Return On Investment Ramifications

Juan Martinez, Principal, Profitability, Miami
Juan Martinez, Principal,
Profitality, Miami
In light of the prolonged economic slump, many foodservice companies are placing an increased emphasis on the concept of ROI or return-on-investment. Simply put, they want to know how their shareholders will benefit from any new purchases made.

What's ironic about this new phenomenon is that it's not really new at all. In fact, generating a positive ROI is the very foundation of any capitalist economy.

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The challenge with ROI is the uncertainty that surrounds it. Basically, when trying to calculate ROI you are trying to determine how fast an investment will pay for itself. Unfortunately, many variables can impact how long it takes to generate a positive ROI. And the longer the payback the more uncertainty surrounds the ROI calculations.

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The sluggish global economy has generated a domino effect of sorts. Consumers are not confident about their employment status, which means they have been cutting back on various expenditures, including dining out. As a result, many businesses, although they may have money, are reluctant to invest because of their customers' demeanor and the lingering fear of a double dip recession. And the credit markets remain tight. The net result is an economic stalemate.

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Having said this, I still believe it is possible to help foodservice operators to make wise or even strategic investments in their businesses. Many realize this is the way to maintain their competitive edge, and be in a better position when the dust settles and the economic pressures lessen. The key to doing so is to prove the return will be a positive one. Because both foodservice operators and lenders are guarding their capital more closely than ever before it is critical to have the appropriate analysis done.

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ROI analysis has two sides of it: a more easily quantifiable aspect and a qualitative aspect that is often full of conjecture and extrapolation. The quantitative side can include metrics like traffic impact, labor reduction, product temperature increase or reduction in utility expenses.

The qualitative opportunities are a bit more difficult to calculate. At times they may seem elusive, but if you start thinking about what qualitative aspects are desirable, it gets easier to generate a pretty long list. As this list gets longer, the belief by the group approving the investment becomes stronger.

For example, a piece of equipment that can increase food quality also helps drive traffic. Although the metric of quality can be easily quantified, does that mean that it will be evident to the guest at the restaurant level? If so, will the increase in quality increase sales? Concepts sometimes end up making changes on aspects of the business that seem important to management to the guests. When this happens, the concept generally does not realize the expected return.

Keeping an eye on how changes manifest themselves at the unit level is critical when trying to figure out any impact. I can't begin to tell you how many times I have seen the product perform one way in the lab and another way in the field.

Time represents another ROI variable. This is especially true of investments that are technologically based. It seems as if a better/faster/flashier technological advance shows up not long after you have incorporated new technology into your operation. It is very easy to make the ROI look better by creating a longer life for the investment under consideration. If the life assumed was longer than the actual implementation concepts end up having to write it off, or carry it in their books, when it is not really providing value. The interesting thing is that accounting laws often support longer lives for investments of this sort, clearly providing an incentive to invest. An analysis of real technological lives may suggest shorter life assumptions.

To complicate matters, while calculating at the ROI for a particular investment the market changes– both financially and competitively – this can invalidate the original assumptions. How does one account for thisuncertainty in the initial analysis?

Another complication in ROI analysis is that often the investment ends up being the price of entry to stay competitive. In these instances you have to assume that the ROI is there and make the decision to buy based on capital that is available annually for each of the units. By not investing, the concept may lose competitiveness because the competition may have invested It is not so much about ROI, but more about staying competitive in the market. One could say that drive-thru timers could fall in this category.

Another example of this type of investment may be the area of LEED, sustainability or generally being green. Calculating the ROI of an environmentally friendly investment could make your head spin. Some concepts like Chipotle have been able to figure out how to implement such initiatives very successfully. It is part of their Brand Strategy.

Of course, ROI is but one hot topic permeating the foodservice industry these days. Another subject of critical interest these days is LEED, its impact on foodservice and the ROI it can generate.

A FCSI-sponsored panel on Feb. 9, 2011, one day prior to the The NAFEM Show, will address these very issues. If you are interested in attending, stay tuned for more information.

To summarize, companies want and have to invest to stay ahead of their competitive to drive the business. Getting capital is clearly now more difficult, but with an appropriate ROI analysis, funding is often available. The challenge is that ROI has many aspects that create a certain level of complexity and uncertainly, often making the analysis somewhat complex
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