The UK finds itself in tumultuous times – uncertainty has become somewhat of the norm. Besides questions raised about Brexit implications – ranging from the devaluation of the Pound and the resulting increase in operating costs to securing continued access to qualified and motivated labour – additionally, hotel and restaurant operators have had to deal with new, recently introduced governmental policies and regulations further impacting the bottom line.
On this basis, I sat down with Mark Kuperman, Chief Operating Officer at Revenue Management Solutions (RMS). Mark and his team assist the hospitality industry by providing data-driven solutions to better manage revenues. RMS takes “the guess work out of crucial business decisions while optimizing gross profit and protecting brand value.” Mark and I spoke about how a significant number of employees in the UK received their biggest pay rise to date as the National Living Wage leapt to £7.50 an hour on April 6th, 2017. In line with Chancellor Philip Hammond’s Autumn Statement and Spring Budget announcement, more than two million employees over the age of 25 benefited from the 4% increase. Further to this, 21- to 24-year-olds received a rise of 10 pence per hour. This is in a bid to reach the government’s target of £9 per hour by 2020 for over 25s, with further demand to extend this increase to 21- to 24-year-olds. According to Tahola, an industry’s leading business analytics provider, this could result in operators facing an annual increase of £100,912.50. However, it’s not just labour costs that will hit operators; planned increases in employer pension contributions from 1% to 3% could elevate the cost to operators to more than £109,000 by 2020.
It is thus quite clear that UK hotel and restaurant operators must become smarter in navigating this challenging business environment, which, in the recent past, has put a lot of pressure on the bottom line. Consensus within the industry is that many restaurant operators will be forced, amongst other operational levers, to raise menu prices, whilst streamlining their staffing structure. However, Mark believes there are other ways to effectively offset rising labour costs — without the need to cut staff or dramatically increase prices. Here are some of his suggestions.
1) Better align staffing needs to optimise labour costs: It may sound obvious; however, it’s often something that gets overlooked by operators in search of shrewd ways to offset rising costs. Cutting staff is not the way, as this impacts the overall restaurant experience for customers. The key here is to manage the value equation in the eyes of customers and never consider raising prices, whilst cutting service levels. In fact, there’s the saying, “food brings them in and service drives them out.” Operators need to better align staffing needs, with consideration given to peak verses off-peak staffing rotas.
2) The importance of taking a demand-based approach to pricing: Multi-site operators can go even further. Reviewing item-level data for each restaurant on a site-by-site basis across the estate will reveal which restaurants could be organised into different price bands based on customers’ reaction to previous price moves. Taking the customer’s willingness to spend into consideration will ensure customers continue to see value for money when visiting the brand. For operators to successfully navigate price barriers, they must first understand a customer’s willingness to spend. For many operators, increasing menu prices is inevitable. However, there are certain price barriers consumers are reluctant to cross. Therefore, it is important that operators don’t simply go ahead and increase prices, without first analysing customer sensitivity to pricing across all menu items. If done well, an operator can expect higher profits without any signs of customers changing their buying patterns and behaviours.
3) Technology is the most powerful tool to let staff “serve up a storm”: For the first time ever, technology really is becoming the driving force within hospitality. In such a saturated marketplace, operators are turning to technology, to not only get ahead of the competition, but also to deliver on that all-important customer experience. Think kitchen automation, delivery, online ordering, digital tablet ordering and mobile payments – the list really is endless. The beauty of technology for operators is that it seamlessly steps in as a silent partner to take care of the customer journey, leaving staff to deliver on that all-important experience.
4) Get ahead of the times and have a game plan: Unlike increases in food inflation, which are somewhat unpredictable, rises in labour costs can be planned for. As such, operators need to get a long-term plan in place to address these additional costs. In an environment of increasing costs, operators will be in a much stronger position if they make price changes in smaller increments, which are spread over time, not touching the same items in consecutive rounds, rather than implementing them in one hit. The luxury of having time to plan also means that operators can test the water and assess what works best for their business, employees and customers before rolling it out across their entire estate.
5) Profit versus efficiencies – spring clean your menu: Streamlining the number of items offered on a menu will help reduce labour costs and indeed improve execution. Chefs should be looking at the operational impact of specific menu items to see if the way certain dishes are prepared impacts profitability or throughput. Operators need to consider whether they have menu items that are profitable, but actually slow down service. To give you an example, a quesadilla could be a profitable menu item, but the resource needed to prepare it could be, in fact, slowing down operations back-of-house. Therefore, operators need to give serious consideration to where there are bottlenecks in delivering operational efficiencies.
Mark thus urges the industry to be prepared and consider a variety of mechanisms available in one’s tool box to combat the current business environment. Over a recent lunch with Mike Williams, People Director at Byron, Mike and I concurred with Mark’s conclusion and recommendation. He said, “When faced with unprecedented operating cost increases, it can put the squeeze on even the best organisation. In the past, I have seen operations cut labour and costs to such a degree that employee engagement and the customer experience were both negatively impacted. Thus, a vicious circle begins… cutting costs because of decreased sales and thereby continuing to negatively affect the customer experience, which, in turn, puts further pressure on sales, resulting in a new round of cost cuttings.” Mike continued commenting, “The solution is not so one-dimensional in such a complex and competitive sector. A blend of investment in technology, culture, service and consumer research can give you the best of chances to take advantage of this shift in the sector. While competitors cut costs and deliver less for more, those who invest and who are proactive will gain market share and continued consumer support.” A senior industry executive spearheading business operations at another well-recognised casual dining brand added to Mike’s comment, saying, “In times like these, characterised by a tight (and tightening) labour market, recruitment and staffing become even more challenging. We have thus re-doubled our efforts in regards to cross-training and building an internal talent pipeline whilst also further fine-tuning our processes and standard operating procedures to identify new best practices. Whilst none of this is revolutionary in itself, or even new, organisations are well advised to use these new market pressures and realities to re-direct and focus their efforts and energy.”