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Wednesday, December 31, 2008

Outlook for 2009

Back in late April, I mentioned the shrinking size of the loaves of bread at our local bakery in the Smaller Portions Or Higher Prices? article. Today, we noticed the loaves have returned to their normal size. The price per loaf never changed at all during the entire period. We never bought more loaves during the eight month stretch. Actually, I think we bought less bread this year.

We had our annual HFTP Christmas Party at the Capital Hilton. I was running late and grabbed a cab for a short ride. It cost $7 to travel less than one mile. The drop fee was raised to offset higher gas prices. Nobody lowered the meter prices when oil dropped back to earth. Should you tip less to offset the obsolete pricing policy? Since I was in the holiday spirit, I tipped as usual.

With restaurant traffic down for the year, many neighborhoods have seen price wars. Even the top local restaurants here in Fairfax County have post card offers for free desserts. With lower gas prices, most families will have an extra $30 to $70 dollars each week to spend on discretionary purchases. Do you woo them with bigger portions, lower prices, both, or do nothing at all? If you do nothing for the next quarter, I would expect your cost of sales and other direct operating expenses to drop (as a percent of volume).

Many of you will get a true read out on the economic future as the holiday season ends. Expect oil prices to find an equilibrium price higher than current levels. Grain prices will continue to track oil since most gasoline now has a 10% ethanol blend. Interest rates are very low allowing many businesses and consumers a chance to refinance. Credit remains very tight. Bottled water sales are in decline and tap water is becoming a popular restaurant beverage choice.

Rather than using 2007 or 2008 as your compass, try to put together a logical forecast for your region. If you operate near a major banking center, the layoffs could completely change your business model. Anyone in the Mid-West may see an increase in economic activity as stimulus dollars reach the automobile manufacturing companies. State and local governments have less revenue. If you are located in a capitol metro area, you can expect less traffic.

Americans are consuming more beer. You may want to slow down your wine list expansion. Turn a portion of your wine inventory into cash by selling slow movers by the glass. Don't be afraid to accept a higher cost of sales on these bottles. Your shelves are filled with frozen cash.

Tuesday, December 30, 2008

Reader Question About Beverages

Is it a standard practice to include non-alcoholic beverages into food cost? Is that something I should ask my GM to have included in my food cost to help lower the percentage?

I am working in an American Grill/Irish Pub. I am currently running around a 30% food cost and am under pressure to have my food cost dropped down to 25%. Does this seem reasonable in our current economic condition? We are producing a rather large menu for a small kitchen with a walk-in that is shared with the bar and lots of kegs. We do have higher end entrees such as duck and a flat iron entree on the menu.

You have addressed several issues: Consistency; Profit Pressure; and, Shared Storage. Regarding the pressure to lower your food cost from 30% to 25%, you would need to look at this issue separately.

Above all other issues, it is imperative to keep a consistent approach. If you have never included non-alcoholic beverages in your food cost % calculation, any change in % due to the change would be meaningless. You would see a one-time shift in the cost curve and monthly comparisons would look better for a year.

To lower the food cost, I would focus on the duck and flat iron entrees. Is it possible to modestly raise the selling price, reduce the portion size and increase the quality on these menu items? It would be best to do all 3 actions simultaneously.

Eliminate unpopular menu items. A reduction in the number of protein options will lower your spoilage cost. Most spoilage occurs in unpopular protein items. You can also reduce waste and spoilage by avoiding large protein orders. I work with many different food service operations. Usage variances tend to be lower for frozen and shelf stable items. Fresh meat, fish and dairy products need to be ordered carefully.

With regard to the layout issue, it is always better to have clear separation between departments. Your bar operation could be using coffee, carbonated beverages, lemons, limes, olives and other food items. Your chef may use wine, beer and sherry for cooking purposes. Run some numbers to determine the proper allocations and get past this issue. You do not have a lime usage problem.

Tuesday, December 16, 2008

Hot Food Cost Topic

I just received a phone call yesterday from a reader of my blog regarding employee meals. She asked me how employee meals should be handled with respect to food cost calculations. I eventually gave her my answer. Before I directly answered the question, I mentioned my concerns about emphasis on allocation issues.

Generally, I believe there should be a clear policy for each company. There is no absolute method for accounting for employee meals. In the long run, you will have a lower overall food cost result if your focus is on popular menu items and the raw ingredients used in their preparation.

To clarify her position, I asked if she was the owner or a manager. She is a manager and is trying to help with the food cost calculations. Once an organization decides to reward employees based on their performance, it is very important for the performance monitor (in this case food cost %) to be well understood. If the kitchen gets credit for each employee meal served, this credit should be known in advance and applied consistently each month. Bringing up employee meals in a review of a poor monthly performance is a big mistake.

In most operations, the impact of fluctuations in the cost of employee meals should be minor. We used an example in our call to illustrate the point. This operation has weekly sales of $17,000 and 3 employees are offered free meals. I said the impact of feeding these 3 employees each week is at most $50. Many operators use a figure of between $3 and $4 per employee per shift for meals. If we have a bad week, maybe the cost would go up $50 over a normal week.

For every 1% of sales, we have $170 in this company. It is unlikely the employee meal results would help much in explaining a food cost % which is 3% over budget. Look elsewhere for your solution.

In general, all one-time discussions of cost allocations have very little long run impact. Employee meals will tend to have a higher impact during slower periods. If you run a seasonal operation, you can expect the food consumed by your staff to account for a bigger share of all food consumed. Regardless, I believe a combined food and direct labor cost over 65% is indicative of danger in our industry. Any operation with over 2/3 of their sales consumed by prime costs should work hard to lower these costs.

My answer to the caller: Your allocation for employee meals should be clear and should not have a major impact on results. If the same factor is used every period, the employee meal issue will no longer be a hot topic. Consistency is the key to success.

Tuesday, December 02, 2008

Commissary Question

Hello Joe,

I have been an avid reader of you blog for some time now & I have always wanted to ask you a question that I have not come across in your blog & I believe I have it.

We have just opened our CPU to help with consistency first & foremost with a hope to find savings from labor & food costs. What we have noticed is the running costs are something we need to work with & to accommodate them we are spreading them out over all locations, this in the end I find a little unfair as this isn't a reflection on the location “actual” costs. If you could point us in a direction to help the units show the better costs & how we should take care of the CPU expenses. We have discussed charging per item plus a percentage (5-7%), setting it up as a separate business ... Not sure which way we should turn...

With thanks!


I'd expect you to focus on expected CPU benefits and expected CPU costs. Benefits include: consistency, shared resources, shared production labor, lower unit production labor, lower unit investment in major equipment and large drop size for major suppliers. Costs include: packaging, delivery fleet, special equipment, maintenance on the fleet and equipment, delivery labor, administration expenses, rent of the CPU facility, insurance and many other unexpected expenses.

Try to avoid turning the CPU into a full blown warehouse with cases being broken down into smaller shipping units. Keep the initial focus on consistently producing high volume batch recipe items. Try to ship these key production items as cheaply as possible.

Encourage your units to avoid excessive deliveries by splitting the commissary expenses into production costs (allocated by shipping unit) and delivery costs (allocated by delivery). Build the production cost allocation into every container shipped. Higher volume units will bear more of these costs. Rather than a % method, I'd prefer a container charge. This charge would cover all non-delivery expenses associated with the CPU. If the CPU expenses were $200,000 per year and you shipped 100,000 containers, you would charge $2 per container.

The delivery costs should be allocated by actual deliveries. If you had 1,000 deliveries per year and the costs of the fleet (including maintenance), labor, etc. totalled $100,000, the cost would be $100 per delivery.

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