When I was a young pup 25 years ago, my landlord approached me. I had been renting my restaurant from him for five years or so. Ray was retired from the phone company and wanted to sell his local real estate properties and buy a retirement place in Florida. I was the de-facto landlord anyways. When he hit me with his asking price I got a serious case of sticker shock. When I brought this up to my trusted accountant he was optimistically enthusiastic. I didn’t think it was possible to ever own a shopping plaza and 135 feet of prime US-23 highway frontage. I was thinking how tough it was to scrape up the rent in the middle of winter. Chuck, my accountant, was looking at the opportunity for a long-term investment. His advice to me was: “Buy the place. We’ll make the money work. You’ll thank me when you decide to retire.” I also asked the advice of a real estate guru friend and my banker. They all gave me the green flag.
I discussed the possibility of counter offering 10 percent less than the asking price and was out-voted by my group of advisors. Every one of them advised I agree to the asking price. They told me that if I started to haggle on price my landlord would withdraw the offer. As it turns out my arch-rival in town was ready to pounce on the purchase. He had money and hated my guts. I’m sure he would have relished the thought of being my landlord. Twenty years later I sold the place to one of my tenants and semiretired, fairly well off for the son of a school bus driver. What sage advice I got from others. Without their counsel I wouldn’t have had the nerve and expertise to pull off the purchase.
During my 30 years of restaurant ownership I have leaned on the advice of 3 accountants and a few close friends who were very successful in their businesses. What my friends lacked in college degrees they made up for in business sense. My wife and life partner has enough degrees for all of them and is my final advisor. I married up.
Back then, in the mid-eighties, I was driven to succeed. If you tried to sell pizza in my town, I was your worst nightmare. I had graduated from the school of hard knocks and had mastered pizza making, leadership and defined and refined many guerilla marketing tactics. I was learning the ways of business one bitter and expensive lesson at a time. Until I went all in and purchased the real estate, I was mediocre at best in things money and financially related. In fact, it seemed that every time I dug myself out of a debt hole, I dug a new one. I think I was a glutton for punishment. If I were one of The Donald’s apprentices, I would have fired myself. The time had come for me to stop playing restaurateur and start being one.
This is the time I created my loose group of advisors I called The Old Grizzlies. These veterans had more battle scars and business smarts than I would ever have. I called a group meeting as situations arose and traded lots of pizza for priceless advice.
Until I became a land baron, I wasn’t required to account to anyone. If I had a profitable year, life was good. If I had an unprofitable year, we just went without the spoils of success. Chuck, my accountant, was about to give me a wakeup call. He assured me that he would make the numbers work if I decided to buy the place. He failed to tell me at the time that he would start questioning my every expense. He would challenge me to run a tighter and tighter ship. If 33 percent food cost was the norm, he challenged me to shave 2 percent off. When you zero in on every controllable expense item, your numbers will get better. Since he was not biased or grounded in the day-to-day operations of a restaurant, he put everything under the spyglass. After a few months my bottom line was on an upswing. We didn’t have any problem meeting my mortgage obligation. My tenants were happy and profitable. No whining, attitude or tardiness on the rent.
I can’t stress enough how much money was wasted weekly by free throwing toppings on pies. I shudder to think that if I had been as diligent when I made the first million pies as I was the last million, my financial outcome would have been significantly better. The cheap and simple act of pre-weighing cups of cheese and placing a scale on the make line saved me over $400 a week. I’ve seen many 5-8 percent improvements in food cost when working with owners who get it once they see it with their own eyes. I also decided to buy all of my groceries from one primary supplier. In today’s jargon it’s called Prime Vendor Agreement. When I implemented it 25 years ago it was called buying at Cost Plus.
Chuck, the bean counter, now had me zoom into the next highest expense: labor. Controlling this line item is trickier than portion controlling by far. It’s harder to control people than things. The first step was to establish a baseline labor expense percentage. This percentage was calculated two ways. The down and dirty percentage I was shooting for on a weekly basis was computed by my POS system: hourly and salaried wages divided by hourly and daily sales. This amount was 22 percent. After the hidden soft costs are added in, like matching employer social security, unemployment and workers’ comp insurance — plus any employee benefits — the true labor cost averaged at 25-26 percent. My manager’s bonus was directly tied to labor cost and he monitored it like a hawk. Every hour he would print a real time labor cost report. This report was accurate to the minute and made the decision to send someone home early very easy. Prior to setting a ceiling on labor we were generally overstaffed during slow shifts and understaffed during rush hours. We also graphed daily and hourly sales versus labor for the slowest days of the week (M-T-W-Th), as well as the busy weekend days.
During the slow days, we couldn’t hit low labor because we had to minimally staff. We made up for it on the weekends when we had just enough people to take care of business with very few low-productivity hours. We often hit 15 and 16 percent hours. The only way we could do this is to have cross-trained everyone so they were proficient in what I call the “Make It, Bake It & Take It” functions. It was not uncommon to see cooks delivering and drivers answering phones and preparing orders. We were able to pay more per hour by developing high-sense of- urgency crew members. We had pretty much removed all the fat from the schedule. One lightning cook can produce two to three times the volume of a slow cook. We did a time study on everything and knew exactly how much time it took to perform a function. Our best times were legendary. We could hand toss, sauce and cheese a 14-inch pizza and get it in the oven in 23 seconds. We could chop and box a pizza in 10 seconds. We could politely and professionally answer the phone and take an order, then repeat it back for accuracy and quote a price and delivery time in 44 seconds. Everything that is measured is improved.
A well run and managed pizzeria can achieve a food and labor cost of 60 percent. Big Dave’s ran at 55 percent more than 10 months a year. When I see an operation running at 65 percent and more Prime Cost, I know they are close to being unprofitable. That’s when a serious intervention is in order, ASAP. Get your prime costs in order now. If you do, you probably won’t fail to make money. ?
Big Dave Ostrander owned a highly successful independent pizzeria before becoming a consultant, speaker and internationally sought-after trainer. He is a monthly contributor to Pizza Today and leads seminars on operational topics for the family of Pizza Expo tradeshows.