A hospitality business makes money by turning awareness into customers, customers into revenue, and revenue into profit once cost of goods and labour come off. Rich McLeod shows how small gains in average spend, cost of goods and labour can add more than $100,000 a year for one venue.
Market awareness, conversion, number of customers, average spend, revenue, cost of goods, gross margin, labour, gross profit, then variable and fixed costs. Every conversation with your managers should start with which part of that chain you're trying to improve, and why.
On a venue doing $40,000 a week, improving sales, cost of goods and labour by 3% each lifts gross profit by about 21%. You don't need one big win. You need small, steady wins in every area.
That one question moves the focus onto what the team can control once guests are in the door.
Two team members served almost the same number of transactions, but one averaged about $2 more per sale and took $2,600 more in revenue. The team members with the highest spend per head are usually the ones giving the best service.
Your 10 most-purchased and 10 best-selling items drive most of your cost of goods. Get their buying prices, recipes, sale prices and discounts right, and a 2% drop in cost of goods is a conservative goal.
A hospitality business makes money in a predictable order. A certain number of people are aware your venue exists. Some of them convert into customers (the walk-past who reads your sandwich board and comes in, or the regular who comes back again). Those customers spend an average amount, which gives you revenue. Take out cost of goods and you have gross margin. Take out labour and you have gross profit. Then come your variable costs (cleaning supplies, consumables) and your fixed costs (rent).
Rich's point is that variable and fixed costs are fairly quick to get on top of. The part that needs constant attention is everything from the moment a customer walks in to gross profit: average spend, cost of goods and labour.
Take a venue doing $30,000 a week: 1,000 customers spending an average of $30.
That's $2,280 more gross profit every week with no extra customers, or more than $100,000 a year on about $1.5 million in turnover. It's how a venue moves from a 4-5% net profit towards 20%.
Measure average order value by team member in cafes, bars and pubs, and spend per head in restaurants. Share the numbers with your team, then find out what your top performers do differently and train it across the team.
The difference came down to one question: "What entrée can I get you to start with?" instead of "What can I get you?"
See what a 1% improvement in spend, cost of goods and labour would do for your venue.
A restaurant, cafe, bar or pub makes money in a chain: people become aware of the venue, some convert into customers, those customers spend an average amount to create revenue, and then cost of goods and labour come off to leave gross profit. Variable costs (like cleaning supplies) and fixed costs (like rent) come off after that. The stretch between customers walking in and gross profit, which covers average spend, cost of goods and labour, is where constant attention pays off.
Improve three things at once: average spend, cost of goods and labour. For a venue doing $30,000 a week with 1,000 customers spending $30 each, lifting average spend by $2 takes revenue to $32,000. Cutting cost of goods from 32% to 30% and labour from 34% to 31% then grows gross profit from $10,200 to $12,480 a week. That is about $2,280 more a week, or over $100,000 a year on roughly $1.5 million in turnover, with exactly the same customers.
Measure average order value by team member in cafes, bars and pubs, and spend per head in restaurants, then share the numbers with your team. In one counter-service venue, two staff served almost identical numbers of transactions (1,117 and 1,130), but one averaged about $2 more per sale and brought in $13,600 versus $11,000 in revenue. Find out what your top performers do differently and train it across the team. Often it is small: asking "What entrée can I get you to start with?" instead of "What can I get you?"
Not necessarily. Set an overall cost of goods target and a ceiling every item has to stay under, but expect a mix. A higher-cost dish such as a lamb shoulder for two can be worth it if it lifts spend per head, and low-cost items like duck fat potato skins at 16% may be your biggest money makers. The risk of one flat target is that every item drifts to just under it, so nobody gets creative about high-margin dishes.
Know your roster cost in dollars before the week starts, then compare what you actually spent with what you rostered. Track it as a percentage of sales, and use hours in the kitchen, where they land better than dollars or percentages. Most importantly, overlay your customer demand on your roster so you're staffed up when guests are in and not overstaffed when they aren't. Too many people on a quiet shift can actually lower performance.
Rich: How do we make a profit in hospitality? We have this matrix on the right-hand side. I was introduced to the bulk of this concept several years into my hospitality experience, and until then we were literally running around chasing our tail. It wasn't just this that made us act in a more systemised, process-driven way, but it's what I've always come back to with my management teams, when I'm bringing someone along, or when we're having strategic or tactical discussions. What part of the business are we trying to improve? Why is it a priority? And will it lead us to being more profitable overall?
It starts up top with market awareness. At the moment, a certain number of people in your town, your wider region, New Zealand and the world are aware your business exists. That is your awareness. Sometimes you want to grow market awareness, and sometimes you want to grow conversion.
The way I like to describe it: a certain amount of foot traffic walks past your front door today, and they're aware you exist. Imagine your only conversion tool is the sandwich board you put out each day. A poorly written message with illegible handwriting, and no time taken over it, will lead very few of those people to take an interest, look at your menu and come in to become customers. A beautifully done sign with enticing messaging, maybe an enticing offer, should increase that conversion rate.
That's how I used to describe it to my team. There's a big pond of people who are aware of you, and the better job you do in certain areas, the more of them convert. I'm not suggesting awareness is easy to measure, or that you should even try. But the number of customers who turn up is not an accident. It's defined by how many people are aware of you and how many convert to coming in today.
Rich: Conversion also increases when customers repeat and come back more often. A repeat customer is the easiest conversion metric of all.
Once we have our number of customers each day, week or month, we don't just end up with a certain amount of revenue. If those customers don't spend much, we have less revenue. If we have the same number of customers but they all spend more because we're delivering beautiful hospitality, and we've spent time on how our menu looks, feels and is balanced, how our team interacts, and the points in the customer journey where we invite them to spend more, we end up with more revenue. We'll go into specific details on the basic maths shortly, and I'll give you a link to grab these slides at the end, so don't feel you have to make too many notes.
Once we have revenue, we have to pay for the things we serve. If we pour a glass of wine or prepare a burger, there's a cost of goods, which comes out of revenue and gives us our gross margin. Then we have all our wonderful team members, from the glassy clearing glasses, to the team washing dishes, to the head chef or exec chef, to bookkeeping and finance, to operations managers, depending on the size of your group or venue. They deserve to be fairly paid for their hard work, so that comes off gross margin and gets us to gross profit.
Gross profit is where we're focusing, inside this dotted line today. Those of you who are Loaded customers will know this is our world: from the time customers come in to the time they leave, how do we help make you more profitable?
Rich: After gross profit you have variable costs. A super busy venue uses more cleaning supplies than a quiet one, and in a quiet month you'll use less toilet paper than in a busy one. Then you have fixed costs. Around 90% of hospitality venues operate on a fixed rental, so the landlord doesn't care whether you had a busy or quiet month; you pay the same rent. Variable and fixed costs aren't unimportant, but they're quicker to get on top of. Maybe "easy" is too strong, but you can get on top of them pretty quickly.
The area that needs constant attention is everything between your customers and gross profit. In my experience, equal focus on each of these areas is what gives you constantly improving profitability.
If you jump on our website under Resources, you'll find a net profit calculator. You put in your sales, current cost of goods and salaries and wages percentage, for a week or a month, whatever you have accurate data for. It shows the overall increase in net profit if you make 1% improvements in sales, cost of goods, salaries and wages, operating expenses and non-operating expenses. For today I've set operating and non-operating expenses to $1, because I want to show the effect of increasing average spend, reducing cost of goods and reducing salaries and wages.
For a business doing $40,000 a week, if we make 3% improvements to sales, cost of goods, and salaries and wages, we increase overall gross profit by 21%. Small incremental improvements in each area make a huge improvement to overall profitability.
Rich: How does that play out? Take a slightly lower revenue level, a business doing $30,000 a week. Pretty decent size; some of you will be doing more, some less. Here's a mental model that's great to go through with your managers. If we had exactly the same number of customers next week as this week, how would we be more profitable? What would we actually do?
I'm not for a moment suggesting your business shouldn't want more customers next week. But for your management team, their real job once customers are in the door is to make them as happy as possible so they're likely to return, and to turn that number of customers into the maximum profitability for your business.
Rich: Starting at average spend: if we had 1,000 customers last week and they spent $30 on average, that's $30,000 revenue. If we increase average spend by $2 per customer, with no extra customers, revenue goes from $30,000 to $32,000. How do we do that? In a café, focus on average order value by team member. In a restaurant, focus on customer spend per head. In a bar or pub, again order value by team member.
This is an example from one of our order-at-the-counter venues, a QSR, from about a year ago. Look at the two people at the bottom, Chloe and Yula. Over this period they served almost identical numbers of transactions, 1,117 versus 1,130. But Yula's average spend per transaction was $2 higher, so she generated $13,600 in revenue versus Chloe's $11,000. If we closed that gap by 50 to 70%, we'd almost reach our $2,000 revenue increase just by improving one staff member who is clearly working just as hard as Yula, given the number of transactions she's serving.
The first step is always sharing this data back with the team. It's amazing how much difference it makes just by making them aware of it. Then see what your top performers do differently from your bottom performers. Don't assume the gap can't be closed. If you don't currently train your team on the journey from the moment a customer arrives to the moment they leave, there will be things Yula does that are really worth noting and spreading across the team through training and discussion.
When we shared this data with our own team, we always found the people with the highest average order value were also delivering the most beautiful hospitality. There's a direct correlation between looking after people, delivering great hospitality, bringing the energy, and how much people spend with you. There's also a technical piece: asking the right questions in the right way at the right time. But it's great, because beautifully delivered hospitality ends up being the most profitable as well. Bringing data into it doesn't make it painful. Sophie, I feel like you've got a question face on.
Sophie: No, it's just a point that really resonated. I had very similar conversations with a management team in my last operations role, speaking to two performers like this and trying to work out what the difference was in how they provided hospitality. They both gave excellent experiences and had really high secret-shopper scores. The difference was tiny. Yula would go to a table, say hello, and ask, "What entrée can I get you to start with?", assuming they'd want one, whereas Chloe would say, "What can I get you?" It was so small, but it took the experience up a level and assumed someone would order more than one course. It really helped average spend.
Rich: Exactly. If you back your product, you want people enjoying as much of it as possible, and the way the team presents it has an impact on average spend.
Rich: So without any extra customers, we've taken revenue from $30,000 to $32,000. It's so common for a business to increase revenue and none of it reaches the bottom line. We want to take that and a little bit more, so we also manage cost of goods. We'll make a 2% improvement, reducing cost of goods from 32% to 30%, which lets us take the whole $2,000 revenue increase down to gross margin. Where do we focus? If you already use stock in Loaded you may be doing some of these, but if not, there are four things we know will get you at least a 2% decrease.
1. Know your top 10 purchases. Right now there are ten things you order the most of each week by value. Your business might order 80 food items and 50 beverage items, or 250 food and 500 beverage; it doesn't matter. Some high-value items you buy a heap of. If you're a burger joint, it's buns and beef patties, or chicken breast and thigh. You don't need to know the price of flour; it has much less effect on profitability than the price of a patty or a bun. If you're a steakhouse and your biggest seller is ribeye, you need the price of ribeye absolutely dialled, tendered across three suppliers. We have a tendering module where you track what you agreed to pay against what you're actually being charged. Those top 10 items alone will probably get you 2% if you're not doing anything in that space now.
2. Stocktake your top 10 sellers. Stocktaking freaks everyone in hospitality out, especially with 500 or 300 items rather than 80 or 50. Going around counting everything is a horrible thought, and very few people enjoy it. If you have one on your team, treat them like gold. But there are about 10 items you sell the most of, probably similar to the 10 you buy the most of, just packaged differently by the time you sell them. If our recipe and the POS say we should go through 500 burger patties this week but we actually went through 600, finding out why is your opportunity to increase profit. Just five beverage items and five food items is a huge opportunity if you're doing nothing now, and it's far from the time sink of counting the whole venue.
3. Price your top 10 sellers properly. Hospitality is generally pretty good at this because it's the easiest and fastest lever; we can change a sale price quickly. But when people come on board with Stock in Loaded, they usually find five or six of their top 10 have been priced thoughtfully, while three or four haven't been reviewed or are sitting under current market prices. Every sale is $1 or $2 low, and the customer would be happy to pay a couple of dollars more. Sell 200 or 300 of that item a week and that's another $500 or $600 in profit. It's the collective effect of focusing on each of these that produces the profitability increase.
4. Understand your discounting. This goes from the best understood and best maintained, our sale price, to the least understood: how much effect discounting has on your margins and overall profitability. This isn't an argument for or against discounting. For some business models it's an important part of the offer; for others it should be nowhere near. But almost every business has some form of it, whether staff meals, staff discounts, a loyalty card, or anything that isn't selling at full price. You need to understand its effect on margin so you can decide whether the revenue increase you get from discounts is worth it against the profitability you're achieving.
If you're set up on Stock in Loaded, you'll be used to this report, and this is where all the money is. This is the cost of goods products report. If I have a good recipe for each of my top 10 sellers, I've negotiated the purchasing of the top 10 purchased items that go into them, and I understand the discounts on each and their effect on margin, then 2% is the very low end of what's achievable. If you haven't seen this report, in a snapshot you can see the margin being achieved on each item as it sells, and the overall margin.
When people first come on, they might have two or three items with really good margins, while the other six or seven are so far out that they don't believe Loaded is telling them the truth. Then you work through it systematically and discover that the recipe no longer reflects how you serve the dish, that it was written on the back of a napkin or in a spreadsheet, that there have been 15 price changes in the six weeks since it was accurate, or that the chef priced the menu on full price without taking discounts into account. All of this is happening in your business right now, and if you're not aware of it, it's very hard to improve.
Even if you use stock, AI invoice processing is a fast way to track supplier price changes. As you receive an invoice, it tells you if the price has changed since you last received it, and the effect on the top three recipes it affects, automatically. On a weekly basis we pick up about 5,000 price increases, and I can only imagine 4,800 of them would have been missed without it.
If we're starting from scratch, maybe one or two of these you're already doing well and one or two you need to focus on. Pick and choose what's relevant to you.
Sophie: Before you move on to labour, we've had a question from Jason. Cost of goods percentage here shows between 14 and 31%. Should all items aim for roughly the same cost of goods percentage, or does it depend on the recipe?
Rich: You want an overall cost of goods target for your business. I always found it simpler with chefs and my management team to say that every item has to be under X percent. But say the lamb shoulder is above 30%. At least if I can see that, I can have a discussion with the chef. If they say, "That's helping because it lifts average spend per head, a lamb shoulder for two sells at $80 or $90," that's an argument I'm prepared to listen to. If margins are just haphazard and all over the show, that's very different. You'll always have some high-margin and some lower-margin items, and I found it easiest to set a target that everything needed to be at least below.
The one risk is that people set everything at 26 or 27. If my target is 30, everything ends up in the 27 to 29% range, and nobody gets creative about achieving really high-margin items that might be very profitable. Those duck fat potato skins running at 16% will probably be one of the biggest money makers for this business. Hopefully that helps, Jason.
Rich: Now labour. If our labour cost blows out, say we put a whole lot more people on to get that increase in average spend, or have people working longer hours, or reduce the sections our floor team work and spend a lot more on labour, we'll be less profitable. We don't want to increase revenue and keep labour the same next week; we want to increase revenue and find ways to reduce labour. We all have opportunities to do it, and if we do, we continue to take that $2,000, and a little bit more, all the way to the bottom line. If we decrease labour cost from 34% to 31%, gross profit grows from $10,200 to $12,480. Where do we focus?
1. Know the cost of your roster in dollars. I don't think you'd let a manager spend $3,000 or $4,000 on a capital item without at least talking to you, and unless you're under real time pressure you'd probably get a couple of prices. But sometimes people roster without knowing how much they're going to spend next week. It might be $3,000 or $5,000, and that's the difference between 34% and 31% before we even start.
2. Compare actual to rostered cost as the day happens. What did we actually spend versus what we rostered to spend? That's management performance. If a shift manager constantly brings actual cost in over roster when sales were about the same as budget, you have a management problem. You should know that so you can help and support that person to get better, and you want to know fast, because in hospitality we're always bringing on and training new managers.
3. Track it in dollars, percentages and hours. We want the same information as a percentage, because the percentage tells us how we're doing against what we're actually selling. In our experience, dollars land with some people and percentages with others. Hours are the third, and particularly in kitchens, hours tend to land better than percentages and dollars. Understanding how many hours they expected to use for the week and how many they actually used just lands better in those kitchen environments.
4. Overlay customer demand on labour spend. This is the piece that's really underdone, that we focus on in Loaded, and that made the biggest difference in our own business when we introduced it. If you're not using Loaded Time and Attendance, this is what it does: as you build a roster, we show your forecast sales, based on the budget you've entered and your last number of weeks of sales, laid over how much you're spending on labour. We're showing you the trend of customer spend versus the trend of your labour, because that's what rostering is. When will I have customers, and how do I make sure I have people on to give them great hospitality? When I don't have customers, how do I make sure I'm not overspending? Weirdly, when you have too many people on and not enough customers, overall performance actually starts to drop. We're trying to find the sweet spot.
When the day happens, we want the same information: exactly how much we're spending on labour versus how much customers are spending with us. The purple line here is my sales line. I'd be a little concerned that we had this spike in sales, $2,760 in orders, and not many team members on. In Loaded we can look at the trend versus last Saturday and the Saturday before. If that's a regular thing, I want to solve it and make sure we have more people on, because more people on when we have a lot of customers actually reduces our overall labour cost percentage and gives us more profitability.
Rich: So at gross profit level, we've increased from $10,200 to $12,480 without any extra customers. That's the mental model I hope you take away. It's over $100,000 profit increase on $1.5 million turnover. This is how we take net profit from a 4 or 5% return on total revenue to a 20% return. It's not always about chasing extra customers. Look at the conversations happening in your business with your managers, and the time you and your ops team spend trying to get new customers versus how to increase average spend once you have them, how to manage the four areas of cost of goods really well, and how to track the four areas of labour cost really well. If you give those equal focus, consistently, this is well within the achievement bracket of just about every hospitality venue we come across.
If you want to grab these slides and share them with your team, Sophie will drop the link in, or take a photo of the QR code. If you use the rostering and time clock features but not stock, or you use stock but not the time features, reach out directly to Sophie at sophie@loadedhub.com or our support team, and we're happy to take you through it one-on-one. Some of our Loaded Academy sessions can also help you get started. Sophie, is there anything else you'd like me to cover?
Sophie: No, I think that's been great and really helpful. I've popped a link to the slides in the chat, and I've also put up a poll if you don't mind giving us feedback on how you found the session. As Rich touched on, we're on a real push to get a whole bunch of operations sessions out to you, and to have more community conversation about ways to improve profit and be happier, healthier operators. Any feedback is really helpful, including anything Rich touched on today that you'd like to dig deeper into in a future session, such as more detail on specific cost of goods or labour reduction strategies. Keep an eye on our Academy pages, where we'll have links to all our upcoming sessions, as well as in the app. Thank you, Rich, and thank you to everybody else for joining us. We'll see you again soon.
Rich: Awesome. Thanks, guys. See you soon.
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