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Monday, July 31, 2006

Reuse Paper Clips

Energy prices have a significant impact on the economy. High gas prices are like a tax on the citizens each tank. Budgets need to allow for high gas prices and their impact on our industry.

In the mid-1980s, the price of a barrel of oil plunged to $5. Our clientele were put under enormous cost constraints as construction and oil exploration came to a halt. The chief operating officer in our company made a tour of the globe carrying copies of an internal memo from the largest industrial contractor. The short memo stressed cost containment at all levels and made many specific instructions including the reuse of paper clips.

We immediately changed our corporate travel and entertainment policy, created a request system for office supplies and called all contractors to renegotiate service levels. Our clients requested meetings with our contract team and we worked on change orders which guaranteed coverage of fixed costs and reduced the number of onsite managers required by contract.

Our parent company was moving away from a reliance on remote site feeding through acquisition. We started looking for acquisition targets with contracts in urban areas. During this period, I studied zero based budgeting and constructed decision packages for each department and for each acquisition target.

We were able to grow sales and profits by milking the remote site feeding cash cow and investing in less volatile urban companies.

Today, the level of activity in oil exploration is back near the peak and the Edmonton Oilers were in the 2006 Stanley Cup series. I heard a Fort McMurray Today broadcast on public radio and the person being interviewed mentioned a mean salary of $90,000 for the city. I'm sure there are articles about Edmonton's population doubling in the next five years as there were back in 1982.

Back in 1975, my college friends and I went on spring break to Florida. We needed to sit all night in Savannah to get gas since the stations had no gas until the morning delivery. It took about ten years to go from the gas embargoes to the huge drop in oil prices. During this period, oil production began on Prudhoe Bay, Colorado oil shale mines were developed in Parachute, major offshore drilling took place in Alaska, Scotland, Norway and Newfoundland.

The current run in oil prices began during the final year of the Clinton presidency and has now entered the seventh year. In 1982, there were predictions of $100 per barrel oil (vs. $35) and today we hear many dire predictions. Meantime, China is developing strict policies on energy use and America is promoting ethanol usage. Hopefully, in three more years (or less) we'll have more memos floating around demanding reuse of paper clips at the major construction companies.

Thursday, July 27, 2006

Sources For Competitor Analysis

In the recent quarters, I have studied 10Q reports for several steak house concepts and all of the companies reported store openings and closings in these reports. In addition to the excellent public reports available on, there is a wealth of competitor analysis available on the web. I use the excellent information available online at Restaurant Chains and their excellent email Alerts.

An objective plan should contain a thorough competitor analysis with the expected impact on current units and expected openings. It's possible to get a vivid picture of the year ahead through public reports, online searches and press releases. Data on openings is always available months ahead of time. Local newspapers and magazines frequently announce new projects.

These publications also cover closings. A prudent planner would be wise to build in some closings in a realistic five year plan. Just look at Zagat's annual memoriam page in each city, you'll find plenty of closings.

Carefully select your targets for new units. Provide for real world disappointments in your numbers. Check out reports on public companies and look for the term discontinued operations. Careful competitor analysis and realistic planning will provide an achievable long range target.

Thursday, July 20, 2006

Market Segmentation - Strategic Focus

In a previous post, Market Segmentation - Best Practices , I reviewed the best practices from seven segments. Each of these segments has a different strategic focus and the differences impact their long range plans.

Hotels plan for occupancy levels, REVPAR, banquet event orders and conventions. These operators forecast sales and expenses by departments. In a smaller property, there may be a single kitchen with one or two bars and several banquet rooms. Larger properties have multiple kitchens and many concepts. These huge hotels and resorts often book very large events. They typically have a flexible floor plan for the affairs and book many events simultaneously.

The food and beverage team takes a critical view at each meal period, event, buffet and room service. Plans include departmental level figures for food and beverage revenue, production labor, service labor, banquet labor, bar labor, etc. In addition, all other operating expenses are budgeted by department. Monthly reports compare the actual results to these budget numbers for each operation.

The restaurant wizards take a look at previous year's statistics and focus on covers per meal period, check averages, turns, menu price increases, raw ingredient fluctuations and waitstaff productivity. They use this data to forecast the year ahead. Plans consider old competitors as well as fresh concepts in the market. Pricing strategy depends on profit targets and competitive pressures.

From the comparison of menu prices before and after a factor may be applied to the check averages. Covers per period, turns and any change in the number of seats provide the volume data. For each meal period, a sales forecast is put together using the estimated check averages and the forecast of covers. These figures are summarized by week, month and quarter and become the focus of the budget.

Clubs analyze a la carte menus much like a restaurant with a large percentage of sales from regulars. They analyze similar meal period and check average data. Often, banquets and buffets represent a higher percentage of sales than a restaurant. The banquets and buffets are forecasted from a study of previous year's data (often more than one year is examined). Operators forecast start dates and end dates for seasonal clubs and weather may help or hurt them in attaining budget goals.

Provision for staffing is required for the main season and the off-season. Food and beverage revenue and expenses is put in perspective with the members goals. Some clubs seek a break even result from F&B and others expect a small loss. The best F&B operations at major clubs make a positive contribution.

Institutional Caterers
Onsite feeders run a decaying operation along side a growing operation. Since most contracts have a definite termination date, management takes a looks at contract due to expire in the year ahead. Some contracts end when a construction project is completed. If the contract will be renewed in a competitive bid, a probability of success is assigned to the project. Knowledge of the competititor's contract expirations is also critical. Similarly, an estimated probability of taking over each account from the competition is calculated.

The marketing department provides details on new business targets and their estimated probability of success. Each project is defined as hard dollar (profit or loss depends on actual results) or cost plus (all expenses paid plus a fee for management). Total volume affects the amount of overhead required. Cost plus jobs are less risky at the operational level but the documentation of job costs is higher than a hard dollar account.

Institutional caterers break down costs into many categories since the projected margins are slim in relation to revenue. The return on equity is typically much higher than a hotel or restaurant since these operators invest very little in the bricks and mortar.

The markets I have worked with treat the prepared food section like a restaurant although the top managers use market terminology (for example shrinkage includes normal trim in many markets). Projections are made for each menu category with salad bar, roasters, sandwiches, pizza, prepared entrees, sushi, hot buffets, and bakery fairly typical of a large market. Some markets now allow guests to sit down and consume the meal on the premise and alcoholic beverages may be possible. Service is typically self-serve with trays.

The long term plans reflect the size and scope of the operation. Larger markets prepare figures similar to a food court with a single owner. Projections are calculated for each category but the entire operation usually has only one kitchen with a production staff capable of preparing any food item.

Event Caterers
Banquet event order systems house data banks for the previous year and the events already booked for the future year. Event caterers look at each month or season and visualize the year ahead. If the system has too few events in a normally busy month, they will put more sales and promotion assets to work. Letting a night go dark in a busy period is something they want to avoid.

Focusing on each event as a separate job allows a complex budgeted income statement for all events. These estimates are placed side-by side with the actual figures as the year proceeds. Many event caterers segregate purchases by event. Careful control is exercised over each detail.

Alcohol may be served in a cash bar or open bar format. This is determined for each event and estimates for the bar charge need to be made if the agreement is for a fixed beverage cost per patron.

Race Tracks
Race tracks are large complexes with lots of space for guests to roam and many ways to offer food and beverage. Most tracks offer one or more formal dining areas with wait service. Buffets are offered in many tracks since customers are in a hurry to return to the action. Throughout the entire complex, numerous bars and food outlets serve a variety of menu items in a QSR type environment.

Each kiosk is tracked separately and forecasts are required for these stands. The person in charge of the stand prepares a sheet and accounts for the beginning inventory minus ending inventory with a cash projection and reasons for shortages.
Long range plans account for the projected losses due to theft and poor forecasts. Operators try to limit these losses.

The long range plans must account for marketing costs, leasehold improvements amortization, rents, mortgage expenses, equipment rentals, depreciation, fleet maintenance, etc. At the heart of each operation, the food and beverage team need to accurately forecast demand. This demand may take the form of special events, rooms occupied, nightly covers, hot dogs per stand times the stand count, REVPAR F&B component, contracts retained, etc. The secret to success in each highly specialized segment is knowing the marketplace. Customer knowledge, competitor intelligence, major events and the weather may have a major impact on the operation from year to year.

Tuesday, July 18, 2006

Planning For The Unexpected

Today, I witnessed a 1 in 10,000 event. I went to my local barber for a haircut and the place was empty when I arrived. Shortly after I sat in the chair, a young man with red hair entered and sat down in a seat near the door. Just before my haircut was completed, a mother arrived with twin red heads and they were dispatched to two other chairs.

Since I am also a natural red head (now faded to strawberry blond), the four of us were the only clients at 2:30 PM. I've been told the probability of being a redhead in the USA is approximately 10%. Taking .1 to the 4th power, you have a 1 in 10,000 event. Four redheads being the only clients at a single time is rare.

You should always carry adequate insurance protection and budget the cost in your five year plans. Unusual events do occur.

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Saturday, July 15, 2006

Beyond Inertia

In my experience, food cost behaves differently than the physical objects subject to inertia. A tightly controlled food cost stays in line through the efforts of "an outside force" (management). If the outside force is eliminated, the tight food cost will disappear as well.

An out of control food cost will tend to become a greater problem unless an intervention takes place. Leaving a problem alone will not maintain the status quo.

Management by exception provides a system for isolating sub-par performance and devoting resources to turn the situation around. Going back to the physics idea, the larger the unit in question, the greater the problem and the need for a solution.

It is wise to plan for the resources needed to troubleshoot problems in major operating units. Should you divert these resources to smaller issues at smaller units? Probably not a good idea.

Often the time and resources devoted to minor issues in an organization is disproportionate to the potential benefit. People talk of "the squeaky wheel" and often management by exception focuses too much attention on the smaller wheels.

Try to work on solving big issues first before you tackle minor problems.

This logic may be extended to single unit operations. In the high volume, single unit operation you'd be wise to focus on problems affecting major activities. Try to put the little annoyances in perspective.

You may find 80% of your efforts are spent on activities which can only capture 20% of the potential improvement. This is par in most organizations.

Design your reports to highlight major variances and provide comparisons and summaries which put all variances in proper perspective.

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Thursday, July 13, 2006

Planning For Competitive Threats

Any respectable five year plan needs to take a hard look at both the known competitive threats and the possible threats which are not yet obvious. You should start with your main competition. Analyze their current strategies and estimate the impact on revenues in year one. Try to anticipate the outcome and develop a strategic plan for counter-attack.

Porter's five competitive forces is an excellent tool for analyzing competitive forces.

Saturday, July 08, 2006

Passion For Long Term Planning

During my corporate life, the chief operating officer for our group was a frequent flyer with a huge territory. He would schedule meetings roughly twice a year although an unannounced visit was possible at any time. One topic was front page in every scheduled visit. Long range planning was his passion. He viewed the company as a "confederacy of entrepreneurs" and encouraged all of his direct reports to view their plans as a contract.

This passion was best manifested in his favorite story. I will do my best to paraphrase his short tale:
"Every one needs to be a good planner. Sometimes managers forget to plan. These managers may lose sight of their vision.

Planning isn't just for managers. Every person in the organization should have a plan. The time period we need to plan for is a function of our position in the company.

A good pot washer has a plan of attack. He needs to organize the pots and pans and setup a sequence of tasks to accomplish his mission. The tasks might include preliminary rinsing, separation of pots which require soaking and scrubbing, washing the easy pots first and then finishing the tough ones after they have soaked.

This pot washer will be much more productive than one who takes one pot at a time and deals with it.

I expect the top managers to have a much longer time horizon than one meal period. We need to forecast years in advance and have a plan to grow. This plan should keep competitive threats in mind. The plan should focus on the discovery of profitable opportunities.

We use five year plans to provide a compass for the future. Our annual budgets provide us with a means of tracking the plan and making changes over time."

We worked on a new five year plan every year. Our budgets were always based on the year 1 numbers from the most recent plan. The budgets of future years would always take into consideration the most recent year's actual results and the original expectations from the five year plan.

These plans were used to evaluate results monthly, quarterly, semi-annually and at year end. A significant portion of executive compensation was tied to performance.

Thursday, July 06, 2006

Why Should You Count Key Items Daily?

If you have ever taken a shot at linking your entire POS item listing to recipes, the effort is significant and hopefully the return will match. The typical recipe model will include a lot of educated guesswork. Perhaps 5% subtracted from the perfect yield to allow for normal variance. When guessing the count for a typical box of 16-20 shrimp, most people use the low number - 16. If it's actually 20, that's a 20% difference.

Dry goods may settle and when called in recipes by volume, yields can be less than expected. Some models adjust to the conservative side. People want variances to be caused by actions or activities other than normal yield variation. Most people set standard yields to the low side of normal.

Let's introduce a brazen thief into the formula. Our thief is taking a case of frozen meat to the garbage bin about 20 minutes before closing each night.

In our example, it's a high volume operation and the menu is dominated with ribs. Half racks and full racks are sold with a variety of sides and combo choices. The ideal usage calls for 100 cases of ribs a week. The thief works 4 nights a week.

Would your recipe model catch the 4% variance due to theft?

Portion control helps. A case of 30# baby back ribs will include 24-1.25# racks. Daily counts of prep, preliminary cooking and POS sales will help answer the 4% riddle. You won't have time to do this analysis with each ingredient.
Pick your top 10 to start.
It can get addictive when you see the savings. I'd limit this daily activity to 25 items.

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