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Saturday, December 29, 2007

Explosive Recipe Models

Once you have decided on a menu theme, suppliers, a production team and specific menu items, it's time to develop standard recipes. Your recipes should be clear and well illustrated. It helps to take the view of a line cook when crafting plate recipes. Batch recipes are a different breed. If you want to completely understand your operation, I recommend you spend most of your time on batch production recipes.

Basic prep activities should be carefully observed. Actual yields need to be compared to industry standards. Stocks are great for using the trim from your prep items. It's OK to assign the stock a zero cost for the usable trim. Some chefs like to give a credit for trim used in stocks when calculating the prep yields for the primary purpose. If you use this approach, you'll need to monitor the cost of the stock.

Secondary production activities include setups, mixes, sauces, stews, soups, portion cuts and other line items. If you build an explosive recipe model, you can save lots of time later if you need to make changes to your menu.

For example, a pizzeria could have a pizza sauce recipe, a pizza dough recipe, a standard weight for the shredded cheese and olive oil. A pizza setup would include 1 dough ball, 1 standard ladle of sauce, a standard portion of shredded cheese and the standard amount of oil. For a simple cheese pizza, the plate recipe could simply include 1 pizza setup. Pizzas with toppings could use 1 pizza setup and one or more topping portions.

Let's say you decide to change the shredded cheese mix and portion size. Instead of rebuilding every finished pizza recipe, you could simply change the one recipe for the shredded cheese portion. This change then explodes through the entire list of pizza recipes. Since the pizza setup is tied to each pizza and the setup includes the shredded cheese portion, you have updated the entire model with one change.

In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day. These articles will not be typical on the free blog. I'll be posting the following articles in the Linear Regression Techniques Group this month over in the new area:
Slow Day vs. Busy Day, Peak vs. Off-Peak, Manning Chart Analysis, Baseline Sales Projections, and Flexible Teams. Click below to join!

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Wednesday, December 12, 2007

Recipes And Cost Accounting

Variance reports help cost accountants identify unprofitable production and service activities. If your dinner house served a 1 pound steak for $30 and the meat costs $6 and sides run another $1.50, your margin is $22.50. That's a profit margin of 75%.

Meat prices vary over time and the 1 pound steak can go as low as $4.50 and as high as $7.50. This rate variance has a huge impact on your profits. At $4.50 per pound, marginal profit soars to $24 or 80%. It gets tough to pay the rent for your high profile location when higher priced meat hits the loading dock. Your margin drops to $21 or 70% at the $7.50 per pound level.

In this example, our standard price per pound is $6. If our example steak accounted for 40% of dinner business, how do we measure the impact of a price increase? Using this standard rate, we will run a cost of sales of 25% on this menu item. A $1.50 rise in the cost per pound will run the cost of sales up to 30%. Since this 5% increase has a 40% impact value, this one ingredient - a 1 pound steak - is responsible for a 2% increase in the overall food cost.

Rate variances on key items have a major impact on your results. These variances may be difficult to control. Major steak chains use futures and options to reduce the risk. Minimum future requirements eliminate this option for most operators.

The industry has become focused on the usage variance since the degree of control is higher. If you sell 1,000 of these steaks a week and you closely track usage, you may experience a usage variance of 10%. Instead of using 1,000 pounds of steak, you needed 1,100 pounds. At the $6 standard cost per pound, the usage variance costs $600. Repeat this performance for 50 straight weeks and you'll be missing $30,000 of profit. Your food cost percentage for the steak will soar by 2%. Looking at the entire food cost percentage, this unfavorable variance has a 0.8% impact.

Imagine a week with the same usage variance combined with the big rate variance. The impact of serving the $7.50 per pound meat and an extra 100 steaks is $2,250. The extra steaks cost $750 and the extra $1.50 per pound on the 1,000 standard is $1,500.

Companies using variance reports wisely tend to eliminate usage problems faster. These same companies isolate key items and develop an effective purchasing strategy. Their competitors tend to run rambling meetings when food cost numbers are high. Inventory counts and extensions become their focus. In the long run, you won't solve a usage variance or a price variance through inventory value manipulation.

Saturday, December 08, 2007

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Wednesday, December 05, 2007

Basic Recipe Costing

The majority of operations I start work with do not have an operations manual. These same operators have no formal training for new hires. If you start as a line cook, you take verbal orders for most activities. The restaurant will not provide you with standard recipes. There are no photos of the production action and no information regarding weights and sizes.

When we try to develop recipe standards, I ask the manager to treat me as a newly hired line cook. I want these clients to explain in straight language exactly what they expect me to do when I cook. Do I measure? Are all the necessary sauces and prepped items available on the line? Which ladle do I use for each sauce? Most of my questions involve measurement and prepped items.

Over time, I have learned how to take almost any menu and determine what needs to be prepped ahead of time. Feed me some POS product mix data and I can start to prioritize my work. If you take the time to go through your own menu and ask simple questions, you'll come up with a comprehensive list of batch recipes which need to be created first. This task takes some time to get comfortable with but it is critical to success.

A bad place to start is often the most commonly selected menu item for recipe costing - soup of the day. Soups are often on top of most menus. This soup du jour recipe could easily take days of work to complete. There are many choices and it's unlikely the POS system archives the specific soup du jour details. It is literally many soups with complex recipes involving stocks, mise en place, etc. Then you need to weight each recipe by sales data to properly estimate the recipe cost.

Start with your entrees. Be very specific about how the center of the plate choices go from cases of raw ingredients onto the plate going out to your dining room. Do you portion by cooked weight, pre-cooked weight, portion control item, ladle or piece (rack, steak, thigh, breast, etc.)? Is there a portion control system in place to ensure consistency for both the guest and the accounting staff? You can't spend enough time in this area. This is where the major decisions are made in any recipe costing exercise.

Be prepared for the entrees to run a cost of goods sold higher than your actual food cost %. If you have a 35% food cost percentage, you may see the entrees coming in at 40%. The reason the entrees run higher than the food cost percentage is the beverages typically have portion costs far below the overall percentage. Sales of beverages are made in higher volumes than the sale of entrees. These profitable items will help to lower the overall percentage.

Chefs will get involved once they see you are factoring sides, bread and butter, garnishes, etc. into the total cost of these entrees. They have been correctly trained to price entrees to cover all these costs. In addition, they may correctly point out entrees with a high food cost percentage can produce superior gross margins (in terms of dollars). As you gain the support of the kitchen staff in your exercise, please have them proceed to cost any side, starch, bread, roll, garnish and condiment needed to serve each entree. This is the second area of focus.

Maintain a tight focus on the production and service of center of the plate items. You will find a high percentage of purchase volume is devoted to the raw ingredients needed to produce these entree items.

Thursday, November 29, 2007

Hidden Cash

Let's imagine you have had a slow down in business and your state sales tax payment is due in four days. Should you borrow more money to finance your sales tax payment to your state? This decision is faced by many restaurateurs during their off-season months.

Both your balance sheet and income statement may be used to find cash. For those without any accounting skills, debits eat cash and credits produce cash.

On the asset side of the balance sheet, you'll find lots of items burning cash. You could sell unproductive fixed assets (e.g. obsolete equipment, extra vehicles, unused land, etc.) or close losing units. Reducing your inventory level is another way to improve cash flow. Review your food, beverage and supplies inventories and try to get by with 10% less on hand. Collect any overdue receivables.

On prepaid expenses, renegotiate prepayment terms. Try to convert quarterly prepayments to monthly auto-transfer payments. Try to minimize future increases in fixed assets through operating leases.

The equity side of the balance sheet contains the liability and capital accounts. Many restaurateurs go to this side of the balance sheet to find cash. This may be very expensive money. Fail to take advantage of a vendor early payment option and you'll give up from 1% to 2% of purchases. Vendors who do not offer favorable prepayment terms build their cost of capital into the prices they charge. Poor payers are penalized with higher prices making vendor financing very expensive.

Delaying a tax payment could keep the cash in the bank a bit longer but the cost is astronomical. Taxing authorities charge major penalties with interest on these late payments. Delaying a payroll will create morale problems and productivity can suffer.

Generally, you need to stay current on payments of all current liabilities. This applies to repayment of credit lines and mortgages. In addition to late fees, your ability to fund future growth could be impaired.

Long term debt is the best source from the liabilities side of the balance sheet. This is all debt which does not need to be repaid in the next 365 days. Use this 365day reprieve very wisely if you decide to refinance current liabilities with long term debt. If this becomes habitual, the business could reach a point where debt repayment becomes the sole focus of management.

Raising capital from outside investors may make sense. The cost of this money is usually equal to the growth rate of the company. If you can manage your liabilities well, you'll keep all future growth with the current investors. If you intend to grow sales by 10% each year for the next 5 years and you budget a profit improvement from 5% to 8% net, your profit in year 5 will be 150% higher than today. Do you want to give away this future equity to new investors?

Tuesday, November 20, 2007

Elusive Cash Flow

It is quite common to see restaurant owners work hard all year and make nothing at all. The difference between a winning operation and a loser is cash management. Most of your cash will be spent on payrolls and paying suppliers. Landlords, mortgagees, tax authorities, insurers, banks and equipment companies consume more of your cash. Keeping track of single digit potential profits takes resolve.

Don't be in a rush to spend the operating cash flow. A 5% profit is about 18 days of sales each year. You make 1.5 days of sales each month in this profit range. A rainy weekend may wash away the profit. It's important to forecast cash flow.

With the cost of gas on the rise, consumers are tightening their belts. Some may switch to tap water in lieu of a soft drink. Others are skipping the dessert course. If your profits drop to 3.3%, you'll see only a single day of sales as profit each month. Inclement weather could ruin the entire month's cash flow.

You may not see the problem immediately. A restaurant operation disguises major problems for many days. Bad weather, slightly lower sales on a big weekend, a few slow spots in an otherwise busy week will all go undetected. These are all normal events.

One of the problems in our industry is the speed with which cash comes into an operation. For the uninitiated, it could seem like a fantastic cash cow. Customers use cash and credit cards for most of your sales. It all hits the bank account in days. They pay you in advance for sales taxes you probably pay quarterly. Do you have the cash available to pay your sales tax this quarter? This is typically the first sign of trouble. If you need to borrow to pay the sales tax, positive cash flow may be elusive.

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Saturday, November 10, 2007

Cash Is King?

A well lubricated restaurant model should pump buckets of cash into the bank. Once a unit's fixed investment stabilizes, a decent sales volume will start producing positive cash flow. The Wall Street people monitor a key indicator of business health - EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). EBITDA eliminates many of the financing and accounting policies from the income statement model. EBITDA is not the same thing as cash flow.

If you want to eliminate just the impact of depreciation and amortization from the income statement, OIBDA (Operating Income Before Depreciation and Amortization) is the measure for your report. The starting point in OIBDA is Net Operating Income. Just add back depreciation and amortization.

Once a new restaurant begins experiencing positive OIBDA, they are contributing to interest expenses, debt repayment and the fixed investment made in FF&E (Furniture, Fixtures and Equipment) and Leasehold Improvements (expenses needed to change the space which stay with the property). The operator rarely has any income taxes at this point in the evolution of the business. Depreciation and amortization will swallow up these profits.

After many discussions with new restaurant owners and franchisees, I believe OIBDA less interest expenses may be the best solvency measure. This requires a healthy business with a sales volume high enough to cover current operating expenses and interest on your loans. Operating Cash Flow (OCF = EBIT + Depreciation + Amortization - Taxes) is closely related to my measure. In the formative days, taxes are probably irrelevant. OCF must simply be large enough to cover interest expenses.

A business producing positive OCF has the opportunity to approach other investors to convert debt into equity. They have almost reached the end zone.

With one final push, achieving positive OIBDA less interest expenses, restaurateurs do not need to attract new investment. They have covered themselves and can focus on growth strategies. Their work has produced a "Survivor" model. This is a tremendous accomplishment for the boot strap organizations.

Successful restaurant investors pay income taxes. This cost is a tribute to the operation's ability to cover all operating expenses, the periodic write-downs on investment in the infrastructure and interest payments to the bank. These savvy operators can now look to a second location.

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Friday, November 09, 2007

Slow Periods

I received above average email volume regarding the October Newsletter. Many of the emails were from software solutions providers. Buried in the pile was this excellent contribution by Marcel Escoffier (FIU):

What you say about slow periods is true, but incomplete. One missed opportunity chains experience is the opportunity to "retire" menu items or. actually, put them on "vacation". Menu bloat is a constant problem and can be reduced using this technique. During forecasted seasonal slow times, the operator should put menu items "on vacation". If in a seaside resort, the operator may reduce the menu for the off-season and concentrate on food items appropriate for that off season's climate / clientele. Less expensive comfort food and special occasion foods might remain on the menu while "touristy" foods might go into a brief retirement. Items with high food costs and relatively low popularity would be the first to go off the menu. Some stars (popular and profitable) might be retired for a period, keeping ones associated with low profit high popularity items (i.e., keep the stuff that makes the "value meal" profitable.) Off season is not the appropriate time to experiment except if experimentation involves new, more efficient preparation methods.

Just some added thoughts. - Marcel Escoffier

Tuesday, October 30, 2007

Seasonal Forecasts

When food service operators experience wide percentage swings between in season months and off season months, I recommend a simple analytic tool. The key to using the tool is a list of managers and staff working year round. Once you have this list, it is possible to calculate the monthly labor cost and the estimate of food consumed by these people. In theory, the costs associated with paying and feeding the core team should be the same each month. Sales may fluctuate widely.

As an example, let's use three managers with a monthly salary and benefits expense of $16,000 and food consumption of $540. We'll use six staff employees with a monthly expense of $12,000 and food consumption of $720. Combining the 9 core people, we would pay $28,000 monthly and they would consume $1,260 in food. The table below shows the impact on percentage results as volume changes. While labor cost % spikes during downturns, the employee food consumption should not produce a huge swing. Using dramatic changes from $2,500,000 in sales to $250,000 would only account for a 0.45% change in food cost percentage.

So why do food cost percentages go sky high in off season periods? I believe chronic waste and theft are exposed. However, we can imagine a 100% theft free kitchen and focus on waste. Waste will increase as volume drops if the menu choices do not change in the off season. Producing food for a varied menu with lots of choices in each meal period and menu category puts huge pressure on the forecast team. They need to accurately predict the covers and the expected menu profile. If they miss on the busy weekend, the garbage cans will be loaded with dollars of food cost.

In summary, it's difficult to explain away huge upticks in your food cost percentage with employee meal expenses. Try to decrease the number of menu offerings when you are slow. Watch for repetitive waste issues (e.g. an entire prime rib is cooked and only two portions sold - the rest is used in sandwiches and soup). Slow periods do help daily theft issues to surface.

Friday, October 19, 2007

Chronic Waste

Do you feature lots of specials? If specials account for over one third of your volume, you probably experience a significant waste expense. Forecasting is much more complex with menus featuring market-based entree specials.

I find many menus focused on specials create chronic waste. The cost of each bad decision is not immediately recognized most of the time. These mistakes are frozen, rehashed, served on buffets and fed to employees. Some executives praise chefs and kitchen managers for their talent with using leftovers. There is nothing wrong with creatively using a modest amount of over-production. Chronic waste starts when the over-production becomes routine.

Once your operation starts producing too much product due to poor forecasts, you eventually begin to focus more on mistakes than successes. Wait staff are asked to recommend last night's poorly received 5th choice rehashed into tonight's number one choice. Freezer space is used to store items which will become an expense of some future period. At an extreme, I have witnessed companies spending capital resources on greater freezer capacity.

So how do you end this cycle of progressive and chronic waste? The simple way is to develop and feature a solid slate of popular entrees on your base menu. Use specials judiciously to highlight seasonal favorites (preferably using low cost seasonal ingredients).

It's OK to offer some variations on a theme but try to utilize fewer meat and seafood raw ingredients. Waste expands as the variety of protein ingredients increases in your walkin cooler. Operators with limited menus experience very little waste because they offer the same entrees and sandwiches day after day. Study this simplicity before revising your menu strategy.

Tuesday, October 09, 2007

Volume Hides Mistakes?

There is an adage in the restaurant industry which states: Volume hides mistakes. I prefer to take the statement and twist it a little. What are these hidden costs? Why does volume hide them so well? Is there a benefit to eliminating these profit killers?

Hidden costs often involve food consumption unexplained by menu analysis. Finding the food consumed without regard for the number of covers or the menu choices made each day is our goal. When do these costs become visible?

Hidden costs stick out on low volume weeks. When there is no volume to hide them you can identify and eliminate these problems. Embrace your slow weeks and use them to improve the operation.

The core staff will often be on duty during your slower business periods. These workers will most likely consume food while on the job and they may also consume food off the premises. It's a mistake to credit your food cost for employee meals. Rather than issuing a credit, I'd recommend including the employee meals in your food cost percentage. If you credit these meals, you will miss a control opportunity.

Some operators see huge swings when their volume drops. The biggest moves I've seen are from the high 20s to low 40s. If your food cost percentage is 28% at peak volume and 42% at your low point, you use 50% more food per portion served to a customer. Careful analysis of employee food consumption can help identify major problems.

Imagine someone is robbing a case of shrimp each week. The impact of this activity would clearly be greater when volume drops. Your big volume weeks will offer cover for these thieves. Try not to offer additional cover by creating overly generous employee meal credits in your calculations.

Saturday, September 29, 2007

The Focal Point

Have you ever gone to a restaurant with two or more food service operators? I really enjoy these occasions. The insights are incredible. We're talking major critique on staff, cleanliness, speed of service, quality of food and many other insightful comments.

While these friends of mine carve up the dining room, I tend to focus on consistency. I watch nearby tables and see what is popular. I'll almost always go with the crowd at a new restaurant. Once I get my order, I'm evaluating the portion size just as critically as the quality of the food. Specifically, I want to know if I received either a bigger or a smaller portion than the norm.

One classic restaurant experience comes to mind. I invited a friend to a popular pub on a Friday. The pub specialized in seafood. He ordered sole and he never stopped talking about the fantastic experience for the next month. He was surprised at the generous portion size and the top quality preparation. In the many conversations he had with his friends, he highly recommended the pub. Let's put the experience in focus: we're talking about a beautiful 12 ounce portion of fresh Atlantic flounder broiled to perfection.

When we all went out about a month later, he insisted on returning to the pub. He ordered the same entree. This time he really received lemon sole. The pub offered a completely different presentation using 7 ounces of thin filet of sole in a lemon sauce. They lost a customer on the spot. He ate the sole and he even commented on the well prepared lemon sauce. The reason they lost his business was consistency.

The switch from a large 12 ounce portion of flounder to a petite 7 ounce portion of sole changed his mind. The focal point was the center of the plate entree. All the other meal components were fantastic. The generous salad with top notch house dressing was a winner. All classic sides of slaw and fries were prepared well and fit the entree perfectly. The negative buzz caused by the entree swap completely cancelled all the previous word of mouth promotion.

My friend never returned to the pub. He called all of his friends and told them of the switch. He is not a food service professional. He is a radiologist.

I can remember a discussion I had with my boss years 20 ago. We were changing a menu to highlight seasonal favorites. He said you have to be careful what you offer the customers. Its difficult to take away something once the expectation has been established.

Despite well executed meals on two occasions, this restaurant lost a potential frequent diner and created bad word of mouth exposure.

Thursday, September 20, 2007

About Dunbar Associates

I'd like to welcome everyone with an interest in the food and beverage industry. This blog is set for open comments. Every month has a central theme. The most popular blog posts are listed on the sidebar (left hand column). Everyone is encouraged to comment.

Actual consulting services are offered on a fee basis. Most of my clients start with a short two-day site visit. The visit gives me time to review the operation and develop an action plan. We review the plan and discuss possible assistance in the implementation. My clients include restaurants, hotels, caterers, clubs, institutional dining accounts and sports venues.

I'm often asked "What do you do?" and I'd like to quote a client: "You're very analytic but you're also down to earth." The advice you receive is not difficult to implement. If you would like me to train you in the advanced analysis I use, we would progress in stages geared toward your comfort zone.

Please look around the blog and join the newsletter list. It's free and is sent monthly.

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I work closely with Keith Gellman tracking restaurant chain growth using a comprehensive database of groups in the USA and Canada. Keith publishes a weekly newsletter which is free to subscribers.

We have a cooperative called Dynamic Chains. The objective is to reduce the cost of goods sold for all cooperative members. Membership is free.

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Wednesday, September 19, 2007

Hidden Profit Potential

One sure way to a lower food cost percentage is a strategic menu price hike. If you need to disguise this activity, find all the top sellers (by count) hidden in your product mix. Look for soft drinks, coffee and tea, side salads, add-ons, substitutes and extras. Check the all modifiers with high counts and little or zero sales.

Too often, operators give away the extra slice of cheese, two strips of bacon, sauteed mushrooms, lettuce leaves and tomato slices. You'll often see a burger menu category with these add-ons listed after the choices. A common charge is 25 or 50 cents. The two strips of bacon can easily cost 25 cents. These low profit items will hurt your food cost percentage.

Take a second look at your burger category. I see many menus with a basic burger for $8.95 and 5 to 6 options priced $1 higher. Sometimes, the menu will list a bleu cheese burger for an extra dollar. There are plenty of excellent quality bleu cheese options in the market. If your spending $5 a pound for the cheese and your portion size is 3 ounces, your add-on cost percentage is 94%. Charge an extra $1 and reduce the portion to 2.5 ounces and the same bleu cheese will run 39%.

Soft drinks, coffee and tea are high volume choices. An extra quarter or half dollar a drink will produce major revenue increases. Often, the menu does not have to be changed at all to increase the prices on these beverage items. Soft drinks can be priced to hit a 15% cost of sales (or lower).

Finally, I see many excellent side salads offered for a modest charge with a sandwich or burger. Often, the price is $1.95 or $2.95 (sometimes 99 cents!). If you charge $1.95 for a 6 ounce salad with dressing, your cost of sales could be over 50%. Cost out your salad mix and add the cost of your most popular dressing and garnish.

Would you offer a customer this choice as a substitute for fries? Some menus offer this substitute.

On the other hand, I once saw a menu with chips, potato salad or cole slaw included with the sandwiches and burgers. The waitress asked: "Fries?" and I said yes. My check had a $1.95 charge labelled Substitute Fries for Slaw. The fries were excellent and over 50% of the customers had taken the bait.

Sunday, September 09, 2007

Phenomenal Sides

A quick way to attack food cost issues in almost any operation is through a simple menu upgrade. Rather than attacking entrees, take a hard look at your sides. A few mouth watering sides prepared with less costly ingredients will boost profits every time.

Buffet guests will consume fewer meat and seafood items if they can't resist a great side dish or salad. A la carte operations should charge for the extra special side dish whenever possible. If you offer guests a full meal with their entree choice, offer the top side dish as an upgrade option.

Whenever the guests ask for help ordering from the wait staff, the side should be mentioned along with the entree choices. Perhaps, the dish requires a last minute preparation. Bringing this to the guest's attention can increase orders. Special optional toppings can be used to make an impression.

I believe Durgin Park does a phenomenal job of highlighting mouth watering sides, soups and desserts. Whenever I dine at this historic Boston landmark, everyone in the party raves over the traditional accompaniments. The Corn Bread, Baked Beans, Indian Pudding and Clam Chowder are frequently ordered. Newcomers don't have to guess "what's good?" at Durgin Park. The management offers their recipes for all of these favorites on their website. Whether you enjoy the line upstairs, communal tables, waitresses with an attitude or not, the Yankee favorites are top notch.

The best of the breed barbecue shacks get this concept. Brunswick Stew, hush puppies, slaw, beans, sauces and tea need to be first rate. These dishes will bring customers back and help keep your food cost percentage in line. When we drove to Atlanta last year, my family went 50 miles out of the way to try a BBQ shack recommended by a friend. We still talk about the sides.

Doug's Fish Fry in Upstate New York features fresh fish fried to perfection with three main sides: fries, onion rings and cole slaw. All three are tremendous. This is another place we drive out of our way for whenever we're near the Finger Lakes.

My favorite steak houses all have phenomenal sides. We go for the rillettes on baguette at Les Halles in New York. Sometimes the sauce is the draw. Michael Jordan's Steak House was out of Bearnaise sauce on one trip. We waited until a new batch was made.

America's favorite ethnic restaurants all get it. The Italian style greens in Carmine's New York (huge platter) or Tony Luke's in Philadelphia (optional filling for sandwiches) make the trip worth while. Here in Fairfax, Anita's Bean Dip made with Hatch Valley Chili Verde is a winner. Moby Dick's Kabobs hooks you with the flat bread and yogurt sauce. Char Siu Bao (buns stuffed with barbecue pork filling) are a must when we go for dim sum. Cha Gio (Vietnamese spring rolls) make our visits memorable at our favorite pho shop.

Don't crowd your menu with too many of these fantastic side ideas. You want a few carefully selected winners. Position the items on your menu so they can't be missed and don't keep secrets. The baked beans at Durgin Park are listed as an appetizer. You can get them separately or with your meal.

Tuesday, August 28, 2007

Wine Inventory Turnover

For the non-accounting readers, I'm going to start out with a simple definition. Inventory turnover equals cost of goods sold divided by average inventory. Our industry is used to turning the food inventory every two weeks (sometimes quicker). With a food inventory turnover of 26, restaurant managers are often unprepared for the much lower wine turnover rate.

I have seen average wine inventory of $400,000 in an operation with $2,000,000 in wine revenue and a 40% cost of sales. This is a turnover rate of 2!

So why is wine turnover so low at many restaurants? The answer lies in the investment in slow movers. These high priced bottles move very slowly since most patrons opt for less pricey bottles. Often wine list managers need to purchase a minimum number of cases per year for the top tier wines. I have seen one vintner who requires a minimum of 5 cases annually to remain on the customer list. My customers do not sell the 5 cases each year. They are willing to grow the inventory knowing the wine will not sell in a 365 day time frame.

You could argue for these bottles to be treated as non-current assets. The issue is how slow the bottles move. In the worst case scenario, I have seen certain bottles which have not sold - ever. Why do the restaurants stock these wines? Perhaps, the perceived quality of the wine list depends on the inclusion of a certain number of slow movers.

Hopefully, the operator with the wine inventory turnover rate of 2 enjoys a decent turnover on the every day wine by the glass selections. If this is accurate, should the restaurant segregate the slow moving trophy wines from the live wine inventory?

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Tuesday, August 21, 2007

Wine Cellar Investments

An article entitled "The Best Restaurants For Wine Lovers" is featured in the current issue of Wine Spectator magazine (with category lists of the 3,955 award winners). The award winners are also featured in the dining guide which is formated by country and region. You can find lots of winners in major American cities. New York has the most winners of any city - 196.

In the same issue, Harvey Steiman points out new trends with an old American favorite titled "The New American Steak House" with a focus on high profile chefs. In his excellent article, he states: "The classic steak-house wine cellar focuses on Cabernet Sauvignon and Bordeaux." Only two of the 48 American winners of the Grand Award were steak houses. Many steak houses are listed in the broader award category named "Award of Excellence" since their inherent focus on reds keeps them from inclusion in the Grand Award list.

Some of the wines which may distinguish a Grand Award winner from an Award of Excellence winner are featured in a August 3, 2007 Wall Street Journal article "First Growths Make Their Debut" written by Dorothy Gaiter and John Brecher. The 2004 first-growth Bordeaux wines are the focus. They mention the significant drop in price for first growth wines in 2004 vs. 2003 (one of the finest vintage years).

Should you invest in these first-growth Bordeaux bottles at an average of $301 per 750 ML?

Unless you are committed to a long term quest for the Grand Award, you may want to spend your $301 on a full case of popular domestic wine. My experience includes 10 clients with significant wine inventories. In every study, the revenue generated by top vintage Bordeaux bottles was minor in relationship to total wine sales. I'm sure many wine shops experience a similar phenomenon. Most of the wine revenue will be generated by popular, more affordable bottles.

Storage of high priced wine is a major issue. The security needs to be the primary focus. Two of my clients had vaults with doors similar to those seen in a bank. In addition to security costs, the storage needs to be climate controlled. If these vintage wines are moved too often or are kept at improper temperature and humidity levels, they will lose their value.

The chairman of the corporation I worked for before starting my company sent a gift to a partner of a firm in New York to thank him for a personal favor. The gift, a case of vintage French Bordeaux, was very generous. Unfortunately, the partner called our New York office to inform us the wine had turned to vinegar.

The wine distributors now offer "six packs" with a selection of vintage bottles to help restaurateurs feature more top rated wines without investing in a full case for each label.

Very few restaurants can justify the investment required to gain entry into the elite Grand Award list. I believe the risk outweighs the potential reward.

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Friday, August 10, 2007

Basic Wine Cost Control

At the heart of wine cost control, a bottle accountability system provides the information needed to properly evaluate results. Too much energy is replicated by top wine professionals. They frequently classify wines by region, color, grape, vintage, vintner, ratings and other critical evaluation criteria. These are the essential elements required to select and categorize the wines.

Once you have chosen a base wine list and send it to food and beverage control, I'd allow a different view. The highest volume of wine sales is found in pouring wines and house wine by the bottle. These wines compete directly with beer and cocktails for profits. Wines sold by the glass should be consistently drinkable and profitable. If you buy a 1.5 liter bottle of wine for $12 and pour 10-five ounce glasses at $6 each, you'd expect a 20% cost percentage.

To the opposite side of the wine spectrum, we find low volume, top vintage boutique bottles purchased in limited quantity and priced to yield a decent dollar markup. Some of my successful clients simply double the price they pay for these bottles. This would imply a 50% cost of goods sold.

Should these two wine classes be mixed on your books?

The pouring wines will turn many times in one year and many of the premier wines won't sell for over a year (sometimes never). Restaurants may store wine for favored clientele. Some restaurants will buy young wine at auction and let it age over many years. These wines do not belong in the same category as the pouring wines.

I recommend four categories: pouring wines, popular bottle wines, premier wines and investment wines. The popular bottles and pouring wines need to be priced to hit a good cost percentage. A $12 dollar bottle should be sold for at least $30 (40%). I recently enjoyed a well paired wine for $30 at my favorite restaurant. The next week, I found the bottle for $9 at the local wine shop (30%). If you help your customers with the pairings, you can charge more per bottle.

Don't fall into the trap of required wine purchases. Let's say you sell a phenomenal cabernet sauvignon for $200 per bottle. If the boutique vintner wants a minimum order of 5 cases per year at $1,200 per case, your cost is $100 per bottle (50%). At year end, you've sold only 1 case. The remaining 4 cases are in inventory at cost. Do you continue to purchase the annual minimum of 5 cases? Over time, this purchase activity will become perilous. Paying $6,000 to a supplier for wine which generates $2,400 in sales is a mistake.

Creating a winning wine list to use as a sales tool is the job of specialists. Too often, I find my customers lamenting the spoilage of expensive vintage wines. These discoveries often occur when the beverage manager leaves the company. The successor manager goes to the cellar and identifies old legacy wines and clears them from the list. Better to move a slow mover for a huge discount than wait for really expensive vinegar.

Monday, July 30, 2007

Reader Question Regarding Menu Prices

Subject: How to off-set food cost ?
I have been interested in your recent comments on inventory levels affecting food cost. After a company would get their purchases and orders in line and start to control their waste at a unit level, at what point would you consider raising the sales prices of their entrees to help compensate for the increase in supply costs? How would you raise prices? Gradual or once a year? Do you have any suggestions?

Chuck Pagnotto
Director of Research & Development
Escape Enterprises

I would raise the prices prudently and let your customers know why the increase is needed. The recent run up in oil prices and subsequent move to greater use of ethanol is driving food costs up (8% in last 6 months). Treat this as a "one time" action necessitated by the rapid rise in costs.

It's always good to watch every competitor closely. Just a few months ago, the casual American grill group was in a price war.

As to the normal calendar, I like to increase beverage prices before the summer season and food prices before the year end Christmas season (annually).

Thanks for the question!


Saturday, July 28, 2007

Month End Surprises

When food cost percentages are in flux, its common to experience numerous month end surprises. Most of the good surprises will spark a round of high fives and optimistic conversations about bonus time. On the other hand, a bad surprise marks the start of a cost reduction campaign and lots of meetings to find out the cause of the problem.

Most surprises occur because communication is inadequate.

To prevent the majority of month end surprises, implement a simple weekly flash report. The flash report should be prepared at the operations level and communicated to general management via the accounting staff. At a minimum, the report should contain weekly statistics on sales, food and beverage purchases, other purchases, payroll recap, gross profit and management comments.

Once these reports become a reliable tool, the number of month end surprises will decline. As managers become aware of a bad week and take prompt action, profitability will become stable and fluctuations will be minor.

The key to implementing a flash report system is simplicity. Don't turn this into a production on the level of the month end close. The purpose of the flash report is to point out major issues in a timely fashion. Some reports will appear too good to be true. A lost invoice will stick out like a sore thumb in a weekly recap but go unnoticed in a monthly statement.

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Thursday, July 19, 2007

Food Inventory Levels

One of the quickest ways to lower your food cost is to reduce the amount of food stored in the freezers and coolers. Since a lower food cost percentage is associated with a higher ending inventory value, it may not seem logical. However, a high inventory only helps out for one period. In the long run, you want as low an inventory level as possible.

With less food on the shelves, you'll reduce your spoilage cost. I'm often asked for benchmark information. With regard to inventory turns, I prefer at least 24 turns per year. I've seen operators with limited storage turn inventory 3 times a month. If you have over 3 weeks of cost of goods sold on the shelf, you have a problem.

If you run a restaurant with $3,000,000 in annual sales volume and a 33% food cost target, purchases would run $1,000,000. You should avoid ending inventories of $50,000 or higher. If you reduce the value to $40,000, you'll be in the zone. On the other hand, dropping to $25,000 may stress the ordering and receiving teams too much. Adjust the level over time and observe the impact on both food cost percentage and in stock outs.

Holding large quantities of perishable foods will tie up cash and increase the probability of "blowout specials" at dinner. I have had many disappointing meals during my travels which were highly recommended by the wait person. These employees were told to push items which were in danger of spoilage. I never return to restaurants after a disappointing experience with a highly promoted special.

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Tuesday, July 10, 2007

Volatile Food Cost Results

Some operators experience wide swings from month to month in their food cost percentage. Trying to analyze a moving target can be a rough task. One month, everyone agrees the rising costs of raw ingredients are the reason food cost is way high. The next month, the cost plummets to a number far less than just 30 days ago.

So why did the cost go down so dramatically? Its possible the bad month wasn't quite as bad as we thought and the good month simply balanced the ledger.

To test this theory you should check purchases as a percentage of sales. To illustrate, let's use a seafood restaurant with monthly sales of $250,000 and a target food cost percentage of 34%. During a two month test, the food cost % went from 42% to 31% (sales were steady). We look at the purchases in month 1 and find they total $90,000. Month 2 purchases drop to $80,000. Taking these numbers as a percentage of the $250,000 sales figure, we get 36% and 32%. For the period, our average purchases came in at the 34% target food cost.

Period 1 must have had a $15,000 drop in the inventory value (6% of sales). The inventory must have increased $2,500 in period 2 (1% of sales). So what happened? Did high cost of ingredients hurt our period 1 results? I doubt it.

My guess is the period 1 beginning inventory was too high causing the huge variance. The high inventory went unchallenged because management wanted to believe the good news the previous month (caused by the overstatement). When the party ended in period 1, food cost came under a microscope and purchases dropped by $10,000 or 4% of sales.

Let's stop right there! This is a drop in purchase volume of over 11% from the prior month. Sales were steady. Ingredient prices probably did not provide the drop. Most likely, greater management attention and tighter control provided the drop in purchases.

This volatile pattern is referred to as the good-bad-good curve. In reality, we only had one good month - Period 2. If you run numbers like these, you'll be mediocre 2/3 of the time and on your game about 4 months a year.

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Saturday, June 30, 2007

Hotel F&B Reader Comment

The June articles on food cost control calculations were inspired by questions from 4 current students. My focus was on the classic restaurant approach. In late June, I posted a hotel oriented article on the Hotel Food and Beverage Executive Blog with the impact of transfers built into the formula.

Kudos to Wayne for pointing out the missing transfer info on the FCC Blog posts.

Hello Joe,
I found your article on Food Cost Basics interesting for a sole restaurant but in a larger scale property with more than one restaurant let's not forget to included FOOD TRANSFERS from one restaurant to another restaurant in your Food Cost Percentage Formula.

Inventory changes must be taken into account monthly as to either add/subtract the cost from your total cost prior to the final cost percentage. The difference is when an outlet/restaurant has their own stock (versus the commissary or storeroom) and the outlet/restaurant stock has decreased this month then the difference between last month's inventory and this month's decreased inventory presents a debit of the difference to be applied to the overall cost.
The same in respect to an increased inventory then a credit should be applied to the overall cost for the amount of the inventory difference since the cost remains with the stock in the outlet.

I have found that most of the time when food costs increase there is a specific reason whether a special menu for a holiday such as Easter or perhaps an increase is needed in pricing to offset the continual increasing costs of food/beverage or especially when an outlet/restaurant is stock piling unsold food which has no revenue against rather than store the product in the commissary/storeroom until needed provided a monthly food inventory is only completed on the commissary/storeroom itself and not the outlet(s).
In that case the outlets should keep food at a minimum at the end of the month.


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Thursday, June 28, 2007

Effective Food Cost Control

It is very important to use clear, properly prepared reports to analyse food cost results. Often, the reports become the focal point due to errors and omissions. Once the report has lost credibility, a meaningful discussion of operational issues is difficult.

A properly prepared food cost report should have a brief summary at the top of the page. Basic operating statistics should be highlighted. We need to know the period of time (week, month, quarter or year) and the ending date. Operating results should include the period sales and purchases, beginning and ending inventory values, food cost and the food cost percentage.

Supporting the summary information, you should include a recap of purchases, inventories and cost of sales by category (e.g. meat, seafood, produce, etc.). I prefer to show these category totals as a percentage of total food cost rather than as a percentage of sales. This report section should highlight how we spend our purchase dollar.

Finally, a comparison with previous periods is very helpful. Budget comparisons are useful as well if the budgets were thoughtfully prepared. Try to put the current period in context. Show how well the performance was compared to other benchmark periods (e.g. previous month, last year, current year budget, etc.). The comparison section should show in which direction the operation is headed.

Supporting the management summary page, insights and concerns regarding specific components need to be reported. For example, if there was significant waste due to spoilage of produce, the purchasing manager can concentrate on ordering fewer cases (or splitting cases if necessary). Rising prices of gas and corn has impacted the cost of many commodities. Calculate the impact of your meat and dairy price increases on net profits. Bring any other significant findings to management's attention.

Monday, June 18, 2007

Food Cost - Beyond Basic

In last week's article Food Cost Basics , I outlined the traditional formula for calculating food cost percentage. At the heart of the formula you will find the simple food cost calculation: FC=(BI+P-EI). Twisting this formula slightly, we find food cost equal to our purchases plus or minus the change in inventory value:

As your period of time increases between inventories, the purchases will become more dominant than the inventory change . On the other hand, inventory change is a huge factor in operations with daily inventory counts.

In my college days, I worked for a major fast food operation and my duties included a daily inventory of all food, beverages and paper products. We calculated a daily food cost percentage. Whenever my costs were out of line, I reviewed the inventory valuations carefully. Often, the variance could be traced to a low cost item incorrectly extended by a high price. There were many times a pricey item was extended at a fraction of the cost. Once these corrections were made it was possible to see the true picture of results.

Many operators have many more items than the 120 I tracked each day. Also, I doubt their managers are paid $160 each week and scheduled 7 days a week for 10 hours a day. Casual dining concepts often require inventories with over 1,000 items. The daily inventory calculation would be cost prohibitive.

Let's examine the formula in finer detail. The total food cost is equal to the sum of the individual item food costs. If you have 800 items to count, the food cost formula could be expressed as follows:
FC=∑n=1800 (BIn+Pn-EIn)

So for each item in your inventory, you add beginning inventory to purchases and subtract ending inventory. Your total food cost figure is the sum of all these numbers.

If you run these numbers on a spreadsheet, I recommend you sort the matrix in descending order using the extension column. Count the inventory every day for the top 10 items on the page. Calculate the cost of these 10 items each day. I believe you will find the cost of these 10 items (as a percent of sales) will provide you with answers to many of your food cost issues. You may want to increase the number of items tracked to 25 if you have a very diverse menu.

When the accounting department tells you the percentage is up two tenths in the past month, you will know why the cost increased. Analyze the major items and move beyond basic cost calculation.

Wednesday, June 13, 2007

Food Cost Basics

Several people have emailed me in the past few months asking how to calculate their food cost percentage. In addition, many people have asked me for an industry benchmark for food cost percentage. While the food cost formula is straight forward, it may be impossible to arrive at a true industry benchmark percentage. There are far too many industry segments with unique cost characteristics.

Let's start with the basic food cost percentage formula:
FC% = (BI+P-EI)/S

FC%: Food Cost Percentage
BI: Beginning Food Inventory
P: Purchases
EI: Ending Food Inventory
S: Food Sales

It is absolutely necessary to use the same dates for sales and purchase activity. You need to take the inventory after all sales activity has ceased (either late at night or early in the morning). There should be no deliveries during your inventory.

Everyone has a personal preference for valuing the inventory. Traditionally, food service managers used the most recent cost paid for each item to value the ending inventory. Most people still follow this method which closely approximates FIFO. If you are concerned about the freshness of any food in storage, I'd recommend a zero value. For example, stale bread is not worth the same as a fresh loaf (but it can be used in stuffing and French Toast).

Regarding food cost percentage benchmarks, try to get a feel for the industry segment closest to your business model. There are public companies in almost every segment. In general, the faster the service the lower the food cost percentage. QSR operators experience food cost figures below 30% and four star fine dining operators typically approach 40%. Operations in urban areas run lower food cost percentages to allow for the higher rents. If you raise your selling prices to cover higher occupancy costs, you should see your percentage dip.

Many family run businesses operate in premises with no rent and no mortgage. Although I learned food cost percentages should stay below 35%, I have seen many successful family run businesses run above this number.

Wednesday, May 30, 2007

Safe Portion Control Solutions

I guess everyone is aware of the smaller coffee cans now for sale in the supermarkets. The traditional one pound coffee can has shrunk to as little as 11 ounces for certain brands. Each item sold has a little shelf tag with the cost per pound so savvy shoppers can see the true cost per pound differential. The questions for cutting your portion size involve: when? (if at all); how much?; and, what are the other alternatives?

If you are worried about both a higher food cost percentage and the local restaurant competition, I can recommend a few safe portion control solutions. The magnitude of the portion size reduction is key. Not too many people noticed when the cans of coffee stayed in the 15 to 16 ounce zone. When the coffee cans went to 14 ounces, the media picked up on the change.

Today, there is some concern in the marketplace about portion size. The recent press regarding super burger sizes at some of the top QSR groups is negative. Trans fats are out. So is this a good time to reduce the portion size of your top selling item by one sixteenth? That's 6.25% less cost for the same sales price. If your food cost was 35% before hand, you'd have a new 32.8% projected figure. Maybe it is a good time but you may want to take a few extra steps to insure success.

If many of your patrons are currently leaving food on their plate when the busboy comes around, they will most likely ignore this incremental move. An important point here involves frequency. These moves should be made rarely and never twice in a two year period.

It is always possible to offer more than one size or cut for a center of the plate item. Restaurants have traditionally offered King and Queen sized steaks and have offered early bird specials with smaller portions. Terms like petite and super-size are now part of the restaurant customer's jargon. If you are creative with your selling prices for these alternative portion sizes, it is possible to modify customer behavior and point them to higher margin selections.

A price increase for a popular menu item is a decision which many fear. Often, the popular items are the reason customers come to your place of business. These items tend to be less price sensitive than unpopular options. Extreme care should be taken in a highly competitive market with price the number one customer decision variable. Price increases should be done annually or semi-annually on a scheduled basis just before a busy period if possible. Generally, the marketplace tends to expect price increases when the press reports significant inflation. The surging prices for corn and gasoline provide cover this year.

Sunday, May 20, 2007

More Portion Options

In last week's post Dealing With A Portion Problem , we focused on a chronic over sized steak which had been offered to guests over time. This entree was highly popular (one third of customers make this menu choice). I suggested any reversion back to the standard size should take place slowly.

Some may want to try a different approach.

Rather than focusing on the over sized portion, you could consider offering an even larger portion menu choice. In our example, we were offering a half pound steak for $25. The actual serving size of 2/3 of a pound exceeded our standard by a wide margin. We could offer a full one pound steak for two for $45. The cost of the steak per trimmed pound is $15 in our example. The new steak for two would have a center of the plate cost of 33.33%. Our smaller size is producing a 40% center of the plate cost.

If the clients take to the new menu item, we might start reducing the smaller steak's portion size more aggressively (don't go too fast). Since the full one pound choice offers cover, the reduction operation won't have the same exposure. Remember, our example involved an entree which was highly popular. You are trying to get the same gross margin for two people while lowering your cost of sales percentage.

Your dessert sales may rise since two people will consume the half pound portion as originally budgeted. Total gross margin will increase if this happens. Hopefully, your desserts are priced to yield an excellent cost of goods sold as well.

Thursday, May 10, 2007

Dealing With A Portion Problem

Let's say you install a very tight portion control system with a POS feed, a sophisticated recipe model, weekly inventories and a complete purchasing history. After three weeks of fine tuning the recipe model, you realize your kitchen staff were given the wrong portion size for your most popular menu item.

Roughly one third of your customers choose this item as their entree. This entree uses a pricey meat which costs $15 per trimmed pound. Our current portion size is two thirds of a pound instead of the standard one half pound portion. We charge $25 per entree. We serve 120,000 annual covers. The $2.50 per cover variance has an annual unfavorable impact of $100,000. Should you immediately require the kitchen to cut the portion to the standard?

There are many issues involved in this decision. Obviously, your frequent diners have become accustomed to a more generous portion size. It is very likely they would perceive the difference if you reduced the portion at once. Local competition is a key factor. Option one is to do nothing at all.

I would begin to correct the problem slowly. Make a new standard of 10 ounces. This is a small difference and you'll get 16 portions from 10 pounds trimmed. Currently, we use an extra 2/3 of a pound. You'll save this $10 for each 16 portions ($25,000 per year). Track the new standard closely and keep new menu price increases in line with your past policies. Always check local competition carefully before changing the price on a key item.

When the portion size is unchanged on a star menu item, price increases are less likely to impact customer perception. I would avoid decreasing the size and increasing the menu price simultaneously. Wait until your normal menu revision month to raise the price.

Thursday, May 03, 2007

More on Take-Out and Delivery Issue

I received an email from Wayne regarding my post on Take-Out service. He has a great point regarding delivery costs. When the food is not picked up by the customer, delivery costs (which can be substantial) need to added to my break even list.

I have a quick question for you after reading your
monthly blog. I know you mentioned "as long as your take-out sales
cover the costs of food, production, packaging and order costs, your
overall profit will improve" but I question when one uses a delivery
service which charges 30% for pick-up and delivery and you add costs
(food & packaging) and labor charges to possibly break even.

How would your overall profit increase unless those
individuals return to dine in your restaurant where the profitability is
possibly higher due to dessert and beverage sales or those individuals
by word of mouth recommend your restaurant?

Thanks for your time.


Sunday, April 29, 2007

Old Fashioned Hospitality

Recently, I received an email from an active reader regarding his unique operation. He described the boarding house style of long tables filled with patrons passing large plates and bowls filled with hot, fresh food. He invited me to visit his operation to help him with a strategic plan.

Michael King is a hands-on operator with a high percentage of repeat customers who love his return to old fashioned American classics. I witnessed tourists, solo business diners, families, and office workers sitting at his long tables and passing plates and bowls to their left. As the food disappeared, an experienced wait staff delivered seconds.

I want to thank Michael King for inviting me to Nashville and for his great Southern hospitality. He generously asked me if he could post his testimonial on the blog. His email is presented in his own words. Thank you!

The best investment I did was have Joe come down and give me a pair of fresh eyes. With 5 locations going and spending more time in the office then walking and talking, I was finding myself to far into the woods and not able to take a step back and review my operations. I called Joe, two weeks later I'm picking him up at the airport. Two days later, he was able to save me $123 K on the bottom line with changing one item. He was "gentle" with me, but firm. He was able to direct me into seeing that my energy was better spent with two of my locations and shutting down 3 others. He not only helped me save my sanity, he also helped me save my business. Thanks Joe!

Michael King
Monell's Dining & Catering, Inc.
Monell's at Franklin's Historic Jail. Franklin
Monell's at FitzGerald Manor, Gallatin
Monell's Take-Out Express: 2309 Franklin Road & 405 31st Ave North
Catering Number: 615-726-4938

Estimating the Opportunity in Take-Out

Americans have less time for cooking hot meals mid-week and they are buying prepared foods from a variety of venues. Take-out dinners are available from restaurants, markets, delis, convenience stores, transit centers and company dining operations.

In New York, the offerings at both Grand Central Station and Penn Station are increasing from the traditional bakery items to include many gourmet dinner options. Union Station in Washington, DC has a complete food court with every popular cuisine represented. I often hit these spots on my Amtrak trips.

Here in my neighborhood, we discuss take-out and delivery options at poker games and parties. Our pool club lets the many local restaurants deliver to the tables around the pool each summer. More and more restaurants are building access lanes and special parking spots for customer pickups.

Does the proliferation of take-out dining help your food cost percentage? I'm not convinced the casual dining restaurants really sell as many appetizers and desserts to the take-out crowd. After dinner coffee and tea sales are zero. If you rely on strong sales of appetizers, desserts and non-alcoholic beverages to hit a decent food cost percentage, take-out activity may not help.

In theory, the take-out operation requires no wait staff. Production costs are comparable to those of meals consumed in the restaurant. Packaging materials, plastic utensils and condiments may raise cost of goods sold in a more visible manner. Very few restaurants treat cleaning chemicals (e.g. dishwasher soap), smallwares, china, flatware, glassware as a cost of sales.

Nevertheless, I strongly recommend promoting take-out sales. Careful accounting can help to isolate the activity and keep the numbers relevant.

Create a separate sales account for take-out activity. Set your POS systems to track this activity in a Take-Out revenue center. Service labor should be charged to all other revenue centers. Likewise, packaging materials and plastic utensils should be charged to the take-out revenue center. Food cost can be allocated based on sales. If your operation has theoretical cost accounting capability, this allocation can be very sophisticated. For example, coffee and tea could be entirely charged to in house food sales.

The best practices for take-out restaurant operations include restricting sales to menu items which travel well and can be easily reheated. Carefully test your side dishes using the travel test. One of my clients found his famous onion loaf was a greasy mess after a five minute car ride in an expensive container.

Pizzas, sandwiches, chinese food, salads, stews, sauces, rice, pasta, mashed potatoes, burritos, samosas, crudites, sliced meats, cheese plates, ribs, fried chicken and many more menu items travel well. Fresh baked items can travel successfully if the container prevents tipping over and damage due to pressure. Even cakes with frosting and pies with meringue may be taken home. Push the dessert sales when your take-out orders come in each night.

As long as your take-out sales cover the costs of food, production, packaging and order costs, your overall profit will improve. Don't rely on your traditional income statement to track this opportunity. Track the operation in a separate revenue center with separate budget targets. These new targets will provide answers for future decisions regarding new take-out windows and counters.

Tuesday, April 17, 2007

Great Night For A Buffet

One sure way to experience a higher food cost percentage is to substitute an all you can eat buffet in lieu of your a la carte menu on your busiest night of the week. Batch production and preliminary forecast data will set a ceiling on the quantity and cost of production. Service labor is typically lower on buffet service. Most likely, the buffet is priced well above your average dinner entree.

Is this a smart move?

I do not recommend allowing customers to determine portion size. You can help by having manned carving stations. Although you will see a better food cost percentage, you lose some of the service labor savings.

Does the higher buffet price make up for the greater food consumption associated with the buffet service style? I believe the higher prices encourage customers to overload their plates. Your patrons are aware of the menu structure. They will calculate the utility in selecting the buffet and make the decision based on appetite.

Years ago, I was at a training seminar for statistical sampling techniques. In the early evening, a classmate asked "where's a good place to eat around here?" and very few people responded. Finally, a friend suggested an excellent Italian restaurant with a Wednesday night only buffet. He said he heard about it from his cousin who lived in the area. It was a Wednesday. Four of us decided to join him at the buffet.

This restaurant offered both a la carte menu service and the buffet. Our waitress asked if we were ready to order. Everyone encouraged me to start first. I was a definite for the buffet from the moment I stepped inside. My friend stuck with his original plan and also ordered the buffet. The next person was dieting and she chose a chicken breast entree. The ordering dynamics changed and the last two people also selected from the a la carte menu. Both people ordered a pasta entree with a side of Italian sausage.

Our buffet was priced twice as high as the typical entree. We each enjoyed clams on the half shell, shrimp, baked lasagna, prime rib, salad and we picked up dessert for our still hungry mates. Everyone kept looking at our prime rib (a beauty) with envy.

This restaurant employed help to carve the rib and portion the stuffed pasta dishes. The portions were generous and the goal seemed to discourage patrons from going back to the self-serve shellfish selection and salad bar. Desserts were eye popping and our friends begged us to bring them each a slice of a decadent chocolate cake. Our dieter stuck with some fresh fruit.

Our fellow diners decided they would order the buffet if they came again including the dieter.

I am 100% sure the cost of the food we consumed exceeded the target food cost percentage. During the meal, I noticed most tables were filled with serious buffet lovers. Clearly, the wait staff was skeletal. They did pay for extra help to handle portion control at the carving station. Were they right in the decision to go buffet style? I believe they were doing well with the buffet strategy.

Since they used a sumptuous buffet with prime rib and a top notch seafood selection to fill seats on a Wednesday night, I liked the idea. A quick check of the other restaurant parking lots nearby showed the wisdom of the decision. Shift the same meal service to Friday or Saturday night and I'd be against the decision.

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Monday, April 09, 2007

Market Segmentation - Service Style

The food service industry offers patrons a wide variety of menu choices served with style in many formats. An operator's choice of meal service is an important strategic decision. This strategic decision will impact the target market, price policy, expected food and labor costs and overhead.

QSR Operations
The QSR segment has operations with higher paper costs and lower food cost percentages. These units have limited menu choices, relatively few raw ingredients, more frozen items and many portion control items. Typically, QSR operators experience lower spoilage and waste due to the tight menu focus. In recent years, QSR menu strategy has been dominated by value meal options and upscale fast casual themes.

The value meals are available for breakfast, lunch and dinner. Leveraging the low cost per ounce fountain beverages, the segment has presented customers with a simple order by number order process (well suited to the drive thru patron). Fast casual menus use more fresh ingredients and charge higher prices. Many of the traditional QSR strategy is used including meal pricing, paper and plastic plates and self-service.

Take Out Meals/Delivery
In our neighborhood, there are many casual dining concepts with growing parking space devoted to pickup order customers. Often the dining rooms are nearly empty and the take out window is packed. This meal service style has spread beyond Chinese food, fried chicken and pizza. Delivery cars move through our side streets each night with Thai food, Latin style chicken and steak dinners. The choices multiply if you are near the hotels and inns frequented by business travellers.

Take out and delivery has significant paper and packaging costs. Parking spaces, drive up windows and other structural changes require higher initial outlays. More help is required to take orders and make the deliveries. Wait staff may not be required.

Food cost may improve. Operators know exactly what is placed in each take out order. However, the opportunity for profitable after dinner dessert and beverage sales is lost.

All You Can Eat Buffet
Often the toughest meal service style from a cost control viewpoint is the AYCE buffet. These operations require high volume to offset the cost to stage the initial buffet layout. Savvy buffet veterans use portion control at carving stations and other high cost service stations. I have seen buffet operations with a breakfast/brunch food cost percentage below 25%. Some seafood buffets may run over 50% food cost percentage.

In theory, service labor cost is lower and most of the food cost is fixed before the first guest arrives. High customer counts provide the solution to the profit puzzle.

Cafeteria Service
The corporate dining rooms are fed by queues of guests with trays making selections. They pay the cashier for exactly what they select. There may be two or three meal specials each day for a value price. Many patrons order a sandwich and a snack. They drink tap water or beverages from their office refrigerators. These meals may be subsidized by the company or the entire cost may be charged to the customers. Food cost percentages may run high by design.

Table Service
Dining rooms at many restaurants offer relaxed dress codes and popular ethnic and American grill menus. Patrons come for the ambiance and service. Entree portions are large and meat and seafood dominate.

Service staff are trained to sell appetizers, desserts and after dinner drinks. The talented sales team will announce specials, make suggestions and time the pace of the meal. They may communicate with the host stand to manage the turns and maximize revenue.

Food costs vary depending on the overhead. Restaurateurs who own their property may choose to run a higher food cost percentage and communicate value to the clientele. Major hotel dining rooms may run lower food cost percentages to help offset the higher service labor and overhead.

The well run table service operation depends on excellent communication. When the entire staff functions as a team, these restaurants can deliver a fantastic return on sales. The wait staff has to work to improve the check average. They need to know exactly what items to promote.

Saturday, March 31, 2007

Benefits of Proper Accounting

I realize most operations today have rigid accounting standards and excellent cash controls in place. In my corporate days, we tracked all cash daily from every unit. Using budgets and an automated accounting system, we closely tracked all changes in expected revenue and expenses. When I left this environment and started my consulting business, I sent out marketing materials to over 500 restaurant owners in the New York metro area. Some of my earliest clients had archaic accounting systems.

In these early consulting projects, I helped restaurant owners setup a chart of accounts, general ledger, balance sheet and income statement on several low cost accounting programs. I suspected some of these clients had "off the books" activities. I encouraged each of the operators to declare all revenue to the local and federal governments.

One of the owners asked me to help him out with a complete accounting makeover. He was breaking even and his cash flow was erratic. The restaurant was busy on weekends and weekday business was improving slightly. He had hoped to be saving a little for retirement as the business improved. Unfortunately, he continued to draw on his savings each month. I decided to review the entire control system for all working capital accounts.

Cash was not being deposited each day on a routine basis. Daily revenue and cash reports were not completed 20% of the time. Employees received a payroll check for their regular earnings but they were paid for overtime in cash. Certain suppliers were paid in cash. The owner also went to the produce markets early in the morning to save money. The cash used to pay the overtime pay and food supplies was deducted from revenue. I explained the serious risk he was taking with this approach. Further, I told him I suspected he had a thief in his operation. His poor accounting records served as a mask for the thief.

He believed he was saving a huge tax bill. I explained the total saved on each unreported dollar was 20% (sales tax, employers FICA, FUTA and SUTA) since he was breaking even. The total of this activity was 10% of his volume. Taking his view, I explained "the benefit" was 2% of sales. He actually believed it was 10%. I convinced him to rework his records, report the revenue, payroll and expenses properly and setup a system of cash management.

In the first 45 days, we discovered the thief and the owner was in shock. His "most loyal employee" was ripping him off for $5,000 per month (cash).

There are many issues involved in this project. The owner was jeopardizing a growing business with first year revenue of $1,200,000. He wrongly believed he was saving $120,000 by hiding revenue and expenses. In reality, he was losing $60,000 a year in cash (or 5% of volume). The $24,000 in unpaid sales tax, FICA, FUTA and SUTA payments represented a paltry return for this monumental risk.

He took my advice and paid all government agencies their proper fees. His business began producing a steady and growing cash flow. Since he now was showing a profit, the bankers loaned him money at rates far below the 15% his credit card company charges. His cash flow turned positive and he started saving $10,000 per month.

Monday, March 19, 2007

Signs of Theft

Some people can feel when they are getting ripped off by someone inside. Trust your gut. If you have a strong suspicion there is a thief the problem is probably already chronic. Set and bait the traps.

One of my first assignments involved catching two thieves with their hands in the cookie jar. The first suspect was the closing bartender and the second was the closing chef. My client was sure the food cost was out of control. He felt the bartender was guilty of treating his friends to expensive wine.

Prices on shrimp and crab were dropping steadily in this restaurant with a New Orleans themed menu. A new vendor had joined the competition and prices at the Fulton Seafood Market were trending lower. The food cost percentage was steadily climbing to an unacceptable level.

Portions were very straight forward for both of these key items. The popular Jambalaya called for 6 pieces of Shrimp 16/20. Crab meat was only used in crab cakes (1/4 pound per cake). The Micros 2700 POS system was programmed for two crab menu items - a single cake appetizer and a two cake entree portion. The Jambalaya was only available as an entree.

If you run into a period when vendors are discounting prices on high volume purchase items, food cost should be in decline. This poor performance could not be blamed on the market. I had the owner go count the crab and shrimp. He gave me the phone number of the modem hooked to his POS system and I installed the polling package on my computer.

Based on recent sales activity, there were plenty of shrimp for the weekend. The freezer had 5 blocks of 5 pounds each. Since we were out of crab, an order was placed for 20 pounds. So the available portions were 75 Jambalaya and 80 crab cakes. Sales counts for the weekend were 44 Jambalaya and 72 crab cakes (30 apps and 21 dinners). I called the owner on Monday morning and asked him to count the shrimp and crab. He reported no shrimp and 7 crab cakes in the freezer.

I prepared the report for him to use in the discussion with the chef. After being confronted with the numbers, the chef responded. He told the owner he had donated two blocks of shrimp to a popular local charity. The owner knew the president of the association personally and began to dial his number. The chef stopped him and admitted to the theft. He was replaced and the food cost fell in line.

There were zero sales recorded on the Micros for an expensive California Merlot (the entire week). A fresh case had only 5 bottles instead of 12. The bartender said his friend asked him to charge his account for the week. He drank one bottle a night on each night. The friend would come by soon once he cashed his paycheck. The owner let it fly. I protested but he said bar sales were way up since this person had started. His friend started paying and still drank his nightly bottle.

Friday, March 09, 2007

Preventing Food Cost Surprises

In my recent article, The Number One Cause of High Food Cost , I singled out improper ordering as the primary cause of high cost. If I'm right about the cause, the wise operator should spend more quality time on placing food orders. Since many of the tasks involved in placing an order with a vendor are time consuming and analytical, many operators spend their energy reducing the amount of time spent in this activity.

Initially, the time saved is put to good use in other key management areas. Once two or three months have passed, the time savings will generate less of an impact. Distractions will fill the time slot and the savings benefit will wane.

I'd like to see the same amount of time spent in a better fashion. You are already spending this time and it's built into your routine. If you spent the time more wisely, a significant benefit could be achieved.

Food cost surprises can be dramatically reduced. Better forecasts and tighter par levels can reduce inventory levels and the resulting spoilage. Spend most of the time forecasting demand and restrict weekly purchases to 30% of expected sales. Your inventory levels will decline (assuming you've been running a food cost percentage over this threshold). After several weeks, recalculate the necessary par levels for all key items.

As you fill more of your time allotment with this activity, your cost improvements will generate excitement. Forecasting will become a game everyone looks forward to participating in each week. Your actual food cost percentage will tend to be closer to the ideal cost target. Adjust the 30% figure above to the long term food cost target.

You may find a few extra hours. Effective bidding can produce major savings and innovations. Take some of the time and review your purchase specifications for all key items. A fresh look at these issues will have lasting results. Tiny changes in specifications can often produce big profits.

In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day. These articles will not be typical on the free blog. I'll be posting the following articles in the Linear Regression Techniques Group this month over in the new area:
Slow Day vs. Busy Day, Peak vs. Off-Peak, Manning Chart Analysis, Baseline Sales Projections, and Flexible Teams. Click below to join!

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Friday, March 02, 2007

Number One Cause - Revisited

I received an email from a reader with some excellent points. His focus is on menu item pricing and he makes a great argument for solving food cost percentage issues before they materialize:


Great article, sort of. One problem though, you have only identified the problem, not solved it.

Food Cost's initial controlling point is Menu Item Pricing. It took me years to come to grips with this. Being afraid to "raise" prices is the most overrated fear a restaurant operator may have. Raising prices allows an operator to pay the staff better, make capital improvements and ultimately create a cleaner, better run and more profitable entity. Are customers as sensitive to pricing as we make them out to be? What is the threshold, is $9.99 too much for that salmon dip with pita chips? Obviously each market is different, but customers are MUCH more tolerant today of higher prices(Starbucks is getting nearly $5 for a cup of coffee. God bless them, because they set the table for it to be okay.).

At the end of the day is it really worth being in business if you can't charge enough to cover your overhead and make a profit?

My company has confidence in its menu item choices, thus allowing us to charge the maximum. If a company is still struggling to "make food cost" after being in operation for six months, and a comprehensive breakdown on each menu item cost was performed (prior to opening) giving the concept a food cost spread % that when plugged into a proforma provides a theoretical profit, then step 2 (Management/Operations) must be initiated to discover the culprit. My theory though is, most restaurants never understand Step 1! I have an entire manual written on Step 2.

John M. Stout
Bagel Bagel Franchise Systems, Inc.

Hopefully, we'll get some more feedback on this angle. Proper ordering requires a well designed recipe model and accurate forecasts. Many operators run without standard recipes or pro formas. It's a big mistake.

Last May, I ran a series of articles which "decomposed" the entire food cost percentage calculation. In the article, I stated:
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.

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