Nov. 6, 2020

The Mystery of Margins

I can’t be the only person who opens up their P&L, not realizing I am holding my breath.

I wonder how many other businesses feel that as viscerally as we do as restaurant owners.

Dancing on this tight rope for years and years can feel like a zero-sum game. All of a sudden we have the power to re-write the script.

Are larger margins possible in the restaurant business?

How can we communicate with our customers about the realities of making food?

And could we imagine a world where making profit is easy?

 

I spoke to a few of my industry buddies to find out...

The balancing act

Profit and Loss are the basics of economics. It’s a concept so fundamental, we practically have it tattooed on our foreheads at all times. I think there is no entrepreneur better acquainted with the P&L balancing act than the humble restaurateur. This game we play to keep the numbers in check kept me up at night too many times to count.

When brilliant businessman and visionary Chef Sam Marvin opened Bottega Louie to $8-9 million in revenue in its first year, I was shocked to hear that it still didn’t make a profit.

“We opened up and we were successful. We did 8-9million right out of the gate. Year One we turned zero profit. But it was part of our plan to spend it all in Year One. We wanted to invest in the business.”

Even though this was intentional, it is crazy to think that turning over such high numbers could still mean that your profit margins are slim. So I guess having top-notch service, beautiful design, and a loyal set of customers who visit multiple times a day still won’t save us from the P&L dance. But what could?

Collaborating with Consumers

Pricing comes up a lot in my conversations with other restaurateurs. Customers just aren’t paying enough for the food and service we provide. The idea of low-cost food is so entrenched in our culture, it’s tough to move away from.

Some awesome restaurateurs like Joelle Parenteau from Wolf Down took the leap into higher pricing when lockdown started. She was surprised at the results, “My focus was how do we fix these margins? We did everything we could to optimize our business in terms of labor and supplies but we had no choice to raise prices. Covid made it impossible to ignore. The irony of course is that we raised prices and braced ourselves for the response and no one said anything. Why did we take so long to do this?”

On the other hand, Nyesha Arrington raised a great point when it comes to potentially out pricing your customer. “A quick fix would be to raise prices but is the world ready for that? If guests are paying $1000 at French Laundry, does that raise to $2000? Is the world ready for that?”

I think about this too. I debate in my mind whether raising my prices could be shooting myself in the foot. Do I raise prices to what they should truly be? Or is it possible to keep prices where they are and realign the expectations of customers for that price? Either way, it smells like revolution.

Building a Better Business

The margin mystery always comes back to the high expenses of the restaurant business. I’ve had so many discussions about how we can solve each of these drains on our finances.

For many of us in the city, rent was astronomical. LA rents could make your eyes water. Trust me! There’s a great migration out of the city as some of the most famous restaurants in the country close in these high ticket areas. This is the perfect time to renegotiate with landlords.

And then there are service fees. Ah yes, service fees - so controversial. The system of tipping is a complicated one but rewarding great service on a front and back end can only help the health of a restaurant in the long run. Restaurateurs like Joelle Parenteau have already implemented this system with great success to keep great people on side in her restaurant. Readjusting salaries and having a flat service fee can help with balancing labor costs.

These are just a couple of ideas of where we can tip the scales on the margin seesaw we’re all on. I know for sure that when I jump back into the restaurant business, I have got to find a way to recalibrate the P&L. Let’s turn our businesses from surviving to thriving in the new age.