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Chapter 16 Video case
Pizzeria Uno
Profit margins in the restaurant business average three to five cents of every dollar of revenue. When you’re managing pennies, accounting for them is critical to growing a successful business. Pizzeria Uno has learned to manage its financials effectively and grow dramatically. The Pizzeria Uno Restaurant Corporation started in 1943 and was taken public in 1987. Currently the chain operates in 31 states and four foreign countries with more than 200 restaurants, both franchised and company-owned. Its average restaurant generates $2 million in revenues annually. Financial management for Uno starts at the store level, where the firm employs sophisticated accounting mechanisms to manage the cost structure of the business. The management team in each restaurant is primarily responsible for collecting data through point-of-sale computers that send information to a corporate database every night. These computers collect data about sales (what people are buying), supplies needed to replenish inventories (what items have been sold that day), and employees’ hours and wage rates. Uno has developed a cost control model that determines what its food and drink costs should be, based on experience and the current menu mix. For example, based on the model, Uno expects each restaurant to sell twenty ounces of Jack Daniels liquor in a particular day. However, if the cost control system shows one restaurant incurring a cost for twenty-five ounces but selling only twenty, the company is paying for five ounces that cannot be accounted for. If Uno is planning to run the business at 25 percent of the cost of sales, and the data indicate one of the restaurants is actually running at 27 percent of the cost of sales, then corporate management will want to know why there is a discrepancy. Either the drink has been given away or the bartenders have been over portioning the beverages. The restaurant business is a cash business, and Uno is able to use working capital to its advantage. Because the company is dealing with rapidly consumed products, it has the luxury of using its vendors’/suppliers’ money to fund its operations. If the restaurants buy a food product on a thirty-day net pay basis and sell the item within a day, Uno can have the use of that money for more than three weeks before it has to pay the supplier. Compare that to a manufacturing company. When an auto company builds an automobile, it has to buy the steel to make the car long before it sells the car. Manufacturing companies have to spend working capital to build up their inventory before they can sell that inventory for cash. Effectively managing its balance sheet is a key component in ensuring that Uno continues to improve shareholder value. Debt is an important tool that it uses to build equity. If Uno can borrow money at 7 percent and put it to use in its restaurants that return 30 percent, it has earned 23 percent on someone else’s money an impressive return on debt. Building restaurants is capital-intensive. The average Uno restaurant costs $1.6–$1.7 million in upfront capital to build, excluding the land. The company has typically bought the land, which can be a risk since ownership does not result in a high return on assets. However, it does allow the company to control its own destiny and future, and to lock in a large component of its expansion costs. The company uses long-term debt and, in some cases, mortgage debt to finance its land purchases. By using debt, Uno increases its return on equity as long as its earnings are higher than the interest charged for the borrowed money. And history shows that, more often than not, land values increase over time. The bottom line is that Uno has been able to manage its balance sheet and avoid tipping its debt-equity ratio. Pizzeria Uno’s goal is to operate in the top echelon of restaurant companies. The company believes that despite a recession that has hammered the restaurant industry, it can continue to manage its business to improve profitability, return on sales, and return on capital and to drive net income and earnings per share. Uno’s stated goal is to grow its business 20–25 percent annually, measured in earnings per share. For more information on this company, go to
www.pizzeria-uno.com
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Questions
1. What are the primary sources of funds that Pizzeria Uno uses to run its business, and how does it use these funds?
2. How does Uno monitor and evaluate the financial performance of its restaurants?
3. Pizzeria Uno typically buys the land on which it builds new restaurants because it allows the company “to control its own destiny and future.” What are some possible disadvantages to this practice?
