Building a Profitable Business Model in the F&B Industry

A common problem that persists in the F&B industry is that people who work in food often do so with a lot of passion. Of course, passion is important: having a deep passion for what you do drives the quality of the product you create. But passion also means that you see the world through rose-tinted glasses.

A common product of over-optimism, for example, when operators or investors confuse what they think consumers can buy with making money. You could sell a Ferrari for 10 dollars, and people would buy it, but you would not make any money on it. Having a sober assessment of what people are willing to spend on an item versus what it would cost you to sell it, is important in evaluating whether your business model is even actually viable.

Rose-tinted lenses are particularly dangerous in the F&B industry, as there is a relatively low barrier of entry: many investors jump in and try their luck. However, it is a business which is structured in a way that stacks the odds against new investors and operators. The business climate for F&B is also constantly changing. In Singapore, for example, e-commerce and delivery means that revenue is being moved from malls to in-home, which fundamentally changes profits and cost calculations, especially in rental of outlets in malls.

So, you need to be an optimist to be successful in F&B, but you also need to be a realist. The approach I take in assessing a business tends to be very sober. What are the nuts and bolts of the business? What are the levers we have available to grow our business in a profitable way?

Within the F&B industry, the typical levers that we would consider are: the price point of the menu; the raw materials required to produce the food, and whether they are specialised and require special logistical arrangements, or use generic ingredients; whether staff require significant training to operate an outlet at a high level; the rental cost of a unit, and the cost of furnishings that would go into it, and so on. Putting a critical eye into the nuts and bolts of the business give a good indicator as to the potential profitability of a new business, and the things that work and don’t in an existing business.

Let’s apply this thinking to Four Fingers. In my view, it’s a chicken product that is not particularly low price, but is good value for money. In terms of raw materials, we use generic ingredients like chicken, fries, rice, vegetables, soft drinks – nothing that requires specialised warehousing or logistics. In terms of staff, we do not require many specialised staff, but we do need a strong system that allows people to be trained easily and be deployed in a scalable manner. When we unpack the fundamentals of Four Finger’s business this way, it then gives us a better idea of the levers we can adjust to maximise profit, and ultimately, growth.

The Golden Square Foot

A tool that is useful in business evaluation would be what I call a “Golden Square Foot.” I factor in all the costs that go into building one square foot of an outlet for the business, and I compare that with the revenues that a square foot of an outlet would bring in. This allows me to compare the investment per square foot versus the potential profits that would generate.

Once you have the ratio, it becomes easy to make evaluations on the profitability of the existing model, or to determine whether it makes sense to expand to another outlet based on different rental costs. If the ratio falls below the amount that you are comfortable with, it empowers you with the confidence to walk away from a rental deal knowing that it is not profitable. Alternatively, if the existing business model provides a ratio that is not satisfactory, you then know you have to adjust certain components in order to increase the profitability per square foot of your business.

An example of where this is apparent is in space efficiency. In F&B, rental will likely be the largest cost for your business. Thus, minimising the cost of rental per customer would increase profitability. Take Four Fingers for example. We know that every seat turns between 7 and 12 customers a day, spending 7 or 8 dollars a meal. If we wanted to increase that number, we would find ways to increase the number of seats within the premises.

Compare this to a café. Customer churn tends to be far lower – customers will want to come in, spend five dollars on a coffee, and sit for three hours occupying at least one seat, but sometimes a table for four. If you were to fall victim to viewing your café business with a rose-tinted, passionate lens, you may think “I need the décor in the café to be very elegant and nice.” However, that tends to lead to customers who want to stay longer in that café, but do not necessarily want to spend more money. So from this simple example we can conclude, using the Golden Square Foot framework, that spending more on décor increases the cost per square foot, and may actually hurt the yield as well. Thus, perhaps less of the starting budget should be spent on the décor of the unit.

The kicker, of course, is that rent is the same whether you start a café or a fast food outlet, but the revenue generated differs greatly due to the nature of the business. The ability to maximise consumer spending per square foot is really where you start your model, and should always be the priority.

The same concept can be applied to raw ingredients. In general, you want to sell products that have high perceived value and low actual costs. An expresso is the perfect example of this – you purchase an espresso at around 4 dollars, but from experience I know that the actual cost is around 10 cents. Japanese ramen is another example – in Japan, it is considered fast food, but outside of Japan, good ramen is seen as premium. The actual cost of ramen is low in relation to how much you can sell ramen overseas. So, in order to maximise the yield per square foot when structuring your business, it is important to put away sentiments of wanting to sell premium products or very high-quality coffee. Instead, you should aim to create a proposition where people are willing to spend substantially more than it costs you to sell it to them.

Building a brand

Another factor that would help increase the profitability of your business would be to look at building the brand of your business. I first realized this when I was in charge of Walt Disney’s merchandising in Eastern Europe. I would issue licenses for companies to produce products with Disney characters. During talks with these suppliers, I found – quite obviously- that the cost of producing a teacup without a Lion King print and with a Lion King print is extremely similar, but the teacup with a Lion King print would sell for 25% more. I then realized that if you invest in brands, you can create value off the brand alone.

In my experience, I find that the word “brand” is very misused – few people understand what brands really are. They are a promise that exists only to customers, within their minds and their hearts. In order to make this promise to them, there must be a concerted, deliberate effort over time.

The idea of building a brand extends to virtually every decision you make about your business, as you want people to be exposed to your brand to the maximum amount. Think of your store not as a store, but a venue for customers to experience your brand. What colours should your outlet be? What uniforms do the staff wear? What do they say when they greet customers? What should the packaging of food be like? What music should be played, and how loud should it be? All of these impact the customer experience at your store, and thus are the drivers of the brand experience your store delivers.  

Understanding your brand and what you want it to be can help you make many informed business decisions. With Four Fingers, I saw us as the Red Bull squaring up against the Coca Colas of the world. Yes, Coca Cola is much larger, but they cannot afford to experiment or rock the boat too much, because they need mass appeal to fuel their purchases every day. But if you were a much smaller brand, you can afford to take risks and act as a disruptor in the category in an attempt to appeal to a specific group of customers.