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.

Thursday, August 28, 2014

Operators Are Watching Portion Sizes Carefully

I have been traveling through New England and Upstate New York this summer. While driving on major highways, the meal choices are limited to major chains for the most part. Menu prices tend to be 10% higher at the rest area food courts.

Most of the popular concepts have strict portion control built into their service. I did not notice many changes in portion size. The main observation in the chain concepts was the tight control over complimentary condiments. Gone are the handfuls of ketchup and mustard. Napkins are also being strictly controlled at the grab and go locations. You need to ask for cream for your coffee at every place I visited.

My favorite meals were in off the beaten path locations.   Most operators were watching the portion sizes.

We stopped for a chicken BBQ at a church near Keuka Lake in Hammondsport, NY. For $8, they served one half chicken, one roll, one butter patty, one serving spoon of salt potatoes and one container of cabbage salad (similar to cole slaw).

The utensils and napkin were carefully distributed - one per guest. The lemonade was technically unlimited but the cup size was designed to limit consumption. It was a very satisfying meal and I complimented the pit crew on my exit.

I want to emphasize the portions were carefully controlled. This does not mean they were small. On a trip from Amherst to Concord, MA, we stopped for fried clams. I decided to order one quart for three people. We were overwhelmed with clams but the portion was controlled. The way the operator handles portion size is as follows: a waxed one quart container with flaps for the cover is placed in a paper bag. The server fills the container all the way to the top of the flaps.

We would have been satisfied with a pint. However, I observed the same paper bags at the picnic tables nearby. The amounts seemed exactly the same.  The parking lot was completely full and the seasonal shack had an impact on the local traffic patterns.

The server handed me three containers of tartar sauce (one per person) and let me know more was available if needed. Guests helped themselves to napkins.

We enjoyed a terrific breakfast of Eggs Benedict in Concord. This dish was carefully put together with one english muffin, two poached eggs, two slices of back bacon, a serving spoon of hollandaise sauce and 3 ounces of home fries. We were all offered a second cup of coffee or extra water for the tea. The potatoes were excellent and we all had exactly the same size portion.

Massachusetts has world class ice cream stands and terrific donut shops. It's impossible to travel through the state without stopping at least once for each temptation.

While the medium cup of ice cream would have been called large in the Mid-Atlantic, every customer was served the same overloaded cup. Donuts are easy to portion. The napkins were self-serve at the ice cream stand. We each received a single napkin at the donut shop. Control of napkins, sugar and cream was the norm at several coffee shops we visited.

Amherst, MA is part of the five college consortium between the Berkshire Mountains and the Quabbin Reservoir. Although we were in town when school was out for the summer, the main street shops were open for business.

We enjoyed one of the best roast beef sandwiches in many years at a sub shop and bakery. The fresh baguettes were sliced in half and the freshly sliced beef was weighed (5 ounces). The lettuce and tomatoes and the condiments were all carefully portioned. We received two napkins per sandwich. I noticed the baked goods were all pre-sliced. Some cookies were wrapped in 3-packs.

Our favorite spiedie pit in the Southern Tier area (near Binghamton, NY) serves generous portions. The spiedies are portioned prior to cooking on skewers. The meat is served on a single pita with one spoonfull of sauce. All condiments and vegetables are measured carefully.

We split a large french fries order. They use a bag method similar to the fried clams stand but smaller. All of the patrons at the tables near ours had the exact same bag size filled to the brim. For beverages, they hand you a cup and you can refill the cup.

There is an outdoor market/bazaar operation outside Penn Yann at the top of Keuka Lake. We were told to see the Polish Princess for her pierogies. She was sold out of everything except the pierogies since we arrived near closing time.

We each received five pierogies and we were allowed to spoon on the sour cream and dill sauce. She chatted with us and encouraged us to enjoy the sauce. The orders sold for $5.75 per portion or $1.15 per pierogie.

She looked like she had a busy day.

With so many restaurants wrestling with tactics to lower their food cost this year, it is important to watch your portion sizes like a hawk. Make sure you are consistent. If you are known for generous portion sizes, it is important to meet your customer's expectations.

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.

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