost can make some formerly profitable items much less profitable.
- Take advantage of the lower prices of in-season produce – you can even mark up prices slightly by emphasising freshness and seasonality. Highlight seasonal items on special menus. Having the flexibility to edit your menu and pricing is important too – ensure that your POS system lets you do this easily.
- When prices of certain ingredients shoot up, teach staff to upsell menu items that are more profitable.
- Try not to mix high-cost and low-cost ingredients in your recipes.
- Offer discounts on special menus or promotional items only. Discounts on regular items create the impression that your profit margin is high and customers will wait for promotions to patronise.
3. Forecast sales accurately
It results in better employee scheduling, ordering, and prepping. More than a quick glance at past month's sales average is needed to have good forecast.
- Remember to account for holidays, community events, competitor activity, weather, and ordering rates.
- Find ways to predict the demand for each menu item and turnover rates, such as reading analytics from your POS system.
4. Increase staff productivity
80% or more of your sales come from peak periods in your restaurant, so how much food you can serve during peak periods without affecting consistency or quality is critical.
- Have better, more efficient scheduling. Minimise the number of staff working during slow periods; close off part of your restaurant if need be.
- Cross-train your staff so they can perform multiple roles or lend a hand where needed.
- Make your staff care about your business – being sent for business training gives them a sense of ownership. For example, Jigger and Pony sends employees with leadership potential on a Dale Carnegie managerial course and promotes from within the organisation.
- Review your kitchen’s roles and processes, factoring in prep and cook time. Are the procedures efficient, and do they justify the price of the menu item? You may have to change components of dishes or whole menu items for more productivity.
- Establish job descriptions with clear and measurable performance indicators. Employees who know what is expected of them perform better.
5. Reduce employee turnover
Hiring a new restaurant staff member is costly (especially in an industry like F&B where the turnover is high) – think of the time taken to respond to enquiries, interview candidates and then train the new member. And there's the marketing budget for hiring. Studies have shown that rehiring can cost up to 16-20% of that employee’s annual salary.
- Provide better training. At most places, training only consists of two or three days of shadowing another team member. Better trained teams make fewer mistakes, have better customer service, and reduce staff turnover.
- Treat staff like family. Greendot cultivates a sense of family, which in turn results in loyalty and happier employees. Higher morale makes customers feel more welcome too.
- Give you staff room to breathe. Employees wanting to take long breaks often feel they have to quit in order to do so. The Spiffy Dapper has a cool way of retaining good staff: they can accumulate leave by working extra shifts (they receive bonus days) and then take up to 90 days’ leave at one shot – enough for a millennial backpacking trip of self-discovery.
6. Alternative revenue
- Use your facilities after hours to generate alternative revenue by holding cooking classes, private events or renting your kitchen to caterers.
For instance, a Singaporean cafe called Monniker hosts “Weekends at Monniker”, where they host different chefs (usually home cooks keen on trying their hand at a full lunch service) each week. Reservations and pre-orders are made, and Monniker and the chefs split the profits.
7. Utilise free publicity
- Review and cut ineffective marketing from your budget.
- Make your food as Instagrammable as possible to encourage customers to share photos.
- Engage with customers on social media; hold small contests encouraging them to share your post and like your page, with free food or drinks as prizes.
8. Track your purchasing trends and food wastage
- Monitor purchases and compare them to the food sold. Wastage comes from over- or under-portioning, dishes being sent back to the kitchen, or theft.
- Under-purchasing on the other hand, leads to stock shortages and emergency purchases.
- How meticulous are chefs and food handlers about portion control and following recipes? Do they measure ingredients with a ladle, weighing scale or some other specific measuring unit? Creating procedures in a restaurant is easy, but making sure they are enforced is another challenge altogether.
10. Optimise your tech
Old POS systems are expensive to upkeep, and expensive management/payroll software are costs that can be minimised. Do your research for modern, cost-effective restaurant technology solutions that can replace any that are out of date or redundant.
11. Increasing prices
Every restaurant owner is afraid that increasing prices will drive away customers, but sometimes even a 10-cent increase on a frequently ordered item can lower your food costs significantly.
- Know what to mark up. Low-cost items like non-alcoholic drinks (sodas, tea, mineral water, etc) are big profit margin items. (Wine has an average markup of 200-600%; pasta, pizza and bread-based dishes that are made in-house have cheap raw ingredients.)
- Aim to find balance in keeping price-sensitive items reasonably priced while marking up items that you can get away with.
Encourage environmental consciousness and save on packaging by giving slightly bigger portions or a small discount when customers bring their own takeaway containers and plastic bags.
Cheryl Tay is the editor and marketer at iCHEF Singapore. She also manages iCHEF Club, a growing community of F&B owners in Singapore – organising events, an online newsletter and the F&B Entrepreneur Bootcamp, the only regular workshop on opening a new restaurant in the country. In her spare time, she attempts to read every book that’s ever won a literary prize and watches cat videos. Like any proper Singaporean, her love for food runs deep – especially spicy food. Chili is life.