Improving Food and Beverage Profitability

July 03, 2018

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As a food and beverage business moves through the stages of its lifecycle – from “start up” to “rapid growth” to “maturity” – consistent growth is critical. The focus on consistent growth is even more important at the “maturity” stage − when businesses often slip into a slow decline, which can then lead to demise. A continuous growth, development and profit improvement mindset, and strategy will provide better positioning to ensure a sustainable saleable business as it progresses through the business lifecycle.

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A profit improvement and value enhancement process involves assessing the current state of the business to identify inefficiencies, gaps and risks, and then making changes to specific areas that might impede profitability. Improved profits can mean stronger cash flow, which can translate into optimized working capital, a stronger balance sheet, and higher enterprise value.

HOW TO GROW A BUSINESS AND IMPROVE PROFITS

In order to boost the profitability of the business and put it in the best market position to improve the bottom line, the top line needs to grow.  A robust Profit Improvement Process is the integration of three key, measurable revenue metrics:

  • Acquire more customers – of the appropriate type
  • Increase transaction frequency
  • Increase average transaction size

Constantly measuring, monitoring and managing these numbers ensures the business is being worked “ON,” not just “IN” and is the key to improving the effectiveness of each business process. For example, a 10% increase in each of these metrics will add 33% to the top line.

1. Acquire more customers – of the appropriate type

Not all customers are alike. Define the characteristics of the best customers, which could include demographics and their respective buying habits. Learn about why they buy from specific places. Is it price? Service? Quality? Selection? Something else? As this is better understood, tailor marketing and communications accordingly. 

Develop a UCD (Unique Core Differentiator) that clearly articulates to consumers, customers and prospects why the products are the best option for them. For example, take advantage of the current foodie trend for healthier, tastier foods and beverages to set the business apart. This not only clearly differentiates the business, but it provides a consistent message for the entire team to use. 

As more and more leads and orders happen online through mobile apps and social media, be sure to harness the power of technology to attract more of the “appropriate” consumers who can then drive demand for customers to offer more products. Remember, customers – and competitors’ customers – present many business opportunities. Conduct a “SWOT” analysis to understand competitive strengths, internal weaknesses, and external opportunities and threats. This will help focus on the potential roadblocks to enhancing productivity and meeting customer needs including changing regulations, skilled labour shortages, and the challenges around transportation.

2. Increase transaction frequency

Increasing the frequency customers buy from the business is vital to long-term health and profitability. It costs several times more to win a new customer than it does to have an existing customer purchase again. Think of the investment of time and money to acquire the customer for the first sale. Each additional sale doesn’t involve any acquisition cost, so for every returning customer sale, more profit is earned.

The business wants the right customers to keep coming back. Using the characteristics developed in Step one as a filter, classify the customer base into tiers: A, B, C and D customers. “A” customers would be the best and most desired — they are loyal, dependable, or just plain nice. “B” customers have the potential to become “A’s” with a little work. “C” customers are not ideal, and many businesses struggle to deal with ”D” customers. Create different messages, promotions and events for the “A” and “B” customers to encourage their return. Additionally, each time they make a purchase, remember to say, “thank you” and “please do come again!”

It is very important to serve customers well. Many business owners are surprised to learn that 68% of customers who leave for a competitor do so because of perceived indifference. In other words, they did not feel valued or believe that the business and its staff did not truly care whether they bought from them or not. Keep in mind, not following up to say thank you and please come back, failing to present special offers or send special mailings, and not asking for input, can all be perceived as indifference. Provide customers excellent service and constantly nurture these relationships. Encourage customer feedback, both formal and informal to show customers they are valued. Customers need to know the business is striving to do even better for them.

3. Increase average transaction size

The following outlines basic selling strategies:

Cross-selling: Consider what additional items can be offered  to add value and help the customer get the most out of the purchase.

Upselling:  An effective way to upsell is to offer good/better/best tiers, such as silver, gold, and platinum.

Bundling: Items or services bundled together into a single purchase adds value for the customer. This will make products and services more attractive, create a higher perceived value for the customer and increase your average transaction value.

Working margins and pricing: If a business wants to increase the average transaction amount, they must firmly understand their margins and how the bottom line is impacted.  Avoid discounting and price wars as a strategy to maintain and increase the average sale value.  Consider the following: 

If the margin is presently 35% and prices are reduced by 10% . . .

To produce the same profit as before the discount, the sales volume must increase by 40%. That is not to increase profit, it is just return to the pre-discount profit margin. It is unlikely that a 10% discount will spur an extra 40% in sales.

On the other hand...

If the margin is presently 35% and prices are increased by 10% . . .

Sales can decrease up to 22% while maintaining the same profit.

Data indicates that only 15% of the market actually purchases based on price alone. It is important for businesses to differentiate themselves in the market, and show why their products or services are worth more. Sales could actually increase ― even with a price increase. The product could also start to appear more valuable. Increasing rather than decreasing prices could be worth further investigation.

WORK ‘ON’ NOT ‘IN’ THE BUSINESS

Evaluate the key elements of leadership and operational practices as shown below and then select the areas most likely to improve the profitability of the operation. Using these selected strategies, build out an action-oriented plan to put the business in the best position to develop and grow revenue and profits. 

The result will be a more sustainable and valuable business.

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For more information please contact us or learn more about our Food & Beverage services.