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.

Once you have evaluated your business objectively and have an idea of the various levers you can pull to adjust the business, you should then attempt to define what success means for your business. Is it to establish a global presence, or is it just one café where every customer is extremely satisfied with the experience? Having the clarity of what the ambition is for the business will allow the people within the business to operate efficiently, as they can communicate these clear goals to their team.

I like to tell my staff I time travel every single day. What I mean by that is that I come up with a five-year plan for how the business is going to go. I break down this plan into four quadrants.

The first quadrant is the fundamentals of the business that have to be established before we even build a store. What is our brand? What is the menu? What is the design of the logo, how will the uniforms look?  

The second quadrant is about the store. What are the types of locations we are aiming for, how large a trading area do we need for our operations to be optimised, what are the designs going to be. Establishing this step will set the parameters for where you plan to open outlets.

The third quadrant is about operational excellence - the aspects involved in ensuring that the product the consumer receives is at its best. This pertains to staff training, hiring protocols, the procedures that occur in the day-to-day running of the store.

The fourth and final quadrant is about staying in touch with our customers so that we stay relevant. Businesses and brands have to evolve over time in order to stay relevant to the people they are targeting. As such, identifying long-term trends that the business will have to adapt or adjust to should be factored in here. For example, there is a growing trend toward a demand for delivery options. Our business needs to be able to deliver an excellent product even when delivered, and our costs must be able to be sustainable in spite of this.

Alongside these four quadrants that map out the direction of the business, I also like to map out milestones that are to be achieved in the span of the five years broken down into annual brackets. Within the first year, maybe you would want your IP trademark to be registered. Within the second year, you want to have five outlets. Within the third, you want to expand overseas. Laying out your goals over the five years helps crystallise your vision and the direction for the company’s growth. As they say, if you don’t define your destination, you will never arrive. Using the chart allows the team to reflect on the direction of the business, rather than just being driven by the daily grind.

The benefits of planning ahead – it is easier to lead

When you have your plans laid out, it is far easier to inspire your team to feel like they are on the same page and moving along in the same direction. You can tell them the five-year plan, and the role they play in bringing the business there. People automatically feel like they are part of something greater than themselves, and that drives results.

Of course, the plan has to be broken down into chunks such that the team member you are communicating with can relate to them. Showing a 100 million dollar plan to a store manager will not inspire a connection and spirit of teamwork. But if you tell him that the store is an integral part of the business’ future, and thus these are the following improvements that have to be made within the next few months, they will understand and feel part of the team. I personally believe that when you lead people, it is important to show them the potential of the future, but also make it relatable and show them where they can contribute.

A good example of this happened in McDonalds. Back in 1999, I was part of the team that rolled out McDonald’s Global Brand Promise. The genius of the Promise was that it didn’t just apply to boardrooms and to senior management. It was something that was rolled out to where the action happens – the McDonald's stores themselves. Every single person in every store had the Global Brand Promise made relatable to them, and were shown how they could contribute to the plan.

If you have happy staff, there is a high chance you have happy customers. With happy customers, you likely have happy investors. Rather than looking at your investors first and employees last, I like to look at the employees first and make sure they are happy. If so, they will be committed, stay longer, be more productive, and ultimately make every other party happy.

Of course, it is important to shift the goalposts when goals are met. As you approach the first target, you have to have the next target ready, as it keeps people engaged and always looking to surge to the next finish line. But you can only have these targets and justify them if you have established clear goals from the start.

In conclusion, it is important to have a realistic understanding of how your business functions in order to maximise how you can make money. This comes from examining every aspect of the business model with a critical eye. Once you have done so, you should come up with a vision of how the business should function, with key indicators and frameworks that guide decision-making, like having a ratio for the Golden Square Foot. Armed with these, you can come up with a realistic long-term plan that sets clear targets for everyone in the organization. You then have a whole team energised and motivated, rallied around a single mission – with that, you can really move mountains.

1 Never be afraid to seek advice

Anyone, from any level, can always learn something. Seeking mentorship from someone more senior will always yield new lessons for your personal growth and development.

2 Understand your business

Even senior leadership must have the fundamentals of the business at their fingertips. Reflect on your business model and what makes it tick. Doing so could yield innovative ideas on how you can better the functioning of the business.

3 Be both a pessimist and an optimist

Have an idea of what things could look like if they went very well, but also what could go wrong. Evaluating every decision from both lenses will allow you to make more informed, well-thought decisions.