Food Bliss (not its real name) supplies catering services. It also had a problem, leaking profits which refused to be plugged. Now this was a not a traditional profit leak. Both the symptoms and source were known. However there was an underlying weakness that was not initially recognised which lead to the problem and the business down the wrong path.
The “split personality” approach (trying to serve two different markets with different needs and price points) to the catering business was not working. It was resulting in very low yields, many staff recruitment and retention problems and over-stretched management resources. The ambitious plan to develop Food Bliss as a franchisable entity was deflecting too much time and energy away from the more profitable ventures of the business. It threatened to derail the whole Company.
Before Profit Leak Diagnosis and Action
After Profit Leak Diagnosis and Action
Read on to discover if your business can turn things around like Karen did.
Food Bliss has two principal areas of operations:
Food Bliss saw its underlying strength as manufacturing and supplying fresh functional food to time poor people. A point of difference between the retail products and functions and events is that Food Bliss could add value through a range of additional services to functions and events. By adding value they could charge a higher margin.
Approximately 40% of their business operations was tied up in commercial kitchen/ manufacturing and wholesaling of food to the retail outlets, 30% of it was in retailing food and beverages at the retail outlets and 30% in the production of food and servicing of Functions, Conferences and Events.
However the profitability picture was completely different. Of the retail outlets, 6 of 9 were losing money. The profits generated by the functions and events kept Food Bliss afloat. Without functions, Food Bliss would not survive.
There was an inherent contradiction at the heart of their operations. The retail operations and functions and events operations involved two opposing business models. Functions and events were built around larger clients, gourmet food, higher margins and a high level of service. Reputation and word of mouth had a significant impact. Purchases were planned.
Retail operations were built around production line, albeit good food, retail staff, a high level of fixed infrastructure, lower margins, and a low level of service. The nature of the sites and client base means that reputation and word of mouth had little impact. People came to the outlets to primarily buy the outlets products, not food. Food is largely an incidental or impulsive by-product of the visit, or a Smoko break.
The company had adopted a strategy of seeking to improve its weaker operations, rather than building on its strengths. The rationale was that retail provided a much more even cash flow that helped cover the uneven cash flow of functions and events. It was also less demanding of management time. Functions and events are very demanding when they are on.
This strategy was undertaken despite recognition that functions and events were fundamental to the company’s success. As a strategy it was not successful. The profit bleeding could not be stemmed. It needed to be cauterised.
The “split personality” approach to the catering business was resulting in very low yields, negative cash flows, many staff problems and over-stretched management resources. The approach was deflecting too much time and energy away from the more profitable ventures of the business. It threatened to derail the whole Company.
The combined strengths and expertise of the Directors equipped them to successfully tackle large functions and move into the upper end of the catering market.
The solution was to remove the split personality and re-focus management efforts to attracting high yield Functions and Event Management. The non-performing low yield entities were sold off.
Within twelve months the business was transformed and has been profitable ever since. You win more races by building on your strengths than on correcting weaknesses.
Profits Leak Detective
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?