Why Restaurant Margins Are Higher Than You Think

Matt Wampler: David. Thanks for coming on, man.

David: Good to be here. Thanks for having me.

Matt Wampler: Look, I’m fascinated by your background. I mean, you, unlike many people, have literally run companies that have touched every aspect of restaurants. You started out with hot schedules, labor management, black box, marketing, analytics. Now you’re on to craftable. You’ve got the food cost side. I mean, that’s revenue, food cost, and labor. I mean, that you’re summarizing the three big ones for restaurants.

David: You know, it seems to be all aspects and areas of opportunity for a restaurateur today. So it’s fun to have these different use cases that I’ve had the opportunity to work with.

Matt Wampler: Before we get into back of house and what’s going on in that world today, I’m curious about the experience you had leading hot schedules right in the middle of the dot-com rise, fall, transition to the internet, which was a huge leap forward to today navigating the world of AI. Any parallels between the two?

David: Everything. I would say that the time frames are a time frame of innovation and change. Navigating both of them has not been easy by any stretch. But they’re extremely exciting times, you know, when you’re really trying to figure things out, being the first or at least one of the first. They’re fun challenges to solve for. Not easy.

Matt Wampler: Anything you learned back in the nineties that is a hard lesson that you take through to today and think, okay, next time I go through one of these large change environments, I’m not gonna make that same mistake.

David: I think everything has to be really thought out with the customer in mind when you’re making these changes. As a restaurateur, you just expect things to go right. They don’t have a lot of patience for bugs, issues.

Matt Wampler: Really, my experience is every restaurant is waiting for things to go wrong. They’re so used to everything falling apart. It’s just what’s gonna fall apart next?

David: You just can’t let it be your tech, cause if you do, you’re toast. So that’s the one aspect of it. And coming as a restaurateur to want to build tech to think you have all the ideas, there were lessons learned to where you have to take a step back cause not every restaurateur thinks the same, not every business is the same. There’s the difference between a Jimmy Johns and a P.F. Chang’s. So I really think there’s these businesses, they have different workflows, there’s different levels of skill sets. So I would say that there was a lot of lessons learned from that aspect of really considering sourcing all types of restaurant styles to really understand how to build and build effectively for all segments of the market.

Matt Wampler: Well, I have to imagine that’s gotta be one of the bigger adjustments for you. You know, when you look at labor scheduling, it’s really just revenues and people and where you put them. It’s pretty uniform. Everybody may want to put them in a different place, but functionally the operation is similar. Black box, that’s analytics, one size fits all for the industry in a lot of ways. But when you get to back of house, the complication is every restaurant’s totally different. So how do you build around the individual needs and nuances of businesses while still having a platform that’s applicable to all?

David: It’s definitely significantly more complex than a scheduling and labor management. I think there is the realization that it takes a tremendous amount of discipline from a brand to truly utilize a back office correctly. And most companies are looking at it just to get a food cost. So they think of inventory as end of month or end of week and they take counts and then determine what’s our food cost. There’s a nuance to where really truly understanding actual versus theoretical, because that’s where you start to really truly understand what are the top twenty items that are driving sixty percent of my revenue. And when there’s that level of focus, you really start to understand this variance. What’s in it? Is it spoilage, is it theft? Why does it occur? That’s really where the rubber meets the road.

Matt Wampler: You use the word discipline and it instantly gave me the analogy of a gym membership. When people are getting back-of-house software, a lot of times it’s like a gym membership. They’re like, I’m gonna get this because I’m gonna pay for it. And then I’m gonna be forced to use it and we’re gonna do it. And then sure enough, the New Year’s resolution passes and they stop using the gym membership and it never actually gets there. How do you get people to have discipline?

David: I think it’s really truly understanding a lot of times the decision maker, the person that is choosing to bring it in, it’s really the importance of their leadership to share the why behind it. And if you can really truly share the why behind why you’re doing something, it comes across differently to where people are inspired to do right. It’s cultural. Great leaders in business share the why behind something. They seek buy-in. And once that buy-in occurs across the organization, the discipline just naturally happens. But if they’re forced, or if it’s just because I said so, that’s where you start to see things being undermined. So I really believe when it comes to implementing anything, any tech, any systems, processes, there needs to be an understanding of the why.

Matt Wampler: Yeah, we talk a lot about the fact that very rarely is there a technological barrier to solutions. It’s usually an operationalization barrier. The technology can be made. It’s getting it operationalized that’s always the challenge in this industry.

David: Absolutely. I am motivated to get managers, chefs emotionally connected to profitability. If we can get them emotionally connected to profitability and truly understanding what does it take to become profitable without the expense of the customer experience, then I really believe that whether it’s labor or AP automation or inventory management, I believe those things will be adopted because all they are is tools. That’s the way that I look at this tool set that we’re offering. We have a tool set to forecast a sales trend, order, receive, review menu engineering, do an audit, take inventory, review analytics. But what I see the difference now, it’s not just a tool set, it’s an intelligent tool set, meaning how does it surface information or insights rather than you having to go hunt for it or pull it up in an analytics platform?

Matt Wampler: You know it’s weird. Somewhere along the lines, profitability became almost like a dirty word. But I go right back to when I was in restaurants. Jimmy Johns always recommended you do a bonus program and you bonused out 25% of the profits if they hit certain benchmarks. I always ran into restaurateurs and operators that didn’t want to necessarily share how much money they were making with the team. Is that a controversial subject today?

David: It shouldn’t be. I grew up in South Texas in a small town. Growing up and moving to the city for me was eye opening and when you start to travel internationally, I really started to hear cultures talk about Americans and our capitalistic views. I came across maybe seven years ago a good friend of mine, Fred Lafranc, introduced me to conscious capitalism. I went to the Conscious Capitalism CEO summits here in Austin. And what I learned was that John Mackey started this with the Whole Foods founder and what he believed was that capitalism was a force for good if it was conscious. The reason behind a business wasn’t solely for increasing shareholders’ wealth. It could be used as a force for good to where there was a multi-tiered bottom line that was investing back in the people, investing back in the community and into the environment.

Matt Wampler: All right David, so my hypothesis is that let’s say the average profit margin in the industry is five percent. The best run restaurants are twenty plus percent. Let’s say 20% is the theoretical best every restaurant could do. That’s fifteen percentage points or a hundred and fifty billion dollars a year that’s left on the table in this industry. Do you think that that is in the realm of what the inefficiencies are?

David: The margins are there. The margins are there. They’re just overlooked. And we’ve conditioned, we’ve conditioned our managers to focus really on two things prime cost, food cost, labor cost. Now, they are the highest controllable expenses, but they are not the only controllable expenses. So if you go beyond that, there’s a lot of money there. Let me just say this. I went back into the restaurant business around two and a half years ago. And I was partnered with a very well-known restaurateur here in Austin. Beautiful restaurant, 50 years, iconic. He wanted me to take over the business. And I started to find out this company could be a lot more profitable. We tied the managers to all controllable costs. We brought on the guest experience because you cannot control cost without at the expense of the customer. So we ended up saving 600 basis points in five months to invest back in the kitchen. This is where the light bulbs were going off.

Matt Wampler: All right, so the average profit margin is five percent. Best run restaurants are twenty plus percent. That’s a hundred and fifty billion dollars a year left on the table. What gives you hope that that gap can be closed?

David: The most profitable businesses are the most simplistic businesses. Really truly understanding the kind of clientele that you’re going after, what you’re gonna be and what you’re not gonna be. The most important thing is really knowing who you are, what your brand represents, and what you are going to be great at. When you get that right, that menu, and you know how to price it and you know how to negotiate where you’re gonna really make your money, then you have the high probability of being profitable.

Matt Wampler: Survivorship bias, right? The ones that had a simple menu that lasted for 70 years. Were they just the ones that didn’t go out of business? Because I sit here and wonder, we’re at an interesting time in the world. You’ve got to adapt and change to stay with it.

David: I really believe it goes back to leadership. Is leadership willing to take risks, make bets, test things, trial and error before they just roll things out. I do believe in testing things, testing, trying, saying that’s not gonna work. I think the ones that are smart about that, that really protect their culture, their business, are the ones that are in business for forty, fifty, seventy years.

Matt Wampler: So let’s talk about leadership and you know making those tests and changes. You’re stepping into a leadership role as the new CEO of Craftable. As we’ve discussed, really complicated. It’s like a gym membership in a lot of ways. Right in the middle of the AI boom and SaaSpocalypse. Why are you doing this to yourself?

David: I joined Craftable a little over two years ago as a board member because I still wanted to be involved in tech. What the co-founders built reminded me very early stage of Hot Schedules. And when our co-founder decided that he wanted to step aside and focus on family, we were looking for the CEO. I wasn’t planning on coming back into running tech. But when we got down to the end and we had some really incredible candidates, there was this concern that the candidates had not really been from the industry. And there was this level of protection of this seemed right to get back in. And I would say that there was some unfinished business with Hot Schedules on things that I still wanted to evolve and build. And I saw that potential here.

Matt Wampler: David, how do those conversations go? For all of us that haven’t been in the boardroom selecting a CEO, how does that process even work?

David: It’s never easy. Founders that have been successful and grown a business like this, it is one of the most critical and important roles for the board to be able to select the right person. I’m fortunate enough to have been a founder. To have grown a business, to make all the mistakes and learn through that, understanding the importance of the culture that you’re walking into versus the culture what you believe it should be. Culture is just behaviors, the way people learn to work together, especially when they’re in the trenches and building it up.

Matt Wampler: The ironic part is I half wonder if you removed every founder from their company and then needed to find a CEO and the founder actually applied and you didn’t know they were the founder prior, if any of them would actually get hired.

David: Probably not. With scale and growth, as you’re scaling and growing any business, there’s challenges that you face that either you’ve faced it before or you haven’t. And typically when you’re scaling and growing a business, you want somebody that’s been through some of those challenges, knows how to hire the right talent and experience necessary to scale and grow that business. Boards want to bet on experience.

Matt Wampler: So you’re here today, we’re facing the quote unquote SaaSpocalypse. How do you view that? Is it something that keeps you up at night?

David: When it comes to these types of trends, I don’t lean in on them so much because at the end of the day, it’s not gonna change who we are and what we stand for and what we’re trying to really accomplish in supporting our customers and making an impact on the industry. It’s noise to me. Now, is it a conversation and discussion that we have? Absolutely. But I just try not to allow that to alter where we’re going. We made some bets late last year on how we were going to evolve as a company. And based on those bets, I’m looking up today thinking like, wow. Those bets have allowed us to innovate at a pace that I’ve never been able to experience before.

Matt Wampler: Yeah, and I want to get into that in a second. But ironically, if you were buying into the SaaSpocalypse, you would have made the same decisions and invested in the same bets. So how is it that you can not worry about the big macro trend and also make the reaction that you did to go address it?

David: Our AI wasn’t an afterthought for us. We’ve built this into the entire workflow. And the goal was not let’s build an AI native platform necessarily. It was more of what people really wanted was automate the back office. What does that mean? How does a sales forecast trend drive a suggested order, an accurate suggested order? How does it drive prep? How does it drive staffing plans? That’s what back office was always supposed to be. This is the unfinished business of Hot Schedules. When I look at this industry, there’s a lot of roll-ups. And now we’re not about a roll-up. We’re about developing the best tech that drives high adoption that people actually want to use, and it simplifies by automating that entire process with a high degree of accuracy to where they can focus on being in the restaurant running it, not in spreadsheets.

Matt Wampler: Walk me through what the future looks like because most of the back of house systems, the only real advancements they’ve made is like automating the recognizing of your invoices and input. There hasn’t been a lot of advancement in back of house over the last 20 years. Am I incorrect on that?

David: It’s ordering, it’s inventory count. What a lot of companies haven’t gotten right is the forecasting to drive the suggestive ordering and prep. And this is when you really think about where’s the loss, the loss is in the waste, in the spoilage. Managers and chefs are pressed for time and they shoot from the hip in ordering. Everything has a shelf life, everything is perishable. The industry contributes to around thirty billion pounds of waste a year. Which if you kind of just do the backwards math, I can feed seven million people. Now, we are one of the most generous industries as well, to where we contribute to these great causes to end childhood hunger. But at the same time, if we look in the back of our kitchen or the way that we’re doing things, there’s something fundamentally wrong here. I feel like we’ve failed on the technology side to really get the tech right so they don’t over-order or under-order.

Matt Wampler: Hey, look, you talk dirty to me. I love forecasting anything. When I was convincing my co-founder that we should do this, the biggest concern we had was we’re not that smart, right? Why doesn’t this exist? I agree with you on all of that. I actually think all of the inefficiencies really stem from that reactivity and not proactively looking at the data. How hard was it to actually bring forecasting to fruition in a big company like Craftable?

David: It’s not easy. It’s about hiring the right talent and really looking at this. With sales forecasting, we did statistical forecasting at Hot Schedules and we took the rolling four and it was good enough and accurate enough. Order is a different thing because you have to truly know what you’re forecasting, what are you gonna typically need. Do you actually have what you think you have in a cooler. There still needs to be human intervention. Some of the businesses that we support are upwards of 10, 15, 20, 30 million annual unit volume. These are big complex businesses. So the forecasting driving suggestive ordering, prep production and optimizing of staffing. That was the most important piece of this. And testing with the right partners and customers before we fully launch is the right thing. Because if it’s not right, we don’t deploy it.

Matt Wampler: So one of the questions that I wrestle with is descriptive analytics versus predictive versus prescriptive. Right now you’re not on the hook when you’re not giving them any advice. When you start to get to the prescriptive side, where I’m saying this is how much chicken you need for the day, if that number’s wrong, there are repercussions. Is that even a topic that you guys wrestle with at all?

David: Absolutely. We saw the article that came out with Starbucks, where they had rolled out nine months of pain of getting it wrong. So it’s not trivial. I believe that this is a bit of the holy grail. And I do believe the advancements are there. We’re going about it with the right approach and thinking about the complexities of the various businesses. There has to be a consideration of the workflow. What does this workflow look like in terms of the day in the life of an operator? I need you to take an audit of these 15 items. Because these 15 items are the highest purchased items. And if you go and take an audit, you could do it really quick. I’m talking voice audits. I walk into a cooler and I just share, and we’re rolling this out.

Matt Wampler: Well, and that leads to the holy grail of could you eventually get rid of inventory and this be a new source of how things are calculated?

David: Yes, absolutely. Absolutely. Look, one of the things that we were working on prior to selling Hot Schedules, we were working on a dynamic inventory platform. And the notion was get rid of the end of week, end of month. One of the most painful things for operators, and there’s ghost inventories and things that are done in a lot of gaming when people’s metrics are tied to that. I really wholeheartedly believe the twenty items generate seventy to eighty percent of your revenue. If you get those absolutely right, nail it. Those are the things that are most important. I would love to say at some point in time of no more inventory. When I was with PF Chang’s early on, Paul Fleming didn’t believe in end of month inventory. We were so busy. His mindset was that we don’t have time for that. I just see a world to where this becomes one of those things that is a thing of the past, to where there’s a more intelligent way to do this.

Matt Wampler: Well, and I mean it makes sense. We used to count every cup. Maybe we spot check it quarterly. There’s gotta be a better way to do it.

David: I think we’re stepping over dollars to pick up pennies when we’re thinking like that as an organization.

Matt Wampler: Well, in an industry where the phrase is if you count the pennies, the dollars take care of themselves, it makes sense that they step over dollars for pennies.

David: The most important thing is the well-being of the leadership team. And if you find yourself in an industry where you’re counting cups that you throw in the trash, you start to question, why am I here and why am I doing this? Is this really my career? We need to be doing higher value things in leadership.

Matt Wampler: David, do you ever have one of those phrases where you’ve been saying something for a long time and then all of a sudden realize everyone’s saying it and it’s almost cliche? I’ve been saying for years, how do we get the humans doing more human things and allow the technology to take care of the analytics, the inventory, the ordering, all those tasks.

David: It’s just truth, Matt. Having run restaurants, I remember the early days. I was through the nineties where you just felt good about a shift. I wasn’t off the floor. I was at the host stand to be able to scan and see everything all the way to the kitchen.

Matt Wampler: Isn’t it ironic that there are so few great days that when everything goes right, you actually remember the day?

David: Absolutely. We had this notion of the perfect shift. Kind of like the perfect game in baseball. In over a hundred years, there’s only been twenty-four perfect games pitched. They’re very rare, far and few between. But the ones for me were where a customer would come up, a guest, and say, I just want you to know you run a really tight ship. This is the best experience. Like that was for me, that was everything. When a team member would say, this is the best job I’ve ever had. That’s what you live for.

Matt Wampler: Well, and this is where you go back to why are predictive analytics so important. If every day was the perfect shift and you got the things right, it would fundamentally change the entire business. When we go talk with restaurants about forecasting, it’s always, okay, how accurate is your forecast? How much is this really gonna matter? And it’s like, guys, we’re talking about five, ten percentage points. We’re talking about every day being the perfect day. The stakes couldn’t be higher.

Matt Wampler: I wanted to go back to the people side of the thing and removing it from the metrics. Once they have the forecasting, they’re not focused on metrics and inventory and admin tasks. There’s so much in the industry that’s been built up systems and procedures wise because they didn’t have forecasting. How long do you think it’s gonna take for the industry to actually unwind all of its preconceived notions and start hiring team cheerleaders as general managers?

David: I think there’s no choice but to do this now because since the pandemic, a lot of people left the industry. A lot of experience left. We have no choice but to go find the right attitudes that are great with taking care of a team and driving great retention. One of the things I loved about Black Box, they found the Moneyball metric for any brand was GM retention. The GMs that were there for five, ten, fifteen years knew their business. Those days are gone. So we have a lot of new people that just don’t know what’s going to happen the day before or after.

Matt Wampler: Well David, let’s face it, as an industry, we have a terrible sales pitch. Do you want to be on call twenty-four seven, deal with irate customers, manage a multi-million dollar business and get paid not that great? There’s a negative connotation. It is not a great sales pitch to come work in restaurants. And until that’s fixed, what do you expect?

David: I think as a young person, I joined as a young person and there was just something that was fun and dynamic about the camaraderie, but also the serving. You just need to find people that have that gene. When you do and they love it, they just work their way up.

Matt Wampler: Totally agree. But there’s no one that’s saying I wanna quit my corporate job and this restaurant thing seems fun. Because on paper it doesn’t look that fun.

David: I would say that when I left the restaurant industry to start Hot Schedules, I didn’t have children. You couldn’t imagine raising children, not getting to go to soccer practice or football games or homecomings. There’s a lot of sacrifice. When you probably got out just like when I did, I was just like, wow, this is what a holiday looks like?

Matt Wampler: Yeah. It’s the time I got out. I had my first daughter and was like, is this going to be my life? Cause it’s ninety hours a week and it’s usually weekends and nights and nothing ever, when something breaks, it’s always at the worst possible time. So I want to go back. You guys are doing some fantastic things. It’s an exciting time. There’s almost like a renaissance in the back of house. How do you view the tech stack in five years and where you see Craftable fitting into the infrastructure?

David: Everything coming through Craftable of what we consume is every invoice of everything you’re purchasing. We process it in less than thirty seconds. There is no standardization of an invoice. Most every OCR invoice management platform has a human in the loop. We went on this long hard journey with invoice AI to not have a human in the loop. And I’m not talking just the broadline vendors, I’m talking about the knife sharpeners and the Verizon bills and the linen and everything else. Every invoice, every company had their own specific nuance. The way I look at Craftable is total controllable cost management. Anything and everything that you’re purchasing. We can detect any anomaly and we can provide a margin leakage insight.

Matt Wampler: Okay. Well, hold on. So I get it, it’s not easy to standardize the invoicing. Now I’ve got this data. You kind of got to the good part of now we can give you actionable information of where the margin leakage occurs. How do you actually do that?

David: We map all items to recipes and we remap all point of sale to recipes that map to items. So we understand what’s coming in and we understand what’s going out. We understand plate margins. We have the menu engineering to where we’re seeing things that were stars, the highest sellers with the highest margins drop. Let me just say, I’m running a restaurant. I scan an invoice, and let’s just say it’s a ribeye. This ribeye is flagged. Your plate margin drops, but it’s your highest selling item. You have multiple choices. You could sell it and just get the low margin. You can create a chef special to cannibalize the regular ribeye and get a higher margin. You can create a contest. Or you can go and change the price. When you can provide that level of actionability, operator in you, whether you’re experienced or not, can say, okay, that’s a low margin. Here are the two or three things I can do right now on this shift.

Matt Wampler: You know, it’s fascinating because I’m sitting here thinking, not only do you have all the data and some proprietary data in there, but also you get the cause and effect of this is what the operator did, and this is what the results are. Which in some ways is this pool of experience that can be transferred to some other restaurant that’s in a similar situation. Is that kind of how you’re viewing it?

David: There’s a lot I learned from Black Box on benchmarking. But if I can take my brand and understand where I stack up, whether it’s my plate cost, maybe it’s produce, maybe it’s linen, I can start to compare and contrast. Data takes the emotion out of conversations. And we live in a very emotional world right now. People are working really hard and they hate to be called out on things. If you show the math and you say if you don’t do anything, this is how much it will cost you for a month or for a year, all of a sudden it puts things in perspective for that operator.

Matt Wampler: Going back to your steak example, a restaurant owner or operator could easily say, we’ll just eat the cost, it’s not gonna cost us that much. But if they saw the number and they thought, it’s gonna be three hundred dollars, that changes the entire situation.

David: That’s the way we look at the insights. Show the math. The insights, it’s a tile, it’s a card, it’s high level, you select it, it gives you the math. It’s not just margin leakage, it’s revenue leakage as well. Because revenue leakage occurs. We know everything a server is selling. We could tell an order taker versus somebody that can explore the entire menu based on what they’re ordering.

Matt Wampler: So I want to dig in a little bit more on this idea of system of record because you store the truth in a lot of ways. The numbers will set you free. You have all of the numbers. At the same time, AI allows for a great amount of flexibility. When you’re the system of record, how much do you want to let AI into the system?

David: Well, we have no API to the LLMs. We built our own models. We run our own GPU clusters.

Matt Wampler: That helps with data privacy, but your AI internally can still go in there and mess up the system of record if you let it.

David: The data is the customer’s data and I’ve always firmly believed in that. When customers do business with us and they need access to data because they’re gonna create their own data lakes, that’s open for them. But publicly publishing those APIs and everybody that wants access to just build into the LLMs, those are the things we want to be a little bit protective of. We want to be thoughtful. At the end of the day, the customer needs access to the information, it’s their information, and I wholeheartedly have always believed that.

Matt Wampler: Do you feel like as an industry, we’re moving more towards how do we bundle everything together?

David: My belief is that if you are what others may call a feature and not a platform, with the speed at which things can be developed, everyone needs to be protective of what is it that we’re going to be great at. I still think people are going to choose to be best in class at something. They’re gonna provide the better service, they’re gonna be spot on, they’re gonna serve a certain ICP. In order to be great at something you have to be bad at something else. I’m of the notion of connecting the entire back office end to end. It may not be for everyone. But I see a certain portion of the industry that is underserved, using legacy tech, pulling retrospective data while they’re losing millions and millions of dollars because they can’t react fast enough. I do believe that no one has successfully built out the full back office, food and labor.

Matt Wampler: What gives you hope that now is the time that it’s gonna happen?

David: I’m seeing it happen so fast. It’s the reality and putting it in the hands and testing. I just got through a review of a very important thing that we haven’t really fully announced on where we’re going and I’m blown away like with my team. It feels so unbelievable of how quickly the build can occur.

Matt Wampler: I gotta tell you, I first off, thanks for coming on. I love that you guys are getting into forecasting. I think this is one of those areas in the industry that has been so underserved. And it feels palpable today with how many people are having that realization that forecasting isn’t a trick. There are real gains to be had. And rising tide lifts all boats.

David: Well Matt, I really appreciate you having me on. I love your background and how you build with integrity and purpose. I meet a lot of founders and there’s a lot of great people out there, but people that come from the industry to solve problems, there’s a certain level of empathy that we have for frontline managers. We want to make their lives better. We want to make it easier for them to run their operations and I see that in you and what you’re doing. Wish you the best.

Matt Wampler: Hey, appreciate you coming on.