Friday, October 31, 2014

Should We Include Labor In Our Standard Recipes?

A frequent reader question topic involves the addition of direct labor in all standard recipes.  Before giving a firm recommendation, I'm going to explore the pros and cons of this approach.

On the plus side, recipes which include a labor component will make side-by-side gross profit comparisons between daily specials menu options more informative.    Many restaurants enjoy a major profit contribution from their specials.  Knowing the expected gross profit is a big plus.  By their nature, specials are designed to provide a spark and they should be priced to deliver a decent profit margin.

If we feed the recipe model a week or month of actual menu item sales counts, the recipes with a direct labor component will show the number of expected hours (and dollars) of direct labor .  This figure may be compared to actual labor cost data.  This is one of the benefits desired by operators who adopt this approach.

Switching to the minus side, the addition of a direct labor component to standard recipes makes variance reporting more complex.  Recipe costing software is designed to quickly calculate the impact of price changes for major ingredients.  This impact may be muted by any pay changes. 

The payroll rate increase issue also impacts ongoing use of the recipe model.  While the software is designed to enter food purchase orders, invoices, stock issues, etc., it does not have a robust payroll data link. 

In fact, operators need to "purchase" hours of direct labor with the most recent rate per hour.  The hourly rate is a single figure and it needs to include burden (vacation pay allowance, worker's compensation insurance, unemployment insurance, disability insurance, etc.).  The explanation on how the model handles labor can be confusing to anyone without a degree in accounting or management.

 Some operators use central production (i.e. commissary) for a group of restaurants.  They may have a dedicated team producing food which is packaged in standard containers and shipped by tray or case.  If the commissary team produces a similar volume of finished product each week, the addition of labor (and possibly an overhead factor) may be useful in billing the units.

I would recommend operators examine their true reporting needs carefully before adding a direct labor component to their standard recipes.  The extra work involved in the setup and ongoing maintenance needs to be justified by the benefit derived from the reports.  Most companies control labor with time clocks, schedules, productivity software and employee incentives.  The addition to the recipe model may not offer a good return for the time invested.

Thursday, October 16, 2014

Banquet Guests Choose Most Expensive Items

Dear Joe,
I hope this finds you well.

Please tell me, what happens when you offer a banquet package for a flat price and the clients consume only the most expensive item?

You have no right to stop them because the package is quoted with a specific time (1 hour, 2 hours).  Also, what do you consider when you cost from 1 hour to 2 hours?

Jean Claude

A great number of banquet packages are offered to guests on an all you can eat basis for a time period specified in the contract.  There are ways to control your costs without bringing attention to your tactics.

Many caterers offer a package with a high profile protein item.  In order to restrict access to this item, for example Prime Rib, many give each guest a token or a ticket to hand in when they order their serving from the carving station.

I have worked on cost control for steak night in an operation at a construction camp.  Our guests consumed over 5,000 calories daily.  We expected each guest to consume 2 steaks.  Most guests ate exactly 2 steaks, there were almost an equal number who ordered either 1 or 3 steaks.  We did not have anyone who ordered a 4th steak.

In our contract, the cost of this steak night was weighted highly in our estimates. 

For your operation, it is essential to forecast the number of portions consumed by guests as accurately as possible.  As the meal service goes on for the second hour, your consumption experience will change.  During the first hour, you will have greater consumption than in the second hour.  If the service continues, this trend will continue.

Some tips from my clients include:
Creating a portion size which matches the guest behavior.  For example, you may want to offer a smaller portion size if you believe most guests will return for a second portion.

Budget around 70% of the typical male portion size for the female portion size.

Create a special station for the key item and stage displays of top quality pastry items along the path to this station.

Offer an absolutely irresistible second choice.  Many guests will try each entree and will be satisfied.

You can structure your event differently when you go beyond 2 hours.

For years, I partnered with a restaurant owner to offer traditional Clam Steams in Upstate New York.  These events are pretty standard in the New York Capital District.  Guests are offered a steak or chicken option.  Often, the steak price is $2 to $3 higher than the chicken.  Other than the entree, the event is entirely all you can eat.

At the start of a 5 to 6 hour event, the guests are offered clam chowder, hot dogs, Italian sausage with peppers, and burgers.  In addition, a selection of salads, baked beans, rolls and salty snacks are available.

Around one hour later, raw clams are available to guests.  They shuck their own clams.  Traditional condiments are offered.  The raw clams are available for around 90 minutes and the other items are available all day.

Generally, there are activities and games to break up the food service as the day progresses.  Either a band or a DJ provide music for dancers.

Later in the day, the guests line up for their steamer basket which consists of one dozen clams, one potato, 2 links of breakfast sausage, and an ear of corn.  Guests are encouraged to enjoy unlimited clam broth straight from the steamer.

The grill station is limited to guests with tickets.  They present the grill master with their chicken and steak orders.  This service is restricted to one steak or one half chicken per guest.  Very few people have room for dessert.

The secret to success is an awesome Manhattan Clam Chowder.

Monday, October 13, 2014

Reader Question: Margin vs. Percentage?

This month, Adam from New York wrote an email asking whether it is better to use contribution margin or food cost percentage.  As many readers know, I prefer using contribution margin.  My early experience in remote site support services showed me the value of tracking all costs by the number of patrons served.

Percentage analysis is better than nothing at all.  It is definitely a good start.  You won't get answers to many questions with simple percentages but over time you will see trends develop.

A little bit of extra work will provide operators with a better view of profitability.  The contribution method will illuminate how an operation makes money.  Caterers, on site feeders, clubs and other non-restaurant food service operations normally use the contribution method.

Restaurants equipped with a top notch POS system can make the shift from percentage analysis to the contribution method.  There are several key data points available on your standard POS reports.  You need to track the number of guests served (covers), the sales per guest (check average), a category breakdown of menu item sales (PMIX report by category) and a ranking of your menu item sales (PMIX ranking report).

For any given period, your food cost divided by the number of guests served equals your cost of sales per cover.  You can subtract this figure from your check average to yield the gross margin per guest served.  I recommend a 3 month time frame for both the check average and the food cost per cover.

In addition to your total food cost, take the time to break out the cost of all protein items including meat, poultry, seafood and cheese.  You now have your food cost separated into the protein cost and the cost of all other food items (including non-alcoholic beverages).

Armed with your number of covers, the average sales per cover and the cost of sales per cover, you can assemble a simple but powerful report.

In our example, we served 25,000 guests in the most recent quarter.  The food sales per guest averaged $20 producing $500,000 in food sales.  Our food cost per cover of $6 produced a cost of sales of $150,000.  We earned $14 per cover and a total of $350,000 in gross margin.

Protein sales per guest averaged $12 and other food and non-alcoholic beverage sales per guest averaged $8.  Our $150,000 food cost has a $100,000 protein component and a $50,000 non-protein component.

Our gross profit per guest is made up of $8 from sale of protein items and $6 from sale of non-protein items.  Smart operators have their server staff well trained in sales of non-protein items.  These items may include extras like a side salad, a cup of coffee, garlic bread and a slice of pie.

Most guests will order a single protein item (entrees, sandwiches, appetizers) and they will order 2 or 3 non-protein items (beverage, soup/salad, dessert).

It is common to have a higher contribution from protein items.  You may want to keep your direct labor and direct operating expenses equal to your protein item contribution.  The profit from non-protein items will offset occupancy costs and help put money in the bank.

Monday, September 01, 2014

A Margin of Safety for Restaurateurs

In an earlier post, High Food Cost Due to Inflation, I recommended an across the board increase in menu prices. During the month of August, I received several calls and emails asking how big the suggested increase should be for most restaurants.

Anyone considering an across the board menu price increase should first conduct a thorough competitor analysis. If you find your competition has already raised prices, you should go ahead with the increase.

Every menu has a unique cost composition. I can only speak to general market conditions. Two key components of gross profit have shot higher in 2014. The impact on labor costs of the Affordable Care Act has been estimated at between 1% and 2% by operators here in the Mid-Atlantic. Food Costs have risen 7.5% in the protein category.

If your food cost percentage was 30% before the 2014 cost increase, your current percentage would be around 32.25% (30% * 107.5%). We can also add 1.5% to your labor cost. If your cost before the ACA was 30%, we can estimate a new labor cost of 31.5%. In order to achieve a profit of 40% after cost of sales and direct labor, we would raise menu prices by 3.75%.

The ACA will continue to cause general price levels to increase as employers provide employees with the mandated health care coverage. I'd recommend additional menu price increases on a quarterly or semi-annual basis to cover the additional costs. A 1% quarterly increase would provide a 6.75% increase in a 12 month period. My previous range for the increase was between 3% and 10%.

Restaurants Continue To Struggle With High Protein Costs

The market prices for beef, pork and chicken remained high this summer.  In the most competitive markets, restaurant operators have had a tough time building higher costs into their menu prices.  Consumers continue to carefully manage how they spend their discretionary income.  These consumers see the higher food prices when they shop in the grocery stores.

Restaurants need to take a long term view and develop a strategy to deal with the challenging environment.  I remember when McDonald's first came to our area in Upstate NY around 50 years ago.  You could purchase a meal for $0.40.  This meal consisted of a hamburger, a order of fries (similar to today's small portion) and a soft drink.  For shake lovers, the meal cost rose to $0.50.

If you visit a McDonald's today, you may find a similar meal for $3.00.  They have a separate dollar menu in many locations.  This is an increase of $2.60 in 50 years.  The average annual increase is around 4.1%.

How long has your operation been in business?  If you saved your original menu and check average information, it would be a great exercise to compare today's prices with your oldest menu.  Create a spreadsheet and enter the years in column A.  Label column B "Meal Cost".  Column C "Growth" will have 1.041 in every cell.  Column D should be labeled "New Cost".

Columns B and D will be filled with calculated values.

Cell B2 will have the price of a meal in your first year of business (or the first year you kept solid records).  Cell D2 will have a formula as follows:  =B2*C2.  Cell B3 will have a simple formula as follows:  =D2.  You can copy the formula in B3 all the way down.  Repeat this with cell D2.

The final value in column D will yield the cost of a meal this year if you steadily raised prices 4.1% each year for every year you have been in business.

I ran a catering operation in my sophomore year of college.  The sale prices for whole chickens back in the 1970's was $0.29 per pound.  Today, I can buy chickens for around $0.99 per pound on sale.  These sale prices are tough to find for fryers and broilers.  The $1.49 per pound every day chicken prices do reflect a 4.1% growth rate.

Restaurant operators can increase profits steadily, over a long time period, by implementing a slow growth policy for menu prices.  A 4.1% growth is roughly a 1% increase each quarter.  Today's high protein costs provide cover for restaurants who need to increase prices by a much higher percentage.  Make sure you know your competition thoroughly before implementing any large price increase.

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