My kids hate going to dinner with me. I repeatedly ask the same question to the people waiting on us. I think it’s a great question, even though the answers are consistent. The question is, “What’s the biggest expense in any restaurant?
I’ve received many different answers over the years from people taking my order:
- Furniture and fixtures
- Food
- The building
- People
That’s the typical core four of the answers I get. The staff behind the registers at QSRs provide similar answers.
Have you figured out the answer to a restaurant’s biggest expense?
A Restaurant’s Biggest Expense
Before I answer the question, look at the picture below.
What do you notice? I see just one person and lots of empty seats. And that’s the biggest cost of a restaurant–the empty seat.
“Wait a minute,” you say. “That’s a trick question.”
Is it? Why?
Consider the following financial statement presentation of a QSR:
I need to come clean. The empty seat is not a restaurant’s biggest expense. But the numbers can be staggeringly high throughout twelve months.
The Value of Empty Seat Thinking
I’ve reviewed many restaurant P&Ls during the past twenty-five years and never seen a line item for the empty seat. That’s partly because accountants prefer showing variances between a budget and actual performance. That works, too. But I still like to see a value for empty seats daily, weekly, monthly, quarterly, and annually based on tables and normal table turnover.
Once we have that number, there are a few actions we can focus on:
- Enhanced marketing and advertising efforts.
- Improved staff education about the empty seat and how they play a role in getting butts in seats (brainstorming is key).
- A more significant push on corporate sales and events.
I’m assuming metrics reporting is improving for restaurant owners and managers. Improvement will be enhanced once all team members can see these numbers. Educate, educate, educate. Everyone owns marketing, even if it’s in a small role. That’s the primary key to filling the empty seat.
A Tip of The Cap to This Industry
I was a finance VP at Orscheln Industries, based in Moberly, MO, early in my career. One of my jobs was to oversee the financial performance of their small $40 million real estate portfolio (my boss joked that the portfolio was built from petty cash).
When I looked at the real estate company’s financials for the first time, they made no sense. If I couldn’t understand them, how could those up the food chain make heads or tails of the numbers?
One of my first actions was to revamp the reporting from the ground up. I wanted to see above-the-fold reporting on every property, showing me and my readers the occupancy rates. This led to GRP reporting before net realizable revenue.
A few years later, I worked with my first multi-tenant real estate client. My thinking going back to my Oscheln days was validated. The first line item on every property P&L in their complex reporting was Gross Revenue Potential.
The real estate industry reporting tapestry has influenced my thinking in other business sectors, such as restaurants, and it’s easily applied in contract food service. Accordingly, I’m tipping my cap to the real estate industry for this GRP reporting and continuous improvement construct.
Appendix – Calculating Potential
In the video, I reported GRP in one of the income statements. GRP stands for Gross Revenue Potential. Regardless of industry type, I’d like to see this number on every company’s P&L.
But what is potential? How is it calculated? How does it differ from an owner’s or manager’s budget?
There is no perfect answer; it is just a reasonably educated guess. The number is not the same as a budgeted number or target. Instead, the potential is based on table count and a reasonable turnover rate per time of day. The GRP is contextual. A Subway at a busy intersection in a college town has a higher GRP than a location in a small community in a low-traffic area.
Let’s start with a simple dinner example where most customers eat inside–takeout is minimal.
- Table count: 20
- Seats per table: 4
- Bar seats: 20
- Total Seats: (40 * 4) + 20 = 100
- Reasonable turnover for dinner: 2.5x
- Average ticket/cover per seat: $45.00
- GRP = 100 * 2.5 * $45.00 = $11,250
Let’s assume we had only 200 paying patrons; the average ticket was $41.00. The evening’s revenue was only $8,200, or 73% of GRP.
What do you do if you are the General Manager for this location? Do you take no ownership of missing potential, or do you work with your social media manager on ideas to improve butts in seats? What will be your message to the team? How will you get them to help improve traffic count?
Since the COVID shutdown, I have gotten many questions about calculating GRP with high takeout counts. There are two ways to modify the math:
- Use the method above, and use historical norms on takeouts based on seasonality.
- If carryouts are always higher (such as Papa John’s), then GRP will be based on the typical counts based on history.