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Friday, April 11, 2008

Impact of Coupons on Food Cost

Since many of you are trying coupon mailings to increase sales, I decided to review this popular topic. Frequently, I'm asked how to account for coupons in the food cost percentage calculation. This issue has no absolute answer. My preference could change depending on the length of the coupon campaign and the impact on total sales.

In general, my strong preference is to record the total gross sales and treat coupons as a method of payment. This approach provides a consistent base sales for cost % calculation. Net sales may reflect the coupon discount or you may want to record this activity as a promotional expense. It's a good idea to check with your accountant to make sure the treatment is consistent with previous periods.

Should you decide to extend the coupon campaign to a longer term, management should examine the overall impact on the operation. It's possible to keep costs in line with gross sales levels and experience rough times. If coupons represent over 5% of gross sales and the length of the campaign is indefinite, the operation may not be able to cover fixed costs.

A short term coupon campaign is a terrific way to meet new guests. Unit management should be alerted when a guest redeems a coupon. Rather than treating these customers as second class citizens, it's an opportunity to give special treatment to a potential long term patron.


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7 comments:

Jeffrey Summers said...

"A short term coupon campaign is a terrific way to meet new guests."

Joe, Joe, Joe. Did you drink the Koolaid? The last thing you want to do is begin your relationship with a new guest by telling them that the products you offer are not worth the menu paper they are printed on, so here is a discount to get you to the correct value. Coupons are never he answer.

Shame Joe. Shame.

Joe Dunbar said...

I agree with you 100% on the decision to run a coupon promotion. However, if a restaurant decides to play the coupon game, they should maximize the promotional benefit.

Joe Dunbar said...

My definition of short-term:
Coupon on the bottom of the POS receipt.
Good for 1 week or less.
Limited to off-peak days and times.

Now you have a potential frequent diner on your hands.

Adam said...

Joe,

Interesting idea. I am not sure if I agree with your accounting method. If you account for coupons at full value ($5 off is accounted for at $5) and you pay for the $5 discount at full value out of your marketing fund then you will be at a disadvantage. It has been my experience that just about every chain pays for coupons at a discounted rate and this allows them extend their marketing funds. Have you heard different?

MJ said...

Can you help me understand the use of Gross Sales vs. Net Sales?

The way I see it, Net Sales is the cash you received to pay for the food you server. So Food Cost should be a percentage of Net Sales.

Using Gross Sales is creates an artificially low Food Cost %.

What is the advantage of using Gross Sales? It doesn't seem to reflect reality.

I would think that you'd want to see that the "cost of doing business" increases when you coupon more.

If you reduced the price on the menu it would impact your food cost. A coupon is a way of lowering your price to a select number of people.

Anyone's views on this would be most appreciated.

Joe Dunbar said...

MJ,
There are certainly pros and cons to the two methods. I like your conservative approach personally. It is a clean method and cuts right to the net amount.

In the case of a short term coupon promotion (hopefully to convert weekend guests into mid-week guests), the gross sales method provides greater consistency for judging food cost control efforts.

The super market method may not work for everyone. For operators utilizing standard recipe models, the gross method works the best.

Joe Dunbar

MJ said...

Joe,

When you say that the gross sales method provides greater consistency for judging food cost control efforts, is that assuming that you are only looking at the actual food cost?

We are using the gap between ideal and actual to determine how well a store is controlling costs. Both ideal and actual are using Net Sales so they move together if there are coupons. Each store's ideal is based on that store's product costs for the week and that store's menu mix for the week.

MJ

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