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Monday, March 24, 2008

Leaner Menu Equals Lower Food Cost

Many restaurant operators endlessly search for new menu ideas. This strong focus creates bloated menus which are difficult to manage. Forecasting demand per entree item increases in difficulty as the number of protein choices increases. Rather than searching for new items, you may get better results with a review of current menu choices.

Unpopular menu items with relatively low gross profit potential should be eliminated. Some operators avoid removing an unpopular item because a valued guest always orders the item. Take the item off the menu and get even closer to your valued guest. Stock enough ingredients to produce their signature item on the days they enjoy dining out. You'll improve your overall menu performance and you'll get closer to your valued guest.

Another great tool for improving gross profit is wait staff recommendations. When a guest asks "What do you recommend? I've never been here before." the 2 most popular menu items should be promoted. Selling items preferred by your regulars to newcomers is a simple tool ignored in many restaurants.

Try to restrict the number of daily specials. Unless your specials are merely promotions of base menu items, try to limit specials to 3 per meal period. When I visit a new restaurant and the server goes on for several minutes trying to explain the merits of 6 or 7 specials, I get concerned. Are they trying to blowout yesterday's unpopular specials? Maybe they only prepared 4 items tonight and 3 are leftover.

By promoting popular items and eliminating unpopular items, you'll bank more dollars. New menu ideas will come and go over time. Use these trendy items for busy night specials. Always sell your top items to newcomers.

Thursday, March 20, 2008

Restaurant Prime Cost Savings

With the government now announcing a recession (vs. slow growth scenario), we can officially start looking for more ways to cut costs. Will the consumer continue to spend 48% of their food dollar in restaurants? Maybe. But a slip to 40% would mean a 17% cut in volume for the industry.

Our mailbox is loaded with coupons here in metro Washington DC. Anywhere from a $1 off to free sandwiches, entrees and desserts. Lots of 10% off coupons.

If you are experiencing a 20% drop in food sales, your storage areas may have some newly freed capacity to take advantage of during the downturn. Try to schedule fewer production batches on your popular batch recipes. For example, an Italian concept could produce enough marinara sauce on Thursday to last through the entire week. Most places produce enough for the weekend. Since you would be making roughly the same amount as before, only the usage on the line would change. You could save an entire production run. This labor cost saving is significant.

Try to look for other activities which may reduce your fixed labor costs. You'll still need to clean everything each day so look elsewhere: napkin/silverware wraps could be handled 4 times a week by wait staff prior to meal service instead of daily. Shelf stable mixes and prep may be handled on busy days only.

Restaurant employees often yearn for the elusive two days in a row off. What's wrong with 3 in a row? In my college years, they scheduled me 10 hours a day every day. Good way to save for school but not much time for a social life. You may be able to cut down on overall pay, overtime, and the number of missed shifts (employee illness and emergencies). It never hurts to ask your employees directly.

Utility costs are going nuts all across the country. Try an extra degree on the thermostat during hot months and one less in cold months. Every little change adds up to more dollars. It's good for the environment too!

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Wednesday, March 12, 2008

Slow Day vs. Busy Day

In my early days with Sodexo, I spent days in frigid Northern Alberta analyzing costs at our largest North American project - Syncrude. If you have a bundle of determination, a study of your slowest day vs. your busiest day is a phenomenal exercise. Since I was specifically paid to improve profits at our Syncrude project, this is where I began.

Slow Day/Busy Day requires taking four inventories in one week for every cost center. The time clock hours need to be available for each of the two days as well. You need to know every employee's job title and department.

Calculate the total sales, labor cost, food cost, beverage cost, linen, paper, chemicals and other supplies. You won't be able to analyze electric power, water, telephone, sewage, garbage pickup, etc. Assume these costs are either fixed or 100% variable. I prefer to let these costs vary with sales.

Start a spreadsheet with all of these sales and expense categories as the left column. Feel free to split labor into Management, Kitchen, Service and Office. Include an estimate for burden (employer's FICA, FUTA, SUTA, Health Care, 401K match, etc.) in your labor expenses. We always had our burden cost available for each project. Make a column called BUSY and another column called SLOW. Enter in all the data from your analysis.

The next two columns are DIFF and VARIABLE. The values in the DIFF column are the difference between BUSY and SLOW. In the VARIABLE column express each value in the DIFF column as a percentage of the sales total in the DIFF column. The VARIABLE percentages are your variable costs as a percentage of sales.

The final column is FIXED. The calculation is a bit trickier but still straight forward. Multiply the sales in BUSY by the percentage in VARIABLE and subtract the result from the BUSY value for the component. For example, if your busy day sales were $10,000 and the variable labor cost is 21%, the variable labor expense is $2,100 for the busy day. If the total labor cost for the busy day is $2,800, the FIXED value is $700.

Go to the bottom of the table and sum the expenses in every column.

A fantastic estimate of your break even point is now possible. Subtract the VARIABLE total from 1 and divide the total FIXED by the result. For example, if your VARIABLE total is 72% and the FIXED total is $1,400, your break even sales is $5,000 or about $1.8 million annual.

The cost of performing this exercise is typically recovered promptly. Everyone in the operation will know you are serious about cost control. Remember, this requires four inventories of all consumables in one single week. Don't waste the effort with bad counts. I used to wake at dawn and return at close after midnight on the slow and busy days.

Sunday, March 09, 2008

Do You Know Your Break Even Point?

In my MBA program at Rutgers University, they made sure every graduate could calculate break even points. We were given a myriad of scenarios with a variety of variables. Our tests included irrelevant information to make sure we could focus on the essential formula. Break even point analysis was taught in microeconomics, cost accounting, advanced cost accounting, finance and analytical techniques courses.

The basic formula for determining your break even point follows:
BE Break Even Point
FC Fixed Costs
VC Variable Costs

If your business had fixed costs of $500,000 and a 75% variable cost rate, your break even point is $2,000,000. If your fixed costs are $800,000 and your variable costs are only 60%, you'd have the same $2,000,000 break even point.

Which operation would you prefer to own in a growth market? How about a recession?

When a business experiences solid growth, it's possible to increase fixed costs and prosper. The operation with the low variable cost % would be the growth choice. However, you'd want the low fixed cost scenario during recessions.

Think of higher fixed costs as unit expansion. You invest in new FF&E, leasehold improvements, etc. and you expect a big increase in sales and profits. Restaurant expansion may slow this year. We may see units closing and corporate management positions decline in number. Companies are working hard to lower their fixed costs.

When you read about comparable unit sales in the financial press, get your calculators out. If our unit with the $500,000 fixed costs above experienced a 10% drop in sales, fixed costs would need to drop $50,000 to maintain the same break even point. With higher commodity costs, food manufacturers and suppliers are raising prices. Market prices have shot up in major grains and dairy markets. Delivery costs are up due to higher energy prices.

The government may eliminate food and energy from the core inflation rate but we can't ignore these increases. If your sales are in decline and your variable costs are increasing, it's probable last year's profit may not be possible. If you use the previous year's results in your budget calculations, management meetings will be more contentious this year.

The smart operators will look for unique menu solutions which reflect value to customers and help lower variable costs. Buying new equipment is a risky gamble in this climate. It's best to constrain your menu team with the existing equipment. Look carefully and evaluate the work needed to prepare and finish any new menu items. Labor cost is a key component of variable costs.

What items can you add to a dinner menu? A popular pasta dish is a good choice for these profitable meals. The sauce may be reused for several days without additional labor. The pasta is cooked to order and is shelf stable. You can offer profitable add on items like shrimp and chicken. Try to buy the same shrimp and chicken specifications already used in your base menu. We want to limit the number of protein items required overall.

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