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Friday, May 26, 2006

Menu Analysis - Decomposed

When I studied Finance in grad school, our textbook Managerial Finance by J. Fred Weston covered portfolio theory. In a chapter appendix, Dr. William Sharpe's Capital Asset Pricing Model was presented and the calculation of beta coefficients was the focus. In my corporate position, I used the CAPM to analyze operating margins of our hard dollar catering contracts in Sodexho Canada. You can find many applications for portfolio theory in everyday business.

Menu analysis lends itself to portfolio theory. Think of your menu as a portfolio of selections offered to customers. Today's POS systems provide lots of great data to analyze. Tracking menu item gross margin vs. total menu gross margin can be quite helpful. Imagine a popular menu item with a volatile ingredient like crab meat vs. another menu item which utilizes a price stable ingredient. CAPM would assign a high beta to the crab cakes.

My clients have some huge concerns when they start tinkering with their menus. One example of this concern: "If I drop this dog, I'm worried the few fans will go somewhere else and take their family with them to a competitor." Some fearlessly raise the price of coffee, iced tea, soda, and bottled water yet dread raising certain items over a particular threshold. Perhaps they can't imagine charging over $10 for an appetizer or over $20 for an entree.

Whether you choose to try CAPM, menu engineering or just use a gut feel, menu changes are huge events. Simple adjustments for inflation can send super price conscious patrons to the competition.

One of the best discussions I ever had regarding menu analysis took place with a person who never attended high school. He was very worried about raising his entree prices at dinner above $9.95. The year was 1993 and many of his competitors had made the move. We discussed the menus of area restaurants all day.

During our discussion, I mentioned one of the low cost competitors ($8.95 and below) seemed to be in decline. Their parking lot was spotty on peak nights and bare early in the week. The response: "Nobody knows why they go there!" We really tore this point up. The menu had zero focus. This restaurant served pizza, pasta, burgers, pita sandwiches, tacos, chicken fingers, 8 oz. steaks and fried shrimp. Simply stated, there wasn't a fad they didn't mimic.

While my client employed a strategy of a tightly controlled 40% food cost on a BBQ menu, this competing restaurant had no formal strategy. They simply added new menu items as eating habits changed. Watching the lines out the door waiting for a BBQ fix on a rainy Tuesday, I quickly converted to the focused menu camp. The competitor closed two years later.

No amount of mathematics can solve the riddle of the restaurant with no soul.

Monday, May 22, 2006

Food Purchasing - Decomposed

Your purchasing decisions have the greatest impact on the food cost percentage. When I refer to purchasing, I do not mean expediting vendor orders. Often, poor forecasting can turn the purchasing function into a frenzied group of expeditors. The more time the purchasing team spends on follow up calls, the less time is available for vendor analysis, material standardization and negotiation.

Your purchasing director should have the time and resources necessary to perform the critical tasks of this function. The best purchasing directors are market savvy and have standard costs for all major items. These pros focus on tiny windows of market opportunity and make larger purchases when the conditions are favorable. Due to the perishable nature of many food items, they need to be completely aware of usage trends and near term forecasts.

I find the purchasing directors often have either a poor relationship with the executive chef or a phenomenal relationship. The great relationships produce the best results. These teams discuss upcoming demand and alternate specifications. The purchasing pros handle the supplier negotiations. The chef handles the menu and demand forecasts for key items.

In the manufacturing environment it is common to use an ABC stratification system. The "A" parts represent 10 to 15% of items and 70 to 75% of purchase volume. The "C" parts represent 70 to 75% of items and less than 10% of purchase volume. In the middle are the "B" parts. Typically, purchasing agents focus on the "A" parts and setup long term contracts with suppliers and manufacturers. A greater planning effort is devoted to the "A" parts.

Switching to our industry, I've found the top 25% of items will encompass a very large percentage of purchase volume. Depending on menu focus, their coverage varies from 60% to 90% of total purchases. If you study these items carefully, you will see three conditions develop.

The first condition will include items which seldom vary in price per pound or case. These items are plentiful, shelf stable and easier to monitor. Some items will vary depending on season and temporary weather conditions. Volatility is high when moving in and out of season. Finally, some items change in price constantly due to a variety of variables.

Within the top tier of items, often further stratification may be performed to isolate the top 10 or top 25 items. I would make an additional recommendation. Spend slightly less time on the items with steady price trends. Focus more efforts on the volatile items. Secondly, spend significant efforts on forecasts for items with very low shelf lives. Overstock of highly perishable items is to be avoided if at all possible.

A solid purchasing team with proper resources can make a major impact on your overall food cost percentage. It is possible to buy 10% less food for the same menu and sales level. For example, I have seen a company without a well managed purchase function drop from a 40% food cost percentage to a 36% figure. Similar results have been achieved by operators across industry segments.

A big question always comes up regarding the cost of such and effort. Most multi-unit groups have a well developed purchasing function since the numbers speak for themselves. Find the balance between the cost of improving purchasing results and the benefit using a simple formula.

Multiply your most recent 12 months of purchases by 10%. This result is the break even budget for a qualified purchasing director. Compare your result against HR market studies in your region.

A $3,000,000 volume of food sales with a 40% food cost percentage would justify an annual expenditure of $120,000 at break even. If you could hire a competent professional for $75,000, you would see a $45,000 benefit. That's a net benefit of 1.5% of sales. If your growing the concept, the return on investment will increase as your units increase since the benefit of purchasing efforts is multiplied by the group volume.

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Tuesday, May 16, 2006

Utilizing Specials

When the walkin cooler gets overloaded with one or more perishable items, the chance you won't turn your inventory dollars into tomorrow's profits increases. Several tactics may be employed to deal with this issue. My least favorite is the blowout. A blowout is typically the top special promoted aggressively by the waitstaff. It is common to offer the special at a discount to the median entree price.

Most blowout menu items involve an ingredient about to spoil. You're actually motivating your sales team to sell an entree made with ingredients well past peak. This picture is very different from the ideal special.

Specials can be excellent devices for testing new menu ideas. Many chefs try to promote super fresh, seasonal items using their top special of the night. On the customer side, lots of people like to try new items and everyone can be persuaded to order a popular seasonal dish.

As you ponder the use of a blowout as your special of the day, try to imagine the impression you will make on the customers. Those customers who frequently order a suggested menu item are statistically most likely to be disappointed. Unlike the customers who normally order off the main menu, they may be less forgiving of one substandard meal.

Too many competitors are effectively utilizing specials. A poorly executed blowout could cause negative word of mouth and hurt future business.

Saturday, May 06, 2006

Inventory Control - Decomposed

A decade before spreadsheets, inventory forms would be produced from copiers each count period. The count team would often take their counts with no knowledge of the previous count or the current replacement cost. Once the sheets were turned in to the office, a team of accountants would update the unit costs and extend the counts to reach a value.

This costing method is a hybrid of the FIFO method. Since the staff would pull recent invoices for pricing information, they were closely approximating the pure FIFO value. Most inventories were rapidly calculated with calculators and streams of tape could be found on the floor and in waste baskets.

Today, many operators use spreadsheets in place of the copied forms and adding machine calculations. Where do the current operators go to find the prices to use in extensions? I always ask how people get their numbers and the responses are quite varied. Some people use the most recent costs much like the way mentioned above (last cost method or FIFO hybrid). Others don't bother to look up new prices. They use the same numbers from the previous inventory (old cost method or hybrid LIFO). A few ambitious souls go to the trouble of looking up all prices from a two week period. They use average prices (average cost method or hybrid FIFO).

On some spreadsheets, the analysts enter count numbers in columns with beginning inventory, received (often by day of week) and ending inventory. The net counts (i.e. BI+R-EI) are multiplied by a single number. The source of the numbers vary by operation.

I'm not a fan of this method. When I passed the CPA test in 1981, inventory valuation issues dominated the theory section of the test. It would be difficult for even the most aggressive CPA firm to allow the period-end purchases to be ignored in determining inventory valuation. There is currently a big discussion involving elimination of LIFO valuations. LIFO is effectively banned in England for inventory valuation.

By presenting purchases according to GAAP, many restaurants will improve their food cost figures and present better reports to the executives. I recommend valuing ending inventory based on FIFO. In addition, a prudent reserve for spoilage should be calculated and used as an offset to the asset value on the balance sheet.

Your month end inventories should not be altered with WIP figures which can't be substantiated. A fully cooked prime rib roast which wasn't served the previous night should not be valued highly. Freezer burn could lower the value of lobster tails, shrimp, fin fish and meat. Don't value items which may only be used in a soup the same as those received fresh the same day.

Inventory valuation should be consistent from period to period. The value should be conservatively calculated. Counts should be accurate and the counting day should be delivery free if possible. It is best to use count personnel who have no role in purchasing and production.

Expensive items should be counted frequently. The month end accounting cutoff should produce few surprises on your top 25 items (often the top 25 items will account for over 50% of annual purchases). Daily counts on these key items will eliminate most inventory errors and will improve ordering and usage results.

Spend a lot of time designing count sheets for the freezers. No mathematical calculations should be performed while shivering count teams go through the shelves. The sheets should include every possible way to count the critical inventory items. Shrimp 16-20 may be on the sheet as case, box, pound, tray (for pre-portioned menu items) and portion. Just enter the counts and present the F&B controller with the sheets. Standard ratios should be used for portions.

Spend more time in the freezer than you do estimating the amount of dry spices in the containers. Some chefs expense spices and keep expensive saffron under lock and key. Check dates on any package with a date. Don't do this every month in the dry storage. Make a rotation schedule for these items. I've seen expiration dates more than a year past on some dry stock.

Count the stock early in the morning if possible. I am totally against the beer guzzling crew waiting for the door to close on the final customers before racing through the counts. Unfortunately, this happens too often.

Finally, if you want your inventory valuation to have more meaning you should count all stock weekly (on Monday morning). Consistently calculated weekly inventories will help you focus on chronic cost issues like over buying and over portioning and keep discussion of inventory errors from the management meetings.

Friday, May 05, 2006

Legacy Food Cost

Have you checked your freezers lately? What's in our collective freezer space? Many people create short term profits by freezing mistakes.

Imagine paying for an air shipment from Hawaii for a large purchase of freshly caught fish. Next, the fish hit the menu on advertised specials. Despite big crowds, you have sold only half of the shipment and the fish may spoil. What happens to the rest of the fish? Actually, I found them with an owner I was helping during an unannounced inventory. They were frozen solid. The profit was frozen too for another month.

Outside behind the same restaurant was a much larger freezer. It was loaded with 20 other mistakes. Freezer burned crab legs, ground beef in a box marked tenderloin, a variety of other "fresh" fish and some year-old lamb racks all scattered throughout the big box.

The unusable food in the outside freezer was valued at $10,000. This legacy food cost was pushed into the future at a seasonal resort restaurant. The chef's strategy was effective in spreading mediocre results over a long period of time.

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Thursday, May 04, 2006

Timely Portion Control

A packed pub in a historic Boston hotel serves lots of burgers, fries and draft beer. The food cost was significantly higher than their ideal calculation projected. With a very fast turnover and tight receiving controls in place, management reviewed portion control policies.

The burgers were easy to test since they used portion control patties. Both the buns and patties were counted daily. Since the counts were in line, we tested the french fries. Way off!

Plates left the kitchen with well portioned stacks of fries. In fact, the cooks weighed the fries before placing them on the plate. So where was the problem?

We checked the garbage and found loads of fries.

The busy lunch period the next day illustrated the problem. A complete bag of fries was placed in the basket and properly cooked. These fries were seasoned and the orders were filled. Then the cook moved the garbage pail beneath the leftover fries and swept them into the garbage.

A quick training session solved the problem.

Tuesday, May 02, 2006

The Food Cost Percentage-Decomposed

Too much attention is placed on inventory accuracy. Most people miss the finer points of determining their food cost percentage. Clearly, the sales figure which dominates the formula should take center stage. A very close second is the purchases figure. The inventory obsessed need to take a different view.

Many hotels and restaurants count monthly (or every four weeks) and I see too much emphasis on inventory valuation. The impact of inventory change depends on the time period. Monthly values should be reasonable given the day of week and time of year. The change in the inventory value (i.e. beginning minus ending) hardly matters once a period of 90 days is considered.

Inventory is very important in a weekly analysis and all important in a daily calculation. If you're researching a problem and perform daily calculations you need to be very exact.

The wonderful POS systems available today from the best companies provide a bundle of sales analysis. My favorites are check average and covers by meal period. I break down sales using a simple matrix with a row for each meal period and columns for covers, check average and sales.

On the purchases side, I break down the purchase data using a larger matrix with rows for each key item and grouped data for low impact items by category. The columns include units, average cost and total cost.

For the inventory, I prefer a simple inventory change figure. One number is fine. Simply subtract the current period's value from the previous period's value. The net value should be a reasonable and consistent estimate. Don't count WIP inventory one period and eliminate the figure the next period.

Some quick checks on inventory value by location and category will provide enough information to locate the flour extended by case price when the count team used pounds. Perform a simple analytical review and correct major errors.

Many operators give no credit for highly perishable items like bread, fresh fish and other items specific to the operation. This helps to avoid over buying since the items are expensed immediately.

Inventory valuation should not be the reason for a good or bad food cost percentage in any given period. Any operation which runs a hi-low pattern or a low-low-hi pattern has a far greater problem. These patterns typically point out cost control weaknesses. Someone is trying to hide the truth. I have seen plenty of inventory extensions with a spice valued at $1,000 plus. The people presenting these reports may be both incompetent and dishonest.

Look long and hard at sales trends by meal period. Some operations run lunch menus with higher implicit costs. If the lunch/dinner ratio changes, the food cost will be impacted. Extremely high or low counts will have a major impact as well.

Most of the real action will be in purchases since the money you spend with your suppliers is your cost. Highlight dramatic price changes on any key item. Look for flaws in your ordering strategy. Compare figures from one period to the next and over the long term.

If you focus on sales and purchases, food cost percentage surprises will be fewer and more positive.

Restaurant Data Pros

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