March/April (Revised)

CHALLENGES & OPPORTUNITIES
THE CHALLENGE
COST
CRUNCH
New challenges are shifting
restaurants’ operating costs
In an industry with notably low
margins, inflation and added
expenses have a significant
impact on profitability. And,
given revenues have been negatively
impacted by the ongoing
crisis, increased costs weigh heavy
on operators.
As, Nick Di Donato, president
& CEO of Toronto-based Liberty
Entertainment Group, explains,
efforts to pivot to different revenue
streams weren’t enough to
make up for restrictions. “There’s
no way anybody can be profitable
under those circumstances, where
you still have to pay rent, taxes,
hydro and so on, in large spaces,
and your sales were minimal.”
fsSTRATEGY Inc.’s 2020
C-Suite Survey indicates the
majority of industry leaders (68
per cent) expect the cost of sales
as a percentage of revenues to
change in 2021 (up from 60 per
cent in 2019). And, 16 per cent
of respondents anticipate cost of
BY DANIELLE SCHALK
goods sold will increase by more
than two per cent this year.
In terms of food costs, the 11th
edition of Canada’s Food Price
Report predicts an overall foodprice
increase of three to five per
cent for 2021. The report forecasts
meat and vegetables will see some
of the most significant increases,
with expected increases of 4.5 to
6.5 per cent for both categories.
Most C-Suite Survey respondents
(60 per cent) also indicated
they expected other operating
costs (such as utilities, repair and
maintenance, advertising and
promotion) as a percentage of
revenues will increase in 2021.
And, an increase of 0.1 to 1.5 per
cent is anticipated by about half
(48 per cent) of those surveyed.
Continuous efforts to adapt to
ongoing restrictions and requirements
have also proved taxing.
In fact, a recent survey of The
Fifteen Group’s Canadian restaurant
clients found the businesses
had spent an average of $15,000
on pandemic-specific operational
changes. David Hopkins, president
of the Toronto-based consulting
agency, points to items such as
personal protective equipment,
enhanced cleaning supplies, airfiltration
units and patio improvements
as additional expenses
restaurants have taken on.
“In terms of long-term [challenges],
certainly the biggest one
we’re trying to model out for our
clients is the overall, long-term
impact of takeout and delivery
service,” says Hopkins. As he points
out, when third-party services cannibalize
direct/on-site sales, it takes
a real toll. “If you’re a $2-million
restaurant and $100,000 of that
revenue pivots to ordering from
[third-party delivery] instead of
either picking it up themselves or
going to your restaurant, then that’s
costing you $30,000 in straight
profit that you would have had
otherwise,” he explains.
And, he adds, increased demand
for takeout also results in an
increased need for packaging supplies,
which, as we approach a
national ban on many single-use
plastics, represent a greater expense
than in the past. “Restaurants are
going to have to start factoring that
into their entire pricing model,”
adds Hopkins.
THE OPPORTUNITY
The residual effects of the pandemic
are expected to present
some opportunities and relief
on certain operating-cost fronts.
“Probably the biggest one we’re
expecting, and we’re already seeing,
is with the labour market,”
shares Hopkins, noting the current
environment has shifted this
to an employer market — at least
for the short term.
Similarly, restaurant closures
have made the rent market more
favourable. Hopkins notes this
almost exclusively impacts new
openings, but there may be room
for established restaurants to
negotiate better deals.
And, while increased food
costs present a challenge, as
Hopkins explains, coping with
challenges around meat pricing
over the last five years has
dwarfed recent changes in this
category. Having weathered this
on-going problem, he is confident
operators are well equipped to
pivot their menus and pricing to
accommodate increases.
“As restaurants plan for recovery,
a consistent supply of fresh,
local food can help minimize
costs and ensure availability of
key ingredients. Focusing on
staples will help draw in guests
by satisfying their craving for
comfort in uncertain times,”
Sarah Caron, director, Marketing
and Nutrition, Egg Farmers of
Canada, stated in Restaurants
Canada’s Foodservice Facts 2020.
Through this time, restaurateurs
have been forced to adapt and, in
many cases, become more agile in
order to run their businesses as efficiently
as possible. “The restaurant
industry, as a whole, has demonstrated
just how resilient, creative
and innovative it is,” Brian Deck,
CEO of Smooth Commerce, said
during the Canadian Restaurant
Investment & Leadership Summit
in November.
For example, Oakville, Ont.-
based The WORKS Craft Burgers
& Beer took the pandemic as
an opportunity to re-create and
evolve the brand. Changes included
reducing the brand’s menu by
about 20 per cent to help streamline
operations. However, as part
of the re-design, the brand also
introduced a wider selection of
craft beer, new craft poutines and
added successful LTOs such as
The Tragically Maple burger to
the permanent menu.
As the brand’s president, Bruce
Miller explains, these efforts were
made “to make sure that, when
we come out of the pandemic,
that we are set up for success.” FH
FOODSERVICEANDHOSPITALITY.COM
MARCH/APRIL 2021 FOODSERVICE AND HOSPITALITY 61