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.

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.

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