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Monday, September 25, 2006

High Degree of Operating Leverage

Some of my earliest clients were high volume restaurants on the New Jersey Shore. I noticed some key similarities among the successful operators. The very best started with a small operation on a relatively large area of land. Over time, they grew the restaurant's capacity with incremental additions. At their peak, these restaurants had many dining rooms and multiple kitchens. Some were found in the annual top 100 lists in industry publications.

As I gained clients further north in the state, I advised them to try growing incrementally and talked some out of major unit expansion. Rather than enlarging the fixed cost base, I advised them to maximize their profit at existing locations.

Since food service operations exist in a highly competitive environment, operating margins tend to be low. A restaurant operating at or near their break-even point will have a high degree of operating leverage. Any increase in sales volume beyond break-even will produce a significant increase in the bottom line. This leverage will decline as sales volumes increase over time.

To illustrate the concept of degree of operating leverage, let's look at an example of a steak house concept doing 50,000 covers per year and an average sales per cover of $40. Their 35% food cost translates to $14 per cover, their variable labor is $10 per cover and direct operating expenses are $6 per cover. Fixed costs total $250,000. The degree of operating leverage at this point in time will equal 2. A 25% increase in sales will produce a 50% increase in profits.

Rather than opening a new unit 20 miles away, the operators convert unused floor space into an additional dining room. The new seats fill quickly on busy nights and the room is closed early in the week. Covers increase by 25% to 62,500. If all costs remain in line, profit will expand by 50% from $250,000 to $375,000.

One of my clients expanded the dining area in the original restaurant three times before successfully opening a second location. The steady cash flow from the original site allowed him to take a bold move and he now has two high volume operations.

Wednesday, September 20, 2006

Entree Pricing-Dollars vs. Percentages

The adage says "We put dollars in the bank NOT percentages." So, should you run some higher priced entrees with a corresponding higher food cost percentage to boost profits? Maybe. You should be prepared for some unplanned possibilities.

I'm going to use an example steak house with current annual covers of 50,000 and sales of $2,000,000. The average sales per cover is $40. Management has decided to introduce two new entrees priced $10 above the current average entree price. These entrees are costlier and will raise the food cost percentage.

Let's say 20% of patrons choose the new entrees and covers remain stable. Sales increase $100,000 and food costs go up $50,000. We should have another $50,000 going in the bank account. It's a good thing...right? Maybe.

All too often, managers forget to follow through with the dollars vs. percentages concept in the other cost components. If they track labor cost and other operating expenses on a percentage basis, a big chunk of the $50,000 could leave the bank even though operating reports look solid (percentage viewpoint). These cost components are fairly difficult to manage on an entree basis. Few companies track utilities on a per cover basis.

If we had variable labor costs of 25% and other operating expenses of 15%, you could see $40,000 (40% of $100,000) in higher labor and operating expenses creep into the income statement over time. We'd still be $10,000 ahead of the status quo.

If the raw ingredients used to prepare the pricier entrees are more volatile in price, you could actually see months with zero change in the bottom line despite a nice sales jump. How often do you read articles about publicly traded restaurant companies with higher check averages and average unit volumes with little to show on the bottom line? Management explains the disappointing profits are due to higher prices for key entree items. It happens all the time.

I'm all for more dollars in the bank. Don't ignore percentages when implementing these strategies.

Thursday, September 14, 2006

Ideal Usage Tricks and Techniques

The people who produce variance reports for the weekly and monthly management meetings need to forecast the likely meeting discussion for each red flag item. Common excuses occur over and over and it's necessary to anticipate and eliminate these distractions. The only way for a food and beverage professional to have a positive impact on the results is through proper focus.

Find the real problems ahead of time and structure your handouts (or overhead presentation)to highlight the major issues. Everything else is simply an exercise in excusing poor results. When the acceptance of these anecdotal responses is chronic, the operation will lose control and wide fluctuations in monthly numbers will ensue. Hopefully, a review of the common excuses will help you prepare for the next meeting and the tide will turn.

At the very top of my list is the inaccurate inventory extension. Since you should have complete control over this number, avoid making bad numbers "the reason" and take the extra time to double check all very small and very large extended values. There shouldn't be any spice, flour, pasta or rice valued in the thousands of dollars. Lobster tails shouldn't be valued for pennies. Make a second copy of your Excel file and sort the list in both ascending and descending order. See what comes to the top and ask if it makes sense.

Cutoff issues are always near the top of the list and the actual inventory count should be taken without deliveries. Check your drawers thoroughly and look under the desk for missing invoices. If you keep a receiving log (highly recommended), use the log to make sure you have every delivery included in the proper accounting period. Check with accounts payable for a copy of the latest statement and see if the credits are reported in the proper period. Try to completely eliminate accounting adjustments from the management meeting discussions. It is a distraction and credibility quickly disappears when the numbers don't follow the matching principle.

The operators will have front line experiences which should be the real focus of the meeting and it's important to be prepared to support these topics. Let's say you have a major unfavorable usage number for beef tenderloin. Do your own investigation on customer returns and possible menu specials(POS system data). Check waste reports if you maintain these records. Subtract the waste from the total variance to determine the net amount (variance NOT explained by waste). Try to get to the heart of the variance. There will always be steaks returned by customers due to miscommunication of their cooking preference. Excessive waste and customer returns must be documented and the problems must be solved fast.

Production staff will give better explanations if the topic is presented in a straight forward manner. Imagine the meeting dynamics. It's possible for certain issues to be assigned too much weight. If the waste and returns are minor, report the total variance and show a separate line for the waste and returns. Calculate the net variance and open the discussion with this figure. You may find the real problem involves meat which did not meet specification. Portion control may be lax. There is always a risk of theft. Listen for other explanations and you'll get closer to the true variance issue.

Before your meetings, go back to your recipe model and look for recipes which call the top variance items. Follow the recipe path backwards if there is butchering or trimming involved. Ask yourself if the actual usage is a better figure than the ideal usage. My tenderloin example was chosen specifically for this angle. An untrimmed tenderloin will lose close to 50% of it's weight when being prepared for steaks. If you don't have a butcher yield sheet for the item, print one for the meeting and make it an action plan item.

Once you are in the meeting, get the variance analysis focused by introducing each item thoroughly before the discussion begins. Your credibility will increase as you move beyond traditional distractions involving inaccurate extensions and cutoff problems. Supply everyone with your preliminary analysis and highlight the net variance. As the management team begins to take you seriously, they will come better prepared and some genuine progress will be the result.

Thursday, September 07, 2006

Food Storage Rules

There are certain items which must be stored more carefully in order to hit your cost targets. Highly perishable items are the top priority. With most vendors running daily deliveries (despite rising gas prices), the quantity of highly perishable goods should be minimized. Schedule the purchases carefully and avoid excessive buys. Spoilage of highly perishable items should be kept to an absolute minimum. Make sure the coolers are well organized and always rotate stock after a delivery.

Store items with a high risk of theft in very visible locations. Too often, I see small, high cost portions of premium meats and seafood left in storage areas far from management's view. Certain operations stock 5 ounce tenderloin portions and jumbo shrimp in storage areas well away from the office. It's much better to move these items close to your field of vision.

If you like video surveillance systems, make sure one of the cameras is pointed at the location used to store high risk items. If you use pull sheets, keep the sheets for these coolers in your office and in plain view. You should know how many portions are available for sale to customers at the start of each shift. On a rotation basis, you should subtract the meal period POS menu item counts from the opening quantity and check the inventory. At a minimum, count these high risk items daily.

Make your freezers easy to count. Keep everything in the exact same location at all times. Messy freezers are a problem which should be solved ASAP. If items are improperly stored in the frigid environment, it's very likely you will order more when they are in stock. Once the staff see the new delivery, theft is easier and unlikely to be detected.

Walkin coolers should follow the same rules as the freezer. If you need some space for rotation of special items, try to set aside a separate cooler or a defined section of your larger cooler. Most items should be stored in the exact same location at all times. Orderly freezers and coolers make ordering more efficient and help prevent unwanted losses due to theft and spoilage.

Finally, dry storage areas are typically the best maintained of all inventory locations. Make sure super expensive items like saffron and truffle oil is in a place where theft is completely impossible. Keep the storage rooms dry and cool and watch expiration dates. Try to reorder dry items using a par stock system. Determining par levels may be difficult for event caterers but most operations should find two or three par levels sufficient. For busy periods, build the stock to the high par level. Drop the par when business is slow. Maintain the status quo at other times.

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