Recently, two businesses I often visited went broke. Both had good locations, strong client bases, and were well-regarded in their communities. They were in the food industry, operating in different areas – Woolgoolga and Forster.
Both had been trading for over ten years, had good reputations, and had performed well in the past.
Of course, the owners themselves would best understand the decline. But as businesses collapse, owners often become disheartened and lose perspective. I had no involvement beyond being a customer, but based on my knowledge, I’ve drawn a few conclusions.
General Challenges in the Food Industry
Wages are always a major risk, especially when you add in the compulsory 10% superannuation. Realistically, a food business needs around a 15% return on investment just to stay healthy. To achieve this, it’s essential to:
- Conduct a quarterly KPI review – step back and assess the business regularly.
- Ensure BAS, super, and accounts are handled by a qualified accountant so all costs are properly recorded and nothing is hidden.
- Act quickly on what the numbers are telling you.
Case 1: The Coffee Shop
The coffee shop struggled because times changed – and they didn’t.
The cost-of-living crisis (though arguably exaggerated) was front of mind for many people. Customers still came in for coffee, but far fewer bought cakes, so the return per table dropped sharply.
This could have been avoided with price adjustments. Two main issues stood out:
- A lack of understanding about revenue needed per table.
- A lack of courage to increase prices, which is a common problem.
The shop needed to charge more for its core product. Instead of $6 per cup, it should have been closer to $12. Simplifying the pricing structure to one price per cup, regardless of size, would have helped. The true cost of a coffee, fully accounted for, is closer to $20 – so why undercharge?
They also failed to implement a minimum spend per table (e.g., $20). This would have discouraged customers who only bought a single coffee while occupying space, effectively forcing additional sales (like cake).
Reason for failure: Lack of price leadership.
Case 2: The Cake Shop
The cake shop’s downfall was tied to management, staffing, and premises. While the business looked strong from the outside, the issues were:
- Labour costs creeping too high. High staff turnover meant constantly replacing workers, and although some were paid above award rates, poor performers weren’t moved on quickly enough. The focus should have been on fewer staff, but better quality staff.
- Premises not up to standard. Poor staff amenities made the workplace unappealing, leading to staff dissatisfaction and shorter tenure.
- Weak financial management. The business relied on its past success and didn’t set clear financial goals. Management didn’t engage a high-quality accountant with proven results. They saw accounting as a cost rather than a tool for success, which left them without the insight and discipline they needed.
Reason for failure: Lack of management experience and poor advice.
Final Thoughts
Both of these businesses could have survived – or at least lessened the damage – if they had taken good advice from their accountants and acted on it.
PS: I worked in the food industry for a year in the 1980s, so I understand its dynamics. These observations are based on my own knowledge and experience.