To maximize their profit, businesses must maximize revenue while minimizing expenses. Here’s an examination of the tough world of hospitality, where restaurants have seemingly tried to either maximize revenue or minimize expenses, but not both simultaneously.
During the Great Recession of 2007-09, we saw many restaurants focus on maximizing revenue. This was evident in staying open for longer hours (including being open every day), adding meals (e.g., dinner-only restaurants added lunch service) and creating new menu items at different price points (remember that many restaurants added prix fixe meals?).
Fast forward to today in which we are seeing a low unemployment rate and relatively high inflation rates. Several studies have revealed that Americans are not eating out as often, and a labor shortage in the hospitality industry persists. As a result, restaurants are tending to focus on minimizing expenses by cutting back on hours (e.g., many bars now close at 11 p.m. instead of 2 a.m.), cutting back on days open (e.g., closing on Sundays and Mondays) and not participating in events (e.g., “Taste of”). These tactics correlate to keeping total wages paid and the cost of goods sold–two major variable costs–as low as possible.
While restaurants shifting to a strategy of minimizing expenses is a result of market conditions, it is the wrong approach for long-term growth. For one reason, the industry is creating a new normal in which diners will continue to dine out less often (costs aside) if restaurants continue to have reduced hours, reduced service and/or reduced offerings.
Plus, focusing on just surviving means lost opportunities to right the ship. A study showed that a restaurant open just one fewer hour a week will lose $1,922 in revenue over a month, and that translates to $23,000 a year. Meanwhile, data from 2022 shows that restaurants have cut back on hours by 6.5 on average, which is roughly $150,000 in unrealized revenue.
Finally, a race to the bottom is usually a death spiral. It wouldn’t be surprising to see restaurants further cut back on offerings and hours to the point that they eventually close for good.