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Wednesday, March 22, 2006

What Should Our Food Cost Be?

In a suburb of New Haven, CT, I was asked to help an event caterer organize accounting for receivables and payables. During our discussions, he decided to expand the scope of the project to include inventories and cost of goods sold.

Since I needed to gain a knowledge of his operation, I asked what his food cost percentage was the previous month. He said without hesitation: "Our food cost is phenomenal! We run a consistent 22%." I asked if he divided his revenue into components. He said he did not. Just to complete the basics, I asked for the recent beverage cost. I was told: "We shoot for a 10% beverage cost but it can vary depending on cash bars and open bars in any given month."

It was apparent they needed help analyzing alcoholic beverage service.

At this point, I felt it necessary to ask point blank how costs were computed. Event catering is very different from a la carte restaurant service. It is completely false to shoot for a restaurant style benchmark.

After two hours of sifting through financials, it was clear the operation was out of control on both food and beverage. The chef was reporting food cost as a percentage of the entire catering package. The pricing for a package typically covered food, beverage, entertainment, flowers, photographer (optional), limo service (optional) and prime location rental (optional).

Adding together the 22% and 10% to get a F&B total of 32% was my first attempt to get the staff focused on how 22% might possibly be a high number. I explained a restaurant would never divide food cost by the combined food and beverage sales. They then realized the 22% might not be as great as they had imagined. The reply was: "So we're good; not great."

They asked: "What should our food cost be?" I said about $5 per person for most events.

I mentioned my catering background. My remote site feeding background focused on cost per manday. One person in camp per day would be entitled to housekeeping services, food and beverages. We kept all financial data in categories and divided each category's cost by the number of mandays in the period.

We decided to rework the cost of goods sold data. The rework provided a method for tracking costs by event category. Once they had a clearer picture, the food cost swings were more apparent. Eventually, they had a system of control which allowed separate reporting for open bar events and cash bar events.

A second benefit emerged from the project. Precise pricing for clients was possible. Depending on menu mix and selection of entertainment and service options, a quote was provided with a minimum count and a price per attendee.

Their final menu included three layouts on a fixed price basis. Gold, Platinum and Diamond service food choices were offered at three price levels. Regardless of menu choice, clients could choose from the full list of auxiliary services with a per person charge for each.

Once the operation realized their food cost results were not phenomenal, they began to track costs and profits increased.

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