Tech Entrepreneur To Restaurateur & Back: Bo Davis Discovered The Problem He Wanted To Solve (Ep 166)

Jaime Oikle of RunningRestaurants.com chats with Bo Davis, Co-Founder & CEO of MarginEdge. As both an experienced restaurant operator and tech entrepreneur, Bo brings great insights to the episode.

It's more important than ever to capture every nickel and dime possible for your restaurant's profits, and tech is leading the way to help make that possible. You'll enjoy our fun conversation as we talk about math, profits, menu costs, and more.

Find out more at MarginEdge.

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Tech Entrepreneur To Restaurateur & Back: Bo Davis Discovered The Problem He Wanted To Solve

We've got a great episode for you all about back office technology for restaurants. Joining me is Bo Davis, co-founder and CEO of MarginEdge. Good morning, Bo. How are you?

Good morning, Jaime. Thanks for having me.

I am excited also, and I have to confess, I'm a little bit too excited because for the second week in a row, I get to start the episode with an F-bomb. Let's do it. Right on your website. This is me. I'm not making stuff up. Right on your website, you have a quote that says, running a restaurant is really freaking hard. We can help you do it easier. It's a true statement. Tell me about MarginEdge.

Does it? We actually got in trouble for that one time and had to scrub the F-bomb off once. You must have found it somewhere. It was on the front page when COVID first hit, and it said, I forget what it said exactly, but something about screw COVID. Can't remember. I'm sorry. MarginEdge is an application that we designed to help restaurants run their back office. I'm a restaurateur myself, so I've been running restaurants for seventeen years. I opened my first restaurant back in 2005.

Had one in Orlando near you in Florida Mall for a while, and over the first ten years of running those restaurants, basically got an idea of just how hard it is and as this show is about. I came from technology previously and had just finished a master's in finance and thought I was quite smart when I opened my first place. Had never run a restaurant before and was just shocked to see just how hard it is.

The variable revenue with variable revenue, I'm sorry, variable revenue with variable food costs, variable labor costs. You're trying to hit this narrow profit margin with all of your numbers moving simultaneously. It's brutal and as your listeners know, and so after ten years of doing that, we decided to start a software company that really focused on just that, on getting your data in quickly, getting it efficiently, and letting operators know where they stand day to day so that they can do what they actually love and not focus on the paperwork.

Listen, that's one of the things that I rarely write anything down, but the one thing I did write down today that referenced to you guys is that same point that running a restaurant is hard, and the realization is it's not going to be, like we're never going to go back the way it was three to five years ago. It's just not going to go back that way, where it was maybe a little bit easier, there was money in the system, you could bring profits out, but like now.

I give up because it was hard three to five years ago.

Of course it was. It was always hard, but like imagine now, the pandemic, the cost, the this, the that, it's never going to be easy again. If you thought you could do it on the back of the envelope, or just because you felt like it, that whole thing I believe is going away. You have to use tech like you guys and other systems to get every, you have to, I got some change around, but pennies and nickels, you have to find everything now that's in your business and you have to pull it out just in order to succeed, to have a little bit of a buffer, and I'm sure you guys preach that.

That's right. The variability in the restaurant industry, even pre-COVID was brutal and post-COVID obviously has just been, the words are ridiculous. Unprecedented and all of that. We've seen delivery sales go from, on average, 5% to 7% of our clients up to 45%, 50%, 55%, then back down to 15% before Omicron and then back up to 25%, and that's across $3 billion in sales and several thousand restaurants. That's a large sample size to see numbers bouncing around like that. It's been hard for sure.

It's probably one of the fascinating things about where you sit that you get to see data across a big swath of people and how it's zigzagging in probably metros, but also regionally and so forth, but let's go back for a second to your operation. You got into it, when you had a restaurant operation, you started it, I think I saw it somewhere.

I still do. I'm still a restaurant operator, so the concept is called Wasabi. It's a conveyor belt sushi restaurant. We basically operate in shopping malls, so we were, like I mentioned, in Florida Mall in Orlando, and we were in six or seven states at different times, and that concept is great, but like all of them, the numbers are changing too rapidly to take a step back and not know what's going on, and so MarginEdge really, the concept around it really evolved through those years of just trying to know where our costs were on a daily basis and manage smarter.

I wanted to get into the tech stuff and the food cost menu stuff. We'll go out to your website in a little bit, but one other quick thing I want to point out from your site that I liked, and it'll tell people a little bit more about you, quote from your website, not making this stuff up, fun fact about Bo, it's two fancy master’s degrees, dropped out of high school, but so this wasn't a straight line for you to get where you are.

I didn't expect that fun fact. I'm a high school dropout, and not in the Bill Gates dropping out of college genius way, more in the typical restaurateur high school was rough way, but I got a GED and then went back to college, and I've done a master's in finance and a master's in data science, and I've taken education more seriously later in my life, but when I went into the restaurant business in a five, I really was coming in cold from a restaurant perspective, and so I had to learn the hard way all of the challenges around it and really learned about the difficulty of just the quantity of information.

If you're a restaurant, you're buying 700, 800 different things, like everything from napkins to tuna, to wasabi, to chopsticks, to cleaning supplies, and like literally hundreds of things, and a decent restaurant's doing a couple of $3 million in revenue, so you're spending a million dollars a year on variable costs and across all of those different things, and it's just too many things to keep an eye on, and at the time, there were restaurant management systems that would let you do inventory and those sorts of things, but they required this massive amount of data entry, and so you would spend forever typing in every line item of every single thing you bought so that you could get reports, but who has time for that.

MarginEdge was really designed around taking all of that data entry out, so we basically have an app, you take a picture of an invoice, we take all the line item data down to how many avocados did you buy, how many pounds of chicken, and we tie into your POS, so we're integrated into like 60 point of sale systems, so we're getting everything you sold, and basically automating that whole restaurant management system space, so you've got a real idea of where things are down to how many pounds of chicken should I have on hand right now.

I'm going to pull this up because I think it'll be instructive for what we're yapping about right now. This is out to your website, MarginEdge.com, and this little section.

It's brand new. We're very excited about it. We just launched a new website.

You should have been on the web for a while. They've invented that. It's been out there.

It's a new version of the website. We did have a website.

I know. I'm joking, of course, but anyway, I think this is towards the middle of your site, and I like this because we got a few little tabby things, but food cost control is a big deal. You guys obviously specialize in this, and I do want to talk about the menu analysis in a second, but what are some tips people need to think about around food cost?

It's particularly hard right now with all of the inputs changing, and so I think menu design is always a challenge, and one of the things our tool will help you do is look at seasonality of products so you can see things, not just what the price is today, but over time. I'll stick to my sushi restaurant. We use a lot of avocados. We can look at what the seasonality of avocados are, and so our salmon avocado roll, we can see, well, the food cost might be fine today, but given the seasonality of avocados, it needs to be priced differently in order to handle that.

Also, looking at things like what do you sell a lot of that is profitable, the highest value items, and making sure that the things that are not just less profitable but potentially using ingredients that you're not able to reuse in lots of other places so you can consolidate your ingredients. The less items you're buying, the tighter you can keep your inventory, the tighter you can keep your food costs, the less things you have to watch with price movements. Trying to consolidate your menu around ingredients that are the most useful across ingredients.

Another thing we like to talk about is return to net versus food cost percent. Food cost percent is something we all are used to looking at. I know my restaurant is supposed to be 25%, and we watch that very closely. When you're designing the menu, you also want to keep an eye on how much do you actually make on an item. If you've got one entree that costs $4 and costs $1, so it's got 25% food cost, that's great.

It's got a $3 return to net, but you may have another dish that costs whatever, $6, and the food cost might be $1.50 or whatever, $1.75, so it's a little higher than 25%, but the return to net is higher. You definitely want to look at not just the percentage, but the profitability. I just touched a couple different things.

Do you think, we've talked about in some of the training we've done on our site over the years, about what you're talking about. I always give the example of a restaurant who goes, let's say they're a wing joint, and they open up, and they're, well, we have to have wings too. What's the price? Probably should be $9.99. They just stick it on the menu because it sounds right. You can't do that. You got to pull stuff off the menu. You have to rejigger. Let's talk about menu analysis. How do you help folks with that?

No, that's right. In a tool, in MarginEdge and tools like ours, you would basically be able to design your menu and be able to see what the costs are again over time. The menu will actually lay out based on the POS data, how much you're actually selling of each one. You'll see not just what the cost is, but how much you're moving it. We actually use a four by four chart that's fairly popular where the upper right-hand are the items that are selling high and are high profit. The bottom left are the opposite. Obviously, you can have things that are selling less and cost more and all the four variations.

That gives you a visual ability to see it. It really is the combination of how much are you selling? What is the cost? A plate, an item that has a wonderful food cost, but you don't sell much of it isn't terribly useful. It's all about trying to get as many dishes as you can in that upper right quadrant. Sometimes, one of our clients actually just sent us the analysis they did with MarginEdge. Sometimes it's a matter of, they looked at their Reuben and the Reuben was huge and the food cost was high. They just cut back on the physical size of it.

If you're over-portioning. You can't say that that's always the answer. Obviously, sometimes your plate is already portioned properly. It's a balancing act. Honestly, most of the time what we find is it's partially about recipe design, but it's more about the operation of the kitchen. If you have an eight-ounce piece of meat on a plate and your chef is cutting it at nine or ten ounces.

They're doing it by eye. It's very easy to miss an ounce or two. Suddenly, your 25% food cost is 30 or 32%. Your 10% profit now is two or three percent. Just by that couple of ounces on the primary protein on the plate, weighing. Making sure that you're actually building your recipes properly in the kitchen and you're not wasting. One of the things that we also do. I was actually just talking to an executive chef of a big place last week about this.

They've implemented our touchpad. They have iPads in the kitchen and they have all the recipes loaded in MarginEdge. We've got this kitchen display viewer. They've actually got a requirement per station to have the chef pull up that recipe on iPad and weigh it. It's going to slow you down some, but if you're a fine dining establishment and those plates really cost a lot, it's worth the extra couple of minutes to make sure that you're not putting too much foie gras or too much sea bass or whatever on the plate.

That's right. I'm getting a little echo. Hopefully, it's not on the recording, but the quadrant that you talked about, that classic Boston Consulting Group quadrant or whoever folks at the dog stars. If they haven't done that, they're probably surprised when they see the result of where some stuff sit on that. You can be like we are jamming out, whatever it is. I'll just, it doesn't, it doesn't matter. This sandwich and they're like, shoot, we sell a ton of them, but we don't make any money on them and surprises.

That's right. The most recent one we had was we did a case study with a client and we were walking through how they were using MarginEdge. They said that they were, it was actually a bar in a wings place, like a higher-end bar with wings. When they did the analysis, they found I shouldn't giggle, but it happens when they did the analysis, they found the wings were very profitable when sold at full price, but they had a happy hour and the happy hour was actually selling them below cost. They literally were giving money away every time those wings were ordered. It's very easy to do.

This people, this is what gets people. I've just go back to the website for a second, math degree, not required because a lot of times people will look at it as shoot, I know I need to do that stuff, but it's like, it's hard. It's complicated. How do you guys take the math out of the equation? How does the software do that?

Think about that four by four, for example, it lays it all out for you. You move your mouse over one of the dots and it's, your sea bass entree and a little box pops up and it says in the time zone you picked, time period you pick, you sold 423 of these, your return to profit was this and your percentage food cost was that. It's immediately apparent. The visual in that example is literally laying out for you. Upper right is good. Bottom left is bad. You're seeing what your menu looks like.

That's true, not just on that report, but throughout the software, the whole thing is designed for people who are restaurant operators, who are moving quickly, don't have time to do a lot of math or analysis, and just want to be able to look at the results. As simple as stack ranking your plate costs or showing you we have price movers. The items in your inventory that are changing in price the most in the most recent period. We actually do a quick analysis that says, based on the change in price of the item you're buying and the quantity you bought this period, how much did each ingredient add or take away from your food cost? If you see, avocado spike, you can see literally that cost me $248 this period to date.

If salt goes up or something small, then it doesn't make any difference and it'll flow to the bottom. It's not just about the percentage change in the cost, but the app, the actual impact on you, which we can do. Cause we have literally every line item that you're purchasing.

That's what I was going to ask. Data in data out to the system. A lot of times, a lot of these systems, if you go back ten years, stuff like this started to happen, then does it get used as you can put in now it's so much easier and I'll go to the invoice page in a second, but getting it in as the hard part now, but once it's in, it really can produce them.

Getting in, it used to be the hard part. I think technology has completely changed that. The point of sale systems that we integrate with is fully digital. We're getting everything you sold without you doing anything once the setup is in place and then, your invoices. You're taking pictures of those. We're pulling all that data out. That's also being done without you doing any work. The recipes take a little work to put in. We have a service that helps with that, or you can do it yourself. Once they're in, your recipes aren't generally changing all that frequently. There's some setup work to it, but then the information is there going forward. The barrier to entry to systems like this has dropped dramatically over the past ten years.

Before I jump out of screen share, anything else you want me to go to on here? Do I need to pull up your about page again? Get some more quotes, anything else you want to get?

No, we love, I love the case studies. There's a bunch of video case studies. I won't ask you to go through them all now, but if anybody is interested, you can go on there and you can see about Clyde's group, which is 150 million in sales. You can see about your local brewer and various types of restaurants. You can look for someone that looks a little bit more like yourself. That gentleman happens to be one of my favorites. That's a Crane's restaurant. They just got their Michelin star.

The case study on there, just as a quick note on restaurants, is one of my favorites ever. He opened fine dining, came, moved from Spain, opened a beautiful fine dining place in DC the month before COVID. He stayed open through COVID. His sales were in the, I shouldn't say, but they were extremely low. I went in there and ate and met him, and he was at the expediting line, making sure every plate was perfect. Nobody in the restaurant, eighteen months later, he got a Michelin star.

The place is jammed. His numbers are through the roof. He is killing it. It was that attention to detail and caring, even when people weren't even around. Even when there was no money in it, chef Pepe is a wonderful human being, but anyway, sorry.

That's a great side note.

It's one of the inspiring stories from the restaurant business and that COVID period, people who just kept their heads down and really did the right thing. It paid off in the end.

The passion part of the business and the hospitality part of the business, that will not change. That needs to be an equation for everybody moving forward to have success. You can have good food somewhere, but if you have good food or even average with great service or great attention to detail, it makes a big difference in my opinion. We hit a lot right there. We don't need to get into what COVID did to folks. I did have some notes on that, but we touched on that enough.

It's fun to start looking forward, isn't it?

I hope we can write and don't have to go back. If you were to give folks who were still hesitant on the tech side, a lot of restaurants are still a little behind the curve on the adoption. Obviously, you guys are in it. You've done it yourself, but that may be what's the word I'm looking for?

From my sales books, a selling…

A selling objection. We don't like tech. I don't know how to use it. How do you deal with objections like that?

Honestly, one of the things about COVID is it certainly made most people a little more open-minded to technology because we all had to do what we had to do to survive. Certainly, we still see that. I think the most important response is just that we lean heavily into treating restaurants the way restaurants try to treat their guests. We're big on service as a service, not just software.

We do a lot to try and help restaurants on, let them help them learn what the different pieces are and grow into the software over time. They don't have to adopt everything all at once. There's some pretty valuable information you can get. That's the low-hanging fruit just by taking pictures of invoices and connecting your point of sale. You can get into the more fancy stuff later, the theoreticals and the recipes and the recipe analysis and all that stuff.

You don't have to do that out of the gate. If you just start by knowing how much am I spending every day? How much is my revenue? What are the percentages? You can do that. You can stand that up in a couple of days and you'll be a lot better off than waiting four weeks for a report for sure.

That's right. I would be remiss if I didn't ask everyone's favorite question and there's no answer for it. I'm not putting you on the spot, but what is the, people will say, what should my food costs be? What should my profit margin be? What should I be able to take home at the end of the day? Because as the public thinks all restaurants are millionaires automatically. It's a very exciting, profitable business.

I'll tell you my personal experience, Jaime. I have opened several restaurants that were dogs and lost money. We're in the red from the day the door opened. It is one of the most painful things I can possibly imagine in a professional career. I've opened a couple that have done really well, one that felt like a lottery ticket and had a 30% profit margin almost from the beginning. The range is really dramatic. I think the standard people think people talk about is 10 to 15%, but certainly there are 30% restaurants. My restaurant, I have a 30% restaurant right now. They exist. I think it takes a lot of work.

I think it does. I think when people and a lot of operators out there are forgetting about COVID challenge and stuff, but historically, if you're sitting in, 3%, 5%, 8%, you question yourself at the end of the day.

I don't think, honestly, if you've got a three or a 5% margin, the chances of bad weather killing you are too high, unless you've got a lot of cash in the bank to help you through any downtime, there's too much volatility. If you're making 3% or 5% steady state, you're going to have some bad periods. I know you're in Orlando and you guys get sun year round, but for a lot of us, we've got seasonality that has a deep impact.

For sure, and that's more typical across the spectrum. It's not all sunshine and rainbows here in Orlando. Let me assure you of that, first of all, but all right. I enjoyed our talk at parting thoughts and to send it to the website, send them wherever you guys have, maybe there's more case studies or reports.

MarginEdge.com. There's lots of information there and plenty of places for you to click on a link and have one of our people jump on. One of the things I would say is we lean hard into our operating experience. Every person in our sales and marketing team, which is 35 people now, have been either owners or general managers or executive chefs, every single one of them. If you reach out to us, you'll talk to somebody who has been around the block.

That's a very important differentiator there. I appreciate that. Folks, Bo Davis, co-founder and CEO of MarginEdge. Check them out at MarginEdge.com for more great restaurant marketing service, people, and tech tips. You can check us out at RunningRestaurants.com. We'll see you next time. Thanks, Bo.

Thank you so much.

www.MarginEdge.com