It’s a numbers game
When you look at the number and mix of businesses in communities across the state or country, you will observe that there are many similarities from town to town. Population, and the concentration of that population, is a significant determinant in the number and type of auto repair shops, barbershops and grocery stores. We also observe that when one business closes, a similar business comes in to occupy that space. Such is the case in the restaurant sector, where the turnover rate is quite high.
Most small-business owners are intensely focused on their own internal operations and customers. They manage their finances and inventory tightly and set their prices and wages according to their best sense of what the market will bear. From time to time, it would be nice to know the answer to the question, “How am I doing compared to owners of similar businesses?”
Over the years, data has been collected on a variety of revenue and expense figures across business categories. Some of the databases are private or have a cost associated, but there are resources available to the average entrepreneur to make some good comparisons.
The National Restaurant Association, which represents restaurants across the nation, works with the accounting firm of Deloitte to collect information by a number of demographics.
Here is a sample of information that a full-service restaurant owner might find of interest:
Category: Full-service restaurant (average check per person, $15-25)
Sales (food): 78 percent
Sales (beverage): 22 percent
Gross profit: 68.2 percent
Operating (expenses as percentage of sales):
— Wages and benefits, 33.2 percent
— Rent, 5.1 percent
— Interest expense, 0.5 percent
— Utilities, 3.4 percent
Income before taxes: 3.5 percent
These numbers are just the beginning of your analysis, and adjustment should be made for local conditions. We all know that our utility costs are the highest in the nation, so you would expect that ratio would be a little higher. If you take that cost into account when you set your prices, your income before taxes should be close to the 3.5 percent target.
Other industry associations have reports available to members for little or no costs. Another free source is bizstats.com. From its database, let’s take a look at an auto parts store.
Category: Motor vehicle parts dealer (sole proprietor)
Cost of sales (percentage of sales): 63.9 percent
Gross profit: 36.1 percent
Wages and benefits: 6.3 percent
Rent: 3.8 percent
Income before taxes: 12.7 percent
By comparison, the auto parts store has a greater profit potential owing mostly to lower employee costs. Restaurants are also notoriously hard to keep profitable as food and ingredient costs tend to be volatile. Price changes are harder to make quickly, and customers always seem to notice.
So, what are the lessons we can take away from these few numbers, and what advice do we have?
For the restaurant owner:
1. Pay close attention to small changes in the price of ingredients, and don’t delay in making price adjustments to reflect those costs.
2. Since your margins are very thin, make sure that your number of customers and their ticket totals remain constant. A small decline in these numbers makes it harder to cover high fixed overhead costs.
3. Payroll is a large component of your operations, so make sure to match employee shifts and hours to the precise times when customers are in your store.
For the auto parts owner or other similar retail operation:
1. Inventory is an important component of several of your costs. It is reflected in the size of space you rent and in the cash you have tied up in goods waiting to be sold. Managing your inventory turnover, floor displays and backroom inventory will go a long way to keeping you profitable.
2. Customer acquisition and retention are very important success factors. So focus on ways to create new first-time customers using all of the tools available, including social media. Create a positive experience for the customer by paying attention to ease of access, staff interaction and other ways to create a repeat buying pattern.
3. As we have said before, pricing is an art based on science. Be bold in using specials to increase traffic, but never forget to encourage staff to cross-sell to boost per-ticket sales.
Kurt Corbin is assistant state director of the Hawaii Small Business Development Center, a University of Hawaii at Hilo program that is funded in part by a grant from the U.S. Small Business Administration. This column is published every other Monday. Email questions or comments to firstname.lastname@example.org.