The Downs Golf Club: the Catering Operation - Assignment Example

The Downs Golf Club A Review of the Catering Operation Contents 1. Executive Summary 2. Review of last six months of accounts and analysis of the catering operation 3. Discussion of concerns and suggestions for increasing profitability over the remainder of the current financial year. 4. Proposals on the future development of the catering facilities 5. Bibliography 1. Executive Summary The Down’s Golf Club Catering Operation is a venture which has produced a reasonable level of profits over the past six months. It has a profitable Club Room and Bar, attended by a loyal membership who are willing to pay premium prices to dine and drink there. However, sales have been flat over the last four months, as the Club Room and Bar have reached capacity, and the other facilities appear unable to attract new patrons. This has made it difficult for the operations to grow revenue and reduce costs, and thus to increase profits. This report suggests several options for increasing revenue and profits, both in the short term and in the long term. Assuming that further study demonstrates that these options are feasible, the report also suggests several ways in which the newly expanded operations could reduce their operating costs, thus driving both efficiency and profitability much higher. 2. Review of last six months of accounts and analysis of the catering operation Down’s Golf Accounts – Periods 1 to 6 Period Period 1 (4) Period 2 (4) Period 3 (5) Period 4 (4) Period 5 (4) Period 6 (5) Total   Jan Feb Mar Apr May Jun   £ % £ % £ % £ % £ % £ % £ % Food   Downs Carvery 14,260 30.40% 18,450 28.18% 31,000 27.56% 24,800 26.93% 24,800 26.99% 31,000 27.07% 144,310 27.58% Club Room 31,360 67.00% 44,525 68.00% 77,000 68.44% 61,600 66.88% 61,600 67.03% 77,000 67.25% 353,085 67.47% Functions 1,220 2.60% 2,500 3.82% 4,500 4.00% 5,700 6.19% 5,500 5.98% 6,500 5.68% 25,920 4.95% Sub Total 46,840 100.00% 65,475 100.00% 112,500 100.00% 92,100 100.00% 91,900 100.00% 114,500 100.00% 523,315 100.00%     Liquor Downs Carvery 3,220 8.90% 4,166 9.01% 6,850 8.15% 5,600 7.43% 5,600 7.43% 7,000 7.43% 32,436 7.88% Club Room 16,800 46.30% 20,885 45.18% 39,875 47.41% 33,000 43.77% 33,000 43.77% 41,250 43.77% 184,810 44.89% Bar 15,800 43.60% 20,075 43.43% 32,125 38.20% 30,800 40.85% 30,800 40.85% 38,500 40.85% 168,100 40.84% Functions 455 1.30% 1,100 2.38% 5,250 6.24% 6,000 7.96% 6,000 7.96% 7,500 7.96% 26,305 6.39% Sub Total 36,275 100.00% 46,226 100.00% 84,100 100.00% 75,400 100.00% 75,400 100.00% 94,250 100.00% 411,651 100.00%   SALES SUB TOTAL 83,115   111,701   196,600   167,500   167,300   208,750   934,966       COSTS Food 24,945 53.30% 37,830 67.73% 48,160 58.54% 38,296 53.64% 38,296 52.79% 47,724 53.73% 235,251 57.47% Liquor 13,500 37.20% 18,025 32.27% 34105 41.46% 33105 46.36% 34250 47.21% 41106 46.27% 174,091 42.53% Sub Total 38,445 46.30% 55,855 50.00% 82,265 41.84% 71,401 42.63% 72,546 43.36% 88,830 42.55% 409,342 43.78%     GROSS PROFIT Food 21,895 46.70% 27,645 49.50% 64,340 56.27% 53,804 55.99% 53,604 56.57% 66,776 55.68% 288,064 54.80% Liquor 22,775 62.80% 28,201 50.50% 49,995 43.73% 42,295 44.01% 41,150 43.43% 53,144 44.32% 237,560 45.20% Sub Total 44,670 53.70% 55,846 50.00% 114,335 58.16% 96,099 57.37% 94,754 56.64% 119,920 57.45% 525,624 56.22%     WAGES 32,525 39.10% 41,250 36.93% 49,347 25.10% 49,105 29.32% 48,400 28.93% 52,396 25.10% 273,023 29.20% NET PROFIT 12,145 14.60% 14,596 13.07% 64,988 33.06% 46,994 28.06% 46,354 27.71% 67,524 32.35% 252,601 27.02% OVERHEAD/EXPENSES   Rates             70,000 41.79%         70,000 7.49% Fuel         17,500 8.90%         14,500 6.95% 32,000 3.42% Other operating expenses 3,450 4.20% 4,716 4.22% 6,215 3.16% 5,185 3.10% 5,385 3.22% 7,430 3.56% 32,381 3.46% Interest payments 10,000 12.00% 10,000 8.95% 10,000 5.09% 10,000 5.97% 10,000 5.98% 10,000 4.79% 60,000 6.42% Marketing 2,000 2.40% 3,500 3.13% 3,500 1.78% 2,500 1.49% 2,000 1.20% 2,000 0.96% 15,500 1.66% Sub total expenses 15,450 18.60% 18,216 16.31% 37,215 18.93% 87,685 52.35% 17,385 10.39% 33,930 16.25% 209,881 22.45% NET PROFIT -3,305 -4.00% -3,620 -3.24% 27,773 14.13% -40,691 -24.29% 28,969 17.32% 33,594 16.09% 42,720 4.57% Sales These are primarily driven by the Club Room and the Bar, with some support from the Carvery, but little contribution from Functions. In the first two periods, sales were low, but experienced a rapid growth from February to March, and have sustained a level of approximately £40,000 per week over Periods 3 through 6 inclusive. This growth could have been driven by the additional marketing spend in February and March. The main concern with regards to sales is that total sales are very dependent on the Club Room and the Bar; with 67% of food sales going through the Club Room, and 85% of liquor sales going through the Club Room and the Bar. Given that both these are members only areas, and that they have a very limited capacity, with the Club Room only holding 60 people, and the Bar holding 70, this will potentially restrict sales growth in future. Indeed, given that the Club Room seats 60 at a food cost of £28 per head, the £77,000 takings in Period 6 indicates that the Club Room was filled its capacity more than 45 times during a five week period. This is equivalent to nine full sittings a week, out of a possible 14, and if weekday lunches are ignored on the basis that many members may be working, the Club Room is currently at full capacity. Equally, the fact that the Bar, which holds 70, is taking almost as much liquor revenue as the Club Room indicates that it too may be near capacity, based on guests visiting in the evenings and on weekends. Profits Gross profits vary between 50 and 60% and, during the sustained level of sales in periods 3 through 6, have remained fairly steady. This shows that the operation has the potential to be profitable, however the fact that gross profit levels have not changed significantly since this steady level of sales was reached suggests that the catering operation has not had a strong focus on leveraging any economies of scale in order to increase its profitability. When looking at the next profits, it is interesting to see that rates and fuel costs are all accounted for in the period in which they arose. Better accounting technique would be to spread these costs across the periods to which they relate, thus giving more even and relevant net profit figures. Also, net profit figures show an average of 4.57% over the period, after all costs have been taken into account. This is quite a low profit margin, with very little cushioning in case of a fall in revenues, although if calculated for the last four periods it would be higher due to the greater sales, and thus cover for fixed costs, in these periods. Costs For comparison purposes, Brinker International’s 2006 annual report has been used as a source of comparable industry norms for standard costs. Brinker owns a large number of restaurants, including the Chili’s and Maggiano’s Little Italy brand. Their costs can thus be taken as a reasonable approximation of efficient industry standards. Brinker International’s Annual Report 2006   2006 2005 2004 $ % $ % $ % Revenues 4151291   3749539   3541005   Operating Costs   Cost of sales 1160931 28% 1059822 28% 980717 28% Restaurant expenses 2264525 55% 2076453 55% 1924390 54% Depreciation 190206 5% 179908 5% 167802 5% General and admin 207080 5% 153116 4% 150558 4% other 1950 0% 61855 2% 69236 2% Interest 22857  1% 25260 1% 11495 0% Net Profit 303742 7% 193125 5% 236807 7% As can be seen above, Brinker’s costs of sales stand at just 28%, much less that the Down’s 43.78% average. This indicates that the Downs could make several savings from improved sourcing and procurement activities, although Brinker undoubtedly enjoys economies of scale and buyer power in this regard. Brinker’s restaurant expenses appear comparable to Down’s wages, rates and fuel expenses, and in this regards Down’s is more efficient, with their restaurant expenses totalling 40.11%, compared to Brinker’s 55%. However, given that the total percentage of these two expenses is 83% for Brinker and 83.89% for Downs, it is possible that both operations are approximately equally efficient, and merely define these cost groupings differently. This equally agrees with the fact that the profitability figures for both companies are roughly similar: when taken over Periods 3 through 6, Down’s net profits are 6.71%, although this doesn’t take into account apportioning out fuel and rates. 3. Discussion of concerns and suggestions for increasing profitability over the remainder of the current financial year. With regards to increasing sales, one of the first priorities should be to increase Club Room capacity, either by better use of the existing space; or by refurbishing one of the function rooms to use as a second Club Dining Room. However, possibly the best option, given that the Downs Carvery is taking less than half of the revenue of the Club Room, is to switch these two rooms around. This would give a Club Room with a capacity of 160, potentially doubling takings from Club Dining. Whilst the Carvery would be reduced to a capacity of 70, it should still be able to accommodate its patrons, as its prices are just over half that of the Club Room, but its food takings are less than half, indicating that it has less patrons than the Club Room. There are two potential hindrances to this plan. Firstly, the décor may be very different in both of these rooms, and so it may not be straightforward to switch them around, and may require refurbishment. Secondly, the distribution of visits to the Carvey may not be even. For example, if the Carvery is full to capacity at weekends, but empty during the week, switching the rooms may reduce the Carvery’s revenues by half. As a result, further study should be taken into the feasibility of this option. Another option for the remainder of the financial year is to boost prices in the Club Room. Members can already use the Carvery, but most seem to choose the Club Room instead, despite the higher price. This indicates that the prestige factor associated with the Club Room makes its demand very inelastic, hence price could rise quite substantially without harming takings. However, excessive price rises could harm the reputation of the new club owners, and lead to a member’s backlash. Cutting costs is another potential option for increasing profitability however, in the short term, this would need to be done either by sourcing cheaper food and liquor, or by reducing wages. Better sourcing tends to take time to implement, hence this would likely only have a minimal impact on the current year. Reducing staff costs appears feasible, due to the mixed abilities among the staff and the high wages paid, however care must be taken not to demotivate the staff, or harm performance levels. The Club Dining Room and Bar are prestige venues, with members choosing to dine and drink there due to the exclusivity, rather than the cost. Harming the service could harm the prestige of both venues, and harm both sales and image. 4. Proposals on the future development of the catering facilities The main improvement that should be made in future is to refurbish the facilities rooms, both to take pressure of the Club Dining Room and Bar by offering extra facilities, and also to tap into the lucrative function market. Given that the Club Dining Room and Bar are both close to capacity, it is likely that patrons are being turned away on at least some days in the week. As the current kitchen is under-utilised, and demand is high, it is only the dining facilities that limit growth. Combining a refurbishment with a new marketing drive could feasibly see revenues from the Club Dining and Bar increase by up to 100%, based on the increase over the last marketing drive from January to April. This would also be supplemented by function revenues, if the refurbished rooms can be successfully marketed as function venues. Furthermore, this could be achieved with a minimum of additional kitchen expenses, given that the kitchen is already under-utilised. Once these revenues have been raised, the additional buying power generated can be used to improve the catering operation’s sourcing and procurement activities. This would reduce the cost of goods sold to close to industry standard levels. Whilst the expansion in revenues would undoubtedly require additional recruitment, if this recruitment is well managed it could be combined with a drive to raise the overall skill level of the kitchen staff. Also, some of the existing staff could be replaced by more flexible workers, who would work during busy periods, but not during the quieter periods. This would help keep wage costs in proportion to revenue, whereas currently they fluctuate between 25-40% of revenue. 5. Bibliography 1. Brinker International Inc. (2006) Destination Known. 2006 Annual Report. Read More