Sunday, June 7, 2015

How Do Buffet Restaurants Price For Profits?

I've been thinking of writing a slightly different content from what I usually write relating to personal finance and investing so glad that I managed to churn out one.

At work, one of my main task is to make budget plans for the company and have them revisited regularly to allow the company to meet the required pre-set budget target. At home, I make my own personal financial planning to make rooms for sufficient working capital so that cash doesn't run out and get depleted unnecessarily before the end of the month.

Sometime during last year, I wrote an article explaining on the amount of financial planning you will need to have before you decide to open up a cafe. You can view the original article here. Today, I'm taking a look at the same industry with a slightly different proposition -- Buffet Restaurants. It's always interesting to find out how these businesses work on the back of our mind when we gulped our food down our throats.




Consumer's Standpoint

If you are a Singaporean, you shouldn't be a stranger to the wide variety of choices for Buffet restaurants to choose from. These All-You-Can-Eat buffet are usually available in most hotels and restaurants and if you are savvy enough, you might pick up a discount or two using a credit card or coupon from Groupon, depending on availability.

The interesting thing that makes All-You-Can-Eat Buffet psychologically attractive to consumers is that you get to eat a variety of as many foods as they are available, get yourself sickeningly full and you pay a fixed amount of price. After all, if the price of the buffet costs you $50, you might as well gulped down as many food as possible because it's the only way to get most value from there.





Well, in theory, this is the same as budgeting for our stomach because you can visit a normal restaurants and still eat as many variety of foods to choose from the menu and get yourself stuffed full. The difference probably lies in the fact that people are generally risk adverse when it comes to spending on food and having buffet style means that they are insured against any probability of bad outcomes where the expected bill might exceeds the amount of budget originally planned. This is especially true when you are treating a bunch of friends or having a huge family gathering where you don't want to be the one paying when you have an eater the size of a sumo wrestler or drinker the size of a barrel and costs are unexpected.


Restaurant's Standpoint

It gets interesting when you think from the restaurant's standpoint because now they're exactly at the opposite end of the spectrum.

We mentioned earlier that consumer gets to plan for a fixed price ahead of schedule when they go for buffet style but for restaurants this can be very difficult to plan because they do not know the amount of food consumers will consume. They certainly do not want a sumo eater to come to their restaurants on a daily basis as they know it will dent their profits. This is interesting because in economic terms both the buyers and sellers have asymmetrical information and the restaurant owner does not know who is going to turn up for the day or who is going to consume more food on any given day.





I spoke to a client who is in the business of running a buffet restaurants and he mentioned that they often revisit their budget plans and the average amount consumed on a frequent basis. After all, you can't have an average amount consumed worth $30 and have the restaurants priced lesser than that. They'll soon go out of business in that case. So if the average amount of food consumed is worth $30, restaurants will price it above that depending on the margins they want to take home. This means that if you come to a buffet restaurant as a family, you are probably going to get the father eating (a lot) more than $30 worth of food, but the mother and daughter eating (a lot less) than $30 worth of food, making it profitably for the restaurants to churn out at the end of the day.

The reviewing process continues until there is a marginal increase in the average amount of food consumed and they will have to raise the price to protect their margins. In the case where the marginal price is decreasing, restaurants will usually keep the price the same (they will not adjust the price downwards) and bring home bigger margins.


Other Benefits

One other benefits I could probably think of from the owner standpoint is on the limited number of staff required to attend to the individual customer. With labor costs becoming such a crunch for service industries these days, restaurants could perhaps review their strategies as they do not require particular staff to attend, take orders and bring food to the tables for each customer that dine in.

Maybe this is just what companies like Japan Foods or Sakae Sushi needs, as we've seen their labor numbers creeping up over the years.


Half-You-Can-Eat Buffet

An alternative to the primitive All-You-Can-Eat Buffet is the Half-You-Can-Eat Buffet concept I was thinking about. I do not know how cost effective is this going to be from the restaurant or consumers viewpoint but it may worth taking a note if the concept becomes popular in the future.





The first reason is due to the sustainability as we want to see reduced food waste going to the bins. Through this direct method, we can impose a fine or penalty if the customers could not finish the food they've ordered or taken. In fact, we see this being imposed on many restaurants as a deterrent to wasting food.

The second method is the customer retention methodology where consumer that comes for the first time gets measure of how much he or she eats and this will then get pro-rated when the consumer comes back for the second and subsequent visit.

The third method is the regurgiation methodology where the consumer eats half full and then get challenged to eat the same proportion for the other half to obtain some sort of promotion/discounts to the full original price.


Conclusion

There's a lot to think about given the different settings restaurants are trying to price and make to entice consumers. Some entices them with credit card discounts while some entices them totally with unlimited servings. This post serves as a change of writing content from financial freedom but makes an interesting business plan to consider.

The next time you are going for a buffet, maybe there's something you can ponder about behind the concept for the food you are enjoying.

How do you think Buffet Restaurants priced their margins? Are the profits sustainable? How do they adjust to changes? Is the Half-You-Can-Eat Buffet concept going to work? I am interested to hear your views.



2 comments:

  1. Although All-you-can-eat buffet brings customers, the food and variety play a crucial role in bringing back returning customers. Unless the buffet is really enticing and satisfying, customers hardly take a second chance for a mere all-you-can-eat.

    If there is a popular item/expensive item (such as meats), I observed that some restaurants do not keep the bowl full of items so that patrons will not gobble over everything. You can also notice ice creams/soft drinks will be given free flow which invariably fill up stomachs, but fruits will be of less quantity or just one or two varieties.

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    1. Hi Brother

      Exactly. People tend to go for quality over quantity these days, but somehow the expectation of the spread will always still be there.

      If I am opening up a buffet restaurant one day, I'll be sure to give them free flow of soft drinks and juices, these make them full rather easily.

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