3 Tips for Cafe Profitability

Everyone’s motivation for buying or starting a cafe is different, and many cafe owners are ex-baristas or chefs and not necessarily business minded. Cafes can look like an easy way to make money and many are surprised at how hard it is to turn a profit.

Beyond the day to day running of shifts is the complex framework that owners need to have in place to ensure their business is running in a sustainable manner. These are things like managing cash flow, creating strategies for growth, staying on top of compliance, updating systems, and being nimble and adjusting your product and services to compete within a saturated and constantly evolving market, but it’s often the financial aspects that are the most stressful.

If you’re a solo operator, juggling all of the elements that yield financial success can be a real challenge. Whatever your business structure, you need to find the right people to help you cover the bases and employ experts as needed to support you.

Success means different things to different people and even in your own business, as you reach milestones, your view of success will change. This happens as you achieve goals and set new ones.

Whatever your view, the overarching outcome of success sits in the creation of a sustainable and profitable business. This means at the very least having a cafe that provides you a decent wage, with a modest profit. In addition to that, smart operators are working at building their business toward a future sale to get a one off bonus payout and redeem their initial investment.

Whether you’re working toward selling, maintaining or expanding your business, there is one core element that will allow your business to be successful, and that’s profitability.

Profitability is the ability for your business to generate profit from its overall operations, and it’s the ultimate driver of success or failure in your business. Put simply, you can be turning over strong sales numbers and still not have a profitable business if you’re not on top of your expenses.

Achieving profitability is a combination of financial oversight, good planning, systems and procedures, expert assistance and a method of ongoing accountability to help you stick to your plans. What I’m finding in struggling businesses right now is a lack of understanding of the financials, little attention to the flexible costs within the business, and the lack of a ‘sales culture’.

By no means do I consider myself a financial expert, but in my many years as a cafe owner, understanding the levers that drive profitability was vital to the success of my businesses, and while there are a multitude of factors that can influence profitability, I’m going to focus on three key things that can bring you some quick results;

Knowing Your Numbers
Building a Sales Culture
Managing Menu Costs

KNOW YOUR NUMBERS

We’re seeing one key problem with our new clients and that is they don’t have real-time financial oversight in their business.

Even if you’re not a numbers person, you’ll need to know the basics, like how to read a profit and loss statement (P&L) and balance sheet, how to determine your wages, cost of goods sold (COGS) and operating expenses as a percentage of overall takings, how GST works and the balancing act of achieving your profitability formula.

When I first started in business we worked with a simple profitability formula like this:

Wage costs                30%
COGS                           30%
Operating Costs       30%
Profit                            10%

Based on recent industry data, the formula now looks more like this:

Wage costs                35-40%
COGS                           25-30%
Operating Costs       30-35%
Profit                            4-7%

Industry averages for profit margins should be a guide for you in your business, however as a unique business with your own unique circumstances, establishing your own profitability ratios and benchmarks for financial stability and growth is vital. For example, you may have low rent and two owners working in your business doing the work of four, allowing you to keep wages down and improve your profitability. In this instance you could be achieving your 30% wage costs.

When it comes to looking at your P & L and balance sheet, annually is too late. You need to be drawing regular reports from your POS and accounting software systems daily, weekly or at least fortnightly, and using that information to make the necessary adjustments.

Products like Kounta, Deputy & Xero in your business give you real time reporting capacity and the data to enable better decision making around rostering, staff performance, which products are selling and when they are selling, what your most profitable items are and annual performance tracking to name just a few of their best features. These digital tools also create a seamless relationship between you, your bookkeeper and your accountant by providing you an integrated network of information.

Within your business these tools allow your managers and team to have access to their own performance results, ATV/sales targets and expenditure budgets, which is another great aspect that fosters accountability and improves performance. I’m a big believer that knowledge is power and when a team is given the data and parameters around the expectations of their role, they have a chance to meet those targets.

What’s great about implementing software tools into your business is that you have direct and immediate access to the data you need and it’s not reliant on a manual process which can too easily be put on the back burner and never attended to.

BUILD A SALES CULTURE

One of the most important things you can do in your business is to hire well and have the right people at the face of your business. Waiters and counter staff that are confident, friendly and engaging are suited to customer facing roles. We all know this and yet so often we see the wrong personality types holding the most precious spaces in a business. Regardless of the circumstances that lead us into these situations, it’s important as cafe owners to continually reflect and correct, getting the right people on the right seats of the bus.

Once you have the aces in their places, it’s important to invest time in training them to deliver an authentic and engaging sales and customer experience.

Most cafe operators I talk to wouldn’t consider their front of house crew to be a strong sales team. Most cafe staff I either coach or encounter don’t act as, or consider themselves sales people. This is a big problem for small businesses that are faced with high competition and tight margins, but I understand it.

In the world today, the sales process is heavily integrated into our every move. Try ignoring digital billboards at traffic lights, or linger too long over an image on social media and you’ll be heavily marketed to. Insidious marketing practises are targeting us, but at the same time it’s making us better at sensing an inauthentic sales scenario.

My underlying philosophy around ‘sales’ is this – if you have a beautiful range of products on your menu, why wouldn’t you want to share that knowledge with your customers, so that they have every opportunity to experience them? This philosophy empowers me to feel confident in the sales process because providing customer satisfaction and a great customer experience is intrinsically linked to the sale of products.

How many times have you been in a cafe trying to get the attention of a waiter to order a second coffee or an additional item, and just given up? How many times have blockages like a lack of signage or no price tags meant you’ve missed the opportunity to order an item?

On the flipside, how many times have you been offered a sample item and ended up purchasing it either then, or at a later time because it tasted so good? How many times has a waiter passionately explained their favourite menu item and influenced your order? These are examples of simple everyday scenarios that either encourage or lose you a sale.

To build a strong sales team there are three key elements:

Product Knowledge
Training
Targets & Accountability

Product knowledge

How hard is it to sell something you don’t believe in? For me, it’s near impossible. To get your team enthusiastic about your product, let them experience it for themselves. It’s a sure fire way to get them engaged and build their confidence and sales language.

The better your team know your menu, the easier it will be for them to sell. The same applies to technical products like brew equipment and ancillaries – ensure the team understand what they are selling and what the applications are.

If you hold regular performance reviews, include product knowledge into staff KPIs. Having clear and accessible recipes with ingredients lists is an asset that not only facilitates product knowledge but creates efficiencies during busy periods.

Another great tool we work with is what I call a ‘Companion Sales Guide’ which is a guide of the best ‘add on’ item to complement a dish. If your team are allowed to order lunch from the menu, use this opportunity to ask them to complete the companion sales guide and share their knowledge with others. Product knowledge builds confidence and you need your sales team to be confident out there, using descriptive language to sell your products to your customers.

Training

Everyone learns at different speeds and in different ways, so it’s important to understand your team and how to coach them in a way that works to their strengths and learning capacity.

Being comfortable in any role takes time and practise. That’s why I love using the skills of the best ‘sellers’ in the team to train others. This process has a dual benefit, as it can reignite the trainer’s enthusiasm and teaches them new skills, while the trainee benefits from learning from a peer rather than the boss.

In our group training sessions I like to re-create customer scenarios, utilise role play and practise the language of sales to achieve sales outcomes. We encourage and incorporate ‘banter’ and a sense of ‘play’ into the sales conversation, which is in my view an absolute necessity in being able to weave a sale into a customer moment. With practise and after building good relationships with your customers, it does become second nature to your team.

Role play has the added benefit of helping to build empathy and understanding about the different needs that customers have, and we find inexperienced team members quickly understand the language and physical actions they need to handle different scenarios they’ll face.

We also encourage prompters like small black boards and good signage that promote daily deals to assist not-so-confident team members in the sales process.

Targets and Accountability

The impact that a 5% uptake of sales in your business can have, is substantial. On a turnover of 10K per week that’s less than twenty $4 upsells per day. That could be a side of haloumi, a second coffee or a muffin, and if you have 3 team members on any one shift, that’s just over six upsells each to reach that goal.

Setting targets and quantifying the potential results is a great way to bring your team along for the journey. It engages them with a focus point and deepens their understanding of the way they contribute to the business’ success.

The important thing with targets is to create a practise of reinforcing, often reminding and always rewarding the positive behaviours you are seeing. This all comes under the banner of accountability. There’s no point in half building your sales team. Following up on their success (or lack of), finding ways to evolve how they sell, identifying what’s working and improving their skills is vital to everyone staying on the same path toward the goals you have in place.

Everyone in your business should be working against some kind of target, whether that’s individual or group. A great measure for front of house teams is ATV (Average Transaction Value). This is a fair measure of how well your team is selling to your existing customers.

Set sales targets for your management team too. They should have targets that feed into your front of house team’s targets. With these I’d focus on weekly sales, wages and wastage targets.

MANAGING MENU COSTS

One of the big contributors to profitability sits with your menu. It’s one area where there can be fluctuations based on supplier prices, portioning and wastage. One key component however, is incorrect menu pricing.

If a menu isn’t costed out properly, with accompanying recipe cards and portioning guides for your kitchen team, or if suppliers increase their pricing over time and you don’t make the necessary adjustments to menu prices, this will directly impact your bottom line. When recipes and portioning are not followed it’s not only the product consistency and customer experience that is jeopardised, but also your profitability.

What we’re seeing with many of our small business clients is that cost of goods are sitting anywhere from 35 -50%, leaving no room for error and little hope for profit. In some cases we’ve seen individual menu items sitting as high as 87% food cost!

It’s surprising how many business owners haven’t costed out their menus, and have no idea how much each item is costing them. The reality is that many cafe owners are guessing menu prices and basing prices on the cafes around them.

Setting yourself up correctly with a suite of kitchen systems that will take out the guesswork and enable accuracy and accountability gives the best chance of success. Knowing how much each dish costs to produce, having clear recipe cards and portioning guides and then ensuring they are followed, are some of the items that should be in your kitchen suite.

There are many costing programs out there and some of them can be expensive. I highly recommend either purchasing a program or having professional assistance to complete your costings and set up your kitchen systems. If you have a chef on board, they should be capable of delivering you a fully costed menu based on your directive for COGs. In a cafe environment and if you haven’t placed priority or set targets around COGs, it is likely not to happen, so utilise the skills of your team where possible.

The reality though is you don’t need all the bells and whistles of an expensive costing program if this is out of your budget, you just need a calculator, some digital scales and some time. You could use a costing sheet. template like this one, but don’t forget sauces, garnishes and extras like packaging if it’s take away.

Once you’ve costed out your menu, then you have to work out what to do with the data.
You may have to raise prices, adjust portions or find cheaper ingredients. Most likely it’s a combination of these.

The other way to deliver an overall menu costs ratio that is in balance with your targets for COGs is to make less of a profit margin on some items and more on others. Make sure you identify those higher margin items to feature on promotions and be sure the floor staff know to push them. Your biggest sellers should have a good margin on them (unless you’re running a loss leader strategy combined with other higher margin items such as alcohol.)

Minimising the menu can be another strategy to help save costs. It reduces your stock levels, prep levels, wastage and can improve efficiency in general.

I mentioned before the ‘suite of kitchen systems’. These are the backbone of your kitchen and include things like portion guides, plate up guides and wastage logs to name a few. Having strong kitchen systems for accountability and product consistency are so important for your kitchen team and general profitability.

There’s so much more to cover with regard to managing your menu costs.  If you still want to know more, or would like help with another aspect of your business, you can get in touch with us via our website or drop a line to info@cafelab.com.au.