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Friday, June 09, 2006

Market Segmentation - Best Practices

Over time, I have observed many segments of the food and beverage service industry. My observations have included hotels, restaurants, clubs, schools, jails, health care facilities, remote sites, markets, event caterers, and race tracks. Without fail, each operation exhibits a specialty when cost of goods sold and inventory control are the focus.

The best practices I've observed do not represent any scientific study and I have no statistics to support my opinions. These are gut feelings which are the result of many years of observations. I hope you find them useful in your organization. Before adding any of these control features to your operation, make sure the cost justifies the benefit.

Hotels are typically adept at inventory control and profit center reports. Most hotels have a central receiving area. Movement of product from central locations is tightly controlled using requisitions and transfers. Some hotels implement an approval system with order limits for each purchase category. They setup strict guidelines for approvals.

The best run hotels can tell you how much of each controllable is on hand at a given point in time (by location).

Hotels are frequently buffet shops and many have at least 40% of food sales in banquets and buffets. This high level of buffet activity helps keep waste at a minimum in the well run operations.

The best run restaurants have a focused menu and they know their customers well. Some actually create table profiles and they can quote statistics on average check by meal period, average sales per table by meal period and by wait person. A few top level f&b controllers know table profiles and use these in demand forecasts.

Restaurants tend to be adept at specials and the best do a fantastic job putting extra profits in the cash register. Today's POS systems have a battery of focused sales reports which help managers price menu items and track usage.

Clubs are often hybrid operations with both restaurant style service and banquet service. The best clubs do a great job segmenting the two operations. Purchasing demands a knowledge of the entire operation. The best club managers are aware of upcoming events and seasonal restaurant trends. I'll discuss ordering for events below.

The members of any club are the focus and many members are regulars. This fact accounts for a more stable forecast model. Knowing the clients intimately helps to reduce waste caused by over ordering perishables.

Institutional Caterers
At Sodexho, we served clients in remote construction and mining sites, health care, business and industry and education. To a lesser extent, we fed prisoners in a small number of jails. Contract feeders and self-operated institutional accounts are driven by cycle menus. These contract menus specify menu options for each meal period in a four or five week cycle menu. This activity is dominated by firms with highly automated systems for tracking item usage. Brand name items often attract rebate income. Institutional feeders are wizards at setting up rebate programs and monitoring their results.

In my role with Sodexho Canada, I setup rebates for coffee, paper, chemicals and other high volume, rebate sensitive items. These rebates accounted for 2.5% of food purchases.

Some savvy self-op shops establish relationships with manufacturers and generate rebate activity. Even though each single account may not have the typical volume required, buying groups allow these single operations to combine their volume to hit a critical mass.

Institutional food service has two huge advantages: menu is fixed and demand is easily estimated. Sometimes, brutal competition for top accounts places a huge demand on the cost control system. The benefit of this tight control is achieved on contracts gained through less stringent conditions. High profits are bagged through implementation of the same tight control systems.

Take home food is a fast growing area and the super markets have created special areas to promote this high profit activity. Although these venues may help minimize waste of perishables in the produce, deli and meat aisles, many top market operations produce items in separate facilities with ingredients purchased specifically for this purpose. Like any food and beverage operation, they benefit from larger volume purchases and purchase #10 cans instead of the smaller sizes purchased by super market shoppers.

These operations often use the new outlet to promote higher quality goods and they charge higher prices. The best run operations sell their finished goods to the deli, baked goods area and produce managers. In a complete twist, they supply the market more than they "buy" from the market.

Event Caterers
The event caterers know how many are to be served and the exact menu items required. These operators try to buy just enough to produce the menu for the event with a minimum of waste. Event reports highlight the count, menu items to be served and raw ingredients needed to produce the finished products.

With tight control of purchases and next to nothing purchased for par, low percentage food costs are the norm. Buffets allow these artists to use small leftovers from previous affairs with common starch items and salads.

Race Tracks
I grew up in Saratoga Springs and I worked for Harry M. Stevens. This company was founded by Mr. Stevens when he went to Yankee Stadium and couldn't buy a hot dog. During my college years, HMS was the top concessionaire for many sports facilities and one of the founder's grandchildren married into the Gulden mustard family.

In addition to lots of hot dogs, beer, soda, fries and chips, Saratoga Race Track served an excellent clam chowder, corn on the cob, clams on the half shell and specialty drinks. Concessionaires know their operations well and they plan weeks ahead for major events.

In Saratoga, we have the Travers Stakes race and there are many huge sporting events annually in the country. Now the NASCAR racing circuit produces huge events each weekend. The Triple Crown and Breeders Cup Day are big horse racing events with huge turnouts.

Concessionaires in New York ship employees from Aqueduct in Queens, Belmont Park in Long Island and Upstaters from Saratoga to create well trained staffs ready for these major days.

Each operator tends to focus on the business model of the particular segment. This focus brings certain specialized strengths into play. It has been my privilege to see so many different segments over the years. I often wonder what food cost percentage could be achieved with the best people from all these diverse areas of the food and beverage universe.

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