Disposable Income and the HST in BC

The economics of disposable income is very simple. There is a finite amount of money people have that they can spend in a discretionary manner. This disposable income can be increased by the assumption of debt (credit cards, lines of credit) but debt is also finite and as debt rises, disposable income becomes non disposable income as it then has to service the increased debt.

Disposable income is spread out into entertainment dollars, travel, vacations, retail and many other areas but one of the main areas is eating and drinking away from home. Hospitality operations rely on society to have a significant level of disposable income so it can have a healthy industry. So what happens when disposable income tightens up, hospitality operations see a decline in sales and we are in the midst right now in BC of seeing this first hand.

The HST is a tax shift from business to the consumer and is going to take $2 billion a year out of personal disposable income. Taking this much money out of disposable income is having a huge impact in the hospitality industry. The government is now admitting that it may take up to five years before the impact of the HST is not felt by consumers, which in turn means that it will take up to five years before disposable income is back to pre HST levels. The introduction of the HST has caused a decline in sales for our client’s restaurants from 7 to 15%.

A client of ours looked at how much tax they submitted to the government in July 2009 versus July 2010. The total extra tax was $8,000. If you multiply this by 12 months and say 5,000 restaurants in BC a total of half a billion dollars of disposable income has been taken away from our industry. In 2009 commercial restaurant sales in BC were $7.5 billion and would have been $900 million in HST (this included liquor sales). The money has to come from somewhere and it comes from disposable income. As our client says “it has further reduced our ability to enjoy ownership and the benefits of ownership”. If we could raise our prices by 12% we would already have done so!

What can operators do to combat the decline? First, cost control must be a continuing priority. Grinding food, liquor and labour costs have become more important than ever. Marketing is were you are going to win the battle. You must increase your revenue at the expense of other operators. There is no choice. Every operator should create a marketing plan and do everything they can to drive business through the doors without a heavy discount. Increasing revenue does not help the bottom line if it is done through discounts. There is no use being busier if you are not more profitable. Increase revenues and decrease costs, an old standard in the hospitality business but more important than ever right now.

Speaking of heavy discounts, groupon (http://www.groupon.com/vancouver) has the ability to really hurt disposable income. We know of a restaurant that went into groupon and generated $12,500 in cash flow. Sounds great except that at the end of the day they gave the farm away. They offered $50 gift certificates for $25. Groupon takes half the funds ($12.50) leaving the restaurant with a $50 sale but only collecting $12.50. If the restaurant has a 30% cost of goods they don’t even cover the cost of goods. The worst part is that the restaurant operator took $50,000 out of disposable income that could have been spent with other operators.

The HST is not going to go away no matter what happens with Mr. Van der Zalm’s petition and the potential for recall. The most frightening thing is that a change in parties next election will actually create further uncertainty for our industry.

Tighten down the hatches, the HST and the current economy are not going to change in the near future. Cost control and revenue generation are the two areas that operators have control of and must pay close attention to. No matter where your location is in the world the principles are the same.

Cash Flow and the HST:

Many operators are in for a shock when they go to pay their first HST payment. As mentioned in the article above one of our clients is collecting $8,000 a month more in tax. If paying quarterly this means $24,000 extra compared to pre HST. We suggest to all our clients that they open a savings account and automatically transfer funds weekly to the savings account to cover the HST. Tuesdays are the perfect day as the weekends receipts hit the bank that day. If you do this having to come up with a huge amount of money in October will be a non event. Expect to see some businesses go under as they will have spent the HST operating their business.

HST and Ontario:

The HST in Ontario has not had the same effect as BC due to the tax structure in Ontario prior to the introduction of HST already attracting provincial sales tax (unlike BC where meals had no PST). The Tim Hortons rule for meals under $4 remains with a 5% tax rate (Gst only) while meals over $4 have the same level of tax as before. The tax structure in Ontario did not change as dramatically therefore the uproar and sales decline is not as apparent. The tax shift has less effect on the consumer than in BC. In an informal pole of a few Ontario operators sales in restaurants are up over last year since the introduction of the HST.

SITE(s) OF THE DAY:

www.crfa.com/research/

Some great data regarding our industry. Scroll down to Provincial Comparisons and see how your province fairs.

Optimum Control Update:

Optimum Control has developed a driver that will automatically import your sales mix from your POS on a daily basis and record your sales. This means no more manual sales mix imports and will also help with your quantity on hand. The driver works with Squirrel, Micros 3700, Aloha, PixelPoint and Silverware Avrio. Contact chris@ro-i.com for more information.

QUOTE OF THE DAY:

"…commercial restaurant sales are highest in the provinces where consumers have above-average levels of disposable income and where there is NO PROVINCIAL SALES TAX ON MEALS.”

crfa website

WARNING, POS THEFT:

Point of Sale are getting stolen at a rapid pace as thieves have figured out that quite often your credit card number or debit card number and pin number still reside on the hard drive of your pos. You can be held liable for the losses caused if your POS system is stolen and used for fraud. If you have any concerns especially if you have an older system call your POS supplier and ensure that you are PCI compliant. Make sure your POS system is not visible from the window when closed and use as much security precautions as possible so you do not become a victim. We know of one POS company that is replacing 8 systems a week right now due to theft.

Thieves are also replacing the number pads on credit card machines, taking them away and installing wireless transmitters and replacing the pin pad. The wireless transmitter sends out the information as the transaction is being processed. Protect your pin pad by checking the serial number daily, engraving something on the pad or a sticker.

US Statistics:

http://www.restaurant.org/research/ind_glance.cfm

We have had requests for US statistics and can not find up to date ones but we did find this industry at a glance page from the National Restaurant Association web site.

Statistics Canada Information:

Monthly receipts for restaurants, caterers and taverns, by province and territory.

http://www40.statcan.ca/l01/cst01/econ92.htm

If this link doesn’t work, copy and paste it into your browser.

Suggestive Selling Seminars:

Over the past three years we have trained staff for a group of pubs on how to suggestive sell. In talking with the owner he states that it is very obvious from his secret shopper reports who have gone through the seminar and who haven’t. Three years ago they sold almost all house rye, now they sell almost nothing but Crown Royal!

Proper staff training through our seminars creates REVENUE! If you want to improve your revenue have us come in and train your staff on how to sell. For further information contact Chris at 604-618-3030 or email at chris@ro-i.com.

Guest Speaking:

Chris Wadham is available for Guest Speaking engagements for your next convention or meeting. Chris has spoken to various groups including large corporations, universities and restaurant chains. If you need a guest speaker for your next event please do not hesitate to contact Chris at 604-618-3030 for more information. Subject matter ranges from doubling your sales in four years to creating the perfect menu.

WHAT R.O.I. DOES:

R.O.I. is a full service Hospitality Operations consulting company. If your company WANTS TO BECOME MORE PROFITABLE then you should be talking to R.O.I.. For more information simply e-mail us at chris@ro-i.com, visit our web site at www.ro-i.com, call us at 604-618-3030 or toll free 1-866-618-3030.

ROI currently has clients in Las Vegas, Santa Monica, Mexico City, Victoria, Whistler, Vancouver, Kelowna, Saskatoon, Winnipeg, Toronto, Seattle and Idaho.

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