Case Study: The CFO and the Cost of a Michelin Star

It can take years for a restaurant to be awarded a Michelin star, which is one of the culinary world’s highest honors. For The Principal along starting-to-be-hip Star Street in Hong Kong’s Wanchai district, it took around a year since opening in late 2011. This year, the Western-cuisine fine dining place is once again on the elite Michelin roll of honor.
 
“It’s not an accident,” says William Lee (pictured), who is CFO of fast-growing Hong Kong hospitality company Press Room Group, owner of The Principal and 14 other restaurants. “We worked hard for it.”
 
Winning and keeping a Michelin star was the aim at the outset, a way to distinguish The Principal in Hong Kong’s packed dining scene. After all, says Lee, “how many restaurants in Hong Kong have a Michelin star?”
 
In the 2014 list, announced last month, the answer is 44, many of them Chinese-cuisine establishments. Thirteen other dining places have two stars, while five have three, the highest rating (‘exceptional cuisine, worth a special journey’).
 
All told, they comprise just 22% of the 284 establishments in Hong Kong that were visited by Michelin’s anonymous inspectors.
 
As CFO, Lee is supportive of the large investment outlays required to maintain Michelin-quality standards. The expenses associated with an 80-seat space designed by Australian studio Hecker Guthrie, a 2,000-bottle temperature-controlled wine room, Spanish chef Jonay Armas and his staff, and a host of other amenities are high.
 
The challenge for finance is to make sure the cost of operating a high-end establishment, two other premium-priced restaurants, a bistro, a casual dining outlet and ten Classified neighborhood cafés and an expansion program within and outside Hong Kong will enhance, not detract from, the bottom line.
 
Rapid Growth
Lee is not at liberty to reveal the private company’s financial results, but he says gross margin at the group level is in double digits.
 
Not bad for an enterprise founded only in 2006 by three friends, who currently comprise the board of directors. Lee as CFO reports directly to the board.
 
In 2006, The Press Room Group started with two restaurants, i.e The Press Room, which continues to serve French-European cuisine, and the first Classified, a casual European-style café that specializes in artisanal cheeses and boutique wines, and an all-day comfort food menu.
 
The Pawn, which serves British cuisine, opened in 2008, in a heritage building that started life as the infamous tenement Woo Cheong Pawnshop in the 1880s, followed in 2009 by the casual dining restaurant SML, where diners can choose small, medium and large portions.The bistro The News Room and The Principal both opened in 2011.
 
The Press Room Group has franchised a Classified café in Jakarta and is looking at China as well as Malaysia and Singapore. Franchise and other fees from the Jakarta restaurant, which is run by the Indonesian restaurant chain Duck King Group, are on the upswing.
 
“We are lucky to find a trustworthy local partner who knows the local market,” says Lee, who will be flying to Jakarta to examine the books and the proposed site for a second Classified restaurant. 
 
Transforming Finance
Lee joined the group in early 2012, after stints with Miramar, Sheraton and Shangri-La hotels and Deloitte. He discovered a fairly common situation among fast-growing enterprises: financial management had not kept pace with the business’s rapid growth.
 
Finance had been focused on transactions and reporting, internal control, cost management, analysis and intelligence, but not enough with regards to real time management information provision and business partnering.
 
What worked for one restaurant or even two was no longer appropriate for a burgeoning chain whose monthly rental bills alone total more than HK$2 million (US$258,000) a month. 
 
That’s all changed. Financial processes have been automated with enterprise software from Hong Kong developer FlexSystem and have been integrated with point-of-sale (POS) terminals, which is the Pointsoft POS system.
 
Some restaurants were on MICROS, an international system widely used in the hospitality industry, but have now been replaced by lower cost Pointsoft, which Lee says is “more economical” in terms of annual maintenance and license fee without compromising on quality. 
 
A key strategy is to maximize the economies of scale from 15 restaurants, particularly in procurement. “You can get bigger volume discounts and better terms,” says Lee.
 
A central commissary bakes the fresh bread and other bakery products used by all outlets (and sells to hotels and other third-party customers), while other units source specialty cheeses and wines from around the world.
 
Above all, says the CFO, talent management and succession planning are now part of the finance function. Lee has implemented a mentoring and career development program for the 11-member team in finance, procurement and IT that he oversees.
 
"Talent management is a group-wide priority", says Lee. Winning and retaining a Michelin star depends in large part on the chef’s skills and dedication, as well as the wait and kitchen staff’s knowledge and level of service.
 
Business Strategy
Because of his extensive experience in the hospitality business, Lee does not necessarily blanch at the high costs associated with running premium restaurants. What he focuses on is ensuring those costs are properly controlled.
 
For example, there is a procedure to be followed when one restaurant takes out a bottle of wine from a sister outlet. One bottle of Bordeaux at The Principal is priced as much as HK$18,000 (US$2,320), so regular physical inventories are also conducted.
 
Only a fraction of the 2,000 bottles in The Principal’s wine room is actually paid for, typically the types and vintages most popular with diners. The rest are on consignment.
 
The margins may be thinner on consignments, but the company avoids tying up capital in assets that may take some time to move, while making sure the restaurant offer a wide variety of top vintages as expected of a Michelin-starred establishment.
 
The Group continues in the innovation of The Principal so it stays on the Michelin list and perhaps even end up with a second or third star. Not every Press Room property needs have a star – that would be too expensive.
 
But every restaurant must have a concept, something that sets it apart from the competition, whether it is Classified’s specialty cheese platter and neighborhood ambience, or SML’s portions and communal feel.
 
Stepping Out
The Press Room Group now feels ready to step out of Hong Kong, with the success of Classified in Jakarta a validation of that confidence. But the franchise model that’s working well in Indonesia is not necessarily the only way to go, says Lee.
 
Wholly owned entities are an option in China, for example, although franchising with trusted partners is on the table as well.
 
Lee spent five years in the mid 1990s in the Chinese cities of Shenzhen and Beihai as financial controller for Shangri-La Hotels, an experience that has given him insights into the business possibilities in the People’s Republic.
 
With China’s recently announced far-reaching economic reforms, he anticipates a more streamlined regulatory process for foreign investment as the promised changes are implemented.
 
The company describes SML as “poised for global expansion,” although Classified seems to be resonating in Indonesia.
 
Whatever the brand that goes out, the priority will be to make sure the concept, the ambience and above all the service will be at the same level as in Hong Kong, but with judicious tweaking to suit the local culture. Classified does not serve pork in Indonesia, for example.  
 
All Systems Go 
It’s all systems go. The Press Room Group has even moved on from its local auditor to sign up with Big Four firm Deloitte, whose international network will be useful when the overseas expansion takes off in a big way.
 
Lee says there are no immediate plans to go public, although being audited by a well-known international firm will help in capital-raising from banks and the stock market.
 
As Deloitte starts work on the 2013 accounts, Lee hopes the Press Room Group will also be awarded the equivalent of a Michelin star – a clean bill of health – for its financial management.  
 
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation.
 
Photo credit: Shutterstock
 
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