You want to make sure you get equipment that’s not going to let you down and, at the same time, you want to get a great price.
After all, buying an asset is no small thing - especially when you can expect a quarter of your energy use to come from things like cold store and refrigeration equipment.
Unfortunately watertight reliability and great price rarely go hand-in-hand. Whether its ovens, sanitisers or fridges, you tend to get what you pay for in the commercial kitchen space.
However, there is one thing you can do to help you make the best purchasing decision for your business – calculate the ROI.
It sounds a bit time-consuming, but it’s actually very easy and it’ll provide you with a clear, objective pointer for your asset purchases.
ROI stands for Return on Investment, and it refers to the percentage increase per dollar from what you’ve invested into an asset. In other words, what you get back out from the cost of buying something.
The higher the ROI percentage on the equipment you purchase, the more financial benefit its doing your business.
Alongside ROI, consider PBP or Pay Back Period. This refers to the time taken for a particular asset to produce the same amount of money it initially cost to buy. So if an asset costs you $2000 up front and six months later it has given you $2000 of income, its payback period was six months.
The calculation to determine ROI can seem a little confusing at first, but it only contains two steps:
The trick to it is just being thorough in estimating as many of the costs related to the asset as you can, not just the upfront price. Delivery, tax, training and installation, labour and operating costs may all play a part. The more costs you account for, the more accurate your estimate will be. But, at the same time, all these hidden or assumed costs are where big differences in ROI can be discovered.
For example, you shouldn’t plan for the asset to work perfectly throughout its lifetime. After all, this is commercial kitchen equipment we’re talking about – products which get intensively used and abused in tough hospitality environments. What’s the cost of fixing an issue? How long will that take and how much will it disrupt service? This all needs to be considered.
You also need to factor in the useful life of your asset. This time should not be shorter than the PBP - if it is, you’ll continue paying for an asset that no longer provides you with a return.
Finally, think about the residual value of the equipment, which is what it will be worth once it is no longer useful to you. Can you sell it on the second-hand market? Could you trade it in when you replace it?
Presumably you’re reading this because you need to research a commercial fridge purchase. So let’s use fridges as an example for estimating ROI.
You can estimate and compare ROI based on a few bits of information that’s easy to find. No sleuthing required. Power costs, which may not be immediately clear, can be estimated really easily by multiplying a fridge’s kWh consumption by the commercial rate in your last power bill.
Fridge A looks like a no-brainer. Buying it will save you $500 upfront. That’s important, because you’ve got to protect your cash flow as much as you can.
But let’s start tacking up the total cost of ownership.
Fridge A is about 20% less efficient than Fridge B, which doesn’t sound like a lot but adds up when you consider that you need to reduce the frequency of asset replacement as much as possible across the lifetime of your business. Ideally, you want this fridge to last for years.
Over 10 years (the designed lifetime of Fridge B), Fridge A will cost you an extra $5000 to run. And that’s if power prices stay the same. They won’t, of course, so you’d better multiply that number as time goes on. In 2017 electricity in NSW, SA and QLD all increased by 15-20%.
Failing to consider energy efficiency against sticker price is incredibly common in businesses of all sizes. In the US Environmental Protection Agency’s ongoing study of supermarket refrigeration purchasing decisions, they refer to the phenomenon as the Energy Efficiency Paradox.
Commercial fridges are typically put under intense pressure, especially back of house where kitchen staff will be slamming the doors and ventilation could be an issue. The rates of fridge failure are, as you’d expect, a lot higher than those seen in the domestic fridge sector.
At the same time, the cost of a failure can also be critical. If you rely on the fridge to deliver service, you need to calculate not just the cost of replacement parts and a service call out, but also the cost of disruption to your business. How much income does your business generate every hour? How many hours will service be disrupted? Those are two key questions to answer.
This is why the strength of warranty makes a big difference. Those offering longer warranties are more likely to have more service support in the field, which means quicker repairs and more parts availability.
Say your business sells gelato, generating $250 income an hour during peak summer periods. Your 6 month warranty has expired, so you’re losing $250 every hour plus the cost of parts and labour to fix the problem.
If you're struggling to understand just how much time could be lost due to malfunctioning equipment, research shows that 60 hours on average are wasted each year. For many businesses, this lost time results in a 10% reduction in sales every month.
Fridge B would have all parts and labour covered, and due to the strength of the warranty you could expect the problem to be fixed within 24 hours.
Fridge A, on the other hand? That’s where design quality comes into play.
Most fridges sold locally, like Fridge A, are imported from regions with different refrigeration requirements to Australia and New Zealand.
There are three things to consider about this:
The combination of a weaker warranty and a higher chance of failure involving more parts that will come at a higher replacement cost, have a big impact on ROI.
This is why it is often more economical to buy a brand new replacement than repair an old piece of equipment.
And with cash flow always top of mind for most hospitality entrepreneurs, many of them fall back into the same trap by replacing a faulty fridge with another one just like it.
How do you avoid that trap? Calculate ROI before you buy to help visualise all the hidden savings and costs that could affect your margins.
Which brings us back to our fridge comparison. Let’s take a look at a realistic ROI comparison based on some cautious estimates.
Even if you don’t intend to own the business for 10 years, all the associated costs with business disruption, repair and replacement, and paying over the odds on power, are well worth avoiding.
An ROI estimate helps you pull all of that into focus.
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