High times for high margins

If the dramas in the pizza game in recent months have revealed anything, it’s that the high-margins end of the business is not the license to print money some assume it is. By John Burfitt

The past 12 months has been something of a roller-coaster ride for the traditional high-margins areas of pizza and burger restaurants.

Grand tales about the mounds of money to be made at this end of the food business seemed impressive, and had many looking into these fields with new interest.

According to a Sydney Morning Herald report in February, Domino’s $5 pizza deals were dragging in enormous numbers, resulting in a net profit after tax for 2016 of $92m—more than double its 2014 figure.

Not long after, however, reality kicked in with revelations about Domino’s multiple breaches of workplace regulations, and some franchisees claiming it was near impossible to make profits at such a price point.

On paper, the burger and pizza sectors do appear like easy areas to emerge winning. With the seemingly tight production costs of pizza bases covered in scattered toppings and burgers consisting of bread rolls adorned with beef patties and slices of vegetables, it all seems so simple—as well as inexpensive—to produce.

Compared to the rest of the industry, pizzerias do indeed make good margins and burger joints too, which almost certainly explains why there’s been such a proliferation of both in Australia’s major cities.

But to be convinced by the myth that this sector is a license to print money can be a dangerous deception, warns industry consultant Ken Burgin of Profitable Hospitality.

“There are no licenses in this game, only hard work and the usual labour costs,” Burgin says. “This is a crowded market and you have to know what you are doing with it. It’s definitely not easy as people on the outside looking in might assume. But, it’s true there are advantages.

“True, some of the processes are simpler and the margins involved with the food products can give a good level of profit compared to the cost of them, but that does not mean it’s an easy business. Just ask any of the many who have tried it only to later close up shop.”

Daniel Mannino of Sydney’s Terrazza Italian proudly announces his business recently celebrated its fifth year, and explains the two golden rules to competing in a crowded pizza market: “You have to know how to make a good pizza that people keep coming back for, and then to ensure there is consistency so those people get the same quality of pizza they had the first time around,” he says.

“Yes, it can be hard to compete when places like Dominos have their offers out there, but we are clear that what we offer is very different. Ours is a gourmet offering, and you really can tell the taste difference.”

Mannino believes that if you can’t compete with the huge marketing budgets of the major pizza chains, the value of your point of difference becomes an essential.

“We are one of the few Italian restaurants in the suburb of Chatswood, which has a huge range of Asian restaurants. So, we make that difference work for us by understanding what our customers are coming to us for, and making sure we give it to them. And if that means putting pineapple on a traditional Italian pizza, then that’s what we do!”

Making location a winning strategy has also proven an important factor for Volpino in Victoria’s Mount Martha. Owner David Weill says apart from local delivery services, there are no other pizza restaurants in the area, but there’s plenty of competition from other establishments to be taken into consideration.

“This is a crowded market and you have to know what you are doing with it. It’s definitely not easy as people on the outside looking in might assume.”Ken Burgin, Profitable Hospitality

“We have not spent too much time looking over our shoulders at what other places are doing, but we have spent a lot of time making sure what we are offering is what people want,” Weill says.

“And you need to get the location right—that is crucial. Location should never be under-estimated as one of the most important aspects. It’s no good having the best menu in town if no one can find you but they know where all your competitors are.”

It’s the same rules in the burger game, says Adam Issa, the national marketing manager for the Ribs & Burger chain, which entered the Australian market six years ago. Today it has 16 restaurants in four states.

“When we opened, the competition was the big four—McDonald’s, Hungry Jacks, KFC and Oporto—but no-one was doing boutique burgers in that space as we do,” Issa says.

As for offering gimmicks or novelties that the competition regularly launch to engage customers, Issa says following suit can prove be a dangerous—not to mention costly—strategy.

“It’s fine to follow a fad, but are people visiting your restaurant because of great burgers or because of a fad which will pass in a few weeks?” he says. “Ultimately, the decision about following a new fad must come back to cost. If you’re not making enough to cover yourself, then you won’t be in business for long.”

Just as the other restaurateurs claimed, Issa agrees that to effectively hold a solid place in the market, all energy must be directed internally first.

“You only have two eyes and I believe you should be using them to spend as much time looking hard at exactly what you are offering instead of what the competition is doing. If you want to perfect your own business, then start looking critically at what you are offering and start improving it from that point.

“One way to do that is to go out and taste what your competition is doing, and then come back and taste your own and see how they compare. Then ask yourself would you really pay for what your place is putting on the table.”

It is important, Ken Burgin adds, to note where the market is heading and what they are already
trying out.

“To compete strongly in this area now, you need to have the dietary issues like gluten-free and vegan taken care of. That makes an impact,” he says.

“You also should embrace technology not just in the kitchen to ensure fast and efficient service, but also in the ordering process through the range of new apps. The way Pizza Hut has done that is impressive, so study it and see what you can learn to try with your own business.”

Burgin adds that when perceived quality is delivered upon, it always emerges as a powerful factor when attracting customers away from the competition.

“Your pizza or burger might be $15, which is more than a $10 deal, but you need to be so clear about the quality of yours so that the customer knows what they are paying for is worth it, and never question it.”

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