Article

Post-Covid Revenue Diversification with Retail and Events

According to the "Future of Commerce 2023" report from Square, the point-of-sale and payment processing company, non-food revenue diversification is increasingly the norm for many restaurant concepts. Of the 1,000 North American restaurants Square surveyed, one-fifth of restaurant revenue came from so-called "non-core" offerings. This includes things like merchandise, prepared and frozen meals sold for takeaway, events and classes.

Even with the return of on-premises dining, operators continue to seek alternative revenue streams. In this article, we provide several examples of successful tactics.

The operators surveyed perceive these offerings as necessary to grow their brands and diversify revenue streams. Eighty-eight percent of operators surveyed said they planned to expand their non-core offerings.

The operators interviewed below aren't seeing anywhere close to 20 percent of revenue from retail, merchandise, classes and the like. Yet each one agrees these revenue streams are important for financial and marketing reasons.

To the independent operator, adding more products to the mix may seem like more work. That isn't wrong – and all the operators surveyed said they wished these streams brought in more revenue. Nonetheless, all offer compelling reasons to consider diversifying with retail, classes, and events.

Selling Signature Products

Customers of Old Juan's in Oceana, California, often asked when the restaurant would bottle and sell its homemade habanero salsa. It took the pandemic for the owners of this 45-year-old, family-run Mexican restaurant to seriously consider the idea.

"Covid gave us the opportunity to look at other things that could expand the business and keep the name out there," says Izzy Kharasch, president of Chicago-based foodservice consulting company Hospitality Works, Inc, who consults for Old Juan's. While 2020 was the catalyst for the retail idea, Kharasch says it took longer than expected to find a bottler and refine the recipe for manufacturing. Old Juan's signature product was finally ready to sell in late 2022.

The owners wanted the salsa professionally bottled for several reasons. They knew in-house production would burden the restaurant kitchen. The product would have a longer shelf life if bottled professionally, leading to less waste. Plus, a bottler would ensure the product met food safety requirements.

"It's easy to find large bottlers" that might do a million bottles a year, Kharasch says. Finding a bottler who could work with a smaller batch took a lot longer. Eventually, Old Juan's owners connected with Monkey Spit, a small-batch bottler based in Nipomo, California who could handle their production levels.

After choosing a partner, the team needed to refine the salsa recipe for bottling and include necessary additives for stability. This process was "painstaking," Kharasch says. The owners went back and forth over a period of several months, tweaking the recipe to make sure it tasted the way it did at the restaurant. Eventually, they found the right mix. Old Juan's sold 162 bottles of salsa the first year, when they bottled it in-house to test the market reception. In 2022, they sold 233 large bottles. The salsa also comes in small bottles, which the owners tend to use as giveaways to reward loyal customers.

"This is an incremental sale that is extremely important. Customers who have the sauce at home are constantly reminded how much they love Old Juan's," says Kharasch. Tourists also enjoy getting a souvenir to remind them of their trip. "Sales continue to increase and the long-term goals are to have the sauce in local stores on a regional basis," he adds.

For operators thinking about retail, a signature product is the obvious place to start. It's something a concept is already known for. Customers may already be requesting this, as was the case with Old Juan's.

Ankit Harpaldas, owner of Sherkaan Indian Street Food in New Haven, Connecticut, partners with Ahista Tea on the restaurant's signature teas, which are served in-house and in tins for retail sale. The Palace Breakfast blend combines Assam and Darjeeling, two well-known Indian tea-growing regions.

Golden City Tea is an herbal blend with turmeric root, licorice root, ginger, lemongrass and orange peel. Harpaldas recalls testing, trying and selecting several of Ahista's teas to arrive at the ideal blends to complement the concept's menu.

The teas are co-branded, Sherkaan and Ahista Tea. Customers notice this element and appreciate it. "A lot of times, people asked, could this tea be sold? That led to the tea tin idea and offering our tea to customers on the go. People are always looking for gifts so the whole tea tin thing is the perfect little gift," he explains. Sales are incremental, although Harpaldas says they do a promotional push around the holidays.

In addition to tea tins, Sherkaan sells branded merchandise. There are Sherkaan hoodies, hats, t-shirts, baby onesies, water bottles, and blankets in the brand's style, incorporating their tiger logo and catchphrase. "I've always been a big supporter of selling merchandise along with the brand. We sell those things pretty much at cost to promote the Sherkaan brand. I consider it free marketing."

"We have a cool, awesome branding team that has done a good job of twining South Asian culture with American culture and our branding shows that," Harpaldas says. The restaurant's bright, colorful and vibrant personality is apparent in items like the "bindaas baby" onesie, which plays off a Hindi word meaning cool. "People have us d those onesies as a baby announcement," Harpaldas notes.

"Our brand is that we're a young hip South Asian restaurant. We are trying to show the world that India or South Asian culture is cooler than people realize it to be. That's why you see this fun vibrant atmosphere versus your typical Indian restaurant of white tablecloths, mellow music."

This clarity of vision helps Harpaldas and his brand team design and develop cool new products. The revenue from the sales may be minor. Harpaldas says he'd love to sell more of these products than he does. But, he stresses, revenue isn't the point. "The point of the merch is to build brand loyalty. It's a reminder to the guest that Sherkaan exists."

This hits upon a key point. Retail items like tea tins and t-shirts bring in revenue. Beyond that, Harpaldas says, they introduce new customers to the brand, create brand loyalty, and sustain it. "When you go to your favorite place, you're proud to support them," Harpaldas notes.

By offering customers additional ways to support them, Sherkaan is cultivating that sense of loyalty and connection that encourages repeat business. When a customer features the Sherkaan onesie in a baby announcement that goes out across social media, the brand gets exposure to a new audience.

Harpaldas acknowledges the current climate in which restaurants come and go "all the time." In his experience, creating a strong brand is important for longevity. A strong brand is memorable. Customers can engage with the brand and show support, not just by ordering food but wearing merchandise. "All restaurants sell food, but how many have true brand loyalty?" he wonders.

The Bamboo Club, a tiki bar and restaurant in Long Beach, California, uses their custom merchandise line to cultivate a similar sense of community and connection. Most recently, the tiki concept partnered with a local designer and Disney artist, Mcbiff, on men's and women's tiki shirts and unisex shorts.

Jim Ritson, founder of The Bamboo Club, says the collaboration was Mcbiff's idea. The designer did a mug release and hosted the release party at The Bamboo Club. He suggested the collaboration, and the restaurant happily agreed. The designs combined The Bamboo Club's brand with elements of tiki culture and local culture. Products were printed locally, by a Los Angeles-based apparel manufacturer. The run was limited to 25 items in each size, from XS to XXXX. The custom cabana wear is on the pricey side. Sales are slow, but Ritson says that's to be expected given the higher price point.

The Bamboo Club also creates custom tiki mugs twice a year. Mugs are designed by local artists, including those responsible for the concept's tiki-themed murals. To date, the restaurant has released three mugs featuring characters that appear in the murals that adorn the interior walls.

Mugs are made in limited addition batches of 500 to 1,000 mugs. Ritson estimates it takes 6-8 months to get them done. There are also wood-burned coasters, pins, sweatshirts, and t-shirts designed by local artists. "All kinds of stuff," Ritson sums up. "The merchandise line is a growing revenue stream for us. It's not a significant part of our revenue, but it's growing every quarter," says Ritson.

"It takes time working with the artists. I probably spend 10 hours a week on the merch line," he emphasizes. While most restaurants don't have anywhere near the quantity and variety of branded merch that Bamboo Club offers, the time factor involved in setting up merchandise is worth noting.

Square's report indicates retail items aren't just popular among operators. Customers like them, too. Fifty-seven percent of customers surveyed said they bought retail items from a local restaurant within the last year. Forty-one percent said they bought another non-core item, such as a class, meal or cocktail kit, or pre-prepared frozen meal.

Turning Unused Space into Extra Sales

The Sergeantsville Inn, in Sergeantsville, New Jersey, is a historic restaurant set in a sprawling 1830s building with centuries of additions and renovations. When co-owners Daniel Brunina, and Jes Taylor reopened the restaurant in July, 2022, they knew they wanted to do something different with one of the smaller rooms onsite. It did not make sense to adapt the room for restaurant service. Not only was it a tight space, but it was located 30 yards from the kitchen and up two flights of stairs.

That said, the room had its own entrance and a dedicated parking lot. "It seemed logical to turn it into a better source of revenue and go from there," Taylor says. The co-owners soon hit upon the idea of a wine and liquor store with its own identity, a place that could support the restaurant's operation and offer something more. New Jersey has a special type of liquor license that allows restaurants to sell alcohol for both retail and consumption. Thus, Ice House Wine Shop was born.

"Once we got the restaurant set and got through the holidays, it was full bore on getting [the wine shop] up and running," he says. Nevertheless, there was no time pressure to get things done quickly. Taylor advises other restaurant operators to "be deliberate and intentional about the steps you take." Taylor consciously chose inventory that didn't overlap with the restaurant's wine list. "The retail pricing structure is very different from restaurant service, and we wanted to not have the disparity of pricing.'

The co-owners strive to offer unique products that customers won't find on the shelves of mainstream wine stores. One such example are wines from Talley Vineyard, a new American Viticultural Area (AVA) in San Luis Obispo. "We were one of the first in New Jersey to bring it in," Taylor says. The uniqueness factor of something like a new AVA offers the restaurant a way to stand out, and perhaps will attract attention on its own right from wine connoisseurs hoping to try the new product.

In addition to beverages, Taylor offers a selection of merchandise, including wine bags and logo apparel. Ice House Wine Shop has a small tapas menu with food from the kitchen, such as cheese boards, bread, and salads. High tops and bar stools provide a space to sit and sip. "On the nights we have a fair amount of guests waiting for tables, this extra space gives us flexibility," Taylor says.

Plans are in the works to expand seating arrangements, with an outside patio area and outdoor service. They're going through the licensing process to serve liquor outdoors.

In spite of his and his co-owner's 15 years' restaurant experience, Taylor says retailing was a steeper learning curve than expected. The added work paid off, says Taylor, who describes the wine shop as "a fun service complement," and a good supplement to the limited bar seating in-house.

Events

When Sherkaan ran a Valentine's "cocktail lab" event, tickets sold out in 48 hours. Harpaldas credits brand loyalty with driving ticket sales. At a cost of $165 per couple, guests received all the tools necessary to craft cocktails at home, recipes for the two drinks they made, and a DIY experience under a mixologist's guidance. "People can turn to us and expect to have a different, unique experience," Harpaldas says, describing the event.

The event was scheduled on a Tuesday, when the restaurant is normally closed. Instead, they earned extra revenue from a sold-out event that contributed to that sense of connection and brand loyalty.

The Bamboo Club offers a robust slate of events, including live music, comedy and Tiki Bingo. The monthly comedy night, Tiki Ha Ha, is "really popular," Ritson says. Those feature a range of big names and up-and-comers.

Ritson and his employees manage all the events programming in-house, rather than work with promoters. A separate staff member does all the bookings, and Ritson estimates that he spends 10 hours a week managing the calendar.

Before opening The Bamboo Club, Ritson worked at venues where live music played every night. Handling so many bookings was stressful, and he's glad he gets to pick and choose.

"We're not going to treat The Bamboo Club like a music venue, but we'll host appropriate bands when we think it can add to the business program," he says. He focuses on bands that are a strong match for the tiki brand. Sometimes, he is able to lure in a big-name band with the promise of an intimate venue for a smaller show.

Sometimes he'll notice when a big crowd turns out to see a show, but other than that he doesn't track how events drive sales. "The entertainment blends together, to be honest," Ritson says.

Like Harpaldas, Ritson emphasizes the way events and merchandise allow customers to connect to the restaurant. "Bamboo Club is developing an identity that offers Long Beach everything," Ritson says. Events, merchandise, and a strong brand personality all come together to create a community feel. This in turn reinforces that sense of customer loyalty that drives repeat business.

Accounting for Retail Sales

According to the Uniform System of Accounts for Restaurants, the standard restaurant accounting practice is to separate merchandise from food and beverage sales. If your restaurant sells tee-shirts, mugs, and other branded merchandise, you'll want to categorize it separately.

The standards are less clear when it comes to food products, experiences like classes, and events. Typically, food and beverage sales are categorized as such. A restaurant like Old Juan's that sells bottled salsas could choose to account for those sales under food; one that sells alcohol could account for that under beverage sales.

If you'd prefer to keep retail sales separate from restaurant food and beverage sales, RestaurantOwner.com President Jim Laube, a former CPA, suggests using an 'other income' category. This separates out the retail income, but it also makes it harder to study these revenue streams and track growth.

If you'd like to better understand how a new revenue stream plays into the overall picture, create a separate category for it. For example, a classes category for cocktail or cooking classes, an events category for event ticket sales, or a products category for retail products.

In addition to income, you'll also want to account for costs. Let's say you offer a cocktail class and supply the liquor and mixers. You can either account for that in the regular liquor column on a profit-and-loss statement or categorize it separately under classes. Most operators tend to go the simpler route; however, if you run classes frequently, and the numbers are substantial, Laube says separating out restaurant liquor cost and class liquor cost may make sense.

There's no hard-and-fast rule, says Laube, but operators should be consistent in accounting for income and expenses. Laube recommends operators confer with their CPA on how best to account for new revenue streams, and to revisit the subject as offerings expand. For example, a relatively small amount of marginal income can be reported as 'other income' for simplicity's sake. That said, as sales grow to a significant percentage of revenue, it could make more sense to report it under several specific categories.