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I recently had the pleasure of attending the IHOP National Franchise Conference (considering it was in Hawaii, the pleasure was all mine) and sitting in on various sessions celebrating the 50th Anniversary of the brand and addressing concerns of IHOP Franchise owners.  No doubt these concerns are not exclusive to IHOP and are shared across many restaurant brands.  One particular session reminded me of a previous post by Jeff Gannon on portion consistency and trimming food costs.

In this breakout session titled Food for the Future, IHOP’s Jay Miller, Director – Research & Development, spoke to attending franchisees about upcoming changes to the menu, addressing franchisee concerns about food quality, cost, and vendor selection.  He also played a few news clips negatively highlighting IHOP among those restaurants busting belts with high fat and calorie count menu items.  He spoke of the growing interest from government entities in mandatory publishing of Nutritional Values on menus and the implied importance of portion control.  Here not only can portion consistency help manage food costs more precisely as prices continually creep up, but more importantly it can protect the image of the brand and its reputation.  Imagine what’s at risk if portions are exceeded, the media secretly tests that plate and nutritional values don’t match those published by corporate.

Once again MVaaS provides an opportunity to manage not only the hard costs, but also the soft costs associated with a household name being condemned by the media for false representation of nutritional information, or anything else for that matter.

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Maybe it’s my penchant for financial analysis, but I was particularly drawn to Jeff Gannon recent post, Alternatives to Expansion in Today’s Economy.

Jeff lays out two scenarios for a hypothetical enterprise to increase earnings by 22%.

1. Build 11 new stores - Upfront cost $9.4 million – Annualized profit $1.1 million
2. Implement a video solution – Upfront cost $0.3 million – Annualized profit $1.1 million

Does anything jump off of your screen?  How about the astonishing difference in invested capital! 

I’m not an expert in the restaurant operating costs, but maybe a reader could help us pinpoint the typical costs of opening a new store.  Changing these costs assumptions would certainly impact the analysis.  However, I do know that customers our our MVaaS solution at Envysion have reported an increase of 1.5% to 2.0% of revenue to their bottom lines.  This is an increase of profitability of approximately 20% (depending on their pre-video results).

In my opinion this is not an either/or question.  Rather the merits of the video solution should be evaluated separately.  And the merits are very compelling:

• Payback Period ~ 4 months
• IRR ~ 319%
• NPV ~ $2.3 million (at 10% discount rate, 50 store enterprise)
• ROI ~ 323%

Any way you look at it, this is very efficient capital.

The past decade has seen unprecedented growth and investment in the restaurant space. Today, most of the industry is seeing top line revenue flatten while food and labor costs rise, putting a tight squeeze on profitability. As the credit markets continue to tighten, owners must find creative alternatives to increase earnings outside of revenue growth from new store expansion.

We’ll use a 50 location concept as an example with average unit volume of $1,200,000 and 8% earnings. This would put enterprise-wide earnings at $4,800,000. What are the options to increase earnings by 22%?

OPTION 1 – Growth Through Expansion

Target earnings increase: $1,050,000 (22%)

Number of new stores required to achieve: 11 = (Target Earnings)/(AUV*.08)

Cost to build 11 new stores: $9,350,000

Timeframe to deploy: 18 Months

OPTION 2 – Technology Investment to Improve Operations

Target Earnings Increase: $1,050,000 (22%)

175 Basis Point Operational Improvement Realized: $1,050,000 = (50*$1,200,000)*.0175

Cost of Investment: $327,100 (6 Camera System in all 50 locations)

Timeframe to deploy: 45 days

Even with flat revenue, an enterprise is able to demonstrate significant growth to the bottom line with minimal investment in technology when compared to an expansion strategy. The timeframe to deploy is of great significance as a technology deployment today would have positive impact on Q408 with full ROI by early Q109.

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SaasBlogs has an interesting question on pricing for SaaS companies – When should software be sold pay per use? 

Why did I find the post, and related comments, so interesting?  Specifically because the question is central to almost every business, and answering it requires thoughtful consideration.

The author postulates that there are two primary pricing options for SaaS applications – fixed recurring fee for unlimited usage (FRF) and pay-per-use (PPU) (author’s note: my acronyms for this post only).  Vendors of SaaS offerings should choose each according to the value acquisition of the customer.  For example, if the customer benefits greatly from sporadic usage, allow them to PPU.  However, if they can continue to benefit as usage increases, provide the FRF model.

I understand the positioning, but would advise MVaaS providers to proceed with caution.  In my view, PPU is risky for MVaaS software vendors, and should rarely be implemented. 

Why?  There are several reasons. 

1. PPU models communicate to the customer that they are first and foremost an opportunity for increased revenue.  Don’t believe me, what do you think of ATM user fees?  Yea, me too.
2. PPU models discourage usage.  There is no surer way for a customer to question the value of a MVaaS solution than to have them under-utilize it and fail to realize all of the available benefits.
3. PPU models introduce uncertainty.  Humans detest uncertainty, and decision-makers are human.  The certainty of $50 per month, no exceptions, is comforting.
4. PPU models are not typical in the software space.  Be prepared to answer tough customer questions on how the PPU model will save them money in the short and long-runs.  Otherwise, be prepared to congratulate your competitors.

The restaurant industry is experiencing the most difficult business climate in recent memory. When you combine food, fuel and labor, there’s not much room for error as each are going up at alarming rates.

What is causing food to rise so sharply? Is it all due to Mother Nature? Let’s have a look at corn production and the new corn consumption landscape. Our recent corn harvest yielded one of the largest supplies ever yet the price per bushel nearly doubled. The reason for this is due to the competition for corn on the world market. Our weakened dollar is sending a growing percentage of the crop oversees. Our fuel crises is sending more of the crop to ethanol refineries.

When this dynamic is combined with weather related events, we get the following:

- Corn feeds cattle, pigs and chickens. Combined with droughts in the Southeast, beef, pork and chicken rise sharply.

- Farmers plant more corn and less of everything else. Other produce rises sharply, including soy-based cooking oils. The price of flour has jumped 250%

The cost of fuel has added a punch as much of the food we enjoy is transported across the country and often imported from other countries. For an operator who delivers food, it’s a tripple-whammy: fuel surcharges on the food in the door, expensive fuel to cook and then deliver the food.

We can also count on the minimum wage to increase each year with recent legislation taking effect. In Colorado, this hit restaurants with large waitstaffs especially hard when compensation for tip-based employees nearly doubled on Jan 1 2008.

My recent posts have focused on using MVaaS to reduce your labor costs and food costs. Now that those are predictable and improving, focus on top line growth through new and repeat customer frequency. All storms come to an end and the survivors are those who employed the technology and discipline to guide them through.

I absolutely love speaking with restaurant owners about the benefits of video surveillance. It helps that as a past owner myself, I understand exactly how video helps an operation. But help trim food costs?

Restaurant menus are thoughtfully constructed with food cost, gross profit and gross revenue in mind. The menu layout is designed to psychologically draw the eye to the most profitable items. Understanding the exact portion sizes of each menu item and exercising portion consistency in the kitchen are paramount to success.

What happens when portion consistency breaks down? Through the use of video I quickly realized that the Path of Least Resistency rules supreme. I saw an employee, I’ll call him “Skip”, top a pizza with cheese by hand as opposed to weighing the cheese on a scale first. Let’s do some quick math on the impact of just 1 extra ounce of cheese per pizza:

1 pound whole milk mozzarella – $2.35

1 ounce – $.147

3,000 pizzas per month @ $.147 = $441.00

What happens to your operation when exact portion controls are not adhered to? The entire cost structure of the menu breaks down, brand consistency suffers and ultimately profitability tanks.

How many “Skips” do you have in your operation? For about $5 per day, you can quickly find out.

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Have you heard?  Food prices have been increasing.

If this is news to you, to quote ’The Turk’ Sollozzo from The Godfather, ”Te salute, Don Corleone.”

If you are like everyone else, you’ve felt the increases in your wallet.  Now imagine the impact to a restaurant owner!

MVaaS providers have achieved initial success in several key markets.  Among those has been the restaurant space.  Derek Gale, Associate Editor of Restaurants and Institutions, provides insight in an article about the burgeoning video business in restaurants.

The main takeaways from Mr. Gale’s article:

1. The systems can pay for themselves in less than a year in theft and fraud avoidance;
2. The systems can be used to deliver effective and efficient service to enhance customer satisfaction.

These conclusions are consistent with the sentiments of our customers.  MVaaS should be viewed as a value creator, not a line item expense.  MVaaS, when properly utilized, is a valuable tool to combat loss and ensure customer satsifaction.

Abraham Maslow, an American Psychologist, developed a landmark theory on human motivation.  Dubbed Maslow’s hierarchy of needs, the theory describes the paradigm that controls human motivations.

In summary, people are motivated according to a hierarchy, which stretches from the most basic (psysiological needs/eating, breathing, etc.) to the most complex (self-actualization/morality, creativity, etc.).  Prior to focusing attention on future levels, one must first satisfy the needs at the lower levels.

Simply put, if you don’t have food, nothing else matters.

It’s interesting to apply the framework of the hierarchy of needs to business organizations.  Answering the basic question “what is most important to them?” is imperative to understand the needs and motivations of customers, as well as competitors and vendors.  This understanding will allow you to anticipate requests, and resist objections.

Depending on your age, you may remember the period of time after the introduction of the cellular phone.  While there were early adoptors, business operators did not immediately provide all of their salepeople with a mobile phone.  It was viewed as a luxury, not something vital to survival.

Obviously this has changed over time.

Where is managed video on the hierarchy of needs for business owners in the restaurant space?  Or the retail owner?  Hotel operator?  If it is seen by some as a luxury, this view is changing, based on impressive returns being generated by leading edge operators. 

Full industry adoption will occur when the absence of managed video is viewed as a distinct competitive disadvantage.  And this is starting to occur.

I’ll continue my string of posts with one of the quick-hits identified through the use of video. Labor is always scheduled against sales targets. On nights when we met or exceeded sales targets, no problem – labor kept in check. However, on nights when we didn’t, were resources being let go early enough to stay ahead of the curve?

Despite the assurances from management, I thought I’d peek into why labor crept up to 27% of net sales. What I found was that my employees were stealing from me. The chit-chat during slower periods, constant smoke-breaks and text-messaging were cutting into more productive uses of my labor dollars. The fix was simple: Eliminate chronic “B-team” players whose behavior changed materially in the absence of mature management, Reduce downtime by closing pro-actively, Stretch and reward “A-team” players.

The result? I was able to eliminate nearly six-hours of daily labor, moving labor costs just under 25% of net sales. For a business achieving $60,000 in net sales per month, I just gave my P&L a $1,200 raise.

Have you given yesterday’s post some thought?  What possible connection am I making between this film and managed video?

Should parents have cameras installed in their children’s bedrooms, made viewable from their favorite restaurant?  Should a public view monitor be made available to all babysitters so they can monitor the well-being of children in real-time?

This is not what I had in mind…although perhaps there is a niche here to fill for some video provider…

The connection I was suggesting has to do with the essence of the babysitter’s situation.  The caller exploited the babysitter’s vulnerability – namely the fear of the unknown.  This is not an indictment of the babysitter, but rather a reality of the situation.  She did not know how the children were at that moment because she hadn’t recently checked.  The children were sleeping upstairs.  She assumed that they were safe.  Only when the caller called did she realize that she and the children were not safe. 

An interesting question arises – Had the caller not phoned to taunt her, how long would she have gone before realizing the danger?

Customers of traditional DVR and VHS video systems must deal with a similar reality.  As long as nothing happens, why worry about whether all of their video systems are operational?  Assume everything is fine, right?  It is only when something happens that they find themselves hoping that their systems were operational. 

Traditional CCTV customers have reported that as many as 50% of their traditional video systems were not fully functional when they did an audit – rendering their investment useless.

A key element of Managed Video as a Service is the ability to monitor the status of all cameras and recorders in real-time, with proactive system notifications alerting the customers of any issues.  When the proverbial caller calls, customers of MVaaS know in advance that their systems are working.  This is something that Jill Johnson could have used.