From an unlawful detainer action to a 5 day pay or quit or simply an inability to meet your obligations, the strategy for finding a solution remains the same.

One of the issues we regularly come into contact with in our capacity as turnaround consultants for insolvent or underperforming units are our clients lease obligations. Typically executed during the “good times”, they have often proved to be an onerous burden on struggling units and when cash flow is tight and a business needs to be lean, the ability to renegotiate these leases is often the ‘make or break’ factor.

For a landlord to serve a 3 or 5 day notice to pay or quit, it may mean that talks to date have failed (or perhaps not occurred) and at this point the landlord is making it abundantly clear that they are willing to risk having a vacant property rather than keeping you as a tenant. Essentially, the landlord is looking to stop the bleeding as he or she does not have faith in your ability to remain as a tenant. At other times, the notice may merely be a strategic move to force you to repay some of the monies owing with no genuine intention of actually evicting you. Either way, receiving a ‘pay or quit’ is a nasty feeling for an operator and creates fear and insecurity for the business. As if cash flow was not tight enough already you now need to retain counsel.

Whilst we are not lawyers we do, however, work closely with our client’s legal team in defining a strategy that makes the most sense under the circumstances and provides the business with the maximum leverage. Our involvement is typically based on the competency of counsel as well as the operator’s ability to see the big picture. Our advice is ‘always get the best advice’. If you need legal advice, don’t use your local firm simply because you know them. Find out what they have done in your sector and ensure you are using someone with the right experience because good advice always pays its way, especially when dealing with something like an Unlawful Detainer – which has very little “appeal” process if you are on the wrong side of the judge’s decision.

Whilst OnSite can make a significant impact on the non fixed costs and provide drastic savings, increased operational profitability and streamlining the concept, if the rental amount (typically 7% to 10% of gross sales) is unsustainable, then the value in trying to save the business may be flawed from the day we arrive.

In a majority of recent cases we have been involved in and where we have engaged with landlords in cases of crippling rent, landlords have often been willing to make a number of concessions when presented with a fair option. It is critical not to ask the landlord to reduce the rent in order to offset operator error or concept failure – if you are running your business badly it is neither their problem nor their responsabillity to subsidise you. This is one area where our appointment provides immediate confidence and assistance to the business: We immediately step in to confirm that the operations are being streamlined and efficiencies are being introduced.

An operator who has made significant errors but successfully repositioned the concept and provided a viable and profitable model still has significant leverage because he or she has identified the problem and found a solution. Typically, landlords recognize the current economic challenges that their tenants face and to the extent that they have a good relationship with their tenant, a paying tenant is a better proposition than a vacant, non rent producing unit. You must engage with your landlord in a professional way as simply ignoring the situation will only make matters worse and enrage the already frustrated owner of your site.

When either handling a pay or quit, an unlawful detainer action or even thinking it may be time to attempt to renegotiate with your landlord, you must remember that as a paying tenant, despite your reservations, you certainly have leverage. You should offer a value proposition that makes sense, with financial payments you can meet in a timely fashion and that work both in the short and long term plans.

In all instances, we suggest the landlord be treated as a partner and where available, make modifications to the lease and rental amounts to provide for a base plus gross volume percentage. This would allow, in some instances, for an immediate reduction in the base but also provide the landlord with additional revenue potential based on the expectation that business will grow and ultimately, get back to its pre-recession top line revenues. This will only happen, however, when you can provide absolute data on your business and demonstrate its ability to provide the landlord with this upside.

We have clients where their landlords have offered rent reductions without it being offset into a loan for payback in the future, whilst others have required the operator to personally guarantee the value of the offset. Arguably this creates an unfair obligation and high level of personal exposure for the tenant, however in circumstances where the rent must be reduced to secure the future of the business, operators have to make tough decisions and compromise in areas they would typically consider off limits if they want a second chance on an existing rental contract.

When proposing a change to a landlord, it must be just that – a proposal. It cannot be neither theoretical or hypothetical nor can it be a napkin with some ideas scribbled on it. The operator is pitching his or her landlord to not only receive a reduced rent but also to have faith in the future of the business: This is a lot to ask. This pressure forces an operator to treat their business as a business and create the required cash flow statements and forecasts, to define a cash model that shows a number of different options to the landlord for them to be made whole and exactly how the tenant expects to realize that. You are pitching to your landlord and should make every possible effort to do so in the most professional way.

If your P&L shows a monthly loss, presenting a landlord with a burden you cannot meet and which you are likely to breach is much the same as saying you intend to breach it. You are not being honest and the landlord will spot this and have no faith in what you are proposing. On the assumption that the model will be redefined and the unit is either moving to, trending towards or is profitable, step one has been completed. A practical landlord has less reason to remove a profitable tenant if an equitable deal can be made and a clear path to get there can be defined.

With the P&L showing or trending towards profitability and the creation of cash flow allocations, forecasts and debt amortization tables, you should now be able to show your ability to manage the historic debt obligations you have and the shelf life on those. For most facilities, the P&L is not the problem – rather it is the cash flow that provides the greatest challenge. The ability (or lack thereof) to service the debt with the profits or available cash flow the unit generates is typically the biggest issue in turnaround business plans. This is immediately exasperated by the issuance of a landlord Pay or Quit notice, as lenders will now not be willing to lend money in such an unsettling environment.

This requirement to have a demonstrable business case also ties in to one of the important operational aspects of a business. You must understand your numbers and you cash flow because what it all comes down to is understanding your data and using the information the data provides to drive your business decisions. If you are running a business where you cannot see, down to minute detail, everything from your stock levels to your net margin on dishes served, then you are then running a business that is not worthy of a landlord workout. This financial information and the ability to scrutinize it is one of the keys to restoring profitability.

For our clients and now hopefully for you, with the creation and utilization of rolling cash flow forecasts showing your ability to manage your obligations, you are now able to create a number of options for your landlord or for that matter, any creditor. You can demonstrate with authority and confidence exactly how you intend to pay debts based on what you realistically earn and can pay. Every creditor would prefer to know what you can pay and will pay regularly rather than what you would like to pay but may not be able to with regularity. The intent to breach a deal or regular breaches of financial commitments made only compounds and exacerbates the problem and the relationship – and creates difficulty trying to structure a new deal.

In proposing to a landlord that an adjustment to the rent structure can be viable, it is important and crucial that the immediate recent cash flow shows that whatever is proposed can actually work now, not based on hypothetical projections of increased revenue.

It is also important to note that as a tenant, you should not be trying to salvage the situation if you are not confident that through renewed efforts and a workable landlord you can increase sales and improve the bottom line. This cannot be about working out a deal just to survive because that alone will certainly not incentivize the landlord to renegotiate.

While there are many different interpretations and variations, there are essentially two options for a reworked lease, “less now, more later” or “base plus gross percentage”.

The “less now, more later” option asks for the landlord to decrease the monthly rentin the short term but increasing the rent in the medium to long term. Less cash is therefore required ‘now’ when the business is in trouble but when it is thriving once again, the landlord can claw back rent lost in earlier years with higher income. This option provides for a set increase and is a less riskier option for the landlord but also negates any large reward for the landlords renewed faith and risk.

The “base plus gross percentage” model lets the landlord accept a lower base rental amount but participate in a percentage of gross revenue (important to note that this is always gross and not net revenue).  There are essentially two different types of percentage rent, the most common being based on receiving a percentage of sales benchmarked against a particular target (eg, $2k base and 6% of gross revenue over $500k). The other practical option is a percentage of total revenue but guaranteed with a base amount (eg, 3% of gross sales, base of $3k).  This is riskier for the landlord but has the attraction of a much more lucrative upside.

In some instances, however, the landlord is no longer willing to wait for rent or strike a deal and under those circumstances, a pay or quit is served. For many struggling venues, this is the final nail in the coffin and as if it could not get any worse, they now have to retain an attorney and use the few pennies left in the bank for legal service rather than operational or debt service.

In our experience, however, this onerous and unpleasant process provides a number of theoretical upside opportunities for both the landlord and tenant. If the process is managed appropriately, it can equally be a fresh start for the business as the decision makers are finally forced to make tough decisions that have likely been put off (perhaps in the hope they will disappear).

Upon being served, now knowing the landlord is willing to go ‘all the way’, the first step is to ask for an extension. This gives you all time to arrange to meet for a frank and open discussion (presuming the option is there) and with everyone’s chips on the table, it allows a thorough discussion as to whether there is a deal to be done. Whilst it is common to believe the landlord is in the driving seat, this is not always the case. If your financial modeling proves your ability as a tenant, the landlord is not looking for a vacant unit and financial exposure for the sake of it and would likely rather not restart the process of finding a new tenant. Equally, if no deal is to be found, you will have sufficient time to contemplate your legal position and take advice as opposed to making a rushed and insufficiently thought out decision.

This article is not about defenses to an unlawful detainer in an effort to find the landlord at fault with a defective service nor is this a step by step guide to the legal options available when responding (answer, demurrer or motion to quash) to such a motion. Furthermore, this is also not an article seeking to find potential covenant breach or retaliatory evictions. There are hundreds of options to drag out, extend and respond to a UD that your counsel can advise on. This is about the options or remedies that you may wish to explore if your concept is viable and you can “make it work” both on paper and in practical terms. This is about turning around your business and dealing with the issue of burdensome rent whilst also nursing your unit back to full health.

Understanding what has to happen and the legal strategy your business should take is unique to each situation. In some instances, the balance outstanding along with other debts may make a bankruptcy with intention of assuming the lease a viable option. In other instances, performing an Assignment for the benefit of Creditors (ABC) with your landlord allowing the debt to rollover to the new entity might be a potential solution.

At other times, it is just a matter of legal defense and starting the process of ensuring your lease is upheld. As an operator your entire business is tied to the lease and whilst there may be some assets (FFE, Liquor license and other items) the only real asset is the lease.

For clients who have run into difficulty with their lease obligations based on year on year and month on month revenue decline, we have seen successful use of California’s “hardship defense”. The value of this defense is that the entire concept of an unlawful detainer is the landlord asking for vacation of the property as an equitable remedy, grounded in fairness. If the landlord is asking the Court to act fairly and return the property then the court must provide you, by default, with that same level of fairness.

If you are experiencing this month on month decline in your business after you entered into a commercial agreement with specific revenue expectations you have not been able to meet – and where you have not been able to meet those due to the economic climate – then this hardship defense has merit. You did not enter into the agreement on false premise nor did you seek to mislead the landlord in committing to pay this rental amount because as an operator, the business case seemed viable. In this climate where business owners are struggling to keep their doors open, the hardship defense is very relevant and one you should turn your attention to and, where relevant, discuss it with your attorney.

This legal process of eviction is terrifying because it does not deal with overdue collections and summary judgments: Instead, the entire business is at risk. Think laterally and contemplate how you can involve your landlord to your mutual benefit because both parties stand to gain from finding a solution in these circumstances.

The next big ‘thing’ is more often than not an old fashioned and tried and tested ‘thing’ with a shiny new layer of gloss and some lessons learnt thrown in to the pot. The same applies in management and in my view, the coming business year will see a greater focus on employee incentivisation, specifically how giving executives and/or employees some sort of shares in a company can be the key to unlocking your business’s potential. What greater way to motivate each and every staff member than by giving them all a little piece of the pie?

Employees share option schemes (ESOPs), pension plans (such as the USA’s 401k) or Enterprise Management Incentive Schemes (UK) are common in publicly traded companies across the globe. Share price data is publicly available information and those shares are therefore tangible and easy to buy and sell. Equivalent schemes in private companies are less widespread however a practical program for the business with a notional trading platform and ‘shares’ for staff is certainly implementable.

The economic challenges we are all facing compound the view that current incentives are inappropriate and can lead to problems triggered by a lack of short, medium or long term accountability for corporate decision making. Bonuses are generated by short term deliverables which may not be in the best interest of the company and a logical replacement to this practice is a more long term, golden handcuff arrangement. Share schemes are a safe and fair way to motivate staff whilst ensuring their goals are entirely aligned with those of the whole company.

The USA has typically led the way for such private share schemes, typically known as phantom stock options or stock appreciation rights (SARs). One of the founding fathers of such practice was UPS, founded in 1907. Until its listing on the stock exchange in 1999, the company was broadly owned by non management, management and supervisory personnel – a practice established by Jim Casey in the 1920s when he gave staff the opportunity to purchase company shares. UPS regularly ran a stock purchasing program before the IPO where staff could trade shares. In January 1997 the price was set at $29.25 and by March 1999 it had risen to $47.

In November 1999, the Company offered 10% of its stock to the public for the first time and on the first day of trading, the stock closed at $67.25. Not only did employees benefit until 1999 with the phantom scheme but with the IPO, they had a second and larger windfall with an even more liquid platform on which they could trade their shares. Hard work and loyalty were repaid twice over.

Why should you offer shares to your staff? It motivates employees, improves firm performance, fosters innovation and promotes sound financial health. It promotes staff loyalty and attracts and retains a high caliber of staff who want to have a vested interest in their future. To give staff the status of part owner of a business is a very powerful motivator.

There is of course a cost in implementing such schemes because you will undoubtedly need advice from specialists. There are accounting and tax issues at play here and it is critical to ensure that the framework you build takes into account local tax issues, accounting implications for your balance sheet and other miscellaneous issues such as ensuring that you allocate enough stock to a trust so that future employees can benefit, ensuring the vesting period is appropriate. Yes they cost money but perhaps the money spent on rolling one of these out would be made back, and several times over, by an all round improved performance by staff.

OnSite Consulting is a nationwide hospitality and consulting company to the casino, hotel & restaurant market. Providing immediate solutions for sites seeking turnaround, insolvency and concept repositioning. www.onsiteconsulting.com

On a daily basis we are required to explain to clients what we mean when we say that ‘a customer does all the work’ in a restaurant, not the operator. Whilst the concept is initially indigestible for an operator, it is nevertheless true. The customer does all the work.

The majority of our customers have focused time and effort contemplating everything BUT the customer. Handling and managing vendors, payroll, human resources and all the miscellaneous tasks that need to get done by someone running a hospitality venue. If these areas are either outsourced or run efficiently, the venues would see an immediate and dramatic increase in revenue – because they would have time to think about the key driver of their business: The customer.

As a restaurateur, you can only expect to get out (receive) what you put in and it all comes back to rewarding the customer for the work they do in arriving at your restaurant. Still puzzled?

When a customer decides they want to eat out there are hundreds if not thousands of different dining options that they can choose from. They made the decision to choose you. They are the ones who have to spend on gas and parking to get to your doorstep and they are the ones who chose to take a break from working (making money) or spending time with other family or friends to eat at your restaurant. They are the ones who took the time to rally the troops and make a reservation.

Once they are in the door, they are taking a risk with their family, friends, business associates or date: They are hoping that this experience and food will be a great one and will be worth both the money they will have to spend and the time. Additionally, the central customer is hoping that the choice of restaurant reflects well on him or her and as opposed to the embarrassment of having made a poor decision. A restaurant, meanwhile, has no risk. A customer walking in is simply an opportunity for them to provide the customer with the experience they deserve which will bring repeat business and/or recommendations to friends or online portals.

The customer is taking all the risk and can end up bearing the brunt of the restaurants mistakes, whether it be disappointment in the service, food, staff, wait times or overall experience. Every time a customer dines out, it is a lottery for the customer.  The price vs. value and the eventual opinion on the venue is not just about food but also experience.

Once they have left your establishment they continue the marketing of your restaurant through reviews on online review portals, sharing opinions with acquaintances and most importantly keeping it in the social arena – being talked about, for good reason, is the critical to keeping a restaurant popular.

This can obviously be a positive or negative for the restaurant depending on the customer’s experience. The positive side is the priceless and essential marketing: There is no better or more valuable form than a recommendation via word of mouth. Your customer needs to have had a very good time to feel compelled to recommend your restaurant.  Conversely, it can also be the kiss of death if the experience was negative. So this is how the customer does all the work. The customers bring in the money required to pay the owners, the customers work to make money to go out for dinner to pay your bills, your vendors, your landlord and so forth. The common error is an operator’s belief that it is the employees that are generating the revenue but this is simply not the case. It is the customer NOT the restaurant generating the tax revenues for the city and state and most importantly, they chose you. When a customer takes a moment to provide critique or opinion, they feel like they are helping the restaurant. Their advice, be it compliments or criticism, should be taken very seriously – because this is the most important of your revenue.

So all in all, the entire process in your restaurant starts and ends with your customer, the one person who does all the work …. and you are not focusing on him or her. So spend some serious time and effort thinking about your customer before, during and after their visit because responding to their needs and evolving with your customer base is the best recipe for success.

OnSite Consulting is a nationwide hospitality and consulting company to the casino, hotel & restaurant market. Providing immediate solutions for sites seeking turnaround, insolvency and concept repositioning. www.onsiteconsulting.com

Economic crisis, lower than average consumer spending, third party booking sites, commission based sales and tourism taking a  turn for the worse are all paths that lead to the same location  – lower average room rates (ARR). The strain from the online retail model continues to put tremendous pressure on rates, forcing operators to believe that even lower rates must be offered to these online consortia. We believe, however, that using online market places are in fact detrimental when rooms are too widely offered. Obviously judging  a hotel’s performance cannot be based on ARR alone as the single metric to determine success or strategy. One must look at other key indictors such as occupancy rates and REVpar to assess whether the lodging facility is performing against industry standards. However the hotel industry has long since been under attack by the very industry that sprouted to promote it.

Events took a turn in 2004 when American Express announced the BAR (best available rate) program which sought to assure customers that the rate quoted was always the best rate available for each night of a multi-night stay. It was often complimented with additional value add benefits (internet, breakfast, airport pickups). In theory a great new model for pricing, the reality is that it now requires a new level of management, control or forecasting that can quickly deflate the REVpar if left to untrained personnel.

It is the industry’s fault. It created mass confusion in the industry. The same hotel and 40 different websites with different pricing carried a room and suddenly booking directly with the hotel directly became more expensive over third partes. Hotel Booking Agents recommending a customer visit a third party site to get better rates and MOVING reservations to outside their control became the norm. What seemed like such a clever way to increase occupancy and ADR turned into a tool for lazy hotel workers and ultimately the problem we are in now.

This lack of pricing congruency has now left the hotel wholly exposed. This is compounded by poorly trained operators and sales clerks in hotel reservation departments mishandling direct calls from customers who have found a price online at a competing hotel or online retailer and asking the hotel to match it. Bringing the customer back to the hotels sales portals, often through the BAR program, is one of the projects every operator is working on. The smaller companies are, meanwhile, waiting to see the results of the larger hotel operators and will copy the model. Just when solutions are being found to bring back that price hopping customer to hoteliers with the assurance that hotel pricing is the same whatever the channel, along come companies who search the mega agencies and portals and hotel sites seeking best prices. Yet another intermediary tacking their commission and fees into your ARR.

The effect of this price pressure has been most felt  by hotels designed to appeal to the widest audience possible – thus in theory attracting a greater audience base. Satisfying everyone but delighting no one if the model or customer base are not loyal, or if the venue does not have a unique selling point, can be a formula for mediocrity.

These generic concepts created by brands for broad appeal without reward  programs or the benefit of an existing brand’s loyal customer base have had a very harsh reality check during this economic climate. Hotels with broad appeal are losing significant market share to more defined and concept positioned properties. Conversely, the boutique hotel phenomenom is less hit by these portals because customers are demanding alternatives to the mass market offerings. This creates significant opportunity for those who have planned and executed a strong concept and are able to differentiate themselves.

Customers are demanding / expecting more and taking their business where it is both fought for and wanted. Often customers do not want to be a number in a generic hotel but rather where their travel needs are best suited. Pricing is not always the primary driver. The demand exists for special and unique product offering to suit these individual travelers’ needs that mass market cannot fulfill.

By focusing on your brand and your USP’s, a hotel is often better able to capture the market. Of course as a developer or owner, there is a risk and potential exposure in being different. Multi unit hotel chains will not want to lease your site is if doesn’t conform to their mould. However the potential increased value from attracting the boutique market is the reward for those who chose to build a hotel in this style.  If there is a case for this model, think long and hard before you build a generic site.

In this circumstance, the operator has to work backwards. Assuming the  NEED / DEMAND for this sort of hotel has been determined and assuming your ability to deliver on the customers’ expectations then the steps to being unique are fairly simple. Of course strong analysis and financial modelling, marketing and sales are still required. Again, this is not the location, demand, product & coverage phase,  as we have assumed that this has already been determined through demand existing.

The process from differentiating your brand and creating loyalty from others is through allowing no-one to compromise on the level of service, facility and customer quality. This is concept positioning and the key to why two seemingly like hotels having significantly different ARRs.

Positioning the brand is positioning the entire facility and its outward and inward appearance to serve the customer. What is it that you are attempting to create and does it match what the customers need? This is just as much about the linens as it is about your restaurant or food offerings. You cannot compete with the large brands on marketing or advertising budget but what you do have the advantage on is press and that is where the attention should be focused.

Yes, we recognize the benefits of ‘outsourcing’ discounts to a third party. Getting rooms rented out is critical to the hotel industry and at times it is worth taking a hit on the ARR in order to have customers on site spending in the restaurant or golf club or room service. We recognize equally that with fixed costs and staff on site, sometimes it is worth selling a room at little or sometimes no profit to increase footfall. We also know hotels often do not want to be seen to be offering discounts directly to protect their brand name.

That being said, a whole sub-industry has grown which no longer serves the very hotel venues who subsidized their set up costs and acted as their first customers. If you are building or repositioning your hotel, slashing the rates is not the answer to increasing revenues. Your competitor and neighbor may be doing this but you do not necessarily need to follow suit. If your hotel lends itself to being slightly unique, if your location adds specific value to business or leisure travelers, if you have an ethic and tradition reflected in your fit out, let the customer know. Look at your customer service standards and whether you enjoy repeat customers. Look at the additional revenue streams your hotel could be benefitting from. Look at how you can reach customers directly and ask yourselves, should I be spending the same on targeted and intelligent marketing as I am losing on offering constantly reducing room rates?

Of course someone can fill your hotel tomorrow – rooms just need to cost $5. OnSite works with many hotel clients and our first job is to look at financial information. All too often, hotel directors have given us incorrect room costs, omitting to factor in deals with third parties. Costs often don’t include the fees incurred in renting out a room from a website or agency the data analysis is therefore inaccurate. Take back control of your pricing by knowing what your pricing is. Consider Opera or other software as a tool not a solution and instead, read the data and make decisions based on the correct information.

The lesson is that just because ‘everybody is doing it’, it doesn’t mean that the obvious solutions to cash flow or reduced customer flows is obvious. Gather the right financial information, take ownership of how you attract customers and how much you will pay to attract them. We know the importance of these lessons in stabilizing or growing a business and work with our clients to ensure they recognize this too.

OnSite Consulting is a nationwide hospitality and consulting company to the casino, hotel & restaurant market. Providing immediate solutions for sites seeking turnaround, insolvency and concept repositioning. www.onsiteconsulting.com

How a casino’s approach to staffing can affect the whole business

How slashing your workforce and promoting junior staff to senior positions saves cash flow in the short term …. But irrevocably and negatively affects the business as a whole in the medium to long term. OnSite look at how to take proactive steps to managing your workforce.

In the current economic climate, casinos – like all businesses – are having to contemplate cost cutting. With labor costs representing the highest area of consistent spend, casinos are slashing workforces at all levels, including senior management with significant salary packages. Employee benefits are being removed without explanation and salaries are being reduced. OnSite recognizes that communication and strategy are critical if workforce redundancies are being contemplated. Whilst the sudden relief to the cash flow can feel like a success and the business does not suffer immediately, the medium and long term damage can be irretrievable.

Casino after casino, from tribal gaming sites and card clubs to Nevada hotel and casino properties, are suffering. Financial positions are weakened with the economy taking the blame and in a panic attempt to restore profitability, poorly thought out redundancy programmes are often being rolled out, often causing more harm than good. As total business consultants brought in to turnaround the entire company, OnSite know that gaming and player loyalty are only a small section of the casino business. Many sites have strong F&B programs, lodging facilities, other customer attractions and a whole back office which are the backbone of the business and the majority of the work force. Staff are the main cost but not necessarily the main cause for concern.

We recognize that a casino business has many variables which can dramatically affect its financial position. We know that slot analysis and hold percentages are a factor requiring attention and that poorly planned multi-tier reward programs which do not appropriately reflect customer spend can be a key driver when reviewing losses in a business – but all these issues are intertwined with workforce management and the use of skilled talent within a site.

If a casino is looking at labor reductions, it must do so strategically and having regard to the whole business. With a focus on the turnaround of casino properties, all too often OnSite see venues taking a blanket approach to cost cutting and sites subsequently suffering from ‘the unskilled epidemic’. We believe this is never a means to an end but rather the beginning of a downward spiral, dragging down all business units with it.

As you slash the workforce, your all important customers will begin to feel and see the difference: With reduced staff on hand your venue is likely to offer a reduced quality of service and a declining player experience. Importantly, the company will likely be struggling to evolve: With a poorly thought out redundancy strategy, the casino will then left with a reduced ability to innovate and lacking the ability to dynamically react to the customers’ needs. This is a business struggling to stay afloat and trapped in survival mode. This sets out the logic behind our belief – this has reduced immediate cash flow spending but is evidently detrimental to the business.

The lesson to be learnt here is that taking a proactive and measured approach to reducing your labor force is never a waste a time. For economic reasons you may have to make changes to your business and fast – but at OnSite, fast does not equate to haphazard. We work with our clients to apply a lean strategy to identify how to change the workforce to reduce costs as well as seeking out those other issues which can have a dramatic and positive impact to the business. Sometimes small changes to a business can release profit – changing margins, looking at supplier costs, evaluating whether the plethora of third parties trying to sell their services and products to you are indeed value add. It may therefore be the case that the first step to reducing your cash flow issues is looking at staffing combined with releasing profit into the business as opposed to simply cutting a cost, especially as the aim is to improve the business and not stifle it. We have seen it all.

Other cutbacks to employee benefits, salaries and bonuses is also relevant. Clearly a business making no money has to make immediate changes but again, the question is how these are made and ensuring that this carried out in the most sensitive manner whilst securing the safety of your business. Some casinos in trouble introduce a mandatory salary reductions across all employees until revenue returns to a satisfactory state. The perception here amongst staff is often that the workforce is having to to bear the brunt of senior management’s mismanagement. This is naturally not always the case but perception here is important. People become disillusioned with their job and good employees question drastic changes which do not come with any clear message about the future and opportunities for growth.

Disillusioned employees who perform well often leave – simply to be replaced by their assistants or other junior level employees. In times of crisis, losing your best people, who are your best asset, is the worst outcome. Employees who are performing over and above must be rewarded or shown how, when the site improves, they will benefit – it is that simple.

Hewlett Packard avoided layoffs in the mid 1980’s with a successful mandatory pay cut strategy but it was implemented with an excellent communication strategy which employees understood. When announced, it was introduced as being for a limited time (6 months) and engendered strong employee morale through a marketing program which ensured no one felt isolated or hard done by. Instead, employees generally felt delighted to be a part of protecting the company and their jobs because they were all in the same boat and could see how they could ultimately return to their original salary – that being to grow the company.

On the issue of annual bonuses and employee benefits, again these require a strategic approach. Here, we are not just talking about financial benefits but also staff meals, parking, snacks available in staff rooms or venue traditions such as cakes on birthdays – often, the smaller the benefit in fact the greater the impact of that retraction to the employee.

Try telling a minimum wage employee that the cookies are gone because of managements poor performance. He did his job, he was never late and he just lost out. The lost loyalty and commitment of that employee through the removal of such minimal benefits costs more than the cookies ever would. Is that the right approach?

Instead, OnSite advises clients to use a redundancy programme as opportunity to show compassion and understanding through communication. A lack of communication with staff puts everyone on edge – ‘am I next?’, ‘what’s happening?’, ‘what’s the overall plan that management or ownership is not sharing with me?’. This does not lead to a strong and dedicated workforce willing to go the extra mile but instead an atmosphere of tension and a demoralized workforce.

Getting out of survival mode requires leadership with strategic and long term vision as opposed to a shoot from the hip mentality. A quick decrease in spending on the P&L can mean an equally quick decrease in turnover and profits.

The sites that we turnaround require a fundamental change in management style and a new approach. Our view is use the challenging economic climate as an opportunity to increase business through clever planning. What is our plan for growth and what steps must be taken to attract customers and realize profitability? This is an opportunity for employees to be a part of a success story and they need to understand in so doing, that their effort is appreciated and they will be rewarded. Incentivisation is critical to any business.

We are certainly not suggesting that your payroll is perfect! On the contrary we have rarely seen a lean payroll. Casinos should be seeking to find the “cost sinks” – the identification of revenue centers, processes and controls which through analysis will have an immediate effect on costs and the significantly swing revenue margins. Your employees are the only ones who are needed to execute the new vision and provide assistance in identifying such weaknesses.

We seek cost cutting opportunities in every site we visit: This often results in overall savings to the business of many millions, time and time again.

IS LACK OF TALENT THE ANSWER TO THE PROBLEM?

Often, decision makers in businesses have not lived through a challenging economy such as we currently find ourselves. Often the team has limited experience in turning around a business, may not be savvy with budgets and financial information. Additionally, and as a result of large scale redundancies, management is often poorly performing poorly due to lack of experience, training and/or ability. Now the entire company will suffer another blow as this individual, who is for whatever reason not qualified to ‘save’ the business, further damages the brand and the operation. OnSite works hard to ensure clients do not allow this to happen and instead focuses on finding the right areas to make cost cuts whilst supporting the best elements of the management and staff teams.

The trickle down effect of poorly resourcing your business can be seen at every level. When an executive is removed the loss begins. The position is often overlooked and not filled by ambitious management who wish to be able to ‘save that salary’ and add it to their savings analysis. But what about the unqualified staff being passed a workload he or she is not equipped to handle? This can ultimately set a company back months. Perception wise the business is still running – however this is superficial. Ultimately, the employee will make errors because he or she is unqualified – and if that person is a division head or in a management position, his or her decisions can affect the whole company.

This process is repeated constantly at casinos and businesses with high staffing requirements. A manager is terminated or leaves and is filled by an existing employee who is not a truly qualified candidate. So now as a casino, you are stuck with an upgraded employee facing a daily battle that lasts several months of how to do their job or make it seem like they are doing their job. The trickledown effect is simple to see to an outsider – a halt in the lifecycle of the department, the halt in effective new strategies, efficiencies and processes and a breakdown in the leadership of the department leading to autonomous workgroups and jobs not being completed correctly or with the overall long term vision of the casino in mind.

The site now suffers directly from an eager employee seeking a promotion and a poorly trained executive who thought it was a good idea. The trickle down continues as the casino now maintains a “status quo” whilst customer attrition continues and the team attempt to apply band aid solutions to deep wounds. The perceived benefits the casino thought it was getting by hiring from within – Kathy knows how to do Dave’s job it will be fine – has now turned into the casino paying more for an employee with no additional skills.

Hiring from within can be positive as the employee knows the business and staff may have good skills that make them worthy of promotion. Hiring from within simply because someone has been made redundant and that employee is vaguely familiar with the job required is, however, a death sentence for a business. How is a poorly trained executive to know better? One could liken it to the difference between manslaughter and murder – same result, different path.

What talent brings is innovation, strategy and a constantly dynamic business model meeting your players needs. What internally promoted and unqualified ‘upgrades’ bring is the huge loss in revenue from not being able to adapt. When hiring from within all we ask is you complete a SWOT analysis because knowing your business is not enough.

OnSite Consulting is a nationwide hospitality and consulting company to the casino, hotel & restaurant market. Providing immediate solutions for sites seeking turnaround, insolvency and concept repositioning. www.onsiteconsulting.com

When completing a casino cage audit, you are normally required through REGS and MIGS to undertake certain tasks several times a day, making sure that every cent is accounted for. Employees are held firmly responsible and have to undergo background checks, licensing and 24/7 surveillance. Reports are sent out to be audited, the process is repeated every few hours and there is not a second that the accounting department responsible for the cage do not know exactly how much is in the cage in both cash and chips.

Multimillion dollar software tracks money and generates reports, shows audit failures and identifies system weaknesses. A casino  will not open without gaming management be it a Japanese replica or the Ballys cream of crop. Not a penny moves without a form and a thing and a process.

Civilian vendors cannot even think of being able to look inside the cage without the granting of specific permissions and security and without being thoroughly vetted. Furthermore, if an audit shows a $90 short during a cashiers shift, there are rigorous protocols that remove that employee from the workplace, with he or she being suspended pending investigation.

The cashier’s float was only $25,000 so why, when a chef has an inventory of the same amount – or more realistically stock with a value of millions – are the same protocols not applied? A refrigerated produce order with a wholesale purchase value of $25,000 is worth $100,000 when sold – add margins, the cost of preparing the food, the notional cost and marketing of attracting a guest to eat at the venue – or $0 in three days when its lifespan is complete and the stock has to be thrown away. We therefore ask the important question of ‘why are the perishable supplies in your food & beverage inventory not treated with the same respect?’

The reason is because it is not a legal and regulated requirement: Indeed to many, food is an annoyance or necessary evil to satisfy the gaming customers. Often operated and managed by underqualified staff and those who do not think of the inventory as a currency, venue management are not treating this valuable stock as they ought to.

The Casino Floor has multimillion dollar software given the rate and speed of transactions and the automation of the gaming process. More often than not, Food and Beverage has excel spreadsheets at best. This is not about software. In these cases, software is mostly purchased as a solution to a problem when the problem is actually that very person formulating the solution. You cannot purchase food cost control, only people can. Software just cuts the man hours down and translates the data into more readable fashion for cross analysis.

Only in the last few years have many properties recognized the ability and indeed necessity for strong F&B presence to provide a significant new revenue stream not only from existing players but also the new customers who come purely for the F&B options. This therefore means there is also a new marketing benefit realized, however the value of strong F&B is not the purpose of this article. This article is focused on how the value of inventory got lost ‘somewhere’.  All too often we walk into mega million dollar sites who use MBWA (management by walking around), P&L and some spreadsheets to analyze their F&B when the converse should apply. The person running the F&B needs the analysis to run that department efficiently.

Our first message to management in these cases is to rethink how this valuable asset is handled and fast. Inventory is currency just like cash and should be treated as such. It should not be laying around in various storerooms, it should not be accessible to ‘just anybody’ and it certainly should have tracking. Unfortunately this is one of the biggest challenges we face in an F&B context: Getting someone to take a can of peas seriously, especially when they go through a palette a week. We genuinely don’t see the difference between a walk-in freezer and a safe. This overall shift in mindset is the largest hurdle to overcome but one that pays constant dividends when applied. Getting people to see it our way and recognize the weaknesses in the procedures in place is one of our key tasks in these situations.

We expect to swing the costs of goods downwards by about 7-12% of total gross program sales. So when our prospective customers ask us how we are so confident in our ability to make change without interrogating the numbers further, it usually comes back to us to see if F&B is controlled by MBWA. Generally, however, a problem in F&B is an indicator of a wider problem within the company as someone should have addressed this issue, fixed the issue or at least understood that at times, there is value in preferring $500 in guaranteed beef sales than $500 in cash.

Let’s not forget, however, the always tightly controlled liquor cage with keys, cameras and par systems for an inventory of $6,500 behind a bar. Managers often do what is at best common practice and at worst, easy …. and ignore the rest. Liquor being the more stolen commodity is a myth because no one knows about the food being stolen either through waste, bad portions or theft. How could they with no accountability or stock management in place?

The good news is that the solution is a simple one. Yes the department needs to be stripped and rebuilt, yes new controls and procedures need to be put in place. But there is one department already on site specializing in this for our cash currency. Accounting of course. Who better to protect our inventory currency?

There are many solutions that casinos should undertake but it all starts with Accounting taking control of inventory the second it arrives on the property. Wherever it may be stored it is owned by accounting and its movement into the supply chain should be through the standard purchase orders and audit logs. Two slips of paper and a controllable inventory has been started. From this one can then branch out into the other issues that require close inspection such as whether the site is holding too much inventory, cost analysis, vendor analysis, plate management and so forth …. but you must start at the root of the problem and move from there.

With inventory sitting in storage and now ultimately accountable to or controlled by an accounting department the process is clear, inventory and par maintenance. By using perpetual inventory as opposed to static, the par can be determined quickly as each unit has a “days on shelf” associated to it. More importantly, the property can now drill down on its costs and its uses to the individual purchased unit which is a key indicator of profitability and efficiency.

With these changes made, you now have an F&B department which need only focus on the cost of goods for the product they have transferred out of storage allowing for a much more isolated process and facilitating the all important checks and balances. This is a real cost system which gives your chef the chance to make an impact and be able to complete his job. The minute it leaves storage, accounting relinquishes responsibility for stock and the chef or section head is responsible.

You have now successfully changed the entire structure of your F&B department. Purchasing is now taking orders on product demand from accounting, receiving is now an accounting function, the chef is focused on food and managing the food offering in the kitchen rather than in the storage and each department has a more focused responsibility in an area they are most skilled.

One small tip – limit access to storage!!

OnSite Consulting is a nationwide hospitality and consulting company to the casino, hotel & restaurant market. Providing immediate solutions for sites seeking turnaround, insolvency and concept repositioning. www.onsiteconsulting.com

Onsite Consulting’s restaurant consulting division address areas of technology owners and managers should be looking at as a direct way to drive sales

In a restaurant market full of competition, what separates you from your neighbor? Service, ambiance, price, parking and décor can all be strong factors in swaying a potential customer’s decision. However one fact always seems to get lost somewhere and that is the ability for your customers to get in contact with you either to make a reservation, discuss special needs or even book their company holiday party. As restaurant consultants, we know that restaurant customer service is the critical and often overlooked as an area than can directly drive improved business when given appropriate attention.

People like good food at reasonable prices but every operator and owner knows that. We therefore advise clients to be one step ahead and engage with customers the moment they make contact in a manner that separates them from their peers.

When someone is looking for a restaurant and has specific needs (group of 12 for example) they start their day at home or the office visiting a few websites of restaurants they are interested in and attempt to make contact. Unlike the rest of the world, the dinner restaurant staff are not early risers and very often the potential customer is met with an answering phone message or an email to an inbox that resembles a black hole.

One of the first recommendations we make to our restaurant customers is to make yourselves more accessible via the web and website. Provide every opportunity for your venue to capture a potential client and most importantly, respond first. On the reservations page, contact page and events page there should be a quick and easy form for your potential customer to fill out spelling out their exact needs.

Now you have a HOT LEAD – someone that has come to you and expressed genuine interest and simply wants clarification on whether you can meet their needs. They have chosen to give you their name, phone and email address. You may or may not be the only person they have attempted to contact so the decision of where they visit now mainly comes down to whether you respond first – coherently and professionally. Of course you need to meet their requirements but the promise of good service and a restaurant that wants your business is a very compelling reason to chose your site. Grab that lead before anyone else and as well as focusing on inventory levels or special promotions that month, you have another very tangible opportunity to increase restaurant traffic and the health of your profit and loss.

Aside from the value of the potential sale you now have what is considered ‘promotions gold’; a live email address of a potential customer to use in your email marketing or other promotions. (It would be wise to ensure your privacy policy on the website expresses your intention to take any users form submission data for opt-in marketing programs).

In this economic climate you may not have an office manager or early office or restaurant staff who can go through and respond to these communications, nor may that person be the most qualified to answer your potential customers questions. It is critical that the person your potential customers are talking to can answer questions correctly and in the most beneficial manner for your business. Your management cannot work 24/7 and so about two years ago, after implementing this web form policy across our clients, we ran a series of tests by handing out a blackberry to the managers of the location.

When you hand a blackberry to your manager, express that you are taking care of their phone bill (if used reasonably, of course) but equally express that it comes with the added responsibility of responding to new business queries. The added responsibility, the perk of having no personal phone bill and, we would hope, the desire to see the venue successful and busy, should encourage that manager to respond to all email queries that come in promptly and professionally. If not, you need to question your choice of manager.

In owning your restaurant General Manager’s phone and therefore phone number, in the event of he or she leaving, the number, emails and communications role over to another member of staff in your organization. That handset and e-information belongs to the business which is another way in which providing this technology safeguards your business. Ownership of your customers is hot property and with ever increasing reliance on email marketing and promotions, the restaurant owner must under all circumstances not only own but also control any device used to interact with your customers.

We use hosted blackberry enterprise servers for our clients which synchronizes the users blackberry, email, contacts, calendar and sms messages to a server for backup and/or review. $14.99 per month is a more than reasonable price to secure your customers data and we encourage all our clients to understand the value of technology to increase productivity, secure data and therefore positively affect their whole business.

When a query comes in for a restaurant using this technology, a notional ticker starts with 30 minutes on the clock to respond, regardless of the requirement. “Table for 2 next Wednesday by the fireplace…” Whatever the message, customers appreciate a personalized email reply confirming their reservation and now more importantly a direct relationship has been created between the restaurant and potentially  the manager who will be onsite that evening. You have impressed and engaged that potential client before they have even booked.

We have all heard and seen the restaurants who are always too busy, unavailable and have the illusion of grandeur they are trying so hard to maintain. If you are so busy 24/7 then this level of bespoke response is not for you; if you are $$$$ dining you may want to implement stronger controls on communications and if you are a quick serve venue, this obviously does not apply. However for owner-operated mid level restaurants who are delighted to engage their potential customers, this is definitely for you.

There are times when the manager is unavailable and in those instances, there must be alternative mechanisms and people in place ready to respond. All responses should be sent with a set “template”, a style that leaves no room for errors – you must implement a top down policy regarding the manner in which your managers may speak to guests. We generally suggest an owner has access to the receiving and sending account in order to review communications in the early days. For our new clients, I ask to be cc:ed on all email traffic and that usually ensures rapid response and a little more thought on the manager’s part!

After running this test for only a few short weeks the results came back extremely positively. Not only did each restaurant report seeing a substantial increase in their email traffic from visitors coming to their website but also an increase of conversions from visitors to actual diners. This topic of conversions is the holy grail for restaurant e-marketing to be discussed at a later date.

The recipient of the email does not know whether the responder is sitting on a ride in Disneyland or behind a desk at the restaurant. To be frank, they probably do not care and whilst it is always optimal to be at your venue or office, it is even more important that this communication receives a response so at times, one has to be creative. The enquirer has a personal email and a name associated with the venue responding. Should anything crop up, need to be added or changed it is one simple email to the manager who confirmed the reservation or manager on duty which ensures the appropriate level of attention is bestowed upon the customer. This level of bespoke attention provides rewards.

“Running late – can you push the reservation 30mins?” is a common email and we are delighted to respond. This is not an opportunity for slang such as “np.” (no problem) and the veil of professionalism should never be removed, whether or not this is a repeat customer known to the restaurant staff.  In addition, we are alerted to special occasions and this contact provides a reason to make contact with the arriving guest, or for the manager to subsequently introduce him or herself to the table of guests. We delight in meeting new customers and install this at all staff levels at venues where we provide any element of food and beverage consultancy.

Placing the web form on the events page and keeping it very simple suddenly has traffic and emails daily requesting information on groups, birthdays, corporate parties and fun promotions. This is a hidden bonus for the venue.  As a restaurant owner you should also be tracking the number of visitors to your website, where they come from and what they search for – now you can track conversions into reservations.

Some restaurant owners have gone as far as checking in with the reservations the following day to ensure that their experience was perfect – a two line personal email is very different to automated review sites or other impersonal mechanisms. It creates a bond that makes people more likely to respond. We consult for a wide range of venues from casinos and hotels to restaurants and nightclubs. We do therefore recognize that this is time consuming. In restaurants where the check value is not reasonably high or in a venue which has high throughput of customers, this may not be best use of a manager’s time but if senior staff have capacity and the venue owner has an appetite for direct feedback.

What separates you from your competition is how delightfully easy it is to contact and do business with you and how attractive you make your restaurant and staff before a customer has even walked through the door. Technology facilitates this so we encourage clients to embrace it and use it.

Bringing in an experienced restaurant consultant can save money, find money and create money.

Restaurant consultants have long argued that the food and beverage industry is overdue a major adjustment. Relentless growth over the last five years has led to over saturation in the food and beverage sector. In a buoyant market, anyone and everyone can take advantage of sustained high per capita spend on dining out and cover over the cracks of a flawed business model.

In a tougher climate, however, the laws of the jungle apply: only the strongest will survive. Food and beverage businesses are suffering and restaurant consulting services can help to find and ‘fix’ those fundamental flaws these business had previously been able to ignore because customers were spending money. Whether it is poorly thought out concepts, unsustainable leases or a lack of financial control, the recent economic downturn has provided the much needed catalyst that the sector needed to clean up its act and it is restaurant consultants who can provide the experience a management team needs to guide them through these murky waters.

OnSite Consulting expects the economic downturn to enable operators with strong concepts, consumer orientated focus and back of house diligence to survive and prosper and force those who do not, to take a serious look at their business – or suffer the consequences. The economic reality is inescapable and whilst economic doom and gloom has been the flavor of the month for some time, the outlook can be positive with assistance from OnSite.

Arguably, a recessionary environment can provide a platform for innovation and economic growth through entrepreneurialism and creative thinking. This climate provides an opportunity for lateral thinkers and those with entrepreneurial flair to excel. For those operators, a restaurant consultant provides an independent view on how the business can improve – because there are always improvements to be made.

Conversely, those businesses with flawed models who are struggling for any number of reasons can benefit from a detailed review of every element of their business and troubleshooting – indeed their survival may depend on it. How can a struggling venue justify paying a restaurant consultant when cash is tight? We advise our clients, whatever position they find themselves in, to stand back and look at their restaurant from a fresh perspective. We emphasize the need to go back to basics and evaluate each and every revenue stream or cost center from the bottom up. Through this exercise of intense scrutiny, we know that almost all of our clients have the ability to improve or achieve profitability from existing revenues, without reckless and short term promotions that their cash flow cannot sustain, and safeguard the future of their business.

All too often, we see companies implementing strategies with a ’shoot from the hip‘ mentality, without thinking of the repercussions of those strategies. Quick fixes to get customers through the door with too good to be true offers do not solve long term cash flow problems. Whilst labor is always the biggest overhead, getting rid of good staff to the detriment of customer service is also a short term solution which tends to lead to medium term problems.

With experience in dealing with struggling and often insolvent businesses, we are able to provide an emergency review of a business. During a first phase, we can identify immediate cost savings and reduce pressure on a cash flow. Whilst this is critical, equally critical is phase two of our review which entails creating the foundations for that business to run efficiently when we leave.

When we meet potential clients, we discuss ways to save money: vendor negotiations, procurement and inventory systems, dynamic labor recommendations. All too often, these customers simply go back to their business, slash costs and expect the business to right itself. The trouble for such companies is that slashing costs is not the answer. It is one of many benefits our services provide to immediately relieve the pressure however it is the ability to maintain this change and tighten up procedures that is a consultant’s value.

When we cross the road, we are taught to ‘stop, look and listen’ before we do so. Fixing a business should carry the very same message.  OnSite avoids short-termist strategies and focuses on the fundamentals of the business; a bespoke review of profitability, efficiency and sustainability.

This market is providing restaurant operators with an opportunity to revisit their business and conduct an audit from the ground up, identifying wasteful cost centers and untapped revenue opportunities. A good consultant is someone who walks in the door with information, teaches it to the client and leaves that wisdom behind. An experienced consultant can also save money, find money and create money and it is these benefits that OnSite’s clients capture by bringing us on site.

James Sinclair is the founder of OnSite Consulting, a nationwide restaurant consulting firm with a specific focus on insolvent or distressed locations, insolvency or concept repositioning.  OnSite’s work is across multiple fields including hotels, casinos, franchises, quick serve’s, casual dining and single unit operators. OnSite clients range from from celebrity chefs to up and comers all seeking to redefine their business model for profitability. Quarter 4 will mark the release of his debut book “How To Save A Restaurant In 10 Days”. For more information please visit www.onsiteconsult.com

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THE $5 QUICKSERVE PROMOTION IS KILLING THE CASUAL DINING RESTAURANT INDUSTRY – WITH ITSELF TO BLAME

The race to market of QuickServe concepts in the delivery of a $5 meal is being replicated by the casual dining market with dire effects

As restaurant consultants, Onsite recognize that each restaurant venue or chain is bespoke. Each site and each brand has its own demographic and its own model which makes that brand unique. We also recognize that price wars are common in any industry and that in difficult times, venues carry fixed costs (such as rent, staff, amortization of capital expenditure) and therefore ensuring customers continue to come through the door is critical. That being the case, however different the concept, many of these brands do share common underlying problems and challenges.

With reference to those restaurants offering ‘unbeatable offers’, we have for some time been expressing concerns that dropping prices or offering ‘unbeatable deals’ is not the quick fix that venues need. These offers rarely bring in the level of new business expected, the restaurant often carries the loss associated with such loss leading discounts for a long period of time and returning to a price point which does make sense for the business can be deeply unpopular because customers get used to these ‘new prices’.

If a restaurant charges $5 for a meal for six months, that venue has now set the new benchmark for its customer. Your customer now expects to get a deal not far off that and when that deal is no longer available, the customer is not necessarily a loyal one because it was likely the price and not the offering that brought that customer through the door. In short, the object of this Quickserve option when replicated by the casual dining market, in whatever permeation, is often defeated.

TGI Friday’s is an example of short term cash flow benefit equals longer term disaster. Their new $5 entrée offering is an attempt to compete with Subway but has not generated the results anticipated by management or the market. Instead, the offer has lowered the spend per check average dramatically. TGI released a statement recently expressing the promotion was an opportunity to give customers exposure to their new salads as opposed to a move to compete with Quickserve but few industry observers believed the statement.

Over the next few months, TGI will likely generate millions of dollars in cash flow from this campaign but the cost of their campaign will likely catch up with them. One might ask how creating the extra cash flow constitutes an unsuccessful campaign and the answer is a simple one. TGI have done their brand irretrievable damage. Onsite argues that the key error they have made is taking an existing item on the menu – that item being the regular full sized sandwich menu including fries and a side salad – and simply slashed the price. The offering takes a full priced group of menu items and offers it for much less than they traditionally sell it and diluted the ‘sit down family restaurant’ concept they created.

Marie Callender’s have recently announced a “kids eat free” promotion twice a week allowing a free children’s meal per adult entrée ordered. A family of four can now eat for $16  if the adults order the $7.99 combo meal. This is in addition to many other discounts this casual dining chain is offering including the $18 two course meal. The trouble with this promotion is, again, the steep discount will eventually catch up to the chain not to mention that the chain is now synonymous with only offering discounted fare. The “Kids eat free” option is normally offered on a single day of the week (more often than not a slow day such as a Monday or Tuesday) but this introduction is going to force rival competitors to offer two or potentially three days a week offers to compete.

In response to Wall Street comments about their operations, the chain released the following statement: “In this economy, it is tough for families to dine out. Marie Callender’s would like to make it easier for families to enjoy a meal out together as a family. Marie Callender’s chose Tuesdays and Saturdays to provide a few days every week for families to spend time together enjoying great food. Times are tough but Marie Callender’s would like to help by offering an affordable and fun dining experience for families.”

Global data does indeed show that the market that has seen the most drastic decline within the casual dining market are those which target families with children. Marie Callender’s is evidently responding to this decline but whether offering so many discounts is the solution remains to be seen: It is too early to tell. Certainly the restaurant industry is putting significant pressure on itself by everyone offering the ‘next unbeatable deal’ in an effort to grab the customer. We recognize the need for fast action but the reaction we are witnessing appears to be ‘shoot from the hip and see what happens’ as opposed to measured responses where financial sense prevails over marketing departments.

Unlike Subway, both TGI’s and Marie Callender’s have larger footprints, greater operational overhead and therefore need a higher spend per check average. More importantly, TGI’s is a casual dining restaurant not a full Quickserve. I don’t remember take out and customer turnover being the TGI selling points and for good reason. TGIs is a family restaurant with a menu where the customer expects to spend more than Subway. It is a place where the customer is not expecting take out and where the customer expects to sit down and eat. These are not the characteristics of the other Quickserve options which focus on aggressively lowering the customer/transaction time.

For those chains who have a risk of bankruptcy or serious cash flow issue on the horizon, we understand the urgency in creating cash flow. It is this questionable reaction to the economic climate which is causing a previously robust industry to implode and the casualties are numerous and high profile. TGI Friday’s attempt to enter the $5 Quickserve markets has the very characteristics of a Company that has a serious urgency to create cash flow with no regard to the long term effect on the business.

I am sure this promotion will not last long and am confident that the surge in customer traffic they have experienced constitutes deal hunters in the main. These are therefore one time only customers; although we do recognize that if these are people who have not been to TGI Friday’s before, to that extent this promotion has potentially encouraged new customers. If the offer has attracted people who typically spend less on food and previously could not afford TGI Fridays, perhaps better economic times will encourage these customers to return in due course.

Early market reports, however, reflect that these promotions are having poor results, as Shoney’s CEO David Davoudpour put it: “$5 meals won’t work in casual dining, (he says…) When you sell for $5 what you should sell for $10, something’s wrong”

A onetime customer, while critical to a business, essentially bring reduced margins in a neighborhood restaurant. Only if that customer visits three times a year is that customer now a profitable one for that venue. The advertising and other operational costs required to get that person through the door can now be spread across those three visits for that one person. The profit on Quickserve & Casual Dining is in recurring customers and whilst the aim is to maximize profit generation from every customer who walks through the door, the reality is you spend an awful lot of money for them to come in so you should do everything possible to make them come back (but not give away the house!!)

A more competitive and profits driven company such as Quizno’s, who needed to compete with the Subway offering because they are a direct competitor, chose a more financially sound Quickserve option. Quizno’s built a product they intended to sell for $4 and therefore were able to create a profit from such their Quickserve offering – instead of it being a loss leader.

With this out of control success (the old adage of imitation is the best form of flattery clearly still stands) and the industry’s need to compete with Subway, commentators and specialists have had a real eye opener about the state of the market and the various engines behind these billion dollar food concepts. Every Quickserve seems to have rolled out something to compete with the Subway $5 offering indeed recently, KFC advertised that their offering was superior to Subway because it included fries and a drink whereas the Subway offering is just the sub. The craze of $5 marketing demonstrates the real brand and marketing value of Subway who in the past few years have returned amazing same store sales with the Jared campaign and now this “$5 sub”.  It is clearly positive for Subway but unfortunate for the rest of the industry that they have reclassified the meaning of the word ‘deal’.

We find ourselves in an economic environment where belts are being tightened and consumer spending has reduced. Companies believe they have to take drastic measures to create cash flow and keep their customers walking through their doors and such campaigns can be a make or break for the company. The error they make is confusing the need to be competitive and offering a product which they sell below a sensible price.

With this in mind, the operator should now consider going back to basics, realizing that even with a month on month decline in same store sales, the value of any offer should be based on two key areas. Whilst a marketing campaign is critical , the financial element is more important. Operators need to be looking inside their operations and find savings and create offers which do not lose money. Sales is vanity, profit is sanity: Casual Dining Restaurants need to focus fast on offers which make money and enhance the brand instead of wild marketing campaigns which not only negatively affect their business but that of their competitors as well.

James Sinclair is the founder of OnSite Consulting, a nationwide restaurant consulting firm with a specific focus on insolvent or distressed locations, insolvency or concept repositioning.  OnSite’s work is across multiple fields including hotels, casinos, franchises, quick serve’s, casual dining and single unit operators. OnSite clients range from from celebrity chefs to up and comers all seeking to redefine their business model for profitability. Quarter 4 will mark the release of his debut book “How To Save A Restaurant In 10 Days”. For more information please visit www.onsiteconsult.com

Many states have upheld different opinions on whether “Arbitration as a Condition of Employment is Legal.” OnSite Consulting considers why this topic requires attention.

Onsite has years of experience handling employment disputes, creating employee handbooks and seeking methods for companies to mitigate their expenditure. The issue of arbitration and the need for a formal policy and implementation of this policy remains widely ignored. All too often, our clients are served with legal papers and with barely time to read the papers, have no choice but to mandate to a law firm to represent them, often at significant cost.

Onsite is encouraging its clients to consider taking proactive steps towards mitigating this potential unexpected cost – a cost which hits a company in terms of both cash and management time- by adding a clause to staff handbooks and rolling out an internal policy that deals with this issue.

The perception of arbitration is all too often a negative one.  Many employees sign an employment contract containing a clause requiring mandatory arbitration which, in their opinion, is a company’s way of avoiding litigation. Fears include concerns that their employers will operate outside of the law and potentially violate an employee’s rights without fear of the consequences. The company requires arbitration and they believe that it curtails their obligations to operate within fair and reasonable parameters.

Of course this is not the case at all and employees need to understand that arbitration is not a soft option but is, in fact, in their best interests. With a rigorous arbitration policy in effect, the desire is NOT to reduce the value or ability of an employee to receive damages nor for the company to attempt to reduce such payouts. If an employee has a bona fide claim then they are entitled to damages. The principle value of arbitration is to reduce the cost of reaching a settlement or payout amount given that arbitration as opposed to the more costly option of a court room is where damages are agreed. The driver of adding an arbitration clause is therefore faster resolution of a claim with a dramatic reduction in cost which benefits all parties involved.

There is a second debate around arbitration, with a suggestion from some parties that it removes the “jury determined awards” that are based partially on emotion instead of an arbitrator, who makes a judgment based on the law only. Empirical research has, however, found little difference between the behavior of jurors and arbitrators when it comes to punitive damages.

When Florida based Darden Restaurants (Red Lobster and Olive Garden are among two of the brands that contribute to its $6.7 billion annual revenues) determined that arbitration was the best scenario for employee issues, their General Counsel specifically noted:

“We [Darden] don’t expect any significant reduction in paying out damages or compensation to employees who have legitimate claims, but we expect our transactional costs [court-related fees] to be reduced by 75 percent. Right now for every dollar we are paying out in compensation to employees, we are paying about $1.50 in transaction costs.”

Small owner operated restaurants and venues with fewer than 10 unit foodservice operations are following in the footsteps of large restaurant chains such as Darden. The pace at which venues are adopting a mandatory arbitration requirement as the absolute authority for resolving workplace disputes is gathering momentum, and rightly so. Coupled with this clause is the need to educate and inform employees as to why this clause is present which can be achieved in an employee newsletter or simple memo to staff.

Arbitration is without doubt mutually beneficial to employees and employers however there is still resistance. For the many commission, retainer or standard rate based lawyers and employment advisors, arbitration reduces the amount of time chargeable and is therefore potentially less popular. Less time equates to less fees.

It is the employer, therefore, who arguably gains considerably from arbitration as it serves to protect them from the potentially huge financial costs of frivolous litigation, petty disputes and the need to go to Court over issues which can be dealt with via an arbitrator. Medium to small businesses often do not have the financial resources or management time available to fight large cases in a court room so the option of arbitration becomes incredibly attractive as a proactive step towards mitigating future court fees.

The employee also benefits as the time spent being represented is reduced, which in turn reduces legal bills for the individual – and ensures a faster payout where damages are justified. In many instances, the cost of representation and the ‘lost time’ is equal in financial terms to the value an employee may be seeking in compensation, so we see many cases not defended at all but instead allowing the employee to gain a default judgement – or in larger cases, the employee ultimately not defending their claim. Again, arbitration solves this issue.

For companies intending to implement an arbitration policy, there are many steps to take prior to an actual arbitration. These range from peer reviews to an ‘open door policy’ where employers and employees can negotiate without an arbitrator present. Whatever a company chooses to do, of primary importance is ensuring the policy is clearly defined and understood, with the intention always being to resolve the issue prior to arbitration but knowing that arbitration itself is a practical and cost effective alternative to entering the court room.

 James Sinclair of OnSite Consulting provides hospitality clients, including restaurants, hotels, casinos & nightclubs, on effective F&B strategies for long term business success. For more information please visit www.onsiteconsult.com

Recently I was on a restaurant client site having dinner and in the span of about 30 minutes the server, manager, busboy, owner, hostess and everyone else asked me “Everything OK”. In so many ways it sounds like a very reasonable question – until I asked one of the servers whether if someone asked me if she was pretty I responded “she is ok” would she be satisfied – immediately it clicked, if she is not satisfied with being described as OK then how can she be satisfied with asking our customers if the restaurant is OK – Dr John Self a lecturer at The Collins School of Hospitality Management at Cal Poly Pomona put it perfectly “By definition OK means the minimum acceptable level”

So next time think about a more inviting question that relates to the actual restaurant, food or reason that the table has chosen to spend their hard earned money with you.

A Customer Service Tip: Everything is NOT OK

Is your company striving for OK?

Sounds ridiculous, doesn’t it? But it happens every day in food service operations around the world. It is a pet peeve of mine when a manager comes striding to my table and asks the inane question, “Is everything OK?”

What’s wrong with this picture, you ask? Let’s break it down:

Everything? Is the manager asking if I am satisfied with the political, economic, ecological and sociological status of humanity? Or maybe the manager thought that I was about to burst out crying and was attempting to offer help?

What about the word OK?

By definition OK means the minimum acceptable level. I doubt seriously if the mission of any company is to strive for the minimum level of customer service! So when the eager manager excitedly receives the expected “yes”, knee-jerk answer to the knee-jerk question, the manager goes away pleased. But should the manager be pleased?

I think not.

I don’t blame the manager. He or she was trained that way. Indeed, it was probably pounded into him or her to visit every table. 100% table visitation. Asking everyone in the restaurant if “Everything is OK” is like a prime directive in most restaurant chains.

What’s so wrong with wanting to get the opinions of all your customers?

First of all, when you ask ‘Is everything OK’, you’re not giving the customer an opening to respond. Instead, it becomes a formality, like the greeting of “How are you?” You don’t really expect an answer, except for the polite “Fine”.

Of course, visiting every table in most restaurants doesn’t give you any time to actually stop and listen to the customers! By running around and asking “Is Everything OK?” you can quantify the experience, and give yourself a false sense of accomplishment by making your 100% table visitations.

It is like the owner of a hotel demanding that the hotel manager keep the hotel full. All the hotel manager has to do is keep reducing the price of the room until the owner’s results are accomplished. Never mind that the hotel is losing money. It may be full now, but it sure won’t be around for long.

Don’t get me wrong; The concept of customer feedback is right, but the execution and results are dangerously wrong. By getting a stock response from a hastily asked question, you’ve learned nothing about the customer’s experience that night. And what if everything actually WAS just “OK”? In today’s market, will a so-so “OK” experience guarantee that the customer will come back? Of course not.

Here are four rules to follow when asking about your customer’s perceptions of your service:

1. Allow time to listen, don’t just go through the formality of asking.
2. Ask specific questions, not general, sweeping statements.
3. Use a superlative that you want to be identified with to the customer. Was your service excellent? Fantastic? Outrageous? Set your sights high not low. Never OK.
4. The quality of the effort is worth far more than the quantity of effort.

It’s time that the hallowed expression “Is everything OK?” was finally laid to rest.

Q: All that red tape with a Small Business Administration loan is intimidating. Any tips on moving easier through the process?

The red tape part is life. You have to live with the red tape whether it’s a conventional or Small Business Administration (SBA) loan.
There is a certain amount of documentation that you have to do with any loan. That scrutiny is even tighter in today’s market than 12, 18, or 24 months ago. A lot of that is based on the sub-prime mortgage market debacle as well as the current state of the economy.
The key with the SBA process is to realize that when people ask you for things not providing them does not mean they aren’t going to ask for them again. When you get your checklist of all the things you have to have, you literally have to have those things. The loans just cannot move forward without them.
There are two parts to every SBA loan. The first part is the bank approving the deal and getting it ready for underwriting. The second part is them putting all the information into that loan file and documenting it in a way that qualifies for that governmental loan guarantee. That red tape doesn’t have anything to do with credit decision, but it has everything to do with what’s going to be required to ensure that the SBA guarantee is there in case that loan defaults.
In a conventional loan, the checklist most likely won’t be as long or as in detail. With an SBA loan, the typical borrow might say, “Well, why do they need to know that? It’s not even part of what I’m trying to do here.” Well, you have to address each one of those areas because they have to be documented for that SBA guarantee even if it does not apply. There is just a whole set of paperwork that goes along with it that the lender has to fill out if the guarantee is going to be in place.
When we say we need three years of personal and corporate tax returns and borrowers come back with the past two years and say, “The third year is in my attic in a file cabinet and it’s July and it’s hot,” that doesn’t change a thing. We still need that third year of tax returns. You just can’t skip any of the steps or the loan is not going to go through.
In this market, not completing a form or having bad penmanship or having a sheet with something spilled on it, the lender is also looking that the application as an extension of your ability to run a business. If you turn in your “homework” and it’s all messed up and you can’t read it, it’s going to be an indication of how you intend to handle a business, of how serious you are about getting this loan done. You’re asking these guys to trust that you’re going to repay the money.
You want to put your best face on literally everything. Over-provide information if you want the process to go smooth and quickly. I like to say there is $150 in great deals—and only $100 in cash. About a third of the deals don’t get funded. And the reason why is stuff like files are incomplete, unreadable, one guy looks like he cares more. It’s just like a job interview; you need to put your best face forward.
Two years ago it didn’t matter because everyone was go-go-go. The last loan an operator got might have been when things were a little looser. Not anymore. The pendulum has swung 180 degrees the other way. The ex-IBM guy with $800,000 to put down on a Ruby Tuesday’s would probably not get a loan today, even though he has that much money. Lenders are looking for someone with direct restaurant experience for three to five years. If you don’t have that, if you’re the money guy, you need to bring on a partner who does have that.
A lot of the conventional, private moneylenders have left the market, especially in the quick-service business. A lot of people, not knowing where to go, are migrating immediately to the SBA. But there are smaller, private money groups out there that are doing conventional lending for restaurants. Depending on the borrower and the concept, there are ways to get things done without going through the SBA.
Credit officers are now really underwriting the concepts, as well as the operator. The better the franchisor keeps its house in order, the better it can answer the questions of the lender, the more likely the franchisee is going to get the loan they are looking for. Not all franchises are created equal in the eyes of a lender. Experience cannot be overstated. Right now that’s the No. 1 focus of most lenders. Then it’s the operator’s track record, financials, the strength of the concept—anything we can use to buttress and make that case.
You’ll likely get more money in an SBA loan because they’ll fund working capital. A conventional loan might fund only all the hard costs and the franchisee fee. But the terms and conditions might be such that you’re much more comfortable in a conventional loan. SBA loans might have a lower rate, but that rate is going to be adjustable. I would bet over the term of that loan that rate is going to go above the rate of a conventional loan, which would typically be fixed.
Don’t just throw up your hands and lay down at the altar of SBA. It might be the best option for some people, but it’s not in the case of all.

The waiter must always be on time.

His station must always be spotless. Tables, chairs, carpet, crockery, cutlery, glassware, flower vases, dumb waiter, menus, salt and pepper, pepper mill, cheese grater, all mustards and sauces.

He must also prepare all requirements in the kitchen as required for service.

Always be aware of personal hygiene, always smile, walk briskly and be polite.

In the dining room, check out the specials for the evening and be ready for service on your station ten minutes before it is open to the public.

On the arrival of diners, as the headwaiter approaches your table you immediately begin pulling the chairs out and and welcome guests.

A good head waiter will usually give you the name of the guests he will sit on your station. This information should be written down in a pad and as the head waiter approaches your table fourteen, you will give a quick look at your pad if you have not memorized all your guests names, put the pad back and say “good evening Mr.Jones, ladies sir,” help to seat the guests by pushing their chairs as they settle and when seated, remove the serviettes one at the time from the place settings. Ladies first, place them on their laps, get the menus and give them to the ladies , then the guest and then lastly the host.

You then ask if they would care for an aperitif or a pre-dinner drink, or “Mr. Jones, would you and your guests care for a drink before dinner sir?”
(When I will discuss service, I will introduce a Sommelier (drink waiter and a runner.)

Get the drink order, take it to the bar, return to the table and explain the specials of the day, (I will write an article on how to learn about the cooking methods to enable you to understand the way the chef cooks, so you can learn and explain the specials quite easily, and also how to learn and understand wines.)

Return to the bar, pick up your drinks, take them to the table and while serving them explain that you will return shortly to take their order. Return after three minutes, asking “Mr. Jones, ready to order sir? Or may I help by explaining some other dish?” This will help you in taking the order quickly as this is what the chefs want,ie – the order taken as quickly as possible. The diners will give you their choices which you will then take into the kitchen, placing your order manually or it may be computerized. If there is bread and butter, or other breads in your order bring them out and serve them.

Never come out of the kitchen empty handed if there is something to bring out. Take wine order, return with wine present it, let the host try it, if acceptable pour it, within five minutes bring out your appetizer, serve it, check the wine, top up if necessary and say “enjoy your appetizer.”

After five minutes return and inquire “how are your appetizers?” If they state “very good thank you,” smile say “thank you” and walk away. This may take ten minutes or so during which time other guests may arrive and you will repeat this procedure with all your other tables. You must also clear empty tables when they have all finished, check wines and water or any other requests that diners may have, keeping your eyes open for gestures. If some one picks his hand up and looks at you, he wants to see you. Go there immediately and see what request he may have. Serve main course and
after five minutes check if satisfactory. If the diners are having a conversation keep your eyes on them but don’t interrupt.

Serve dessert, check on wines or drinks, serve coffee, liqueurs while always checking tables for top ups, drinks, liqueurs. When diners have finished, they will ask you for the bill. Get and check that it is exact then give it to the host with a “thank you very much sir.”

When he pays he may gesture for you to pick up the account. Having done so and never looking at it in the dining room you will take it directly to the cashier. 99% of clients will tip and if 1% does not, it may be because of ignorance.

This may have been a one night in a life time for them, so be gracious and say thank you. By doing so you have accomplished two things – one, you were perfect in the eyes of these two diners and two, the establishment respects your understanding.

Ignorant waiters would have made a scene, those poor people who may have saved for a year for this night were shattered and the waiter with the beggar mentality should be fired, because he gets paid for having the honor of working where he can meet great people and make great money. In life there must be give and take, not just take.

Giuseppe De Carlo

Most culinary schools today are still teaching their students how to compute the wrong food cost. Granted the math is right, but the dollars involved are hurting the bottom line of our restaurants. The problem arises from the separation of percentage points and dollars.

Banks Use Dollars, not Percentage Points One thing I am quite sure of is that banks do not accept percentage points as deposits, believe me I’ve tried! For some reason the teller just looked at me dumbfounded then just started chuckling. Matter of fact she had so much fun with it she showed the teller next to her who responded in much the same manor. I didn’t find the humor in it since I had bills to pay, product to buy, and employees wanting their cash too. To rectify the situation I cowered to the pressure and made out a revised deposit slip using their required dollar standard.

So if you can’t deposit percentage points why do most restaurants use this as their key focus goal? Shouldn’t the establishments focus on dollars instead? Your darn right they should.

A Higher Food Cost Doesn’t Mean Theft or Waste It’s the end of your period and the accountant just brought in the p&l. A quick scan shows your food cost is 35%. What! The first thought that runs through most operators and managers minds is we have a theft or product waste problem. Well, that may be true, but before you go running to the staff and start ranting and raging you have to find out if that is the truth. You may very well have to eat those words after you get through this article. Matter of fact they may need to be praised instead.

What Is Ideal Food Cost Then? Well let’s take a look at what the real food cost value is and how it is divided. To compute real food cost you take the cost of the product you needed to produce the food and divide it by the sales revenue of that food. You can compute the food cost for an individual plate, or over a specific period of time. For example if it costs you $3.50 for the product and you sell the item for $12.00 your food cost is $3.50/$12.00=0.2916 or 29.16%

29% Food Cost, That’s Great Yes, 29% food cost isn’t bad, but is it the best thing for the restaurant? Let’s take a look at sample full service restaurant. Looking at a few of their menu selections we have a chicken dish which is on the menu for $15.00, steak for $19.00 and a steak and lobster dish for $28.00. When we look at the cost side the chicken is $4.00, the steak $7.00 and the steak and lobster $12.00. We do our food costs on these to come up with the chicken dish running a 27%, the steak 37% and the steak and lobster a 43% food cost.

It’s pretty clear, if you want to run below that magical 30% food cost number, ell chicken! But, as I said when we started the bank doesn’t like percentages on the deposit slips, so convert them to dollars. Okay, since they sold a chicken dish for $15.00 and it cost them $4.00 that’s easy, $15.00 – $4.00 = $11.00. Are they happy now? They have their 27% food cost, and banked $11.00. All great until someone tells them of their error. Sure they ran a nice food cost, but they could have banked more money. How? By selling either of the other dishes. The steak, which cost them $7.00 to produce and sold for $19.00 would have banked them $12.00 and the steak and lobster would have brought in a whopping $16.00.

If it were me going to the bank to make the deposit I would much rather be depositing $16.00 for the steak and lobster verses the $11.00 for the chicken and would take the associated 43% food cost with a smile. So, next time your actual food cost numbers come in run your ideal food cost numbers to compare before you fly off the handle with your staff. The difference between your real and actual food costs is where any associated problems can be found with respect to theft or product waste issues.

Saad Hafez has written extensively for the Food & Beverage Underground

There is money out there – it’s just harder to get to.

The Current Climate – What the $#&! is happening out there?

I don’t want to spend too much time on this; it’s pretty straightforward. Basically for years and years, financial institutions have been repackaging bad debt, and selling it on to other institutions in order to increase their profits generally, and finance the boom in M&A activity that we have seen over the past decade, specifically. As a famous TV network executive once said, “Finance is the art of passing money from hand to hand until it finally disappears”. So, of course, the problem is (and always was – it’s not a surprise to these guys, right – please, someone tell me they’re not actually surprised) that, at some point, someone has to pay. And right now, that someone is, well…, pretty much everyone in the World.

Who Cares?

Well, it’s a fair question. But apart from the blindingly obvious answer that it means consumers generally are more cautious about spending their money, experience shows us that there is a more important reason when looking at fundraising: Individual investors tend to spread their money across a variety of risks. Most will put X% into “safe” investments, Y% into ventures which are more than promising (i.e., where they can be fairly sure that they’ll at least break even) and then a small Z% into risky ventures, like bars, nightclubs and restaurants, in the hope that they will find the next California Pizza Kitchen (but they are very prepared to lose Z if need be). That’s what capital investment is all about – the spread of the risk.

So the problem is that, in the current climate, when previously safe investments (like a 150 year-old investment bank – Lehman Brothers) are no longer safe, investors either shift their capital out of Y and Z into X, or they shift it into the space under the mattress. (I’m not joking – these are the guys who invented the expression, “Cash is King” and, right now, they’re taking it to heart.)

Even institutions who are in the business of risk capital (venture capitalists and private equity houses), who invest mostly in the Z category (with a little in Y), are adjusting their risk spread to exclude anything which: (a) they don’t understand; (b) has its success driven by trendiness or the “cool” factor; or (c) which does not bear a good chance of delivering returns to them fairly quickly.

I shouldn’t have to tell you that for financiers, they would place hospitality venues firmly in the (a) and (b) category at the best of times. They would much rather make investments in proprietary technology (inherent value) or old manufacturing (lots of cost centers they can eradicate). As Suze Orman said, “It’s better to do nothing with your money than something you don’t understand”. So what do we have to do? We have to help them to recategorise us. We have to show them that an investment in our businesses will be as likely to deliver a return as in almost any other. And you should have faith – you can deliver the same % returns, if you do it properly.

After all, you have one thing in your favour – hospitality businesses tend to generate and process large volumes of cash. These guys love that. In fact, they love it more than almost anything else.

Nine Steps To Giving Yourself a Fighting Chance

As discussed above, your business is going to be firmly in the Z category (and somewhere near the bottom) before you’ve even left the gate. So here are nine tips for moving yourself out of the investment dead zone:

1. Be Prepared Son. Be Prepared.
   
   • Investors want to see focused people, with a good concept and, above all, a good, well thought-out plan:
     • DO some research on who you think would be best to approach – part of that research should include whether you know anyone who knows them or has delivered good results for them in the past. (Don’t be proud people – you should use whatever contacts you have to get through the front door.)
     • DO write a proper Business Plan. And get someone to help you – if you can’t afford us, call in a favour from your consultant friend (everyone has one), and ask your accountant friend (everyone has one of these too – they just don’t like to admit it) to help on the budget/projections.
     • DO include numbers! These guys only care about numbers. They only care about concepts, designs and feelings to the extent they make numbers better. These people have small hearts – feelings make them nervous.
     • DO NOT, under any circumstances, send the BP out to every member of the National Venture Capital Association. No bulk mail shots. Ever. Investors like to feel special. Investors like to feel that they have been targeted because you have already decided that the relationship would be a good fit. Taylor each plan to each investor if need be. And send out a few at a time.
     • DO try to find strategic investors (people who already own significant investments in hospitality or who can bring some retail experience to management) – they will be starting further up the curve. With institutional investors, I would advise against targeting funds who have never owned anything in the retail/leisure/hospitality sector. With individuals (business angels, etc), I would avoid people who just want to look cool and drink their own liquor in a nightclub – you are rarely going to be on the same page.
2. “Honesty is the Best Policy – When There is Money in It.” (Mark Twain)
   • You’ve got to be a complete idiot to lie to these people. Most of them stopped being accountants, lawyers or investment bankers because that was too easy for them. They’ve done hundreds of deals and have heard every possible variation on every lie by a previous owner, current partner or existing manager. They already think the hospitality industry is full of crooks, so prove that you’re not one of them.
   • Getting the numbers right in the Business Plan is what we call a 30-Second Deal Point – 30 seconds is that amount of time it will take them to walk out the door if they think you’re lying about it (and that includes lying by omission). Apart from anything else (see below), what these people are looking for is opportunity for growth – so don’t be afraid of showing them that things aren’t so good.
3. “Business? It’s Quite Simple. It’s Other People’s Money.” (Alexandre Dumas)
   • Never forget that it’s their money and, once again, that this is an industry financiers are inherently suspicious of. So manage their expectations – always under promise and over deliver. From the beginning. Again, don’t show them a golden, glowing business in your business plan or your negotiations. Show them a golden OPPORTUNITY.
4. “Half the Money I Spend on Advertising is Wasted; the Trouble is I Don’t Know Which Half.” (John Wanamaker)
   • Show them why this can be at least as good, if not better (remember what we said about cash above) than the other investments they’re looking at:
   1. • Show them how much cash you generate.Explain how your plans will translate into higher revenues and greater cost savings – increased margins mean more cash.
      • Talk to them about how, because of that increase in cash/saving, you will be able to make distributions of profits to them prior to them ‘exiting’ the investment (they LOVE that).
5. Show them the Exit
   • I don’t mean show them the door – I mean show them how and when they are likely to realize a full return on their capital investment. All investors have got both (not one) eyes on: (a) how they are going to get out; and (b) how much money they are going to earn when they do.
   • Explain it to them – we’re going to IPO (if you’re very ambitious), we’re aiming to pre-package a sale to X (if the concept lends itself to that) or we’re going to buy you out ourselves once our value has grown in line with projections. The fact is, you are almost always going to be able to refinance/bring in a new (often bigger) investor if things go well.
   • Investors measure profit, not just as a percentage return, but as a function of time. A 100% return within 6 months is worth more than a 300% return in 4 years. The question they ask is “How long will it take me to earn how much?”. The important thing is that you show them you’re always thinking about it and that you have a timeline in mind. (Timeline Tip: Anything more than five years is almost certainly too long.)
   • Paint them a picture, and make it based on reasonable assumptions, and numbers that you can deliver.
6. You’re Not Red Lobster Yet
   • So don’t pretend you are. You may think that your business is worth $20,000,000. It isn’t. It might be one day, but it isn’t now.
   • Be open-minded about the valuation they give you. These people measure value in a rigid manner, as part of an established financial construct. And the question they’ll be looking at is “what is it worth NOW?”. Don’t try and tell them how to do their job – you’d be horrified if they told you how to mix a cocktail.
   • If you look at this properly, it is an opportunity. You should almost discount the value before they sit down – see tip number 3: It’s the OPPORTUNITY they’re looking at.
7. And You’re Not the CEO of Red Lobster Either
   • Investors will always insist on incentive-based remuneration/equity for you. You have to earn your money, and your capital stake will only grow if you do well. Deal with it. These guys have zero interest in how much work you’ve put in already. If you were doing so well, you wouldn’t need them.
   1. • The main thing is to make sure that, if you do deliver¸ you are appropriately compensated – often investors will roll out a formula for increasing your equity stake if you produce results.That’s fine (and you should welcome it) provided that it adequately deals with what happens if you leave the business.
      • On this last point, the general rule is that “Good Leavers” (people who get sick or die, or who leave amicably) should be rewarded with the full value of their equity; “Bad Leavers” (people who get fired for cause, commit criminal acts, lie, etc) traditionally get nothing.
      • Be open-minded about the veto rights they will want – they will want to ensure that you can’t go out and buy equipment over and above a certain amount without their say-so, or sell assets without their say-so, etc.
8. Put Some Skin in the Game
   • It will be very irritating to you, but investors almost always require the owner-operator to have something more to lose. In the old days, they used to ask you to mortgage your house. Now, they’ll often settle for you to give them security over your interests in the business. Of course it’s irritating because you probably already have some cash investment in the business or, as I’m sure you would say, “if you measured how much time and the huge part of my life I’ve put into it,…etc, etc).
   • Stop whining. They don’t care. They are only interested in what MORE you have to lose if they make their investment. In their minds, it’s the only way to keep you honest – the theory is that you don’t care about what you’ve already lost.
   • (The only real exception is if you gave up something else (another job, another venue) in order to focus 100% on this. That is a sacrifice in their eyes. And that’s what they’re looking for.)
9. DON’T SCREW THEM
   • I’m saying it to you again so that you can’t claim I failed to warn you. Before these guys have sat down at the table with you, they have worked out the 100 different ways they can get hosed. You can be certain they will have thought of many others which you haven’t. Don’t do it. Ever. If you do, the word will get around and you will never raise another penny again. In this or any other venture.

Wrapping It Up

As ever, the above is not an exhaustive guide. When targeting an investment, and certainly when negotiating it, you should get help from professionals. It’s money well spent and will save you a great deal of aggravation in the long run (assuming you get the right help, of course). In addition, you could always consider borrowing the money. I guess my comment would be: (a) good luck with that in this climate; and (b) I never recommend that a client should introduce the trials and tribulations of servicing a loan, when they are most likely looking for investment because cash flow is tight. Unless you have a big enough cash/equity cushion, debt (particularly at today’s prices) will almost certainly make things worse.

- James Sinclair, OnSite Consulting

James is an expert in maximizing returns from hospitality venues, whether in relation to a start-up new venue, redeveloping an existing venue or saving problem venues from insolvency. In addition to owning a number of successful bars, nightclubs and restaurants himself, his advice is sought around the country by owners and operators who need his specialist expertise when tackling the specific problems they face.

If you are interested in any of our services, please don’t hesitate to contact us.

I have received a number of emails and phone calls recently in regards to the impact nightclubs, bars and restaurants have seen from what is, without question, an extraordinarily slow period. Operators are finding that they are not just having to deal with the annual, seasonal revenue cycle, but that they are faced with a simultaneous and overlapping crash on consumer confidence, the likes of which have not been witnessed for over a decade. On the assumption that it will not be getting better any time soon, immediate planning can allow for both current and future survival.

I. THE PROBLEM

When consumer spending and confidence hits this kind of dip, the first industry to suffer is the hospitality market.

It’s not very complicated: Consumers have a lower disposable income which, when combined with their view of the market leads to them moving any disposable income they do have to the warm hiding place under the proverbial mattress. As the time of writing, even the banks are under pressure. I was sitting in a client’s office when news broke that Washington Mutual had collapsed and the FDIC was seeking an emergency solution. My client raced to the bank to withdraw his maximum available amount and was freaking out about what would happen tomorrow. His worry was not losing his money – it was obviously protected – his worry was the potential interruption to his business operations.

After all, it is cash strapped businesses like bars, nightclubs and restaurants that write checks and pay bills on tomorrow’s merchant drop, and with credit card sales now making up the overwhelming majority of the transaction base, an interruption of any kind has a domino effect.

We have all seen it and been there; first the Sales tax does not get paid, followed swiftly by the payroll deposits to the IRS and EDD. You are faced with spiraling balances to your NET 30 vendors and, suddenly, within 60 days you are purchasing from a supermarket. Once you fall behind, catching up and becoming current become ever more remote. You are not the first and certainly will not be the last.

II. FOLLOWING THE MONEY LINE (FML) – A BIG PART OF THE SOLUTION

FML has been my strategy from day one – the solutions and options are obviously dependant on size and scope, but with many clients being single or few-venue owner-operators, my suggestions are geared to that market. Here are a few:

Get Your Hands Dirty

Many owner operators have not really jumped back into the hot seat of being their venue General Manager since the first six months of opening. The wear and tear of an NSO and the first months of operation have made hiring a competent manager (who allows you a day off) a delightful relief. From there we all get busy on our next venture, and it is all to easy to forget about the small things – while you may have spent a lot of time at your location generally, you find you have only returned to back-of-house operations and management, when there has been a larger problem.

By retaking your position at the wheel of back and front-of-house operations, you will immediately see a million things that need to be fixed – most of the time, there will be a solution to remove the problem in entirety and save money, or a cost/benefit analysis will show that you will actually make money by spending a little.

So, first things first:

• Your office should be moved directly into your venue if it is not already.
• You should have access to all your accounting data including vendors and payroll.
• You should be working adjacent to your management team.
• You should be on location day and night for a short period, having a hand in every decision, action or dollar spent.

Share the Load – Motivate Your Managers

If your staff are not aware of the cash crunch you are facing, now is the time to bring your upper management up to speed – they are the executioners of your objectives and the motivation of being involved in the solution will have them looking for ways to save or become more efficient, which will produce better results.

Set Your Targets and Chart Your Progress

The first item I generally always try to create is a “money saved spreadsheet” with simple columns: ITEM and then money saved into columns of DAILY/WEEKLY/MONTHLY/YEARLY.

Once you have an item and the associated saving, the number can be placed under the appropriate column and excel can generate the savings in either direction. This spreadsheet, which should be shared with management also allows for tracking progress, so that you actually see the direct result on paper – seeing the saving itself helps bring about the goal.

Don’t Ignore the Little Things – They Grow

The accumulated results of small savings are IMMENSE. A recent client provides a nice case study of how you can achieve immediate savings (not including payroll and COGS):

CASE STUDY: Of course every venue is case specific but in this instance there were so many small items that they actually represented a majority of the wasted expenditure. Just moving to a larger CO2 tank instead of the smaller ones saved $8,000 annually, and having the cleaning crew removed and using existing staff instead saved over $42,000.

Paying attention to very small line items can deliver fantastic savings when amortized over the course of a year. In our case study, cancelling directTV saved $1,400, and having the staff use their own knives instead of using a service saved $1,200.

That’s over $52,000 saved right there, without even trying very hard.

But it’s more than just the money – by forcing yourself back into every nook and cranny of the business, you will find other problems of inefficiency and leakage.

Cross Utilizing Your Staff

In the current climate, a venue operator would do well to use a dynamic scheduling strategy – a scheduling process that can adapt to slower nights without degradation of service.

On a slow Monday can your:

• Busboy also bar-back?
• Second bartender also be a server (and vice versa)?
• Runner be used as a busser?

The payroll is the largest single expense you have and by being on site you can see the opportunities for cross utilization. 30 minutes after you close, why are there still hourly employees clocked in? 2hrs before you are open who is clocked in, what are they doing and could they come in 1hr later and just work harder?

CASE STUDY: A client of mine with revenues of $2.3m was able to shave $350,000 off its annual payroll after 15 days of evaluation. That’s 15% of revenues saved using a dynamic scheduling method. Obviously there was significant data analysis and historic number crunching required, but the only important factor is whether the customer noticed any difference to the level or quality of service. From small bar to fine dining, every operator has uttered the magic words “if the customer had any idea”. Plunging a toilet of one of our client’s restaurants last week I wondered the same thing!

Staffing is and will always be a problem area, but time served preparing, analyzing and creating a solution will recoup serious dividends.

Remember: Vendors and Operators Live in the Same Space-Time Continuum

It’s simple really: your vendors are suffering under the same economic conditions as you are. They don’t live in a parallel universe. And their only insulation from the downturn is for their customers to stay in business.

By way of example, Sysco Food Services are experiencing one of their highest months of returned checks and delinquent accounts – so much so, that they now have a delinquent account specialist who can keep you ordering, even with a past due balance. Smaller vendors with large balances can be asked to move deliveries to COD with 5% of the past due balance added to each order. Sysco is well aware that you still need your product, and will find it from somewhere, so they may as well try and recoup the loss and mitigate their exposure by helping you work your way out of difficult times. So many clients just stop answering the phone when their best bet might be to maintain the existing relationships they have (however strained they may be).

If, however, you are a good or at least quasi-decent customer, now is the time to negotiate with your vendors. Maybe if you change your terms from net 30 to net 10 they will give a larger discount? Smaller vendors would love to shorten their exposure to loss and bring down their AR. Maybe if you consolidate your meat, fish and produce under one company, they will provide savings that surpass the smaller vendors. These are all questions which, if addressed, could provide immediate savings.

Get Smarter About Your Inventory – Product on Your Shelf is Money not in Your Bank Account

Almost every site I walk into has thousands of dollars worth of inventory they rarely use. It doesn’t matter whether we are talking about incessant liquor promotions or just plain bad weekly ordering – the net effect is the same.

So one of my most important recommendations in tough times is to manage your inventory better:

• Order Just-In-Time for the week or half week.
• Pick a vodka brand and stick to it (by ordering more of a single product you can generally get purchasing discounts per case).
• For the akward bottles that no-one drinks, simple solutions can include a drink special for a slightly reduced price or a custom cocktail to a small private party so they believe they are getting a good deal. (In a more up market establishment, a custom cocktail list may allow for the products to be sold for a premium.)

CASE STUDY: Our mixologist took a recent client who had a huge amount of non-moving inventory including a terrible (lets keep it un-named!!) vodka and created a cocktail which sold off the shelf for a premium and forced the client to purchase more product. The end result was the creation of a “Specialty Cocktail List” which works very well.

However, before one races to create this, the costs of the other ingredients, the shadow costs of training staff in preparation and up-selling and the education of customers costs real money and must be properly analyzed prior to execution.

CASE STUDY: A recent Mexican restaurant we worked with was suffering from low sales and generally poor returns so, before they phoned us they added a tequila bar and an inventory of rare and expensive tequilas. None of them sold and now they just have boxes of tequila on a shelf.

CASE STUDY: In a recent nightclub just taking the excess product and creating a fun shot was an easy and quick way to get rid of the product and still see a return. It may not have been the return they originally envisaged when they first purchased the product, but they certainly received more cash than they did when it was sitting on the shelf gathering dust.

The Lesson: There is a method to adding to menu items or twists / extensions of the concept and not following them has as much chance of leading to failure as to success. Many fine restaurants do the same thing with their wine list as the Mexican restaurant did with tequila, but such a one-dimensional approach, if used in isolation, will almost certainly fail every time.

Remember the Point – They’re There to Enjoy Themselves

The product being offered to the consumer and the overall dining experience MUST BE flawless. No ifs, no buts and no maybes. In this market with so much competition, there is no margin of error for a bad dining experience.

II. YOU NEED MORE THAN JUST AN ARTICLE

It is so important to read this article as a guide to the kinds of things you should be thinking about, not a comprehensive step-by-step to instant success. The suggestions set out here have been proven to produce some immediate results, but you will need more than a few tips. A serious process of evaluation, planning and execution is an absolute must. And in the final analysis, I have found the key to lie in constant, honest and intense scrutiny of the data delivered from back and front-of-house. No amount spent is too small or too sporadic to merit your full attention.

- James Sinclair, OnSite Consulting

James is an expert in maximizing returns from hospitality venues, whether in relation to a start-up new venue, redeveloping an existing venue or saving problem venues from insolvency. In addition to owning a number of successful bars, nightclubs and restaurants himself, his advice is sought around the country by owners and operators who need his specialist expertise when tackling the specific problems they face.

If you are interested in any of our services, please don’t hesitate to contact us.

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