Profit margin dilemma: cut costs or boost service?

Nation's Restaurant News, July 30, 1990 by Charles Bernstein

Profit margin dilemma: Cut costs or boost service?

When business slumps, as it undeniably has in the restaurant industry, there are various options to maintain profit margins. One is to simply reduce costs and expenses, while another is to press harder for more service, marketing and promotion to woo customers and increase sales.

Two other possibilities are raising prices to offset the loss of customers (thereby risking a backlash and further attrition of patrons) or proceeding with business as usual and accepting lower margins. With labor, occupancy and operating costs still soaring, no easy solution really exists.

The most typical approach is to cut costs and ride out the storm until brighter days "arrive." This is the easiest route to maintaining margins, and people tend to take the path of least resistance.

These points were brought to mind dramatically at a recent Laventhol & Horwath New York City conference, "Restaurants in the 1990s: A Survival Guide." Prominent restaurateurs presented opposite paths to survival in the current economy.

To Dennis Riese, president of Riese New York and an Arby's, Chi-Chi's, TGI Friday's and P.J. Clarke's franchisee and an Ed Debevic's partner, the answer to any sales declines is to gradually decrease costs so that customers won't notice. He is reducing the martinis from 6 ounces to 5.5 ounces by using slightly smaller glasses, and he is going with less expensive glassware at the bar.

He is also giving one less chicken nugget per serving, slightly cutting portion sizes, cutting back on the total number of menu items and closing perhaps an hour earlier when business is especially slow. Riese, who is a landlord himself, is lending a more empathetic ear to his tenants.

"I'd rather get paid some rent than none to help a struggling tenant for the future," he declared, "and I'd rather get such help myself."

We respect Riese, his ideas and his strategies. As a New York City multi-franchisee, he already has the marketing clout provided for him. But we are convinced that customers will notice the "adjustments" and may react by not going to the restaurant. This would touch off another downward sales spiral.

Riese's approach is a traditional one, an attempt to survive decently until things get better. With wages rising, operators indeed must do something extra to protect their margins.

Still, we would suggest a longer-term approach building for the future and trying to maintain sales momentum in the midst of a market crunch. This is actually the time to invest more money if possible to step up service and win more customers.

We side with the positive, albeit risky, approach of Shelley Fireman, who told the L & H conference that "in a down economy you've got to get off your backside and control your margins by boosting your customer counts." He owns and operates Fiorello's, La Hosteria (formerly Fiorella's) and Trattoria Dell'Arte Italian restaurants in Manhattan.

His philosophy is almost the reverse of Riese's. Perhaps the real difference is that Fireman has three restaurants whereas Riese has a substantial number. But Fireman has poured money into higher employee salaries to upgrade service and boost food quality. Furthermore, he does not hesitate to spend money for his staff to travel to Italy to discover new menu ideas and innovative techniques.

The results: Riese is maintaining his margins in the face of flat sales while traffic has climbed 37 percent at Fireman's Trattoria and a smaller amount at his other two operations and margins are holding steady or improving at all three.

Richard Lavin's answer, in his Lavin's and Sofi restaurants, is to put extra money into making the customers happy. He urged that operators focus on "spending money on the needs of customers instead of focusing on profit and operating costs." That is easier said than done, but it is a worthwhile objective.

Two other New York restaurant owners indicated that while they, too, were watching the bottom line, they would put more money into customer service. "Everything in life and business is about perceived value," asserted Jerome Kretchmer, a prominent New York politician turned restaurateur with the Gotham Bar & Grill. "You've got to meet customers' expectations and keep putting money and effort into the service staff."

"We still must spend the money to serve the customer better than ever," declared Drew Nieporent, who said he serves "regular customers" just as carefully as any of the celebrities who frequent his Montrachet restaurant and the new trendy TriBeCa Grill.

Kenneth Aretsky, chairman of the "21' Club, emphasized how he turned the venerable restaurant's image from an "exclusive private club" to a broader-based restaurant with diverse appeal by spending money on cocktail parties for business executives, advertising banquet facilities and launching pre-theater dinners.

While many restaurateurs are content just to survive the tough times of 1990, some are showing how to thrive with more customer traffic as well as a respectable bottom line. We must always remember that the customer is concerned only with getting the best service and enjoying a happy, comfortable, quality experience, whatever the type of restaurant.