Margin Protectors: Pricing for Profit Is Only the Beginning

Establishing the correct selling price is fundamental to running a profitable hospitality business. You need to understand what a product actually costs, determine the margin you expect it to generate and set a price that makes commercial sense.

On paper, it can all look very good.

The problem is that hospitality businesses do not operate on paper.

Once service begins, the assumptions behind your calculations are immediately put to the test. Wine may be poured a little too generously. A garnish slowly becomes larger. A supplier increases a price, but the recipe cost is never updated. A credit is not claimed. An invoice price changes and nobody notices. A complimentary side that began as a thoughtful gesture gradually becomes an expectation.

None of these things is likely to cause immediate alarm. Individually, most seem insignificant. Collectively, however, they can quietly erode the profitability you worked so carefully to establish.

Profit rarely disappears in one spectacular mistake. More often, it disappears a few dollars at a time.

The margin you calculate is not necessarily the margin you make

Consider a bottle of wine purchased for $20 and sold for $60. The expected result is easy to calculate, but that calculation relies on a surprising number of assumptions.

The purchase price needs to remain accurate. The correct wine must be delivered at the agreed price. Every bottle received needs to be accounted for and every bottle opened needs to be recorded. Pour sizes must remain consistent, wastage needs to be controlled and complimentary drinks need to be captured accurately.

The calculation also assumes that the people working in the business follow the processes designed to support it.

In other words, the theoretical margin relies on the operation behaving in exactly the way the calculation expects.

Anyone who has spent time running a hospitality business knows how optimistic that assumption can be.

Small leaks are difficult to see

If a venue lost $20,000 in a single transaction, there would be an immediate investigation. People would ask questions, reports would be examined and somebody would be expected to explain what happened.

The same venue could lose $20,000 over a year through slightly generous wine pours, inaccurate recipe costs, unnecessary wastage, unclaimed supplier credits and poorly controlled stock without any single incident attracting attention.

The restaurant continues to trade. Customers continue to arrive. Sales are recorded and invoices are paid. Nothing appears dramatically wrong.

The only obvious symptom may be that the final result is not quite as good as expected.

The margin was there on paper. It simply did not survive the operation.

This is what I think of as margin leakage, and it is one of the most persistent problems in hospitality.

Margin needs to be protected

Operators often devote considerable time to establishing prices. Menus are costed, wine lists are marked up and target gross profit percentages are discussed.

Far less attention is sometimes given to what happens afterwards.

The moment a target margin is established, the business needs systems designed to protect it. Standardised recipes help maintain accurate costs and consistent portions. Measured wine pours protect bottle yields. Invoice checks identify unexpected price movements. Stock variance reports can reveal over-pouring, wastage, recording errors or other problems that may otherwise remain hidden.

Regular product mix analysis helps operators understand not only what is selling, but what is contributing profit. Supplier reviews ensure that long-standing arrangements continue to make commercial sense. Staff training helps the people responsible for handling and selling products understand the commercial consequences of the decisions they make during service.

None of these systems is particularly glamorous. Very few people open a restaurant because they are passionate about invoice audits or stock variance reports.

But good systems are often remarkably unexciting.

Their value is in what they prevent.

Finding the source of the problem

When I review a hospitality business, I am rarely interested in a single number without understanding the process behind it.

A gross profit percentage may tell me there is a problem, but it cannot always tell me why.

Has the cost price changed? Has the sales mix shifted? Are portions consistent? Is the POS system configured correctly? Are discounts being used appropriately? Are voids being reviewed? Does actual stock usage align with theoretical usage?

Perhaps more importantly, can the business generate the reports required to answer those questions?

It is rarely what you think. It is often what you know.

Knowing requires the right information, reviewed regularly, by people who understand what they are looking for.

Introducing Margin Protectors

Margin Protectors is a Spruik Lab series examining the systems, disciplines and habits that help hospitality businesses retain the profit they have already worked hard to create.

Over the coming articles, I look at the places where margins quietly disappear and the practical processes operators can use to protect them. We will examine recipe costing, wine pours, portion control, supplier pricing, deliveries and invoices, stock variances, product mix, wastage, training and price reviews.

Each represents a potential leak, but each also represents an opportunity.

Improving profitability does not always require more customers, higher sales or a busier restaurant. Sometimes the money is already coming through the door. The opportunity is simply to keep more of it.

There is enormous focus in hospitality on increasing revenue. Sell more. Add another sitting. Increase the average spend. Upsell the customer.

All are worthwhile objectives.

But before asking your team to find another $10,000 in sales, it may be worth asking a different question:

How much of the profit from our existing sales are we failing to protect?

That is the question behind Margin Protectors.

Over the coming articles, we are going to find the leaks and look at practical ways to close them.