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Tuesday, November 12, 2013

Volume x Margin = Profit

A restaurant owner wants to earn 1.000 and he has a volume of 10.000. So he sets his prices in such a way that he gets a 10% margin.

One day, he decides that he should be earning 2.000 instead of 1.000. Easy enough. He recalculates his prices so that he makes a 20% margin. Much to his surprise, his volume goes away and instead of doubling his profit, he makes a large loss. Some small businessmen learn from such experiences while others don't. When I see some tavernas in Greece, I wonder whether they learned the lesson because many of them still have high prices and they don't do a lot of business.

I became acquainted with the owner of a Thessaloniki taverna who understands this formula perfectly. He tried a creatively new approach. He didn't want to earn 1.000 or 2.000; no, he wanted to earn 3.000. So he cut his margin to 5% hoping that the volume would go up correspondingly. And the volume exploded.

His prices are unbelievably low. The most expensive meal is lamb at EUR 4,95 per order. Most of his other meals are arond 3 Euros (or even less). Half a bottle of Amstel goes for EUR 1,90.

His secret is standardized high-volume production (Chateaubriand for two is not in the cards...).  Meters of grills are full with pork, chicken and lamb. The choice of meals is somewhat limited but all of them are fesh because of the high turnover. Good quality.

He has a large place (no less that 200 seats) and he never sells less than 500 meals per day, 7 days per week. He also does home deliveries. He employs a total staff of 46 ("I feed 46 families", he says) and 80 suppliers do business with him an make a profit thereon.

A small taverna next door has prices at least twice the level and its owner seems to work with a high profit margin because his taverna is empty...

It is fascinating to watch the place in operation. Apparently, the taverna (a rather nice one at that!) has become the preferred place to eat for many employees in the area (hospitals, schools, shops, etc.). One can hardly find a place to sit down and one sees volumes of food turning and turning. The owner says that he and his wife come in every morning shortly after 5 am.

I should actually talk past tense because, as I found out today, the taverna was closed down yesterday. A lot of angry customers were outside complaining. The owner told us that the city had closed him down at least temporarily. Apparently some construction violation was discovered. The owner said it was a difference of 30 cm of a wall and it had been like that for many years. He also insinuated that angry competitors may be behind the problem. The latter would not surprise because the owner is undoubtedly taking a lot of business away from other tavernas in the area.

So, for the time being, 46 employees and 80 suppliers are probably worrying what the future will bring. I am a bit torn myself. On one hand, it seems almost like a crime, certainly an economic crime, to close down a place which brings so many benefits to customers, employees, suppliers and even the owner. On the other hand, a state of law has laws and it is important that those laws are enacted and complied with.

Nevertheless, the taverna certainly is a show case of a brilliant business idea in the working. Hopefully it will return to business soon!

3 comments:

  1. I am a great fan of storytelling, and this one happened everyday in Greece, for as many years as the population remember. I can therefore tell you the sequel. The owner changes the offending wall, and apply for re-opening of the taverna, that is granted after a two weeks delay. However, shortly after, another department informs him that, because he has changed the wall he is now in breach of another rule, that goes on for as long as it takes to re-educate him. Should it be too difficult to mobilize a new department in time, strikes and demonstrstions will be organized as stop gaps in between. Should the opponents get desperate they can always call on PAME, they are not part of the case, but that has never stopped them from interfering. Meanwhile the owner has to pay wages for his staff of 46 since he cannot sack them.
    This happens in the whole width and depth of the society, the means are different but the goal is the same. NO COMPETITION. If you are one link higher in the food chain you do not have to resort to these methods, you have enough political clout to have laws passed that ensure minimum prices for your products (engineers, pharmacists, brokers, solicitors etc.). 90% of the private sector works with this or similar scams, that leaves us with the 10% lowest in the food chain, the wage earners. What do we do to prevent the wage earners from rebelling? Give them a 10% annual pay rise, courtesy of the EU, EURO-zone and the banks.
    Since the donors have had the gall to refuse to finance this system in the future, the famous social cohesion is now being broken down by the donors. I venture the following: The social cohesion was a myth, there was a social collusion. The scams still work, the only difference being that they are now paid by the Greek wage earners, tough luck.

    PS. I also loved your story about parking the Ferrari in the bank, however, it was not a Greek story, it was pure American, it was a win-win, real business.

    Lennard

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    1. Well, so far the story is unfolding differently. This week we saw that the place is open again. The owner said he reopened the day after we last spoke with him. And the wall? Everything fine. Did you have to change anything? No, everything fine. Did you have to pay a fine? No, everything fine. I said to my wife in German that he probably had to pay a fakelaki. Nearly shocked, she put her finger to her month and said that I couldn't say something like that aloud here. The owner is in the best of spirits. Business is booming and he is planning a Christmas/New Year's vacation for the family. He would like to take the family to snow/ski places. He said St. Moritz was high on his list.

      The cost of our lunch for two was EUR 10,30.

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  2. Since we are at storytelleing, here is a Greek tragedy in 3 acts.
    ACT 1.
    Once upon a time the Greek navy wished to procure a frigate. The minister for the navy therefore decided to conduct an unofficial pre-qualification of companies that could carry out the job, not firm prices only "ball park" figures. He invited representatives from a German, French and Greek company. All meeting were held "one on one".
    The German was asking all sort of questions, how big, what weapon systems, what speed? after hours of discussions, calculations and consultations the German came up with an estimate of 1,0 billion. The French said he would deliver a standard French frigate for around 2,0 billion. To the minister's remark that it was very expensive, he replied that his company had enough orders for the French navy. The meeting with the Greek entrepreneur was somewhat different; the minister was indiscreete and told him of the two other estimates. The Greek told him that his price would be 3,0 billion. When the minister asked him how he arrived at that figure the answer was, "one for you and one for me, and one for the Germans to do the job.
    ACT 2.
    Some years later the project materialized and was tendered, however there were only two bidders. The French gave an offer of 2,0 billion. The Germans and the Greeks had formed a consortium, with the Greeks as Commercial Consortium Leaders and the Germans as Technical Consortium Leaders. The Germans had been convinced that it is better to have a local partner when you do business in Greece. The Consortium offered a price of 1,9 billion and was awarded the contract. The project was executed, but as the commercial part of the contract was vague and full of loop holes, the final price came to 3,0 billion.
    ACT 3.
    Is still pending.
    IPILOGUE.
    Acts 1 and 2 wre only played once, for a very limited audience, but the play was much talked about by critics and the general public. Act 3 has not yet been written or performed, but the government has promised that it will be performed and televised for the public, in the distant future. The character of the Greek entrepreneur is still the role model for the nation.
    CURTAIN.
    Lennard

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