[00:00:00] I want to start today's episode with a number.
[00:00:03] 5%.
[00:00:04] That's what the average restaurant in this country generates in annual profit. Just 5%, meaning it does a million dollars in annual revenue. And about $50,000 drops to the bottom line. And the average restaurant in this country is owned by two or three people. So that $50,000 gets split two or three ways, even if just split in half. It's $25,000 for each of the two owners, meaning for every dollar that comes in the front door, the owners get to split 5 cents.
[00:00:34] Put another way, you sell $100 worth of food and beverage, and you get to keep about $5 after all is said and done. But here's the thing. You buy the food, you pay the cooks, you pay the servers, the rent, insurance, utilities, the credit card fees, the linen, the chemicals, the trash removal, and about 47 other bills that magically appear on your P and L every month.
[00:00:55] And after all that, for every hundred dollars you bring in, you get to keep about five bucks and split it with your partner.
[00:01:02] But that's not even the crazy part. Here's what's truly crazy.
[00:01:06] You're the one who signed the lease. You're the one who guaranteed the loan. You're the one whose name is on everything. And you're the one lying awake at 2:17 in the morning because the walk in is making that weird noise that you know is going to cost you more money.
[00:01:20] You're the one who gets the phone call when the dishwasher doesn't show up. You're the one covering payroll when sales come in light. You're the one who put your money, your reputation, your time, and in many cases, your marriage and your health on the line.
[00:01:33] And yet everybody else gets paid before you do.
[00:01:36] That's insane. And I refuse to accept the idea that this is simply how the restaurant business has to work, because it's not. There are restaurants out there making real money. There are owners who are not working 60, 70, 80 hours every week. There are operators who know exactly where their money goes. They understand exactly which levers to pull. They have built restaurants that work for them instead of restaurants that just keep sucking them dry.
[00:02:03] The difference isn't that they care more. It isn't that they work harder. And it sure as hell isn't that they just got lucky. It's because they understand restaurant math. They understand that revenue and profit are two completely different things. They understand their numbers. They understand their menu. They understand labor and pricing and product productivity. And most importantly, they understand that profitability isn't something that magically appears at the bottom of the P L every month. Profitability is something you design.
[00:02:35] So today I want to do something different. This one isn't going to be just one little tactic. I'm not giving you three ways to lower food cost. I'm not giving you five scheduling hacks. I'm not giving you another episode about raising prices by 50 cents.
[00:02:49] Today, we're going to go all the way back to the beginning. We're going to build a foundation. Think of this as Restaurant Profitability 101. Everything I believe about building a profitable, independent restaurant all packed into one massive episode.
[00:03:05] So listen. If your restaurant does half a million dollars a year, listen. If it does $5 million a year, listen. If your restaurant is profitable, listen. If you're doing millions of dollars in revenue and wondering why there never seems to be any money left over for you at the end, then listen. Because by the time we're finished today, I want you to understand exactly how a restaurant makes money. Where the money disappears. And I want you to understand what you need to do about it. So here's the deal. Grab a notebook, a paper and pen. Seriously, Pause this right now. Grab something to write with. Grab something to write on, because this might be the most important episode I've ever recorded. Are you ready?
[00:03:47] Let's go.
[00:03:48] There's an old saying that goes something like this. You'll only find three kinds of people in the world. Those who see, those who will never see, and those who can see when shown. This is Restaurant Strategy, a podcast with answers for anyone who's looking.
[00:04:19] Hey, everyone. Thanks for tuning in. My name is Chip Close. This is the Restaurant Strategy podcast. Nearly 600 episodes over the course of the last seven years. I turn on the microphone two times every single week. All ways to help you level up, build a more profitable restaurant. Why? So you can make more and ultimately work less. I also run a group coaching program. It's called the P3 mastermind. If any of this today resonates and you want to go deeper, you want something, somebody to be walking alongside you, go to RSprophet.com you'll watch a video, learn more about the program. If any of that sounds interesting, you grab time on the calendar to chat with me or someone from my team. We get to ask each other a bunch of questions. If we feel like you're a good fit, we'll talk about what next steps look like. It's totally free and there's no pressure. You go to RSProfit, dot com. That's where it begins. As always, you'll find that link in the show notes.
[00:05:13] Okay, then. Part 1. Revenue is not the score.
[00:05:18] Let's start with the mistake I see restaurant owners making over and over and over again. They use sales as the scoreboard. Hey, how'd we do last night? 14,000. Awesome. Was it? I don't know. Neither do you. Not yet, at least. Because maybe you did $14,000 and made $2,000, but maybe you did $14,000 and lost 500.
[00:05:42] See, the sales number doesn't tell you the most important part of the equation. And I see owners celebrate record sales months all the time while quietly destroying their businesses.
[00:05:54] See, more sales can mean more food, more labor, more overtime. It certainly means more credit card fees. It often means more waste, more repairs, more complexity, more management, more everything.
[00:06:08] As they say, revenue is vanity. Profit is sanity. Did I make it up? No. It's been around for, like, 100 years. Probably longer. Revenue is vanity. Profit is sanity. I don't think the goal should be to build the busiest restaurant in town. I don't think the goal is to brag about doing five, six, seven million dollars a year.
[00:06:29] The goal is to build a restaurant that produces an acceptable return on the enormous amount of capital, energy, time, passion, and risk that you put into it.
[00:06:41] So let me make this incredibly simple. There are only two sides to this equation. Revenue and expenses. What remains is profit. Right? Revenue minus expenses equal profit. Put another way, revenue minus cost of goods sold, minus labor, minus all your overhead equals profit. Profit is what's left over. It's the surplus. And your profit margin is simply the percentage of your revenue that survives after all your bills are paid.
[00:07:12] So if your restaurant generates $2 million and earns $100,000 in profit, congratulations. That's a 5% margin and maybe $100,000. Sounds like a lot of money. But here's why that equation is scary. Here's what matters.
[00:07:28] If something goes wrong, anything goes Wrong by just 5 percentage points, your profit is gone.
[00:07:36] That's how thin this business can be. I know you know that.
[00:07:39] And that's why we had a good month, because sales were up. Drives me nuts. I don't care whether sales were up until you tell me what happened to profit. So the first mindset shift I want you to make during this episode is this.
[00:07:56] Stop running a sales business and start running a Profit Business.
[00:08:02] Part 2 the four numbers. The four numbers you need to know. In fact, the most important, maybe the only four numbers you need. If I took over your restaurant tomorrow, Morning. I wouldn't begin by changing your logo. I wouldn't redesign your menu. I wouldn't fire the chef. I wouldn't start making a bunch of tiktoks. I would start with the numbers. Specifically these four numbers that every owner has to wrap their arms around.
[00:08:28] Number one, sales. How much money, meaning revenue, are we actually generating? Not just monthly, but by the week, by day, by day part. Meaning how much comes in for lunch, how much for dinner? What do you do on a Monday versus a Saturday? Dine in versus takeout, food versus beverage. You can't manage what you don't understand. And I want you to understand it all the way down to the granular level. PPA per person average. How much is a guest worth on a Tuesday lunch? How much are they worth on a Friday dinner? Understanding what revenue you bring in. How much comes in through the front door and when it comes through the front door?
[00:09:08] Number two, labor percentage. How much are we spending on the people that are required to generate the sales we're generating? But. And listen, we're going to come back to this. I don't necessarily want you obsessing over labor percentage alone because percentage without productivity can lie to you. But you have to know your labor percentage. That's number two. Number three, I need you to know. Cost of goods sold. How much does it cost you to put food on a plate and send it out to the dining room?
[00:09:39] Revenue. Right? Your sales, your labor and cogs. Those are your three controllables. That's why I put them front and center. And guess what? Labor plus plus cogs equals? Prime cost. Prime. Understanding how much cogs and labor is compared to total revenue, that number. We'll talk about this later. That that number really needs to be at 60% or below. You can't make real money in this business. If prime cost, meaning COGS plus labor is higher than 60%. Chiseled that in stone. The fourth number. Guess what? You know what I'm going to say it's profit. What's actually left over at the end after all your bills are paid.
[00:10:20] Not what QuickBooks says before. Somebody remembers six invoices and puts them in. Not EBITDA when you're using it to convince yourself that everything is okay but actual operating profit.
[00:10:33] These are the four numbers that tell me an enormous amount about the health of your restaurant. Sales, cogs, labor and profit. And I want you looking at them consistently. Not when your accountant sends you a P&L Six weeks after the month ended up. By then the movie's over. There's nothing else to do. You need those numbers daily, weekly, because they help you manage the business while you're still in the business.
[00:11:01] Part three, right? Prime cost. I told you we were going to dig deeper into that. Prime cost is the center of everything. So let's go a little bit deeper. Prime cost again is cogs plus labor. So what you spend on food and beverage and your hourly labor and yes, your salary labor and guess what? Also your payroll taxes and benefits and other associated labor costs. These are the giant expenses that move with the operation and that management has significant influence over. I told you. Revenue, cogs and labor are our three controllables. They are the three most important numbers. Right? The industry loves a benchmark. Food Cost should be 30%. Labor should be 30%. Prime should be 60% or below. Benchmarks can be useful.
[00:11:47] Here's where operators get themselves into trouble.
[00:11:49] A benchmark is a diagnostic tool. It is not a business strategy. So I say we should chisel this in stone. You cannot make meaningful money in this industry if prime cost is over 60%. But that may not mean 30% COGS, 30% labor. Because maybe you're in a state like California with very, very high minimum wage and no tip credit. And so it's going to be very hard to get a full service restaurant labor model under let's say 35 or 36%.
[00:12:18] But if you can get your labor to 36% and we know prime has to be at 60, 60 minus 36 equals 24, that means our blended cost of goods sold, meaning food cost plus beverage cost, needs to be no higher than 24%. So you cover up the quote unquote sins of labor with cogs. I know prime can't be any higher than 60 and it should be lower in quick service fast casual concepts.
[00:12:45] But again, it's a diagnostic tool and every concept is different.
[00:12:51] A steakhouse might intentionally carry a different food cost than a pizzeria. That makes sense, right? Steaks are expensive, lobsters expensive. The, the high end, shellfish towers, all of that. You can't necessarily cost that out at 28, 29%. Some steaks got to be sold at 45 or 50%. It's only that's the reality of that concept.
[00:13:12] So you balance it with the other areas of the business.
[00:13:15] Likewise, a counter service concept might have lower labor than a high touch full service restaurant. What matters isn't whether you hit somebody else's magical percentage. We preach this a lot in the P3 mastermind. I would love to give you some across the Board benchmarks, but based on your concept, based on your size, based on your market, all of that will. Will affect your percentages.
[00:13:39] So going by an industry benchmark or an industry percentage isn't helpful. You have one. This unit. This unit. This unit. There are healthy numbers that you should find, but you have to come up with those yourself. Again, use the benchmark as a diagnostic tool, not as a. As a. As an overall strategy. Again, I'll reiterate, what matters isn't whether you hit somebody else's magical percentage. What matters is whether the economics of. Of your business, of your model work for you.
[00:14:10] Because again, I would happily take a 34% food cost if the contribution margin and profitability were fantastic overall. And I would reject the 25% food cost if the restaurant was somehow still losing money. So don't worship the percentages. Use them as sort of a North Star, as something to hold yourself up to. But you have to understand what they're telling you.
[00:14:35] Part 4 Food cost. Stop chasing 30%. Right. Let's dig a little bit deeper into this. See, owners love this number because it feels controllable. Food cost is high. Beat up the chef. Change vendors, cut portions, raise prices. Problem solved.
[00:14:50] Except sometimes none of those things actually addresses the real problem.
[00:14:54] So first you need to understand the difference between what your food cost should be and what it is actually is.
[00:15:01] Meaning theoretical versus actual. So your theoretical food cost comes from your recipes and your sales mix. If I sold exactly what the p. What the POS says I sold using exactly the portions that I've outlined in my recipes, at exactly the ingredient cost that I've entered, well, then what should my cost have been?
[00:15:21] But then you have to compare that with actual cost of goods sold. I see. That gap is where things always get interesting. We get over portioning, right? It's inevitable. We get waste, we get spoilage. We've got comps, we've got theft, we've got bad receiving, bad prep, inaccurate recipes, vendor price creep.
[00:15:41] See, those aren't food cost problems. At the end of the day, they're systems problems. And that's a recurring theme in this episode. And I want you to understand that. I want you to pay attention to this. When a number is wrong, we shouldn't necessarily run to blame a person.
[00:15:56] We have to ask, what system allowed this result to occur?
[00:16:02] Because maybe your cooks aren't over portioning because they don't care.
[00:16:06] Maybe nobody ever gave them a portion standard. Maybe there aren't scales on the line or scoops. Maybe the recipes aren't Current. Maybe managers don't actually do line checks. Maybe inventory isn't being counted consistently.
[00:16:19] Again, systems not heroes. You cannot build a profitable restaurant. That depends on your best employee being there every single second of every day.
[00:16:30] Part 5 Contribution Margin Changes the menu conversation. See, here's where food cost gets really interesting.
[00:16:39] Imagine I sell one item for 20 bucks and it costs me $5.
[00:16:44] That's a 25% food cost. Another item sells for $30 and costs me $10. That's a 33% food cost. Which item would you rather sell? See, a lot of owners immediately say the first one. 25%. The food cost is beautiful. Except the first item contributes $15 before labor and overhead. The second contributes 20.
[00:17:09] I make $5 more selling the one worse food cost item.
[00:17:15] See, this is why blindly managing percentages can lead to some pretty stupid decisions. Remember, you don't deposit percentages at the bank. You deposit dollars.
[00:17:25] This is where menu engineering becomes such a powerful profitability tool. Every menu item has two characteristics that we care about. Popularity and profitability. Right? Your stars are popular and and profitable. You protect them. You feature them. You train your team to sell them. Your plow horses are popular, but less profitable. So maybe there's a pricing opportunity, maybe a portion opportunity, maybe a recipe opportunity. Your puzzles make good money when you sell them, but you don't sell them enough.
[00:17:57] Why? Is it the placement? Is it the menu description, server recommendations, the photography, the name?
[00:18:04] And then finally, your dogs don't sell and they don't make you money.
[00:18:08] Naturally, the question is, why are they occupying valuable menu real estate?
[00:18:13] Your menu is not a list of everything that you're prepared to cook that night. Your menu should be a sales tool. In fact, it's the one piece of sales collateral that you give to every single customer. And if you're not engineering, you're leaving profit on the table every single single service.
[00:18:34] Ajinomoto is your answer to every busy dinner rush spent deep in the weeds. When hungry customers walk through your door, they expect good food, right? Good food that tastes homemade. But making every dish from scratch can cut into your profits. Certainly what we're talking about today. Especially with the cost of ingredients and yes, the cost of labor. That's where Ajinimoto Foods comes in. Ajinimoto has a huge catalog of fast, easy to prep frozen Asian products that taste and look homemade. That includes classics like fried rice dumplings and onion rings, and new trendy fusion plates like kimchi chicken pot stickers. See, choosing Ajinimoto is choosing over 100 years of proven expertise in the food service space. Choose to save time. Choose to save money in your busy kitchen or without compromising on the quality your customers have come to expect. Learn more about
[email protected] and yes, you'll find that link in the show notes, part 6 pricing. Guess what? You are probably being way too emotional about it. So let's talk about the lever that restaurant owners are terrified to pull.
[00:19:47] Price.
[00:19:48] I've watched owners absorb increased food costs, increased wages, increased insurance and utilities and rent and those credit card fees. Why? It's because they're terrified that somebody will complain about a $2 price increase.
[00:20:03] Think about that.
[00:20:04] Every vendor gets to raise their price. Every employee becomes more expensive. The landlord raises rent. Insurance goes up, the utilities go up. And somehow the restaurant owner is the only person who's supposed to say, well, I guess I'll just make less money.
[00:20:20] No, Your prices have to reflect the economics of, of the business model. That doesn't mean randomly adding 10% to everything. Obviously, that's lazy. Pricing should be strategic. So you look at contribution margin, right? Just like we talked about. You look at the demand, you look at competitive alternatives, you look at perceived value, you look at price sensitivity, you look at menu placement, and you understand price anchoring. A premium item doesn't exist only because you expect everybody to buy it. They won't.
[00:20:55] Sometimes its job is simply to make the rest of the menu feel more affordable, more accessible, more reasonable, right? I've talked about this before, but you put a premium bottle of wine on the list and suddenly the bottle below it doesn't feel so expensive. I've talked about the Opus One experiment, right? That you have a list of, you know, 100 wines on the list. The most expensive is a bottle of stag's Leap for 1:25. You sell about three, four, five bottles every single month. And then some consultant comes in, puts on a bottle of Opus 1 for 385 and suddenly the 125 cab doesn't look so unreasonable. In fact, it looks, it looks, it looks pretty approachable when the entire list is between 60 and now 125. Then you get one at 385. This experiment has been run over and over and over again. You run the product mix at the end of the next month and you found you've sold three, four, five bottles of Opus One and about 30 or 40 bottles of that. Stag's Le only sold three, four or five.
[00:21:56] Same thing. A $35 signature cocktail can change how guests perceive the 14, 15, $16 cocktails that are all around it. That's psychology. That's strategy. That's why pricing is not an accounting exercise. It's emotional, right? Really, it's a marketing exercise, an operations exercise, and a profitability exercise all wrapped up into one part. Seven Labor. This is the number that everyone gets wrong. You ready? Let's get into it. Because this is where I see owners make some of their worst decisions. Sales are soft, labor percentage goes up, manager panics, we cut somebody, so we cut a server. But guess what? Now service slows down. We cut a cook ticket, times increase, we cut a host. The door gets messy. We make a bad first impression and a bad goodbye.
[00:22:49] So managers then jump into hourly positions, and then nobody's managing the shift, right? We get a manager running the front door. We get a manager on expo, we get a manager bussing tables, and guess what? Guest experience suffers. The reviews decline, the employees burn out. Guess what? Sales decline. Because now instead of a server having to manage five tables, they manage seven or eight. And so they can't get to all the tables. They're not on the table touches. They're not on refilling drinks and getting those second beverages and talking people through the menu because they're harried, pulled in a lot of directions.
[00:23:22] And then we look at the P and L next month and say, hey, why are sales down? Well, it's because you cut your way into a worse restaurant. See, labor cost matters. Don't get me wrong. Of course it matters. But I want you thinking about something beyond labor percentage. I want you thinking about labor productivity. How effectively are the hours that you're buying producing revenue? If I can spend another $200 in labor and generate another thousand dollars in profitable sales, I don't know, that may be a fantastic decision.
[00:23:54] Conversely, having a quote, unquote good labor percentage doesn't always impress me. If we're leaving sales on the table simply because the restaurant is understaffed. And see, this is where forecasting becomes incredibly important. You don't schedule based on what you hope will happen. You don't schedule because Tuesday usually feels busy.
[00:24:15] You forecast demand.
[00:24:18] How do you do that? You look at historical sales, you look at trends. You look at seasonality. You look at weather, reservations, local events, TV schedules. You look at recent performance, and you build the most informed sales forecast you possibly can.
[00:24:34] Then you build labor around that demand again. You forecast first, you schedule second. Put another way, you forecast, then you budget. That's the sequence.
[00:24:46] And when reality changes, you adjust A schedule is not a sacred document. It's an operating plan based on a forecast. A forecast is a guess. Let's be absolutely clear. There is an art to it. It is not a science. Right. When you're dealing with big numbers, big data, of course you can get better.
[00:25:05] But also we don't know if it's going to rain all the time. We don't know if some massive, you know, life altering event is going to happen.
[00:25:12] So we build a plan, we build a forecast, we budget, we schedule based on that and then we iterate. See, good operators, I would say great operators are constantly reconciling their plan against what they're seeing. This is one of the things that we talk about in the P3 mastermind. Everybody in the program gets access to something called the P3 scorecard. It is the single best document, the best way I know how to forecast sales down to the shift every single day, day.
[00:25:45] Track how things go compared to what, how you thought they'd go, Right? So I thought we were going to make $11,000. We actually only made 9,9500. That tells you something. You track that every single day and you look at what that does to impact your cogs number and your labor number and you adjust in real time, not after the period is over, but you track that every single day.
[00:26:09] That's the job.
[00:26:11] That's how it's done. Well, part eight, overhead.
[00:26:16] Don't ignore it, but also, don't hide there.
[00:26:20] See, after food and labor comes what I call everything else.
[00:26:24] I talk about this all the time. When you look at your P and L, when you think about your expenses, I want you to think of three buckets, cogs, labor and what I lovingly call everything else.
[00:26:37] Everything you spend money on over the course of the month goes into cogs, labor, or if it doesn't fit into one of those, it goes into the everything else bucket.
[00:26:46] Revenue, cogs and labor are where you should be putting all of your attention. And then I think you can reconsider your everything else bucket either quarterly or twice a year. But no more than that. Do you have to be aware of them? Yes, but your everything else bucket should be at about 20% of revenue.
[00:27:05] I talk about this the 30, 3020 rule. I wrote about it in my new book that's going to come out at the beginning of the year. That new book is called the Restaurant Profit Playbook. I talk about the 30, 3020 rule right back when I grew up, I was here, heard a lot about 30, 30 30, 30% for COGS, 30% for labor, 30% for everything else. That leaves 10% left over. I think that doesn't work, doesn't make sense. Especially when you look as at as many PNLs as I do. You realize that the very best restaurants, the most organized, most successful restaurants in the world don't operate with 30, 30, 30. They operate a 30, 30, 20. A rough back of the napkin way of thinking about your restaurant expenses. So when we talk about overhead, we're really talking about this everything else bucket, right? Again, after cogs and labor comes everything else. What goes into everything else? Rent, insurance, utilities, your credit card processing software, repairs, marketing, linen, trash, pest control, your accounting fees, and all of it matters.
[00:28:01] But here's a mistake I see constantly. The restaurant is bleeding because prime cost is 5, 8, 11 points too high, and the owner is spending three hours trying to save $87 on garbage pickup. That's not strategy in the end. That's really avoidance. You work from the biggest impact to the smallest impact. It's why in the P3 mastermind, we start by looking at revenue, cogs and labor, right? That's what we look at. Those three. We call them the three moving targets.
[00:28:30] We focus there because that's where we can make the biggest impact. Getting cogs and labor in line and then growing revenue. Those two exercises. Three exercises will do more to drop money to the bottom line than going line by line through your everything else bucket, right? It's why we arrange our PNLs in a certain way and basically draw a red line under prime cost and sort of black the rest out. At least in the first three to four months of working together, there's nothing we need to look at below that line.
[00:29:00] Again, if you do $2 million in sales, 1 percentage point is $20,000. So if you move prime cost even just 3 points, that's potentially $60,000. You're dropping to the bottom line on a $2 million restaurant. And see, I think, tell me if I'm wrong. But when we talk about that now, we're talking about something saving $87 a month on your trash pickup. Nope, I don't care about it. Fixing prime cost.
[00:29:28] Three points on a $2 million restaurant. That's $60,000. That's real money. I can think of some really cool things to do with an extra $60,000 this year. Now, that's why knowing your numbers changes the way you prioritize, right? The P and L isn't just a report. It's a map telling you where to look.
[00:29:47] Part 9 the profitability levers. Right? This is what you're waiting for. See, at this point, you might be thinking, okay, Chip, I get it. I understand the math. So what do I actually do about it? I want to simplify the entire problem into a couple of things.
[00:30:02] Menu, pricing, labor, marketing, and experience. Got it. Let's walk through them. Lever 1, menu. What are you selling?
[00:30:12] What's profitable? What's popular, what's complicated. Meaning complicated to prep, to get, to cook.
[00:30:21] What creates waste, what requires excessive prep, what slows down the kitchen? What do guests actually value?
[00:30:30] A smaller, smarter menu can improve purchasing, prep, execution, pickup speed, consistency, labor, and yes, guess what? Profitability. All at the same time. So menu decisions are really business model decisions. It's not let's make sure we have something for everything, or let's put all the things on that I really love.
[00:30:51] It's let's put on things that people love that they consistently order. And the product mix tells you that. Lever two is pricing naturally. My first question is, are you charging enough? Where do you have pricing power? Which items can absorb increases? Where can you create premium options? Where can you use price anchoring? Are you pricing based on fear or actual data that comes out of your positive?
[00:31:19] Lever three is labor naturally. I'm going to ask, are you forecasting accurately? Are you scheduling based on demand?
[00:31:27] Are you just copy and paste using a set schedule, doing the same thing every single week?
[00:31:34] Are your systems allowing employees to be as productive as possible? Are managers actually managing? Or are they just constantly filling in hourly holes?
[00:31:44] Do you have the right people doing the right jobs at the right times?
[00:31:48] All of those are how we pull the labor. Lever.
[00:31:52] Level four, marketing. And guess what? This surprises people. Hey Chip, I thought this is a profitability episode. And don't get me wrong, it is.
[00:32:00] But you cannot cut costs your way to greatness. I always say profit first, then growth. Marketing is all about growth. Once we know how to manage a million dollar restaurant and it becomes that much easier to manage a $1.3 million restaurant. See, eventually you will need revenue and more revenue. But I don't just want more customers. I want the right customers at the right times, purchasing the right things. And guess what? I want them returning more frequently. We often are guilty about talking about customers and marketing, as if talking about acquiring customers. Acquiring new customers is very, very expensive.
[00:32:39] But getting people back is actually relatively cheap.
[00:32:43] So a but is a but is a but. I need a but in a seat. Who cares if it's an old but or a new but? In fact, I would rather build loyalty, breed loyalty with my regulars and get those same people back over and over and over again. Because guess what? In time, they're going to evangelize for you. They're going to bring people in. They're going to do the marketing for you.
[00:33:04] See, marketing isn't separate from profitability. It's a key part of it.
[00:33:09] Marketing helps determine demand. And guess what? Yes. Demand determines sales.
[00:33:15] Sales change labor efficiency. Sales changes purchasing power. Sales change occupancy leverage.
[00:33:23] Sales, in the end, will change everything.
[00:33:27] Not until you understand how to forecast and budget and keep your team on budget.
[00:33:33] Profit first, but then growth is the thing that really pours kerosene over the fire.
[00:33:42] Experience. And this is the lever that operators often miss entirely. See, because here's the chain customers experience sales, profit. It moves in that direction. See, we can manipulate spreadsheets all day long, but eventually a human being walks through your door. They have an experience. That experience ultimately determines whether they come back. It determines whether they tell someone, whether they leave a review, whether they choose you next Friday, or whether they go somewhere else.
[00:34:14] Seen through a certain lens, profitability really begins by creating something that people crave, that they want to buy. And they want to buy again and again and again. And they want to brag about and rave about something they want to evangelize for.
[00:34:29] Experience is absolutely crucial. Are you solving someone's problem? Are you creating a space, a meal, an experience that can't be gotten anywhere else except at your restaurant?
[00:34:43] When you create something that doesn't exist anywhere else, Disney World is the best example. There's nothing else like it in the world. Not Six Flags, not Universal, not anything.
[00:34:54] So if you want Disney, nothing is going to replace that. If your kids are going, I want to go to Disney World. I want to go to Disney World. You say, we're going to go to Hershey park instead. Good luck. They're going to look at you with frozen, downtrodden faces again.
[00:35:09] Your customers have an experience that generates sales and more sales and more sales and that increases profit. Seen through that lens, the experience that you're providing absolutely drives profitability.
[00:35:23] Part 10 more customers isn't always the answer. I teased this out a second ago, right?
[00:35:30] There's an uncomfortable idea here. Let's dig into it.
[00:35:35] Sometimes, in fact, a lot of times, I don't think you need more customers.
[00:35:41] Sometimes you need to just make more money from the customers you already have.
[00:35:47] Imagine increasing check average your PPA by 3 bucks. Imagine improving beverage attachment. Imagine selling more appetizers or improving dessert conversion. Imagine turning one visit every eight weeks into one visit every six weeks.
[00:36:05] Imagine increasing repeat visits by 10% every year. Imagine improving your sales mix toward higher contribution items.
[00:36:14] Those are the changes that compound.
[00:36:16] The easiest dollar to acquire may be sitting at table 32 right now. This is why operations and marketing and profitability cannot live in separate boxes. They are not separate departments. They all live under one roof.
[00:36:31] Again, the experience creates the opportunity. Training captures the opportunity. The menu directs the opportunity, Pricing monetizes the opportunity. And the systems you put into place make it repeata. If it's repeatable, it's replicable. If it's replicable, guess what it becomes Scalable.
[00:36:52] That brings us to part 11. Systems, not people. Because systems are how you scale. This may be the most important philosophical piece, the most important mindset shift of the entire episode. Restaurant owners love heroic employees, right? Maria knows how everything works. Tony can work the grill and saute and expo and he can jump in a dish. And Jen knows every regular. Oh my new gm. He can fix anything. That's wonderful. Until Maria quits, until Tony gets sick, till Jen moves, until your GM burns out and quits.
[00:37:29] And then the business falls apart. And that's not a people problem. That is a design problem.
[00:37:34] Great businesses don't depend on extraordinary people performing extraordinary acts every day.
[00:37:42] Great businesses are built when they build systems that allow good people to produce extraordinary results consistently just by doing what they're shown to do.
[00:37:53] Famously. That's why McDonald's is as successful as they can be.
[00:37:57] Their mantra early on, though never written down but understood, was how do we make this so it's simple enough that a 16 year old can do it. Because we believe 16 year olds are going to be the ones working this restaurant. And guess what? That's how they built a success. That's how Domino's built success. That's how Chick Fil a is so great. Because they made it simple enough and they trained it the hell out of it. They built systems that good enough people, people who are capable and well trained, could do and produce extraordinary results with extraordinary consistency. And it goes from everything from recipes to prep systems, ordering systems, inventory systems, opening checklists, closing checklists, training systems, service standards, sales systems, forecasting systems, scheduling systems, management rhythms, scorecards, accountability, everything.
[00:38:51] See, the goal is not how do I get my employees to care as much as I do. Because guess what? They probably never will. And that's okay. It's not their restaurant, it's your restaurant.
[00:39:01] The better question is how do I build a restaurant where success doesn't require them to care very much at all.
[00:39:10] It sounds weird, right? It's not what you hear. It's not. We talk about. You hear big, important keynotes talking about how to get your people to care. But I don't care if they care. I care if they do what's required of them, if they do the job that I'm paying them to do. So how do I build a restaurant where success doesn't require them to care very much at all? And ultimately, that's leadership, and that's how you generate profitability.
[00:39:38] Here's the deal. Stop working harder. That's a dangerous badge of honor that we love to wear in this industry.
[00:39:46] Hours. Well, I worked 83 hours last week. Okay. Why?
[00:39:51] See, we celebrate exhaustion as though it's evidence of competence, of care, of passion. It's not.
[00:39:59] Sometimes it's just evidence that the business depends way too heavily on you. And see if your restaurant only works because you are personally catching every ball before it hits the ground. Well, guess what? You haven't built a business. You've just built yourself a very, very stressful job.
[00:40:16] And there's some irony in that. See, working harder often prevents you from doing the work that would allow you to actually work less.
[00:40:26] So you're on the line because somebody called out. So you don't build the training system. You're writing the schedule at midnight, so you don't improve the forecasting process. You're running to Restaurant Depot because you ran out of something again.
[00:40:39] So you don't fix the ordering system. You just go plug the hole. You solve it. You put the band aid on it. You spend all your time solving today's emergencies, which guarantees more emergencies tomorrow.
[00:40:51] And at some point, the owner has to stop asking, how can I do more? How can I do more? And you've got to start asking, how can the business need less of me?
[00:41:02] And here's something really important I want you to make. This is a mindset shift I ask all of the members of our P3 mastermind to make. I want you to understand that profit is not greed.
[00:41:14] We're going to go deep now because I think restaurant owners have this strange relationship with profit, with money, right? We're comfortable talking about food, about hospitality, about culture, community, craft, employees.
[00:41:27] But say, I want to make a lot of money from my restaurant, and suddenly everybody gets real uncomfortable. Why?
[00:41:34] Profit is not the enemy of hospitality. Thomas Keller is incredibly wealthy. Danny Meyer is incredibly wealthy, and they've built two of the most generous restaurant groups operating today.
[00:41:49] See, what I think is that Profit actually protects hospitality. Profit lets you pay people better. Profit lets you replace the broken equipment instead of putting another band aid on it. Profit lets you close for renovations. Profit lets you invest in training, in development. Profit lets you survive a bad month. Profit lets you say no to a terrible landlord.
[00:42:13] Profit lets you take care of your family. It lets you take a vacation. It helps you get a good night's sleep. Profit gives you choices.
[00:42:22] And ultimately, that's what I've always believed a successful business should create. Freedom, Financial freedom, time freedom, options, impact.
[00:42:34] See if the restaurant generates revenue but consumes your entire life, I just don't consider that success.
[00:42:41] So again, if you're doing $4 million a year, but you can't take your kid to a baseball game because the restaurant would fall apart without you, then we've got work to do.
[00:42:51] The goal isn't simply to make the restaurant more profitable. The goal is to use that profitability to build a better life. To be there for your friends, for your family, for you.
[00:43:03] Because you're going to be better for your restaurant if you can be better for all of them.
[00:43:08] I was talking about this about two weeks ago, said, if I took over your restaurant tomorrow, right? What would I do? So let's make this practical. Practical. If I walked into your restaurant tomorrow and you said, hey, Chip, just fix it, here's where I would start. First, I would say, show me the numbers. I want to look at your sales, at labor, at cogs. That would give me prime cost. I would understand where your profitability is, and I would want trends, not just one isolated month. I want to look at where you were last month and the month before and the month before and the month before and against year over year numbers.
[00:43:42] And I would want to see.
[00:43:45] I would want to see where things are, and I would want to understand what you're doing to make those numbers happen.
[00:43:51] I would ask you then to show me the menu. I want product mix, right? So I want to see what you sell, how much you sell of each thing. I would want to look at your recipe cards, so I could see profitability and contribution margin.
[00:44:05] That would give me a matrix. I would see the popularity and profitability of the items on your menu. I would look at the pricing. I would look at your sales mix.
[00:44:15] Ultimately, I would look at your price, anchoring your premium items, all of that.
[00:44:20] I would want to know the tool that you're using to generate revenue. Third, I would ask for you to show me the schedule and show me the forecast that it was built from. If there Isn't one. Then that's the first thing we fix.
[00:44:35] Fourth, I would want you to show me your systems. Inventory, ordering, prep training, opening checklists, closing checklists, your management, your accountability, your sales scripts.
[00:44:48] Fifth, I would ask you to show me the guest journey. Meaning how do people discover you?
[00:44:54] What would make them choose you over any of the options out there?
[00:44:58] What happens when they arrive?
[00:45:00] Talk to me about steps of service. What are we doing to increase check average? What are we doing to capture their information and grow our list? What exactly brings them back? Because remember, customers experience sales profit.
[00:45:14] Then I'd ask you one crucial question. We ask this of Almost every single P3 member when they come to the program.
[00:45:22] Where is the biggest constraint? Not 27 constraints. The one. The biggest one. I talk about Gary Keller's book, the One thing. What's the one thing you could do that would make everything else unnecessary or easier? What's the one biggest constraint? What's the one thing?
[00:45:39] Because again, owners get overwhelmed when they try to fix everything all at once.
[00:45:44] Maybe your biggest issue is pricing. Great, we fix pricing. Maybe it's labor productivity. Great, we fix that. Maybe it's this bloated menu. Great, we fix that. Maybe sales are simply too low to support the infrastructure that you've built. Great, we fix that. Maybe it's marketing. We fix that. Whatever it is, we find the constraint. We call it the areas of opportunity. We look for our areas of opportunity and we attack it. One, we attack it. Then we measure the results.
[00:46:14] Then we find the next one. We attack it. We measure the results.
[00:46:17] That is how you transform your business over 90 days. 120 days.
[00:46:24] So here's the deal. Your homework. I promised you Restaurant Profitability 101. I promised you a very long, big, dense episode. And that's what this is. I asked you to get pen and paper. I hope you listen to me and I hope you've been taking notes and writing all of this down.
[00:46:39] I'm not going to let you finish this episode and feel motivated for 12 minutes and then go back to doing exactly what you were doing before.
[00:46:46] So here's your homework. I want you to pull your last three months of financials, your P. Ls. I want you to write down the four numbers we talked about. Sales, cogs, labor, and your profit. And I want the percentages on all of those. If prime cost is more than 60% of revenue, that's a problem. If profit is anything less than 15%, then you've got your work cut out for you. I want you to put Each of those months side by side. Right? Again, just look at the last three months of financials. PNLs for the last three months. Find those four numbers on each of those three pages. Put them side by side. And I want you to ask what's changing? What's staying the same? What's improving? What's getting worse? Where is the money going?
[00:47:31] Next, I want you to pull your menu item sales. Right? You're going to look at your PM X, identify your highest volume items. Then determine which items generate the greatest contribution margin. Right? That's profitability. Right? Where those lists overlap, those are your stars. Next, look at your next schedule. And I want you to ask your manager, your gm, your service manager, whoever does your schedule, what sales forecast was this schedule built from?
[00:47:57] That question alone might change your entire restaurant.
[00:48:02] Finally, I want you to look at your restaurant through these five lenses. Menu, pricing, labor, marketing and experience. We talked about this, right? I want you to score yourself from 1 to 10 in each of those categories. Menu from 1 to 10, pricing from 1 to 10. Labor from 1 to 10. Marketing 1 to 10 and your experience.
[00:48:23] Where's the lowest score? That's probably where we would start.
[00:48:27] Finally, to close, I want you to understand that we are building a business that is actually worth owning. Right? I want to bring this all the way back to where we started. Remember, 5%, 5 cents on every dollar generated. $5 for every hundred bucks that comes through your front door. On a million dollar restaurant, that's about $50,000 in profit. Most restaurants have two, three, four owners. So it gets split among many people.
[00:48:56] Even if it's just you and one partner, that $50,000 is 25k for you, 25k for somebody else. I don't know about you, but I think we work way too hard to make 25k.
[00:49:06] This is a brutally difficult business. You know that. I know that the latest industry data continues to show enormous pressure from food pricing increases from labor increases and other operating costs. Again, I know that you know that. But I don't tell you all that so that you'll simply accept a mediocre percentage.
[00:49:25] Mediocre profitability. I tell you that because the margin for error is too narrow. You cannot afford to run your business on instinct alone. You have to run it by numbers. You cannot afford to wait until the accountant tells you what happened six weeks ago. You can't afford to confuse sales with success.
[00:49:45] And you cannot work hard enough to overcome a broken business model.
[00:49:50] You have to understand your numbers, then you have to build systems, then you empower your people, then improve the experience, Then generate more sales so you have growth to ultimately generate more profit. And you do that again and again and again. I talk a lot about the P3 mastermind. Do you know what the three P stand for? It's Profit Progress Process.
[00:50:15] Right. We target profit. We make progress every single day. And we put a process into place to make those things possible and consistent and automatic. Again, we generate sales, increasing profitability. We protect that profit and do it again and again and again.
[00:50:33] Let me remind you, the goal isn't to own a restaurant that looks successful from the outside.
[00:50:39] The goal isn't to have a lion out the door while you're quietly wondering how you're going to make payroll next week. The goal isn't to build a $5 million restaurant that pays you less than one of your managers.
[00:50:51] The goal is to build a business that's actually worth owning. A business that generates consistent, predictable profit. One that creates opportunity. A business that takes care of its employees and its guests. A business that doesn't require you to sacrifice your entire life just to keep it alive.
[00:51:11] And see, that's what profitability, in the end, gives you. Not a bigger number on a spreadsheet, but freedom. Freedom to invest, freedom to grow, freedom to hire, freedom to step away if you want. Freedom to choose what's next. That's why all this stuff matters. That's why I do this show. That's why I've got the P3 mastermind. That's why I give talks. That's why I write books. So if you're listening to this and your restaurant isn't producing the profit you think it should, don't work harder tomorrow. Don't walk into the restaurant and tell everybody that they need to care more.
[00:51:44] Don't immediately cut another person from the schedule. But look at the business.
[00:51:49] Find the constraint, the one thing. Put a system into place to fix that one thing. Measure the result, and find the next thing, and the next thing, and the next thing. Because your restaurant should do more than generate revenue. It should create a return on the life you're investing in it. That's the business that we're trying to build. That's why I created the P3 mastermind.
[00:52:11] Guys, I appreciate you being here. If any of this has resonated, if you're ready, if you're ready for a change, if you're ready for something new, then do the homework. Do the things I've assigned here. And if you need a coach, if you need somebody in your corner to help hold you accountable and show you.
[00:52:30] Come work with us for six months. That's what the P3 mastermind is all about. You start that conversation by going to RSprophet.com and that link is in the show notes. This is a long one. I told you it would be. And I appreciate you taking the time to be here with me. Thank you very much and I will see you next time.
