With Good News Comes Some Challenges

We’ve been talking a lot about the recent good news from the National Restaurant Association for the upcoming year. With this good news comes some challenges for the restaurant industry. Commodity costs have been increasing pretty drastically over the last 5 years, which “they” are saying should slow down, but with the implementation of the affordable care act and the proposed increase in minimum wage it’s pretty much unavoidable that a higher than normal price increase is due for customers.

I read an article today that Walmart is planning on increasing it’s wages over the next couple of years. Being that they are the largest single employer in the US that puts pressure on everyone else. As the labor market tightens up it gets more difficult to hold on to good talent. Also seeing more an more press about getting rid of tips which will also cause a significant increase.

What are you doing at your operation to keep costs down? Are you looking at other ways to preserve margins with all these other margin killers coming down the path? Let us know what you are doing.

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I have copied an article below from Daily Finance below that quotes some of the larger national chains about their price increase plans.

The restaurant industry is starting to bounce back, but escalating costs across a variety of line items are forcing some chains to consider larger than usual price hikes later this year.

One of the meatier morsels in Cheesecake Factory’s (CAKE) quarterly report last week was that it was considering a larger menu price increase than its historical average of 2 percent.

“Looking forward to the second half of the year, while we’re always trying to balance capturing guest traffic and offsetting cost pressures, protecting our margins is certainly a priority and we would consider taking more pricing than normal or more than what we have done historically later in the year in light of the cost headwinds, particularly labor wage rates,” Cheesecake Factory CFO Doug Benn said during its earnings call.

Higher group medical claims find health insurance expenses moving higher at Cheesecake Factory, but the chain is bracing the market to see it as the new normal.

“We see other restaurant operators that look like they are willing to take a little more price than what they normally have,” Benn conceded. “We believe restaurant companies including us will have to consider more pricing in this cost environment as the pace of the economy accelerates.”

Restaurants Are Doing Well, Thank You

This is shaping up to be a great year for the restaurant industry. The country’s improving employment rate finds more people with less time to cook meals at home as well as more of the means to eat out. The drop in gasoline prices is also putting more disposable income in folks’ pockets, so they can now afford to hit eateries more often.

The National Restaurant Association sees a record $709.2 billion in industry sales this year, up 3.8 percent from 2014. There will be a total of 14 million jobs in the industry this year, up 3.2 percent from a year earlier. That’s the good news. The bad news is that the association also sees costs moving higher this year. Between costs related to the rollout of the Affordable Care Act and the potential increase of minimum wages, labor costs are on the rise. Somebody has to pay for these developments, and they were just seated in a booth by the window.

Some companies didn’t wait until 2015. Chipotle Mexican Grill (CMG) kicked in with its first substantial menu price increase in three years in May of last year. Its move was in response to a sharp uptick in costs.

There could be some relief on that front this year. Wholesale food prices may have climbed 25 percent over the past five years, but the association sees pork and dairy prices stabilizing in 2015.

Chili’s, Ruby Tuesday See the Same Thing

Chili’s parent Brinker International (EAT) saw commodity prices spike in its latest quarter, fueled by larger-than-anticipated upticks in the prices of burger meat, avocados and cheese. Even an industry laggard — Ruby Tuesday (RT) — finds itself having to pass on the growing costs of doing business to its consumers.

Ruby Tuesday recently updated its guidance on food inflation. It sees food costs climbing 2 percent to 2.5 percent, up from an earlier outlook that was slightly lower.

“We want to make sure that we maintain our value and propositions,” Ruby Tuesday CFO Jill Golder said in its most recent earnings call. “We don’t expect to price at the same level that you’ve probably seen some of the competitors [pricing at], but perhaps some incremental pricing in the 1 percent range.”

In other words, Ruby Tuesday sees the competition jacking up their prices. It’s going for a more modest uptick, but it’s still an increase. So, yes, don’t be surprised if your tab at the end of the meal is larger than you remembered. You’re not alone. Everyone will be paying more.

Time To End Tips?

Read an article from the local CBS affiliate in San Fran/Bay Area suggesting that it’s time to change server compensation away from tips. The article mentions that this is an archaic way of compensation.

I remember when I was waiting tables and tending bar the pay was much better than any other job that I could have gotten with my skills at the time. Of course there was always the bad tip from time to time, but overall the good tips more than made up for it and I was able to make decent money. Also I was able to live is some amazing places too. I worked hard for the money, but again for the most part it was enjoyable and worth the effort.

What do you think? Is this something that could happen in the near term? If it did what would it look like? I guess prices would go up 20%ish to cover the extra wages. It would be interesting to see what would happen with service levels without the extra incentive. Although in Europe most places it’s not customary to tip, but I have noticed that the service is a lot slower. That could also be because they tend not to be as “in a hurry” as we seem to be here in the US.

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The full article is copied below. Let us know your thoughts.

KCBS News Anchor Stan Bunger offers his unique analysis of an American dining tradition.

When San Francisco Chronicle restaurant critic Michael Bauer speaks, people tend to listen. I’m thrilled to see Bauer call for an end to the practice of tipping in restaurants, but I wonder if his call will be heard by the right people.

Bauer suggests the end is near for the archaic (and some might argue, barbaric) system of compensating restaurant employees based on the whims of customers. He cites recent policy changes at places like Bar Agricole and Trou Normand in San Francisco and Camino in Oakland. They’ve raised their prices to include a service charge. Other restaurants are tacking on a per-person service fee.

All well and good, but the places Bauer cites and reviews tend to represent the tip of the restaurant iceberg. Many more meals are consumed (and money spent) at places farther down the food chain from the establishments he reviews.

The restaurant business is a notoriously tough one where low profit margins are the rule. Analysts assume labor makes up about a third of the average restaurant’s costs–but remember, the restaurant owner has taken a big piece of his labor cost “off the books,” relying on customers to compensate the staff with tips.

There’s a popular perception that servers are fairly compensated because good service equals a good tip. Ask anyone who’s spent any time in the business, especially at the places below Michael Bauer’s radar, and they’ll tell you the truth: it’s a crapshoot. Friendly, efficient service might produce a sweet tip…or not. It’s completely up to the customer.

It’s bizarre, when you think about it. It’s like letting moviegoers decide how to much to pay AFTER they’ve seen the movie or letting you wear a new suit for a day before you decide what you’ll pay for it.

We’re all a part of this, and of course, plenty of other cultures play it very differently. We seem to want good service but don’t value it enough to accept that it’s worth paying for. I don’t know about you, but I’ve always felt uncomfortable with the dynamic in which I hold the pursestrings and the waitress tries to curry my favor for a tip. It’s like tossing coins off the cruise ship to the natives, isn’t it?

I hope Bauer is right and the trend of building the price of service into the price of a meal spreads, but I’m skeptical. There are just too many indications that the restaurant industry typically views its service staff as expendable. Take the “auto-gratuity” situation: once the IRS started classifying things like the “18% service charge for parties of six or more” as subject to payroll tax withholding, many big chains simply ended the practice. Result: big parties, big tabs, small tips.

With any luck, places that don’t make Michael Bauer’s Top 100 list will get on board and price a meal in a way that fairly compensates all the people who create and deliver it. But I’m not holding my breath.

How Americans Are Spending Their ‘Reverse Tax’

I read an interesting article today from a financial newsletter that I subscribe to, Money and Markets. In the article, Jon Markman, looks at what Americans are doing with the extra money that we are saving at the pump.

Saving it or spending it? In typical American fashion we are spending it, but where? Of the $24.4 billion saved most of it has been spent on cars and restaurants/bars. Restaurants are 2nd to cars by only 1/100 of a percent, up over 8% vs a year ago. Restaurant stocks are up over 25% in the last 4 months.

Here’s the full article:

Economists and investors are dying to know what consumers are doing with their gasoline savings windfall. Will they save it, invest it, or upgrade their mobile phones?

To answer this question, the data analysts at Bespoke Investment Group first determined how much the windfall is. I won’t bore you with all their calculations but basically they determined a total consumption figure then divided by the monthly gasoline retail price and compared last year’s level with this year’s level.

They figure that roughly $24.4 billion has been saved at the pump since gasoline prices have been falling. And of course that does not include the “perceived” savings to the collective consumer psychology, as studies have shown that there is a multiplier effect in which a single dollar saved ends up feeling like several dollars earned. This is why consumer confidence figures soar disproportionately from a decline in gas prices.

Anyway, of that $24.4 billion saved, Bespoke figures that $21 billion has piled up since October alone, when the gasoline price plunge really got rolling.

So what have you Americans been doing with your “reverse tax”? Contributing to charities? Saving and investing for the future? No —

You, my fellow Americans, have been eating more. And drinking more. And buying more gas guzzlers. Congratulations, you are blowing your windfall.

According to Bespoke data, which comes from government sources, spending on cars and restaurants are up 8 percent vs. a year ago, and 4 percent more on sports and hobbies. So basically you are spending your extra $24.8 billion on burgers and fries, new wheels, and having fun.

The stock group that has benefited most are restaurants, with Wendy’s(WEN), PolloLoco (LOCO), Sonic (SONC), Jack in the Box (JACK) andCosi (COSI) performing best this year, up 10 percent to 76 percent. As a group, restaurants have surged 25.6 percent over the past four months. That is a huge gain in a short period, so you don’t want to pile in now. But it’s a good concept to put in your back pocket for the next time there is a consumer spending windfall of any kind.

FICA Tip Credit Important for Restaurants

Tax season is upon us and we found this tidbit of information in our Missouri Restaurant Association weekly newsletter. Thought it might be useful so we figured we would share. Of course it’s best to consult with your accountant and/or a tax professional before moving forward with any new filings, but this one seems like it can pay off under the right circumstances.

As the filing season begins for tax returns of 2014 income, MRA reminds restaurants to take advantage of the FICA Tip Credit.  Available only to owners of food and beverage establishments, it can save a restaurant owner thousands of dollars per year.  The credit, which is a dollar-for-dollar reduction in federal income tax expense,  is requested on Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips) which is filed with the restaurant’s federal income tax return.

Authorized by Internal Revenue Code Section 45B, the FICA Tip Credit equals the amount of the employer’s portion of social security taxes (currently 7.65%) on tip income not used to bring the employee’s wages up to the minimum wage.  For purposes of calculating this credit, the minimum wage is capped at $5.15 per hour – the rate in effect at January 1, 2007.

A simplified example can serve to illustrate the credit calculation.  Sally, a server for a restaurant, works 40 hours in a certain week and earns $12.00 per hour in tips.  Her employer pays her a cash wage of $3.825 per hour (50% of the state’s minimum wage) as required by Missouri law.  Sally’s total tip income for the week is $480.00 (40 hours X $12 per hour).  Tips required to bring her wages up to the minimum is $53.00 (($5.15 – $3.825) X 40 hours).  Tip income in excess of the amount required to bring her wages up to the minimum wage is $427.00 ($480.00 – $53.00).  The FICA Tip Credit available to her employer for this week is $32.67 ($427.00 X  7.65%). Assuming Sally works 50 weeks during the year, the annual FICA Tip Credit would equal $1,633.50.

Now, multiply this credit of $1,633.50 by the number of servers in the restaurant and one can readily see the importance of the FICA Tip Credit.  All of the details related to the credit are beyond the scope of what can be included in an article of this length.  MRA encourages its members to seek the guidance of a competent income tax advisor.

Hopefully this was helpful and feel free to share with others.

For restaurants, DNC becomes a question of staying open or renting out spaces

Here’s an interesting article from the Philadelphia Business Journal about the effects of a convention on a city. Especially a very large , citywide convention such as the DNC.

The issue becomes booking large private parties that essentially close down your restaurant to your normal clientele and regulars. Does the extra money outweigh the potential negative consequences from the regular local crowd? Have you ever had to deal with this type of situation? Which route did you choose?

I guess there are some options to try to accommodate both scenarios such as reserving your restaurant for private parties on some, but not all of the days the convention is in town.  Or hold a customer appreciation day/days/week leading up to the convention where you could thank your regulars for their loyalty and ask for their understanding during the convention.

I suppose a lot depends on where you are as a business at the time the convention comes to town. If you have been struggling a little bit this could be the shot in the arm you need to get some extra cash in the door. But if you are established and have a great regular crowd you might be better served not renting out to private parties and be open for business as usual.

It would be interesting to hear some real life stories so please share in the comments. Click here to read the full article.

Restaurant workers express optimism about the industry

I came across a great article on fastcasual.com talking about optimism from restaurant employees about the current and future state of the industry. This is of course related to the 2015 industry forecast by the National Restaurant Association that we posted about a few weeks ago. The article cites an infographic from the National Restaurant Association Educational Foundation. Here are some of the highlights:

  • 9 out of 10 restaurant employees say it’s a great industry to land your first job
  • Very positive beliefs that people of all backgrounds can open a business in this industry
  • 7 of 10 say the restaurant industry provides good long term opportunities
  • 9 of 10 owner operators say they will work in the industry until retirement

Click here to read the full article on Fast Casual.

What to do when a health inspector visits

I know, enough with the health inspector posts, we get it. I promise this is the last one for a while, but I happened to stumble upon these 3 articles on restaurant.org and thought it was great info so figured I would share. This last one discusses what to do while the inspector is at your location:

Don’t panic when an inspector arrives. Think of the visit as a learning opportunity that will benefit your operation by making it as safe as possible.

To make the inspection a positive experience, follow these guidelines:

  • Ask to see the inspector’s credentials if the inspector doesn’t volunteer his/her credentials first. In some cases, people have tried to pass themselves off as health officials. If you’re unsure of the person’s credentials, call the local health department or the inspector’s supervisor for verification. Ask whether the purpose of the visit is a regular inspection or due to a customer complaint. Train your employees to check identification before allowing anyone to enter the back of your operation.
  • Don’t refuse an inspection. In doing so, the health inspector likely will obtain an inspection warrant, which allows him/her to inspect your establishment without your consent.
  • Tag along with the inspector and take notes of any violations he or she finds. This gives you the chance to correct simple problems on the spot, and the health inspector will note your willingness to fix problems. Be prepared to provide any information or records that the inspector needs and answer the inspector’s questions truthfully.
  • Refrain from offering any food or any other item that can be misconstrued as an attempt to influence the inspector’s findings.
  • Sign the inspector’s report after the inspection. Signing it doesn’t mean that you agree to the findings; it only means that you received a copy of the report.
  • Ask the inspector to explain his findings to your staff, or share the inspection results with your employees and offer suggestions on areas that need improvement.

Apparently bribery will get you nowhere so steer clear from offering food and/or drinks to the inspector. I like asking for credentials and asking them to explain their findings at the end. Probably not usually very convenient to have the full staff available for the explanation, but at least the manager on duty should get the scoop.

7 tips for working with health inspectors

As a follow up to yesterday’s post “9 tips to prepare for a health inspection” we have another article from restaurant.org on working with health inspectors.

Restaurant operators and health inspectors aren’t adversaries. Think of a food inspector as a partner as you work together to achieve shared goals of preventing foodborne illness and protecting guests’ health.

Here are seven tips to build a productive relationship with health inspectors:

  • Be polite and professional. Encourage managers encourage to ask the inspector questions. They should feel free to dispute any violations they feel are inaccurate, but they should raise disputes in a professional, non-confrontational way. When you disagree with an inspector’s assessment, ask how he or she arrived at that decision, and offer your interpretation of the regulations. The discussion often can help you arrive at a solution.
  • Correct mistakes as soon as possible. Repeated violations will give the inspector the sense their inspections aren’t being taken seriously, which could lead to lower inspection scores. Make managers aware of violations so they can correct them.
  • Demonstrate progress. In the event your restaurant has a less-than-satisfactory result from an inspection, it’s important to show that you have a plan to address the issue. Show the inspector your corrective action plan and ask him or her to add it to your restaurant’s file. Being able to demonstrate that you took action will help offset the negative impact of past results.
  • Be proactive.  Seek opportunities to work with inspectors outside the confines of routine inspections. For example, if your state or county has a new food safety regulation or recently updated its food code, consider contacting your inspector to ask about the changes and how they will impact your restaurant.
  • Get involved. Serving on state and local task forces or advisory committees will provide you with opportunities to work with inspectors and gain a greater understanding of their work. Getting to know inspectors personally and working toward the common goal of protecting consumers will help build trust in you and your restaurant.
  • Share your food safety plans.  Inspectors often are interested in the steps you’re taking to comply with new food safety rules and regulations. What they learn will help them advise other restaurants they work with. Share your plans with them, and ask for feedback.
  • Seek inspectors’ advice.  Are you launching a new product or testing a new process? Ask your health inspector how it will be impacted by the food code. They might have suggestions that will help you improve your business.

Be prepared for your inspection, learn what to do when a health inspector visits and ensure appropriate follow-up from an inspection.

Like any audit the health inspectors love consistency and documented processes. This shows a due care approach to restaurant and food safety. We talked about due diligence and due care last week, click here for that post.

Aside from being polite and accommodating to the health inspector, being organized goes a long way as well. Being able to easily present line checks and temp logs for a specific time period or self inspection reports for the past month can wow an inspector. This shows organization and consistency in daily execution which in turn results in better and safer operating restaurants.

Nine tips to prepare for a health inspection

Here’s some great information from www.restaurant.org on how to be proactive and manage health inspections properly.

The proper strategy for a successful health inspection is to be ready for an inspection at any time. To stay ahead of the game, managers can conduct weekly, in-house inspections before health inspector arrives.

  • Use the same form ̶ or a similar form ̶ that your health department uses, and put yourself in the health inspector’s place. Check with your local health department on what regulations and forms are being used.
  • Walk into your establishment from the outside to get an outsider’s impression.
  • Brief your kitchen staff to review any problems post-inspection. This will help convey the importance of food safety to staff members.
  • Ensure all staff are on the same page. If your staff includes employees for whom English is a second language, have the findings translated so everyone understands how important food safety is to the success of your restaurant. Consider hiring a professional translator. A bilingual staff member might use terms or phrases that might not make sense or could be misinterpreted in other dialects.
  • Know your priorities. Your self-inspection priorities for kitchen employees should include: food time and temperatures, personal hygiene (including hand washing) and cross contamination. Temperature guidelines include checking the temperature of products when they arrive, when they are stored and when they are served.
  • Reinforce the importance of hand washing. Post signs at all kitchen sinks and in employee restrooms.
  • Train your managers to ensure they are up-to-date on the latest food-safety techniques. Restaurant employees can use the National Restaurant Association Educational Foundation’s ServSafe food-safety training programs.
  • Review your local health code for any special, local requirements.
  • Get involved politically to give a restaurateur’s perspective. One opportunity could be to join your state’s health-code-revision committee. Involve senior staff on such committees as well.

Now that you have prepared for the inspection, you need to know what to do when the health inspector arrives. Be warned that inspections usually arrive unannounced, so you’ll want to be ready on any occasion, even during rush hours.

A few of the tips recommend self inspections. County health inspections are no different than any other test really. You need to prepare/study for them so that you can score the highest grade possible. Just like the SATs or ACTs you would take practice exams to get a feel for the real exam. Get into the habit of self inspections and mimic the way your local health inspector will perform the inspection. By doing this regularly you will drive the desired behavior into the culture of your restaurant and be prepared at any time.

Due Diligence and Due Care in the Restaurant Business

Due Diligence and Due Care are words  generally associated with investing, contracts, and lately network security.  In my last position working in custom application development and  cyber security those terms were defined as:

Due Diligence: Identifying threats and risks.
Due Care: Acting upon identified threats to mitigate risks.
I believe that the hospitality industry better adopt Due Diligence and Due Care as management concepts that we fully embrace and implement into our business processes.
In the context of restaurant management, I look at Due Diligence as doing what it takes to serve safe food in a safe environment.  I didn’t say delicious food I said safe food.  Meaning that we use HACCP principles to ensure that the food products that we are serving have been delivered, stored, and prepared safely.
Most restaurants today are, or should be, conducting daily inspections of their facilities paying attention for critical food safety violations.  Making sure food is stored safely, chemicals are stored away from food, temperature discipline is maintained both in cooling and heating.  We aren’t introducing foreign contaminants into the food preparation areas.
By following best practices and inspecting daily, we are performing our Due Diligence in providing safe food for our customers.  Due Diligence is only half of the battle, Due Care is the other half.
Due Care procedures are the processes that you have in place for when you identify an issue.  The key to Due Care is consistent and documented application of the process.
You may be familiar with the phrase “It’s not the crime, it’s the cover-up” that gets you into trouble.  That is especially true when you are doing your Due Diligence, conducting a pre-shift inspection, and you identify an issue but then you don’t correct the issue safely.
An example might be that you fill out a temperature log for a walk-in refrigerator, and you record a 65-degree temperature.  The person completing the temperature log doesn’t do anything to fix the issue, they just serve the food and they get a lot of people sick.
We as a nation are very intolerant of companies that had enough forethought to identify a critical area on an inspection but then not have a plan to fix the issue when they identified it.  We find that unacceptable, and for good reason, you wouldn’t want to fly in a plane where the pilot knew it was missing a wing but decided to take-off.
In the above example, we would hold the company responsible for, not training their inspector well enough to know that a 65-degree walk-in is very bad.  We would also hold them responsible for, not having a well-documented procedure to deal with the issue.
Look at your real-world experience, we for the most part understand when people make mistakes or accidents happen.  We get furious and litigious when mistakes are made and the people responsible are clueless when they should have known better.  We get even with businesses that profit while their customers get hurt.
As hospitality professionals, we have to make sure that our organizations, size doesn’t matter, have well documented Due Diligence and Due care processes in place.  More importantly we have to train, consistently follow, and document those processes in their application.  It is when we consistently apply our processes that we have a chance of protecting our brand and our businesses when we make a mistake.
My name is Tommy Yionoulis, and I’m a restaurant guy and a software guy.  I’m one of the founders of OpsAnalitica; you can learn more about our company at www.opsanalitica.com.
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