Give Me Unit Economics or Give Me Death!

Want to feed and nurture a foodservice concept? Then pay close attention to the many factors that impact its unit economics.

Do you remember this famous movie line? No, not “Make my day!” I mean “Show me the money!” To paraphrase this famous pop culture reference for the restaurant industry, today’s mantra is “Show me Your Unit Economics!”

So what are unit economics? Simply put, unit economics provide a measure of the overall financial performance of a concept: how much profit the concept provides for the investment made after accounting for all costs and revenues. Some concepts refer to this as return on investment, cash flow and payback, among other terms. Simply put, unit economics measures the return to the shareholders.

Here is a brutal reality we all need to embrace: At the end of the day, nothing is more important to a brand’s ability to grow than having the right unit economics. Without the right unit economics, a brand will not be able to grow.

One problem with this topic is that many people do not realize all the tentacles unit economics encompasses. Some stop with the very narrow definition that unit economics is just a reduction in capital cost, or a reduction in the cost to develop and build. While these are indeed important areas that make up part of having the right unit economics, many other aspects positively drive this metric.

Sometimes, in an effort to reduce capital costs, concepts reduce development costs, not realizing the often unintentional and simultaneous reduction of sales capacity. In essence, this negatively impacts unit economics. Some of today’s new prototype designs that you read about promote lower development costs by reducing the size of the facilities and equipment, but at the price of limiting capacity, including throughput sales, production, seating and storage space, among other areas.

The key to successfully managing unit economics is reducing capital costs without negatively impacting the capacity to drive sales in all areas of the business (e.g. inside, take-out, delivery, drive-thru, catering, web ordering, etc.).

Service time represents one aspect that can drive better unit economics. The faster the service time, the more sales a location can achieve. Reducing service time by five minutes, driven by a more efficient food delivery system in the kitchen, via either reduction in the production and/or service sequence, will go a long way toward driving unit economics.

Another critical area that impacts unit economics is on-going operating costs. As a matter of fact, reducing on-going costs is likely the most impacting way to drive better unit economics, since it is an annuity: a cost that impacts the profit each period through the life of the concept.

When looking at ways to lower operating costs, my favorite line item to start with is labor. For most restaurant concepts, labor cost represents either the highest line item as a percent of sales or the second highest, so streamlining this item can help drive better unit economics significantly. I will follow up with additional thoughts on labor management in upcoming postings.

Better unit economics can sometimes manifest itself with qualitative metric, for example product consistency.  Consider that without consistency, you don’t have a brand since locations would be delivering different quality to customers, so this aspect is an important one to manage.

As you investigate how do drive better unit economics, keep in mind that occasionally decreasing one cost can result in higher expenditures elsewhere. For example, using value-added product components to drive labor costs down can generate additional food costs. But increasing equipment costs up front can lead to lower on-going utility expenditures, faster kitchen times, or a reduction in labor costs. Bottom-line, as long as the net impact of the benefit minus the cost remains positive, the foodservice concept’s unit economics will improve.

To impact unit economics you first need to identify in an analytical and objective way where the costs negatively impacting unit economics reside as well as the bottlenecks that inhibit real sales growth. The second step is to address these issues organically and simultaneously, using factual and objective data. As I have written before, the principles of industrial engineering and analytics can help develop this baseline of knowledge.

Whichever way you go about uncovering how to drive better unit economics, make sure that it is in an objective and inclusive manner, since unit economics has many tentacles; some show up as capital or on-going recurring costs, while others as potential revenue streams.

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