October 27, 2014 |

Critical Issues: Warning Signs

By Jeremy White

Sometimes, despite the most well thought out business plan, access to capital and a good product, restaurants fail. When this happens, any number of factors — in fact, it’s most often a combination of many — can be to blame. From poor marketing to nonexistent customer service to a lousy location, a few missteps today can end up costing an operator his business tomorrow.

Here, we take a brief look at a handful of “tells” that can signal a business is in trouble, then tell you what to do about it.

Warning Sign: Your balance sheet is a wreck
You might have: Too much debt

Your balance sheet, simply put, is a current snapshot of your operation’s health. It demonstrates your pizzeria’s assets, liabilities and your equity as the owner. If your liabilities — the amount you owe — are too high, you could be in real trouble. Whether it be from tapping out your lines of credit or (gasp!) using credit cards for major purchases, a balance sheet that’s out of balance is a disaster in the making.

Start by having an experienced foodservice accountant review your balance sheet. He or she will want to delve much deeper and will analyze your income statements, statement of cash flows, etc. If your debt is too high, you’ll need an aggressive plan to pay it down. If adequate cash flow to accomplish this doesn’t exist, then it is time to either cut costs or increase sales (or both). Easier said than done, we know. But an operation can’t sustain a heavy debt load long-term.

Start with cost-cutting measures such as streamlining staff (cross training is the key here). But do not tamper with your product. (See next warning sign.)

Warning Sign: You are considering switching to a cheaper cheese/sauce/vegetable/meat, etc.
You might have: To have your head examined!

Seriously, one of the biggest mistakes operators can make is to downgrade the quality of the food. It may make sense in your head: “If I save $XYZ per week on pepperoni, I can get back to break-even.” Here’s the problem: that subpar pepperoni isn’t fit for an animal, let alone human consumption. As soon as your customers taste the difference (and believe us, they will), they’ll abandon ship. And you’re left with a shop full of bad inventory and no customers to serve.
Your customers don’t visit because of your marketing. That got them in the door the first time, but it never brought them back again. They returned because they liked the food/service/price/convenience. Change your product for the worse … stand in the unemployment line. It’s that simple.

Warning Sign: Your employees are demoralized
You might have: Poor management

Examine the body language of your employees. Are they exuberant, open and outgoing? Do they smile and laugh at work? Do they serve customers with pep in their step? If not, then management is failing the staff. In turn, the staff is failing the customers. And we all know where this leads.

Employees make or break the energy of an establishment, so it behooves you to keep your staff motivated and happy. When you see signs that your crew isn’t happy, address them immediately. Find out what is on their minds and what you can do to make your shop the best place to work. If your staff feels underappreciated, that doesn’t mean you have to automatically throw more money at them. Often, the answer is more about leadership and other perks, such as free meals at the end of a shift or learning trips to pizza-centric cities such as New York or Chicago.

A perk for you: employee retention measures can save countless hours and thousands of dollars that many restaurants spend on re-hiring and re-training the same position over and over again.

Darryl Reginelli, co-owner of Reginelli’s Pizzeria in New Orleans, Louisiana, says: “the employer is responsible for fostering an environment that gets the new hire connected to the company and turns that employee into a ‘keeper.’ This is most easily done through clear, honest communication and support. A system of performance reviews that measure all applicable skills and traits should be used. Don’t just talk to your employees about their performance. Instead, give them a typed or written review that can be discussed together and kept by them for reference. You’ll find that your employees will value their reviews, good and bad, because their superiors took time to think about their future.”

Additionally, Reginelli says it is crucial to “build a culture beyond the walls of your restaurant. Everyone wants to be part of something greater. Eventually, the job will become routine. Even your best employees will need a deeper connection to their work. Integrate your business into the community. Donating product, time and staff to local organizations and events benefits everyone involved. It’s something your staff will be proud of and it will set your business apart from others.”

Warning Sign: Sales are good, but profit is low.
You might have: A problem with employee theft

Sad, but all too true: employee theft happens in this industry more than anyone wants to admit. “Big” Dave Ostrander says that one of his first assignments when he started consulting was to help turn around a group of pizzerias that were barely keeping afloat. The owners, he says, were in serious trouble.

“They had cashed in all of their CDs, 401ks and charged their credit cards to the max,” says Ostrander.

At first glance, the situation had Big Dave puzzled. The group was receiving fair pricing from vendors and had implemented a solid portion control system. A closer look at the financial statements told Ostrander that the company was most likely being plagued by a thief on the inside. To prove his suspicion, Ostrander planted one of his former pizzeria employees on the pizza company’s staff.

“He was hired in as a driver/rookie pizza maker,” explains Ostrander. His real job “was to determine who was stealing and how much was being skimmed.”

As it turns out, one general manager and several drivers were in collusion with one another.
“A year later,” says Ostrander, “my client went from losing $40,000 a year to making $75,000. The $2,000-a-week difference saved the operation.”

You don’t have to plant a mole to catch a thief. Often, a series of security cameras throughout your business — some of them fake, even — can make a big difference.

Warning Sign: Your food costs are trending higher
You might have: A battle with cheese prices

As of the time of this article, operators were getting a much-needed break in the cheese cost category. In early March, when we sent this issue to press, 40-pound cheddar blocks were trading at $1.46 per pound on the Chicago Mercantile Exchange. Compare this to prices in the $2.15 per pound range in early August.

To seasoned operators, this up and down is nothing new. But to an inexperienced pizzeria owner, cheese price fluctuations can quickly kill the desire to own a restaurant. No one understands this better than Ostrander, who fields calls all year long about cheese prices, cheese usage and portioning cheese.

“Most foodservice distributors set the price of cheese, specifically mozzarella, on a weekly basis,” Ostrander explains.

The weekly selling price is typically based on several factors. Ostrander says the five prime considerations are: cost of cheese from the factory, transportation costs from factory to warehouse, administration and selling costs, delivery costs and profit on the account.

It’s important to know that, contrary to the belief of many pizzeria owners, distributors don’t pave their offices with gold off of cheese sales. In fact, Ostrander says, “they make only pennies per pound in profit.”

While that’s good to know, it doesn’t ease the burden on pizzeria operations. So, what are you to do? Ostrander recommends being an informed buyer.

“The U.S. Department of Agriculture (USDA) has created federal Standards of Identity for mozzarella based on moisture (water) and milk fat content,” he explains. “Whole milk and part-skim mozzarella is allowed to contain moisture contents between 52 and 60 percent. Cheeses with moisture contents this high are hard to process, age quickly and don’t bake up well. Low moisture, whole milk and part skim mozzarella  (LMWM, LMSP) contain moisture contents of 45 to 52 percent moisture. Pizza cheese can’t be called mozzarella if the moisture content is higher than allowed by the USDA. Cheese with 45 percent moisture is not the same as cheese with 52 percent moisture, even though they carry the same name. The higher moisture cheeses have a lower production cost because water is cheap. Bargain and economy cheese will most likely have these higher moisture contents and sell for a lower price.”

Translation: choose the right cheese for your operation. This, says Ostrander, “starts with comparing the baking and eating characteristics of equal portions of competing brands. Sometimes a higher cost per pound premium cheese will yield a pizza that is better tasting and better looking using 10 to 15 percent less cheese per pie. Instead of comparing price per pound or ounce from competing brands, you may want to compare cost per pizza using fewer ounces.”