Thursday, August 07, 2014

High Food Cost Due To Inflation

The June Consumer Price Index (CPI) shows a 7.5% increase in the category meats, poultry, fish and eggs (see chart below).  This category is very important for most restaurant operators.  The protein component of most restaurant meals has the highest weight.

Over many months, protein costs have been on the rise.  The trend may correct later this year since the 2014 corn crop is excellent.  Corn futures have been in a free fall since early May 2014.

Source: US Bureau of Labor Statistics - June 2014 - CPI Summary

Should you increase your menu prices to cover the significant rise in your invoice costs?

The answer is yes for almost every operator.  Unless you face very stiff price competition in a market with a steep decline in restaurant visits, it is essential to raise menu prices.  Many operators have increased menu prices to help offset increases in labor costs due to health insurance premiums.  Your guests see the increase in food prices 

If you never prepared a budget for 2014,  you may have a tough time putting the food cost inflation in perspective.  A rise in the cost of goods sold of 10% (e.g. from 30% to 33%) can completely wipe out profit at many restaurants.

Should you raise menu prices across the board?

I would vote for an across the board menu price increase in 2014. 

It has become more difficult to hide profits in non-alcoholic beverages and extras.  Restaurant visitors are looking for a high quality meal for a price that meets their budget.  Many diners are opting for tap water.  Guests are taking a close look at their checks and they are modifying their behavior as they see pricey drinks and charges for extras.

If your current check average is $20, an across the board increase of 3% would raise the check average to $20.60.  An aggressive 10% increase would take the check average up to $22.  You need to study your local competition.  You need to know your guests.  Will your guests adjust their menu choices to keep the check average at $20?  If you think a 10% increase will drive your guests out the door or cause them to order fewer items, you should go with a modest increase.

One thing is for certain.  This is a very tough year to discount menu prices.  If you depend on deep discounts and coupons to fill your dining room, the current rise in protein costs will wipe out your profit.

Saturday, May 10, 2014

Food Cost Tips for Excel Pros

Lots of restaurants control their food cost using a target food cost percentage combined with a purchase recap and an ending inventory value.  They use Excel to do the calculations for the ending inventory.

If you use the calendar for inventory cutoffs, you will be counting the stock on various days of the week.  You need to make sense of the count for any given day of the week.  For example, we'd expect to find high inventory levels closer to the weekend and lower levels early in the week at many dinner houses.

One simple exercise can greatly improve your knowledge of how your food cost varies.  You need to get a feel for the 25 items you spend the most amount of money on over the entire year.  Vendor tracking reports and invoice reviews can quickly isolate these items.

Closely track the cases purchased for each of these 25 items in a separate Excel file or worksheet.  The data would include the date, number of cases and the cost (use the extension figure).  Each month, you need to recap the purchases for each item.  All we need is the summary data:  total cases and total cost.

On your inventory matrix, add a column for PURCHASED to the right of the inventory extension column.  For each of the top 25 items, add the total purchases amount in the new column.

Create another column to the right of PURCHASED called DAYS.  For each of the top 25 items, you will divide the inventory total by the purchased total in parentheses and multiply by the days in the month.  For example, if your inventory for burger patties was $1,200 and you purchased $3,000 in a 30 day month, your number of days would equal 12 days.

Put the number of days for each of the top 25 items in context.  Is the item frozen, fresh, canned or dry?  Most fresh items should yield a low number of days.  You would not want to see 45 days of fresh boneless, skinless chicken breasts.  The freezer may have been stocked due to an especially low cost on a small number of selected items.  Make sure the cost per case for all over stocked frozen items justifies the quantity purchased.

Fresh fish, poultry and meat should have less than 7 days in stock.  Remember all over stocked items are using cash which could be used in other areas.

Friday, April 04, 2014

How to Cover the Higher Cost of Food Items

We are in a difficult year for protein purchases.  The bad weather, diseases and continued use of grains in fuel for autos will make 2014 a challenging year for purchasing managers.  If you missed the chance to sign a long term contract before all the bad news, your company will see a significant food cost increase this year.

How should you react to this year's higher cost of food?  The higher prices are not restricted to restaurant operations.  Grocery stores are charging higher prices for many protein items.  Your customers are paying these higher prices along with you.  There is an expectation of higher menu prices.  Major weather events and the porcine epidemic diarrhea virus were front page stories.

The question is not whether to raise your menu prices.  A better question to ask is "How high should I raise my menu prices?"

The answer to this question will depend on your specific market conditions.  Highly competitive restaurant markets offer value menu customers very low prices on many popular menu items.  If you operate in a price sensitive market, you need to be careful with price increases on your high volume items.

One strategy involves a small increase in a beverage ordered by a high percentage of patrons. 

We'll use an example to illustrate.  Our top menu selections include a protein item with a $2 per portion cost.  We expect the cost per portion to increase 10% to $2.20.  Our annual sales of these menu items equals one million portions.  This is a $200,000 increase in our costs.  Our customers purchase two million portions of fountain beverages each year.  If we increased the selling price of fountain beverages by ten cents, we would cover the increase in the protein portions.

If the most popular menu item currently has a selling price of $6, we could raise the price to $6.20 to cover the increased cost of sales in our example.  This price increase will generally have higher visibility than the increase in fountain beverages.  If you sell a high percentage of value meals, I'd recommend leaving the price of the sandwich at $6 and increasing the value meal price by twenty cents.

All of your food and beverage menu items need to be adjusted on a routine basis (either quarterly, semi-annually or annually).  You may operate in a seasonal market.  Timing of the menu price increases should be in sync with these routine adjustments.  Your customers may balk if you increase prices too frequently.

Some restaurant owners and managers fear a major business loss from setting menu prices too high.  I have seen prices freeze near many popular price points including $0.99, $1.99, $4.99 and $9.99.  If you can demonstrate a quality advantage to your customers, they will be willing to pay the new price.  Once you break through these barrier price levels, I think you will find it easier to adjust prices in the future.

Hopefully, we will see better crop conditions this year.  If protein prices take a drop later in 2014, you can put the profits in the bank to cushion you from the next upturn. 

If you are confident in your knowledge of the market, you could find an opportunity to lock in lower prices later this year.  A significant price decline could offer you an opportunity.  Most major distributors and manufacturers can help their customers with these issues.

One mistake to avoid is going long when prices are already high.  This locks the higher prices in for a longer time period.  Be patient and pay the market prices until you see a significant drop.  Pretend you have a huge freezer behind your restaurant.  When would you want to fill the freezer with product purchased on sale?  This is a good way to decide when to go long.

Thursday, March 20, 2014

Food Cost Control in Catering Operations

If you ask a wedding caterer for their menu, you will often be presented with several documents.  Most caterers in this field offer many options for every course.  The prospective guest may select a custom designed meal by making choices for each course (soups, salads, entrees, side dishes and desserts).  Generally, the guest is asked to choose from 2 to 3 selections for each category.

The selections available are usually extensive.  It is common to see over 100 menu items on a wedding menu.  In addition to the menu items, guests will often be served rolls and butter, coffee and tea, and all appropriate condiments.  Most wedding caterers run a food cost % between 20 and 25% of total revenue.  It is important to understand the revenue amount needs to cover many other expenses including beverages, decorations, music, flowers and direct labor.

A 20% food cost percentage in an operation with an average revenue per guest of $100 indicates each guest consumes $20 of food.  A common menu item served to wedding guests is beef tenderloin.  Many caterers allow 8 ounces of trimmed meat per guest.  If an untrimmed beef tenderloin sells for $12 per pound and we have a yield of 50%, each portion will cost $12.  This is 12% of $100.

Careful control of the beef tenderloin would help us achieve a 20% food cost % in our operation.

An operator who pays too much for the beef tenderloin may also purchase too much meat for the expected number of guests.  Every dollar per pound over budget equals 1% of additional food cost.  A 10% safety factor is often used by people purchasing food.  Final guest counts can be higher than expected but often the count is lower.  Caterers can require a minimum count for a particular event when the exact guest count is unknown.

Imagine we over pay for the beef tenderloin by $2 per pound and we purchase 10% extra weight.  The cost per serving skyrockets to $15.40 (Cost = 1.1 x $14).  This would send our food cost percentage up to 23.4%.  Add a generous level of over purchasing in produce and dairy products and it is very easy to imagine a 25% food cost percentage.

Suppliers want to maximize their profit.  You need to be precise when stating the specifications for the protein items served in your operation.  In my experience, wedding caterers spend from 8 to 15% of their food dollar on beef tenderloin.  Salmon, shrimp, chicken breasts, lamb racks and other expensive protein items are popular.  Work carefully with your suppliers to get the very best quality for the budgeted cost per serving of meat and seafood.

If you find your food cost percentage is increasing over time, look carefully for possible causes.  The following issues are 100% real and I witnessed each personally:

1)  Supplier charges a 20% up-charge for splitting cases.  The chef orders 6 pieces of beef tenderloin averaging six pounds each.  The warehouse has a box with 12 pieces and a small box with two pieces.  The price per pound is $12.  The salesman puts the orders in for the chef.  He orders one half of the 12 piece case (a split!).  The cost per pound is $14.40.

2)  The same chef orders 20% more meat than the expected count multiplied by one pound per guest.  Employees at the office are served cold roast beef tenderloin for lunch in lieu of burgers.

3)  A walk-in cooler in a kitchen specializing in prime rib has 7 partial ribs cooked to medium rare.  The policy is to restrict use of leftovers to alternate dishes including soups, sandwiches, salads, and side dishes.  These partial ribs have a total of 22 portions which were never served.

4) Alaskan salmon caught by line and shipped by air are served to guests.  The cost per serving is 30% over budget.

Since catering menus are often diverse with many different guest options, it is difficult to accurately estimate food cost without a professional food cost control solution.  If your operation is experiencing a high food cost percentage, you should consider the investment in a top notch system.

Examine your protein costs carefully and check all invoices for prices, extensions and quantities.  Compare the quantity purchased to the guest count.  Ask the chef for the expected yield for any large piece of meat or fish.  You can lower your cost the quickest by studying protein usage.

Monday, March 10, 2014

Implications of a High Food Cost Percentage

If you find your self explaining away two consecutive months of poor food cost results, you need to dig into the numbers and locate the problem.  Persistent performance problems can point to a serious issue.

In calculating your food cost percentage, there are three factors:  sales, purchases and inventory change.  Many operators focus entirely on the inventory change when they look for solutions.

While inventory calculation errors are common, a complete focus on the inventory figure can become a distraction.  Lost sales, chronic waste, inconsistent portions and ordering too much food are major problems which need to be identified quickly.  The end of period inventory figure needs to be eliminated as a factor.

The best way to eliminate inventory errors from your food cost formula is to increase the frequency of inventory counts.  If your food cost percentage is too high, switch to weekly inventories if you currently count monthly.

In a typical kitchen, you will find two weeks of usage in the inventory.  If you had to discard your entire stock, the loss is roughly 4% of the entire year's food cost.  You may have a chronic waste issue with perishable protein items.  In an operation with protein items accounting for 40% of the food cost, a 10% waste problem is the same as discarding your entire inventory once a year.

The point is you shouldn't always look for food cost problems in your ending inventory calculation.

Check your labor cost percentages as a check for lost revenue.  If you have a problem with food and beverages being served to guests without a POS system order, you will find both food and labor cost percentages over budget.  Make sure complimentary food and beverages are entered in the POS system with the comp used as a payment method (approved by a manager).  Eliminate the service of desserts, soups, coffee and tea without a documented order.

Honest waste and spoilage winds up in your garbage.  The garbage can also gives feedback on customer satisfaction.  One of the most costly tactics commonly used in casual dining restaurants involves selling an over stocked protein item which is past peak quality.  These menu items are found in the specials.  The POS system will point to a low number served to guests in relation to the line production.  Now the raw ingredient which was over stocked has been transformed into a finished menu item which has been over produced.

Eventually, the walk-in cooler will contain several pans full of these mistakes.  How will this food leave your restaurant?

Generally, leftover food will be served to employees, discarded or reinvented as a new special of the day.  The last option is the most risky tactic.  First, the demand for the protein item was incorrectly estimated.  This error caused the raw ingredient to hit the specials board.  The company loses the wages paid to prepare the original portions which make it back to the refrigerator. 

A second use of kitchen staff to create a new special adds to the labor cost.  Any over production on the second round needs to be discarded.  If any of the unsold food is served at a later date, the chance for food poisoning increases.  Even if no one gets sick, the quality of the meal will be low.  You can lose valuable customers.

When you find your food cost percentage is too high, remember to count more frequently, check for a higher labor cost and always check your garbage cans and walk-in coolers.

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