Technology can impact restaurant profitability and value. To understand how technology can generate and impact income first requires an understanding of the unidirectional flow in a restaurant.

Unidirectional flow is best understood by examining the following flow chart:

The first box represents all of the raw products that are received by the restaurant, such as steaks, vegetables, wine, etc. The products then are stored, as represented by the second box. The products may be stored in various places within the restaurant, depending on the type of product. For example, liquor may be stored in a locked storeroom and at the bar, canned goods and paper products in a storeroom, and fresh food items in a walk-in cooler. As the products are needed by various people within the restaurant, the products are issued. The issuing process, as represented by the third box, may be a formal requisition process, or may be the simple act of an employee going into a storeroom or walk-in cooler and taking product. The product is then used by the employee to prepare a finished product that will be served to the restaurant guest. These two steps are represented by the fourth and fifth boxes. After the product is served, the server collects payment from the guest, and the owner deposits the receipts in his bank. These last two steps are represented by the sixth and seventh boxes.

At each of the steps on the flow chart, there is an opportunity for something to go wrong, which may result in the subsequent steps not occurring. Studies have shown that approximately 25% of employees are not honest and will attempt to steal from an employer no matter what controls are in place, 25% of employees are honest and will not steal from an employer, and 50% of employees are somewhat honest and will steal only if it is so easy to steal that they would feel foolish if they did not steal. The key is the implementation of controls. With the advent of technology, controls are simpler to establish and monitor, than ever before.

Providing real-time inventory reports used to be impossible due to numerous incompatibilities between POS systems, inventory systems, product ordering equipment, actual product invoices, and handwritten food preparation sheets. Current technological advancements have put all of these instruments onto one operating system platform, making communication between these five components simultaneous. This has also changed management's role in operations; instead of managers writing prep sheets at the beginning of each shift, placing orders early in the morning or late at night, and performing hourly-paid employee duties, managers are now able to use computers to automatically generate prep sheets and order product through use of established pars, and immediately convert invoices into inventory, decreasing the number of hours in the office and in the walk-ins taking inventory, and increasing the ability to manage by walking around ("MBWA"), which, in turn, decreases employees' time spent unsupervised. Future trends will include remote PDAs that will increase accuracy in taking inventory, track product shelf lives, and, once again, reduce repetitive management functions.

Technology can vary in price, and for many restaurants, the question of how to finance technology acquisitions must be considered. Predictable methods of financing technology include the use of net free cash flow from the business; the use of bank loans, either a specific term loan for the acquisition of the item, or use of an existing corporate facility; and equipment leases. Some more innovative ideas include phasing the purchases so that you do not buy the components until they can be installed and used; timing the purchases based on seasonal discounts or on your available cash flow; purchasing on the second-hand market, either from failed restaurants or from other industries (since the hospitality industry frequently lags behind other industries in the acquisition and use of technology); use of web-based POS systems, instead of full in-house systems; barter transactions; showcase agreements, where the restaurant agrees to showcase the technology product and provide publicity for the vendor; referral relationships, where the restaurant becomes a reference site for the vendor; and partnering, where a restaurant joins with its peers to increase buying power.

Technology purchases can be expensive, and need to be justified to the owner of the restaurant. Two methods are the traditional discounted cash flow/return on investment approach, and the value-added dimension. In the first method, we calculate the increased income (from either additional revenues or reductions in operating costs, adjusted for the time value of money) that is likely to be produced by the technology, and then divide the increased income by the amount of the capital expenditure. This translates into a return on investment percentage. The amount of the return on investment will depend on the restaurant's ability to convert technology into efficiency, the company's target return, and the restaurant's desire to provide better service to its guests. The value-added dimension is hard to quantify; items to consider include the perception of guests of a restaurant using current or dated technology; identifying and measuring key performance indicators in a profit and loss statement; and use of the performance indicators for training and marketing.

Technology can increase the value of a restaurant indirectly. If technology results in increased net income, then the value of the restaurant under the income capitalization approach to value will increase. For example, if net operating income increases by $10,000, then the restaurant's value will increase by $105,263 using a 9.5% capitalization rate. If you are looking to refinance, the increased value is likely to result in additional borrowing capacity.

If you would like more information on the HVS Food & Beverage Services division, please contact Richard Williams at [email protected]. For information on the HVS Technology Strategies division, please contact Liz Lauer at [email protected].

The preceding article is a summary of a presentation recently given by Richard Williams to the FS/TEC 2002 conference in Orlando, Florida.

Stephen Rushmore
President
516-248-8828, ext. 278
HVS