Especially in this economy, every restaurateur is looking for ways to cut costs. But there’s a right way and a wrong way to go about the cost cutting – if you do the wrong things to reduce costs, you can create problems and even incur hidden costs in the long run. Sometimes when you’re trying to solve a problem, it helps to consider what not to do.

So here are 10 things you shouldn’t do when looking for restaurant cost-cutting ideas.

Top 10 ways NOT to cut costs at your restaurant:

1. Lower Quality – Whatever you do, don’t trade your reputation for a short-term and incremental decrease in your costs. Customers can tell when a restaurant lowers quality. One restaurant I used to love stopped putting pancetta and fresh parmesan on their Caesar Salad. The Caesar used to be the best I’d had in the U.S., but it wasn’t the same without the original ingredients. They may have saved a few pennies, but the end result was a lower quality option. I used to spend $200 a week or more at that restaurant – I’ll bet that the money they saved on that ingredient switch didn’t make up for losing even one customer who visited as frequently as I did.

2. Skimp – Another trick we see implemented in hard times is to skimp on ingredients. Let’s say you have a pizza restaurant and the manager gets a bonus for maintaining a 32% food cost. What happens next week if he misses his bonus because he ran a 34% food cost? Yep, you guessed it, the next week he comes in at 30%. Now, the owner may be happy at first because the food cost balanced out, and the manager is happy because he got the bonus, but the reality is there were customers last week that got fewer mushrooms and less cheese on their pizza. They notice the skimping and go to a competitor. When customers defect, you lose more in lifetime customer value than you ever gained by cheating them with skimping.

3. Overstock – When the recession hit, manufacturing took a dive as businesses began depleting existing inventory rather than ordering new inventory. Par levels were reduced to get more in line with reduced demand. When you get your inventory levels in check with demand, you perform at a healthier level in terms of cash flow and liquidity. Of course, this is a balancing act: if you run inventory down too low, you run the risk of running out. Your inventory levels are important to keep an eye on when you’re cutting costs – be mindful, but don’t cut back too far.

4. Close Too Early – When you close early, it can become a self-fulfilling prophecy. No matter what, your last hour will be slower than your peak hour. When you close earlier and earlier, you will start to notice a shorter peak period. You may think that you’re saving a few hundred dollars by closing early, but you will probably come out worse-off in the long run. As I write this I am in Seaside, Florida (www.seasidefl.com). A local restaurant keeps closing before 9 p.m. Last night the kitchen closed at 8:25 and earlier this week the restaurant closed by 7:30 (they don’t even open for dinner until 5:30 p.m.). The overhead of having a sprawling restaurant on the Gulf of Mexico is fixed – you already are paying rent, utilities, taxes and a bunch of other costs just to plant your flag in the sand each day, and those costs are not diminished by closing a few hours early. The other problem with closing early is that you start to train your customers to expect you to be closed, and so they decide to avoid your place altogether the next time they go out. A lot of these customers will end up converting to your competitors and, for the few hundred dollars you “saved” by closing early, you lose untold thousands in real “lifetime value” from the customers who defected to your competitors that were open while you were closed.

5. Destroy Morale – It is impossible for you alone to cut your costs – every restaurant is connected to a network of people, from vendors to employees, and you need their support if you’re going to make meaningful cost reductions. If you beat up on your vendors too hard, if you push your staff too far, you may get your short-term results – but at the cost of your long-term partners. No one wants to work for a tyrant, and your vendors and staff are even less likely to go out of their way to save you money if they feel stepped on or disrespected for the sake of corporate profit.

6. Cut Maintenance – Maintenance seems to be another of those areas that gets cut when times are lean. Don’t do it. Even if it means borrowing money, you can’t cut maintenance. When maintenance gets cut, lights start to get burned out without being replaced, bathrooms fall into disrepair, hood systems get clogged, fryer oil is replaced less often, and ultimately you run the risk of causing long-term and expensive damage to your equipment, your staff and your customer perceptions. There’s nothing more depressing than a dim, poorly maintained restaurant.

7. Carry Dead Weight – Cull through your ranks. Make a clear-headed, unsentimental evaluation of who is with you based on tenure, seniority or nepotism and who is there because they are actually loyal, committed and high-performance contributors. Turnover of staff is costly, but keeping bad employees and dead weight can be even more costly.

8. Fragment or Splinter – You can find a cheaper price on nearly any individual item you stock or service you hire…but there are hidden costs to being cheap. When you start fragmenting your purchasing across several vendors, you lose leverage and often get hit with costs you weren’t expecting (such as delivery costs, accounting work, unredeemed rebates, etc). Long-standing deep relationships with vendors are often more valuable when you need to cut costs, rather than fly-by-night vendors who you only work with to save a buck.

9. Be Penny-Wise and Pound-Foolish – This goes hand in hand with many of the other suggestions above, but keep in mind the negative impact that can happen in terms of reduced focus or decreased morale with penny-wise approaches. For instance, getting rid of free coffee for staff may save a bit of money each week, but it can have a demoralizing effect on the staff – especially in a recession, people don’t like to feel nickel-and-dimed in the workplace all the time. Some small things like free coffee are highly valued by your staff – more than you may realize. Don’t let the pressure to cut costs lead you astray from your core values and the moral principles your brand stands on.

10. Spend more time in the back office than the front of house – A downturn can cause stress, depression, anxiety and frustration for everyone involved, especially restaurant owners. These emotions can wear you down and sap your happiness and passion. If you feel this starting to happen, take a break. When you worry and get run down, it will invariably impact staff morale and the levels of hospitality your restaurant delivers, which will only make matters worse. Remember, you’re in the hospitality business – you’re in the business of delivering a joyful and pleasant and relaxing customer experience. Yes, it’s a business and that means tending to the numbers, but it can’t be done at the cost of the customer experience and levels of passion, professionalism and hospitality you deliver.

I hope you have found this article helpful. Please share your comments and suggestions on other ideas you have for restaurant cost cutting using the reply form below. We’d love to hear from you and share your insights with other readers.

The recession of 2009 continues to siphon spirits from the beleaguered restaurant industry in 2010.  After decades of positive consecutive sales growth, the restaurant industry has had two back-to-back years of overall sales declines.  It’s clear that to survive, restaurateurs must implement both restaurant cost cutting and revenue-building programs.

Here are ten things you should do (followed by ten things you shouldn’t do in a follow-up article) to reduce costs for your restaurant:

Top 10 ways to cut costs at your restaurant:

1. Sell, Sell, Sell – Okay, technically this isn’t a “cost-cutting” tip, but bear with me.  You can’t operate yourself to a profit.  The top line cures all that ails you – a 2% increase in sales is equivalent to a 10% reduction in food costs.  The surest way to quickly boost profit is to build the top line revenue.  Even though the industry is down, it is only down by a few percentage points overall – meanwhile, some restaurant companies are down by double-digit percentages.  What this says is that even in a bad recession, some restaurant companies are way up.  There are still sales to be had, but in this market it won’t happen on its own.  As the saying goes, “you eat what you kill,” so this is the time to get out there on the offense.  Can you refresh the sales skills of your front of the house staff? Can you get your servers to sell more beverages? Can you put together some creative specials or fixed price options that will get people in the door? Before you start cost cutting, make sure you’re doing everything you can to creatively and energetically sell your restaurant’s offerings.

2. Re-engineer – The tectonic plates of the restaurant industry have shifted irrevocably – and even after the downturn ends, things are not going to go “back to normal.”  There are still many billion dollar restaurant chains sitting on the fault lines thinking that their woes are just temporary and due to the downturn.  The fact is, the restaurant industry has changed – due to economic, cultural and demographic factors – and the pace of change is only speeding up.  The Fast Casual category is growing much faster than the rate of the industry overall, which means that there is going to be cannibalization of someone else’s existing sales.  Home Meal Replacement, which is at $70 billion annually, is the new battle ground between restaurants and grocery stores.  Grocery stores steadily lost market share to the restaurant industry every year for decades and now they’ve had enough.  They are fighting back and operating more like restaurants – you can see it at any well-run grocery store; they’re offering pre-packaged meals, take and bake pizzas, a wide variety of culturally diverse menu options and meals for all sorts of dietary needs.  The restaurant industry has begun to fragment and splinter and the winners are the ones who are specializing.  Meanwhile, restaurant groups like Chili’s and TGIFriday’s continue to operate on the systems and approaches of the restaurant industry of the 1980’s and 1990’s – trying to be all things to all people.  We saw how that worked for Bennigans (they went bankrupt).  Many restaurant companies are holding on (for now) with sophisticated financing schemes, but their focus should be on re-engineering for the future of the industry, not trying to force yesterday’s approaches to continue working.  When you re-engineer, you naturally cut costs as you find more efficient methods and approaches to doing business. Re-engineering means asking, “What is our unique niche? What are the right things for our business to be doing?” You need to be willing to take a clear-eyed look at the reality of the industry, and re-engineer with the approach that “there are no sacred cows.”

3. Invent – There’s nothing like a recession to get the industry dusting off tired old promotions.  The happy hour and all sorts of other state-of-the-art-in-1989 programs are being re-introduced and, to the dismay of those pushing them, the results just aren’t there.  Times have changed.  Consider the media that restaurants use to market themselves. When radio was first introduced as a new form of media, it took 38 years to reach a market audience of 50 million people.  It took television 13 years to reach 50 million.  Facebook reached 50 million in just 2 years.  Meanwhile, tired restaurant chains are pushing happy hour promotions via mass media advertising and taking a “wait and see” approach with social media.  News flash: social media is not a fad, it’s not something that is going to just blow over; this is a cultural phenomenon that is shaping our lives for years to come. Social media isn’t just for Millenials.  (But even if it were, there are now more Millenials in America than Baby Boomers – and Millenials eat out more often and spend more on restaurants than the Boomers do.)  The fact is, the rest of the world and other businesses/industries are having to speed up their rate of change and reduce cycle times.  The real winners – companies like Apple – are winning through invention.  We just experienced the worst financial crisis since the Great Depression, yet Apple’s iPhone is the fastest selling product in history and sales only continued to climb in the recession.  How did they do that without discounts?  Invention.  The more you innovate and invent, the less you have to discount. The more you can do to create a one-of-a-kind customer experience, the more you can afford to charge – and the more customers you can expect to see in your dining room.

4. Furlough – Make sure you keep your top people.  Before you terminate any of the good ones, ask them to consider a furlough or reduced hours.  The National Restaurant Association estimated that for each average hourly employee you hire, you spend $1,500 training them.  Meanwhile, many restaurants have a 100% or higher turnover rate of employees.  If you have a staff of 100, that means $150,000 per year in training new employees!  Since this “training” cost is often just rolled into payroll and not accounted for separately, many restaurant executives don’t know the true cost of their training programs.  Retention is key (and so is a modern day approach to training systems, but that’s another article for another day).

5. Inventory Utilization – When I took over operations for a $4 million Caribbean-themed restaurant, I focused in on the bar.  We generated nearly 30% of revenues from the bar and were running bar costs in the high 20’s (cost as a percentage of sales).  When I studied our purchasing and inventory, I saw that we had stacked up cases and cases of a product that wasn’t moving.  Canadian Club had been running a promotion for their new Canadian Club Citrus and so they were giving bottles of it away with purchases of other faster-moving product.  Our competitors up and down the beach had amassed mountains of this product too.  They started trying to unload it with $2 shots.  Then $1.  Then 50 cents.  No one bought it.  People had never heard of Canadian Club Citrus and they figured that if it was selling for  50 cents it couldn’t be good.  So, I took a different approach.  I invented a drink called the “Cayman Curse” and said we couldn’t tell you what goes in it or you will get the curse of the Cayman’s.  We sold them for $8 and built appeal by putting dry ice in (which makes the drink appear to “smoke”) and supporting it with a suggestive selling program.  Results?  This “mystery drink” made from a previously un-moveable liquor became our top seller.  We started trading a bottle of Crown Royal with other restaurants for a case at a time of the product they weren’t moving.  Our cost in mixing the drink was so low that – coupled with the huge volume – it brought our overall bar costs down to 16% of revenue.  That’s half of what it was!  Just one innovative idea and new approach to inventory utilization made a big impact on the bottom line.  You don’t have to have a bar though – similar approaches can be taken with different varieties of fish, for example, and you’re not only reducing costs but also taking pressure off other fish species.

6. Marketing – The average restaurant in the U.S. spends 3% of revenues on advertising and marketing.  This is a variable and controllable cost that many restaurants cut from their budgets when the going gets tough. To some extent, that’s fair – after all, with the downturn, this is a good time to stop spending on mass media advertising.  Don’t throw money away on billboards, radio, television, bench, Yellow Pages or other antiquated approaches to connecting to your customers.  However, it’s never a good time to stop marketing.  Especially in a recession.  It might sound counter-intuitive, but now is the time to invest in marketing.  You will find that some of the biggest swings in market share happen in a recession as some businesses stop marketing and others turn up the heat.  The goal isn’t just to spend though, it’s to invest.  Now is the time to invest in innovative new marketing programs like social media, mobile marketing and a host of other new approaches advocated throughout many of my other blog posts and articles found at www.aaronallen.com. A lot of these new media marketing techniques offer you a level of flexibility and the ability to measure results in a  way that was never possible before. Take advantage of the downturn – when your competitors are dialing back their marketing efforts – to explore some of the new options to connect with your customers. It’s an investment that will pay off – now and in the future.

7. Ask your vendors for help – Even if times are tough, you can often turn to your vendors for support. Landlords will give grace, broad-line distributors will give extended payment terms, and in general, your vendors want you to succeed.  Your destinies are intertwined in that regard – the better you do, the better they do.  It is short-sighted to price shop vendors in such a way that you bounce from deal-to-deal with no loyalty to a vendor.  When you are loyal and ask for help, generally you get it.  Often, those vendors that steal you away with a lower price are lacking on the service side and sometimes, the service you lose is worth more than the discount you gained.

8. Focus on Majors – The 80/20 rule should be applied to cutting costs.  Many operators attempt to improve 100 areas at once – and as a result, they never get deep enough into any one problem to be able to make a real difference.  The key is to find your critical leverage points.  One of my clients has food costs that have run as high as 47%.  Every percentage point reduction in food costs is equivalent to $100,000 in net profit improvement.  Our approach isn’t to tackle every one of the 350+ inventory SKU’s they have.  Our approach is to focus on the top 5 SKU’s.  Focus on the big stuff first.  Work your way down your profit and loss statement or inventory, working on no more than 5 items at a time.

9. Purchasing Cooperatives – We have introduced many of our clients to purchasing cooperatives.  A cooperative is a buying group that gives independent operators and regional chains buying power like the mega chains.  Whether you’re buying food, kitchen equipment or marketing services, when you buy in bulk you always get a better deal and better service.  If you don’t have the buying muscle you need, join or start a cooperative.  We have seen one operation go from paying $48 for a bag-in-the-box of soda to paying $42 and less.  That’s a 13% savings just for purchasing in a group.  It adds up quickly when you’re pouring 100,000 gallons per year as they were.

10. Set a Good Example – You can’t show up to work in a brand new Mercedes and expect your employees to believe that cash is tight.  You’ll notice many CEOs these days setting examples for their other employees by tightening their own belts too.  The CEO of General Motors worked for $1 per year.  The CEO of Land O’ Lakes (a $12 billion company) flies coach like his employees.  The CEO of Wal-Mart stays in 3 star hotels and often shares a room with another executive.  When the head of the company demonstrates a willingness to put the company above his own comfort, it trickles down to the rest of the company and inspires them to do the same.

The recession has forced every business to look at their spending more closely.  Even the world’s largest governments are facing shortfalls and having to make hard choices.  Use this time as an opportunity for innovative new approaches – not just penny-pinching.  As the saying goes, “Necessity is the mother of all invention.”  Be thankful for the downturn – if you use it correctly, it will help motivate you to adopt newer and better ways of doing things.

I hope you have found this article helpful.  Please share your comments and suggestions on other ideas you have for restaurant cost cutting using the reply form below.  We’d love to hear from you and share your insights with other readers.

Next: be sure to check out part 2 of this series, “Top 10 ways NOT to cut costs at your restaurant.”