Ways Restaurants Can Reduce Audit Risk
Restaurants shouldn’t take on an audit alone. For most people, a night out at their favorite restaurant produces the anticipation of a wonderful meal partnered with outstanding service. The most successful restaurants are those that consistently deliver both. A happy customer, sometimes memorialized by a stellar review, is the cherry on top for the restaurant owner beyond what hopefully will be a long run of solid profitability. For restaurant owners, however, there are certain “reviews” they would prefer not to receive—specifically IRS tax audits. Let’s face it: No one ever really wants to smell what the IRS is cooking in its kitchen unless it comes from a recipe for a tax refund. To add to restaurateurs’ angst, businesses that operate in the restaurant industry present a greater concern to the IRS because they are cash-intensive, and the IRS sees them as a higher risk for underreporting income. This article will explain how those who operate in this industry can reduce their audit risk and prepare if an audit is unavoidable. It’s important to understand what an audit is. The IRS website defines it as “a review/examination of an organization’s or individual’s accounts and other financial information to ensure that information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.” During 2023, the IRS audited fewer than a half percent of individual returns filed and only about three-fourths of a percent of corporate returns filed. A taxpayer is generally responsible for every item claimed on the individual’s tax return; some sort of book or record must exist to support each item listed on the return. Accurate bookkeeping is an essential ingredient for successfully defending oneself in an audit. Whether it is full disallowance of a deduction or refusal to release a frozen refund, without accurate bookkeeping, every meal offered at Café IRS will taste terrible. To avoid that, taxpayers should keep supporting documents for the duration of a potential audit. Generally, the IRS has three years to audit a return. However, there are situations such as substantial omission where the examination/audit period is six years or, if the taxpayer committed fraud or is a nonfiler, forever.
MRM Research Roundup
Mid-Year 2024. Although customer satisfaction with fast food restaurants is up 1 percent to a score of 79 (out of 100) and up four percent to 84 for full-service restaurants, according to the American Customer Satisfaction Index (ACSIÒ) Restaurant and Food Delivery Study 2024, households earning less than $75,000 a year are reducing their restaurant visits because of rising prices. “Both full-service and fast food restaurant customers are skewing a bit more toward higher income levels and college graduates,” says Forrest Morgeson, Associate Professor of Marketing at Michigan State University and Director of Research Emeritus at the ACSI. “Customers are being forced to make decisions between groceries and restaurants, with full-service restaurant inflation about two times that of groceries in the past year and fast food and fast casual restaurants prices up three times the rate of groceries. With customers seemingly viewing dining out a luxury, restaurants that can differentiate themselves in terms of quality and value will have a competitive advantage.” ACSI results again show consumer preferences for steaks as LongHorn Steakhouse and Texas Roadhouse both climb four percent to 85, tying for the top spot among full-service restaurants (and restaurants overall). The former shows its commitment to customer satisfaction by running counter to the “shrinkflation” trend and providing more bang for the customer’s buck, while striving to maintain a cultured dedicated to quality. Meanwhile, despite inflation, Texas Roadhouse is keen on keeping prices low and investing heavily in staffing. Olive Garden is next among major chains, up four percent to 83. Chili’s also improves 4 percent to 80. The chain benefits from a combination of high perceived value through its “3 for Me” menu and service strength through employee retention. Last year’s category leader, Outback Steakhouse, slips four percent to 80. Outback appears to be challenged by a slowdown in spending by lower-income consumers consistent with ACSI findings regarding their customers’ price sensitivity. Meanwhile, IHOP soars 8 percent to 78. Customers are responding favorably to menu changes that offer more variety. Customers indicate better performance across most aspects of the full-service restaurant experience — with food order accuracy (92) and waitstaff courtesy and helpfulness (90) leading the way — appreciating restaurants’ efforts to satisfy customers despite inflation. Providing an outstanding customer experience will be even more critical for consumers feeling pressured to cut back on discretionary spending.
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What To Do When Your Guests Have Sticky Fingers
Nail down your bottom line by securing service items and décor. Among the reasons restaurants fail (poor location, inadequate marketing, lack of staff and inventory control, uninspired menu, unreasonable pricing), customer theft is rarely on the radar. And yet, the diner who walks out with your logo beer mug is damaging your restaurant’s bottom line. After a guest thief takes what they want, the restaurant must purchase replacements and eventually report the thefts to their insurance company, which in the long run will raise their premiums, creating another drag on profitability. If these folks were going to a friend’s house they wouldn’t think of taking a plate, a mug or a picture off the wall. And yet, as a Washington, D.C., restaurateur recently observed, “If it’s not bolted down, they’ll take it.” Here’s how some guests justify stealing. “I just spent a lot of money.” A guest at one of our nightclubs, who spent $5,000 to get $5,000 worth of food and beverage to entertain his 10 guests, took the $500 glass centerpiece on his way out. When we called him the next day, he justified his theft by saying, “I spent $5,000, so I decided to take the centerpiece.” “These plates will look great in my home.” One of our fine dining restaurants — whose check average is well over $100 per guest — has show plates that are on the table when the guest arrives, and each plate costs $100. A few months ago, a guest put two of the plates in her purse because she liked them. “I collect stuff.” There are great sports bars and steakhouses that go out of their way to put up rare, autographed photographs and memorabilia from athletes and celebrities in their establishments. These are one-of-a-kind items with real value, but somehow guests feel justified taking this property. Whitlow’s DC had a guest thief make off with a poster-sized photograph of President Franklin D. Roosevelt. A decade passed before the person sent it back, along with an anonymous note of apology. “They grew up and matured and realized they did the wrong thing, and I think his wife had pushed him to get rid of it,” owner Jon Williams said. “It’s nice when people do the right thing, no matter how long it takes.” Some restaurateurs consider this the price of doing business – even a form of marketing. The customer took that glass or plate or specially engraved pen because they had a wonderful experience and they want to remember it and share it with others. Some even build thievery into their business plans, knowing that accessories and decor will walk and they budget $10,000 or $20,000 a year to replace them.
Securing Your Restaurant’s Outdoor Assets
Wherever possible, it’s best to move your al fresco items inside your restaurant space overnight. Outdoor dining is a great way for your restaurant to extend the number of customers it can serve. In fact, al fresco experiences introduced to help navigate COVID-19 have become permanent additions for many businesses. It is, therefore, increasingly a food business imperative to invest in outdoor dining equipment. Outdoor assets are far from cheap, though. The last thing you want is for thefts to cause you to pay for replacements or to disrupt your ability to provide al fresco services. Therefore, you’ll need to take a strategic approach to securing your restaurant’s valuable outdoor dining items. Day-to-day al fresco dining requires a range of equipment. This might include tables, chairs, awnings, and other items. Keeping these secure in situ and after hours can be quite challenging. Some of the steps you can take include the following. Unfortunately, assets can be at risk of theft or damage during operating hours. Many restaurants opt for keeping chairs secured to the building or tables using chains. This enables customers to move their chairs around, without these being at risk of theft. Tables and sunshades may be more secure by being heavily weighted. Not to mention that not having them bolted to a single space gives you more options for configurations. Wherever possible, it’s best to move your al fresco items inside your restaurant space overnight. However, if this isn’t practical, consider investing in a storage space. If you have some land around your property, a secure outbuilding with a coded locking mechanism may be effective. If you can’t use an outbuilding, chaining al fresco assets with a secure bolt to the building is a useful alternative. Outdoor assets can be great resources for your restaurant, but it’s vital to secure them effectively. This should include attention to storage on and off-premises, as well as investing in security tools that boost vigilance, among other strategies. It’s also worth considering customizing your assets with your brand visuals. This may make them slightly harder to resell and, therefore, less attractive prospects to thieves.
Restaurants Race to Recruit, Retain a Changing Generation
As labor tightens. Restaurant sales aren’t the only thing that stalled in Q2. According to recent federal data, “eating and drinking places” sliced a net of 3,100 jobs in June on a seasonally adjusted basis. That marked the second decline in the last three months (April fell 7,200, while May grew 11,200). In all, the category added just 900 jobs across the period, which represented the weakest quarterly employment performance since Q4 2020—a COVID-saddled time when the industry shed north of 285,000 jobs as the Delta variant hit. The National Restaurant Association noted the slowdown mirrored a “soft patch” in restaurant sales. Eating and drinking places reported total sales of $93.6 billion in May, down 0.4 percent from April and the lowest monthly volume since October 2023 ($93.4 billion). Thanks to continued price hikes, real restaurant sales lost ground relative to 2023 levels. After adjusting for menu price inflation, the category’s sales retracted to their most depressed level since April 2023. Even following June’s tepid run, the industry workforce remains slightly above pre-pandemic levels; it’s about 36,000 jobs (0.3 percent) higher than February 2020’s peak. That’s a vital point to highlight, the Association said, in terms of how the dynamic has started to settle. There were fewer than 800,000 job openings in the combined restaurants and accommodations sector on the last business day of May, per the BLS—the lowest reading in more than three years and well above record highs (more than 1.5 million openings) registered during several months across 2021 and 2022. It was also slightly below 2019’s average monthly level of 875,000 job openings. The full-service industry continues to face a steep climb. As of May, the segment’s employment levels were 233,000 jobs (4 percent) below pre-COVID February 2020 numbers. Employment counts in the cafeterias/grill buffets/buffets segment were 30 percent below.
Taking Care of the Customers
Key to ensuring loyalty. What are the best practices for building a new loyalty program? The first step in building a successful loyalty program is understanding your customers. Hooters has done a great job of creating a community in stores over the past 40 years, and we knew that the foundation of our loyalty program needed to be based on research about our audience, the market and what motivates them to dine at our restaurants. Brands should look to utilize their consumer data and design their loyalty program to adapt to customer preferences and offer personalized experiences or offers. The next step is key: be transparent and clear across all channels. Loyalty programs should be straightforward and easy to understand, so consistent messaging across every channel of the customer-facing journey is critical. Customers should be able to easily navigate a platform to learn how to join, know where to find terms and conditions, deals, and more. In addition, brands should always have a way to measure success. Setting quantifiable goals and KPIs enables us to understand what is working and what isn’t. Keeping customers engaged cannot be a one-size-fits-all approach to rewards, so brands need to offer valuable rewards and a mix of them. At Hooters, HootClub Rewards loyalty members receive a variety of reward types, including discounts, free items, anniversary and holiday deals, exclusive events, and more. On the data side, we analyze preferences and trends to tailor our rewards and communications to meet the individual’s needs and wants. The last, and most important, piece of the puzzle is customer service. Brands need to ensure that they are taking care of their customers, whether it be in restaurant, online or through customer support. At the heart of our brand, our Hooters Girls ensure top-notch customer service in brick-and-mortar locations, and we have a support team that is available online for our guests. These avenues have helped Hooters deliver on our brand promise of “Hooters Makes You Happy” for over 40 years, and through the customer journey and online experience, our goal is for the loyalty program to be an extension of that promise.
A 3M Strategy for Restaurant Success
Value meals. May was a challenging month for restaurant companies. Shares of major quick-service restaurant (QSR) brands experienced double-digit drops, consumer confidence declined, and traffic at fast-food restaurants was down by 2.1 percent, according to the Revenue Management Solutions (RMS) Monthly Trends report. Will the summer sun heat up sales? Triple-digit temps might light up lagging traffic, but QSRs aren’t going to wait for the post-beach visits. Chains from major burger chains to Taco Bell and Starbucks have announced value meals designed to lure inflation-weary customers or keep loyalists from the grocery or C-store aisles. But margins are at a historical low. Positive net sales in May (+1.9 percent YOY) and throughout 2024 were primarily due to price increases, which have surged nearly 50 percent in some segments since the pre-pandemic era and were still up 3.0 percent YOY in May. Extreme discounts, even in the short term, could impact margins. RMS’ Senior VP of Consulting, Richard Delvallée, notes, “Now is the time to invest in menu optimization, as pricing activity is limited and consumer pushback is rising. The key is to maximize your brand’s value proposition across diverse consumer groups, including those who want to spend less, but also different generations, types of households, app users, and beyond.” To optimize your menu using value or bundled meals, remember the 3M’s: Measure, Market and Monitor. Additional insights into QSR sales, traffic, and pricing trends are in the Revenue Management Solutions June Trend Report. Significant changes in consumer behavior started well before the pandemic and have only persisted post-2020. For example, breakfast traffic is down 5.6 percent compared to May 2023, potentially due to changing eating patterns and budget concerns, as well as the competition with winning promotions the previous year.
Did You Know?
Lamb appeals to slightly adventurous, affluent restaurant diners. rend watchers will tell you that consumers, when dining out, want to be adventurous these days, but not too adventurous. Take something traditional and make one change, and you’ve got their interest. Lamb can fit that bill. People know what it is, and if they’re among the growing number of Americans who want bolder flavors, lamb has them. It remains a niche protein, however. Per capita annual consumption in the U.S. is a little less than one pound, compared to more than 13 pounds in Australia, according to Australian Beef & Lamb, the trade body responsible for marketing those products.
Employee Tip
Q2 proves to be tough for the restaurant job market. Eating and drinking places lost over 3,000 jobs in June, while Q2 marked the industry’s weakest quarterly performance since Q4 2020. The U.S. economy added 206,000 jobs in June – a stronger than expected number – while the unemployment rate ticked up to 4.1%, from 4% in May and 3.9% in April. According to data released Friday morning from the Bureau of Labor Statistics, employment levels in the leisure and hospitality sector were somewhat stagnant month-over-month, with just 7,000 jobs added in June. This is compared to 42,000 positions added in May and a 12-month average of 35,000 positions added.
