February 27, 2020 |
Years back at one of my first jobs, I remember the owner talking about a golden ratio of 30/30/30/10, 30% wages, rent and cost of goods and 10% profits. This was supposed to be the silver bullet to every and any F&B business, or so he used to say. I didn’t know better, I was only a kid making coffee and serving scones to people getting off the cable car in New Zealand’s capital. So, I recorded it as an interesting fact in business and kept making coffee and serving scones.
The same place went on to change their scone prices four times in a lapse of a week. I never understood if this was to cover opportunity cost or just a way to keep his golden ratio in place. Despite the knowledge opportunity, I left two weeks later for a place that printed their prices in longer lasting documents and that outlet at the top of the cable car closed its doors a few months later.
Nonetheless, the interesting fact never escaped my mind and I went on to university wondering if the “golden ratio” was true; two core topics were enough to debunk that idea and make me question every “golden ratio” ever put in front of me. However, until now I haven’t systematically explained the incongruencies of this borderline-lazy approach to business projections.
Let’s look at four different regions with similar consumption patterns in F&B, nonetheless with very different business environments; for the purpose of this I choose four markets I know well enough and have enough quality of data for a cross-market business simulation, these are:
Their characteristics are summarised on the following tables:
The simulation is considering four scenarios on these four markets, assuming the “golden ratio” is set at the time of pricing products an operator would consider that for every dollar 30 cents go to rent, 30 cents go to wages, 30 cents go to COGS and 10 cents are the profits.
Assumption on each market for the simulation are as highlighted in the table below:
Worth to mention the footfall assumption is based on the geographic characteristics of a particular market, with wellington being a more densely populated city, Dubai and London being more spread out with identified and established community pockets. Johannesburg set as something in between; and making sure values are within a feasible range for a venue of the simulated size.
“GOLDEN RATIO” IS DISCONNECTED FROM REALITY
Looking closely at the golden ratio is visible that those values are very different from the real world of competitive markets, it could be aspirational, at lower levels of revenue but would make little sense at the upper level of business revenue.
In conclusion and throwing in a wild guess, one could say there may have been a time, 50 years ago (or more), where markets had a more homogeneous structure, relied less on imports, lesser competition and lower minimum wage levels. Then perhaps the 30/30/30/10 model could’ve been relevant. Nevertheless, and needless to say today’s competitive environment is not the case.
As a token for your patience I can share the average business model structure in these 4 markets. These averages were worked with past 2019/2018 data from 10 or less outlets. Don’t take it as a gloomy forecast of what your business could make and run back to invest in gold.
CASE STUDIES AND AVERAGES IN 4 MARKETS
The aim is to give an indication of the competitive environment businesses face nowadays. I can attest of businesses that beat the average, but the common denominator of such businesses is to be realistic and adaptable to the market, as well as not over-commit on record-high rents that could end up making investors uneasy.
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