How to Reduce Restaurant Expenses & Stay Profitable During COVID-19

How to Reduce Restaurant Expenses & Stay Profitable During COVID-19
Chris de Jong

By Chris de Jong

Table of Contents

    COVID-19’s impact on restaurants around the world has been ramping up thanks to necessary social distancing measures—particularly in North America, where 4-5 meals are eaten away from home every week—and restaurateurs are feeling the squeeze on their bottom line.

    By now, many states and provinces have either mandated reductions in seating or the closure of dining areas, with most restaurants turning to takeout and delivery. Comparing 7shifts’ internal data of 10,000+ restaurants, restaurants are seeing an average weekly decrease in sales of 50% across the board in North America.
    So here’s the question a lot of restaurateurs are asking: how do you start drastically cutting expenses to give your business the best chance of recovery?

    That is what we are going to answer in this blog—providing you with steps you can take right now to reduce your costs and boost your revenue to keep your restaurant profitable during COVID-19.

    Psst, even outside of these extraordinary times, this information is also valuable for any restaurateurs that are looking to optimize their operations and get a handle on what they can and cannot control in order to reduce monthly expenses in their restaurant.

    Please note thought: this article is meant to provide information only and is not a substitute for any professional advice you may receive from an accountant, lawyer, HR, or other professional.

    How to drastically reduce expenses – 3 step framework

    Reducing monthly expenses starts with understanding what your expenses are today. Download all the data from your restaurant POS or back-office management platform to get a sense of how your restaurant is operating today. This simple act is usually the easiest thing to do to quickly identify anomalies and things that you can cut with minimal impact.

    For example, you might notice that you’re spending an inordinate amount on napkins. Simply switching to a cheaper supplier is an easy win for reducing monthly expenses and the first step in ensuring your restaurant is on solid financial footing.

    Just make sure that any cutting or substituting is tracked and see what the long-term impact is! Oftentimes, restaurants make changes in how they operate but may not consider the long-term impact on customers until it shows up in an unflattering Yelp! review.

    Step one: evaluate and reduce costs on your main business inputs

    Once you have taken care of all the immediate, obvious cost cutting measures, the first step is to start evaluating your primary restaurant costs.

    Here’s a quick refresher:

    • Labor
    • Food
    • Utilities
    • Equipment and supplies
    • POS systems
    Restaurant cost breakdown

    These five categories typically make up nearly 100% of your operating costs, and are the cost “levers” you can pull or manipulate as a business in order to drastically reduce expenses. Looking at each of them individually, here are simple ways to reduce your expenses for each cost category:

    Labor

    Your team is the backbone of your restaurant and your greatest asset, but is also typically your greatest cost. Evaluate your restaurant scheduling practices to see if you are consistently over-budgeting on labor needs based on your sales. If you find that your labor cost percentage is above where it needs to be, a simple cost-savings measure is to reduce your labor costs to a level that provides the service your customers expect but does not lead to ideal team members.

    During the COVID-19 situation, evaluate how many BOH staff you need to keep up with delivery and takeout demand. If you can cut back on kitchen hands or reduce your delivery hours to the busiest times, these steps can help lower your labor costs.

    Average labor cost percentages

    Food

    The food you make is the lifeblood of your operation, but given that it is mostly perishable, it’s easy to reduce costs just by paying closer attention to inventory and calculating the value of what you have on hand. Once you understand this more intimately you can use ingredients you already have on-hand to do things like:

    • Create more cost-effective menu items
    • Substitute one ingredient for another, less costly one
    • Definitely what you don’t need to reorder immediately to conserve cash

    If your business is focused on take-out and delivery now, look at changing up your menu to offer more combo dishes. Sides are cheaper than entrees, so the more sides you can peddle through your delivery channels, the more profit you’ll get out of your delivery.

    Pro tip: Look at implementing an inventory tracking system like Xtra Chef—it might be a new cost, but it will pay for itself in better food costing.

    Utilities

    At first glance, utilities might not seem like something you can control, but you have a lot of options to influence the amount you pay on restaurant utilities. Small actions switching to more energy-efficient bulbs, adding timers for lights, unplugging unnecessary appliances at close, and more can easily be implemented to cut incremental costs over time. You might be thinking “what about my providers?” but hold tight, we’ll get to that in an upcoming section.

    Equipment & supplies

    The equipment that makes up your restaurant typically runs into the hundreds of thousands to maintain and operate. With such large outlays, a simple cost-reducing strategy is to simply proactively ensure that they are working optimally. Services like 86Repairs can provide your restaurant with preferred rates on repair and proactive service, as the cost to your restaurant when equipment breaks is often far more than proactive maintenance.

    POS Systems

    Your point of sale is the technological heart of your restaurant and the system which is most mission-critical to your operations. However, it is often overlooked by restaurateurs as a source of optimization. The credit card processing fees you pay are an opportunity for reducing costs. Do your research on what different POS providers charge and if you think you are paying too much, reach out to your provider and work to negotiate a new, less expensive rate.

    It’s also worth it to see if any POS providers are offering deals, discounts, or temporary free service during the COVID-19 situation.

    Step two: change what you can control

    Once you have optimized the inputs that comprise the major costs in your restaurant, the next step is to look at any other costs or opportunities that you have direct control over.

    This is important as you need to prioritize making changes to things that will have the most immediate impact on your restaurants, and if you don’t have control over them, it might take too long to see results… and by then it might be too late for your business!

    The areas which you can control and what you can do about them include:

    1. Your menu – A quick option to drastically cut expenses is to create a new, limited menu. Providing customers with fewer choices can help you focus more on the dishes you can really “wow” them with and limit the number of ingredients that you need to have on-hand at any time. Plus, if you focus on your high-ticket items that are the most-profitable from your regular menu, you can maximize the profits you’re getting from delivery.
    2. Your staffing – Let’s say you need to pivot your restaurant to delivery-only. Which, let’s be honest, if an eventuality in the current climate. Under this new paradigm you would not need FOH staff and may only need a few BOH staff. If you change or restrict your staffing needs, then you will be able to reduce costs by nature of your service concept.
    3. Your prices – Last, but surely not least, are your prices. If you need to increase your profits, the quickest thing to do is raise prices. While this is a nerve racking concept to many restaurateurs, research has shown that consumers are not overly price-sensitive with a 20-25% range.

    Step three: influence what you cannot control

    Once you have optimized all of the things you can control, the last – and hardest – thing to do is start trying to influence the things you do not have direct control over.

    But I’m a restaurateur and an entrepreneur I can hear you cry! I control everything. Not so. The areas which you will be able to influence but not control are:

    1. Your rent – If you are in a situation where you are renting, it’s important to be proactive and reach out to your landlords and negotiate either a rental deferral or payment strategy. Most, if not all, landlords will be sympathetic as they will not want to have to find a new tenant in the current situation and will want to work with you to find something mutually beneficial.
    2. Your financial partners – Along with your landlord(s), the same applies to your financial partners, either your backers, banks, or lenders. In the current climate the last thing they will want is you to default on your obligations, so if you proactively reach out to them with an alternative plan, they will be all-ears. In addition, restaurants in the US can apply for emergency loans up to $2MM USD the the US Small Business Administration.
    3. Your vendors – Lastly, reach out to your vendors, from your POS provider to your friendly neighborhood labor management platform. As part of the fabric of the industry, vendors are acutely aware of the strain restaurateurs are under and may be able to provide relief, resources, or remedies to help you during a difficult time.

    Reducing costs going forward

    The three steps you can take to drastically cut your restaurants’ expenses are:

    1. Evaluate and reduce costs on your main business inputs
    2. Change what you can control in your business
    3. Influence what you cannot directly control

    Once you have enacted all the changes you want to make in your restaurant to ensure future financial success go back to the beginning and take another look at your restaurant’s operating data.

    Set a reminder for yourself to review the same data in 30 days and see what has changed. Have certain costs been reduced? Is there still more work to be done? Did you learn anything surprising? The work of cost restaurant cost reduction is never complete, but when you can learn from what works and what doesn’t you will get better at it over time. Good luck!


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    Chris de Jong
    Chris de Jong

    Hi! I'm Chris. I'm the Director of Marketing at 7shifts. I work with our talented team to help restaurateurs save time and money on scheduling.