One of your top employees is seeking a new challenge to rise to? That means Opportunity.
You’re sitting on a temporary monetary surplus? Opportunity.
Your kitchen is underutilized and operates only a few hours a day or only during the tourist season? Opportunity.
An acquaintance offers you the chance to invest in a new project? Opportunity.
Operating and growing a restaurant entails having to meet the challenge of hiring and retaining qualified staff, fine-tuning the logistics of perishables, and other supplies, adjusting to shifting consumer trends, and implementing innovative information technologies. The day-to-day management of a restaurant is extremely demanding; competition and climate pressures are numerous and sudden. Unfortunately, the heavy burden of daily operations management pulls the manager’s attention away from longer-term strategic issues, such as diversifying one’s sources of revenue.
Managers should consider taking more time for strategic thinking!
Yet, revenue diversification is a question of survival. The future is uncertain and the multiplication of activities may provide the necessary degree of stability and strength to make it through the changes that lie ahead.
Revenue diversification is adding new activities to create new sources of income, using part or all your equity, your assets or your production and service capacities.
By multiplying their sources of revenue, restaurateurs can increase their total sales over the long term, improve the synergy of their operations, enjoy economies of scale, boost the productivity of the resources being used, and enhance their global offering by meeting current needs. For example, managing a central kitchen to provide many more sales points would create exactly that.
As is the case with a stock portfolio, having a mix of activities and revenue sources allows reducing the risk associated with any single activity and benefiting from the growth of various markets. If sales during dinner period is declining, maybe breakfast sales will go up.
Diversification is a rapid growth strategy. There are four different approaches according to the strategic diversification model developed by Igor Ansoff (1965, 1984) and applied to the restaurant business by Marcel Coté (2008).
From the least to the most risky, the approaches are the following:
- Least Risky “stay the same”: exploit the same market with the same restaurant, only bigger
- Franchise: conquer a new market with the same type of restaurant
- New concept: open a different type of restaurant in the same market
- Highest Risk: open a different type of restaurant in a new market
Where restaurants are concerned, these four types of approach can take on different forms:
|Same product||New product|
Develop your market further with your current service
CREATION AND BROADENING OF PRODUCT LINE
Open a new service in the same market
Offer same service in a new market (franchise)
Offer a new service in a new market
according to Igor Ansoff (1965), as applied by Marcel Côté (2008)
This idea has been around for a while in the the market, and examples are numerous. Here are a few suggestions of what one can consider to diversify his restaurant revenues:
Type I: Same market and product/service
- Enlarge dining room and/or kitchen;
- Install and promote a bar;
- Install a terrace;
Type II: Same product/service, new market
- Develop franchises in new cities;
- Centralize production and subcontract for self, a distributor and/or other restaurants;
- Offer product in grocery stores;
- Offer home delivery on your own or through others (e.g., Foodora, Just Eats, Uber eats);
Type III: New product/service, same market
- Offer catering service;
- Extend business hours (breakfast, lunch, dinner, and late night);
- Install a take-out counter;
- Manage a service counter under contract in a corporation, mall or other place of business;
Type IV: New product/service, new market
- Manufacture brand-name products for a distributor;
- Offer catering service in another city;
- Open a counter at the airport;
- License your trademark;
- Write a cookbook;
- Make public appearances in the media: television or radio show, Facebook, podcasts;
- Keep a blog or publish podcasts or videos on social networks.
The more that the activities are interrelated, the better the chances of success. For example, the more similar the menus, the easier it will be to produce them with the same level of quality.
This is what is referred to as related diversification (Harrison & Enz, 2005). In this case, the new activity is related to and somehow capitalizes on what the business already does, offers, or uses, such as food production and distribution, technology and staff.
According to Harrison and Enz (2005, p.164), there are a number of strategic reasons or opportunities for wanting to diversify:
- Reduce risk by investing in different businesses or less competitive sectors;
- Stabilize and grow revenues;
- Improve overall growth of one’s activities;
- Use cash surplus;
- Exploit under- or unused resources, capacity, and competencies;
- Create synergies;
- Reduce inter-business costs;
- Use borrowing capacity (leverage);
- Integrate and exploit new technologies;
- Increase one’s power on the market.
Again according to Harrison and Enz (2005), owners or general managers could want to diversify their restaurant’s activities for the following reasons:
- Enhance the value of the business;
- Extend their operations and responsibilities across a larger set of resources (e.g., employees, buildings, networks);
- Increase their salary and bonus;
- Create a work environment with a more refined management style and more specialized positions.
Once the decision is made to diversify and in which direction, the restaurant management team won’t throw itself in too many new projects at the time. All these decisions are part of a strategic plan, with attainable goals for which the team is accountable for. It’s important not to lose sight of the restaurant’s missions and global objectives.
Adapting to the new market by trying new ideas is also a question of surviving as well as growing.
Diversifying one’s revenue sources is a strategic decision. For every strategic decision, it is important to define the expected outcome – i.e. create an attainable goal. The same holds true when developing additional sources of revenue. Do we merely want to up revenues and create synergies? Do we just want to avoid targeting an overly narrow or declining market? Is the aim to earn higher dollar profits? Do we wish to raise the business’s reputation? One way or another, how performance is measured will be fundamental to determining whether the outcome is successful.
However, in every development project, the higher the risks, the higher the chances of failure. What counts above all is obtaining a stable average return across a mix of activities so as not to depend on one single activity alone.
SUCCESS DEPENDS ON WHAT ?
- Deliberation before deciding;
- An exact measure of how much is to be invested and how long it will take to recover the capital outflow;
- The strength of a recognized brand or name;
Your financial strength:
- Access to investment funds;
- A rigorous business plan;
- Existing businesses that are financially sound;
- Excess production and service capacity (e.g., work space, equipment, raw materials, labour, business hours, transportation);
- High-performing physical facilities that can accommodate additional production and services;
Your team and business skills:
- A team of collaborators with ALL the required competencies;
- Knowledge of the laws and regulations specific to each source of revenue;
- An effective marketing strategy mindful of the initial brand image;
Depending on the diversification project, there will be new things to learn, new collaborators to integrate, and new physical facilities to arrange. It is not uncommon when diversifying activities to have to hire new employees who possess complementary competencies required to operate the new activities efficiently, in order to meet efficiently the demands of new activities.
For example, the idea of operating a new central kitchen to become a subcontractor for other restaurants and to supply grocery stores implies obtaining a new production permit to manipulate and cook meat, choosing a distinctive packaging for products and, above all, making major changes to culinary production facilities. For a further example, creating a new catering service will require conducting an aggressive marketing campaign directed at new target customers, purchasing rolling stock, and training a new team.
STAY FOCUS AND BE CREATIVE AND PATIENT
Clearly, the risk factor will be high and, in the short term, the profits may not justify the investment and additional resources. In the early going, during the transition period, it may even be necessary to operate at a loss. The business’s cash position will no doubt be put to the test. However, the profit situation should improve gradually as sales pick up, costs decline, and a higher level of productivity is achieved.
Adding different types of activities may also require changing the legal structure of the business. The organizational chart will need to be redesigned as well to reflect a new division of responsibilities, particularly where human resources are concerned. This is all part of a sound and beneficial trajectory for the business given that it will have to implement greater standardization in its services, products and processes, and adopt best management practices.
Whatever the motivation behind wanting to diversify, the importance of putting together a team of qualified, professional collaborators cannot be emphasized enough. These should include, of course, lawyers, strategists, and accountants driven by the desire to succeed. In addition, it is vital to size up both the risk and potential profitability of all new activities and to determine their payback period as best possible. In closing, it is worth underscoring a critical factor that could make a big difference when diversifying revenue sources: The greater the inter-relatedness and the synergy across activities, the better the chances of success.
About the author:
Professor François Pageau M.Sc.CMC teaches restaurant management at the Institut de tourisme et d’hôtellerie du Québec, in Montréal since 1996. His fields of expertise are operational control, management, strategy and facility management. He has published articles in Theoros and contributes regularly to HRI magazine, a specialised publication in Quebec. Through the years, he has been involved in program development at the university and college level and collaborated with Ryerson University and École Hôtelière de Lausanne.
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