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Friday, April 23, 2010

A Bigger Divisor Helps Your FC %

Don't overlook sales when reviewing your food cost results. There are several important reasons to scrutinize the divisor in the formula as much as the net purchases total. Your sales figure depends on covers, check average, promotions, coupons, discounts and lost revenue.

Lost revenue is related to menu items your service staff can serve a guest with no order entered in your POS system. Typical examples include slices of cake or pie, small pastries, coffee, tea, cocoa, soup, rolls and ice cream. Less common items include modifiers normally ordered through the POS system which have a small charge to the guest.

A second source of lost revenue involves unauthorized voids and price adjustments. I remember working with a family restaurant with a special price for ice cream sundaes for dinner patrons. Anyone visiting the restaurant for dinner was offered a sundae for 99 cents. After reviewing several POS data tables, I noticed late shift changes on many $3.99 items to $0.99. These patrons did not have dinner. They all paid cash. Their orders were changed from the full charge for the sundae to the dinner special price.

My annual estimate for this activity was $10,000. As you can imagine, these changes had to be made by a manager. The wait staff did not have the authority to amend closed checks. If the managers on shift were pocketing cash, you can be 100% confident the wait staff felt comfortable serving items not ordered through the POS system.

Chronic lost revenue won't show up in check averages. If this theft has been going on for years, the check averages will be consistent.

Wednesday, April 21, 2010

How Much Do We Need To Charge?

I received an email from a company with a large buyer of their tamales. The buyer pays $1.50 and they want to price the tamales to have a 30% cost of sales. Currently, they charge less than $3.00 for the tamales.

At $3.00, the cost of sales is 50%. If they could sell the $1.50 tamales for $5.00, they would hit their target. This is a 67% increase in selling price.

The tamale manufacturer could re-engineer the tamale at a $1.20 price point. If the seller raised the price to $3.60, they would be close to the target 30%. Do you think the customers would stand for 20% decrease in portion size and a 20% price increase?

The tamale manufacturer could offer a volume incentive. If the buyer hits a volume target, they could offer a discount. This discount could be paid monthly or quarterly. They could continue selling the tamales at $3.00. If the manufacturer produces the smaller portion for $1.20, they would have a 40% cost of sales.

Let's use a 20 cents incentive as an example. The buyer would achieve a 33% cost of sales if they hit the volume target ($1.20 minus $0.20).

Thursday, April 01, 2010

Understanding Menu Categories

How many of your dinner guests order a starter? Let's use 50% as a guess. Same question for dessert. We'll use 25% of guests for our dessert guess. Do all of your dinner guests order an entree? Maybe you see 90% due to substituting a starter for the entree course. Do you offer side dishes? How many guests pay extra for a side? We'll use 25% as a guess.

Our customer profile looks something like this table:
Starters 50%
Entrees 90%
Sides 25%
Desserts 25%

We would expect this profile to run a higher food cost than a restaurant with similar prices and menu choices with the following profile:
Starters 25%
Entrees 90%
Sides 25%
Desserts 50%

Restaurants with relatively higher dessert sales tend to run lower ideal food cost percentages. Think of the elaborate pastry displays when you visit a hotel for Sunday Brunch. They want you thinking about dessert before you take your first bite.

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If you specialize in huge portion sizes and high volume, you may not wish to push dessert sales. You'll run a higher food cost %, lower check average and the increase in covers will make up the difference.

If your customer base is in a rush, you can offer a full meal option with smaller portions of all 3 courses for an attractive price. This is common in entertainment areas near theaters and stadiums. You'll effectively change the profile as follows:
Starters 100%
Entrees 100%
Desserts 100%

You could manage the choices for the 3 courses and create a full meal profit which is higher than the current average per cover.

Impact of Beverages

Most of my clients love to see the cost of their entrees, appetizers and sides come to light as we build the database. After completing the entrees, it is common to hear the managers state: "So our food cost % is in line."

The ideal cost of the entrees tend to be equal or slightly higher than the actual food cost %. Actual food cost % should be higher than ideal food cost % since no operation is perfect. If your actual food cost is below your ideal cost, your recipes need work.

Before answering the benchmark question, I like to ask whether non-alcoholic beverages are included in food sales or beverage sales. If the coffee, tea and soft drinks are included in the calculation of food cost %, the ideal food cost % will be much lower. As an example, a steak house with an overall food cost of 38% actually had an ideal entree food cost of 41%. The wait staff did a terrific job selling a low cost dessert course with pastries and hot beverages.

The overall ideal food cost was 35%.

Entrees tend to have a much higher ideal food cost % since they bear the cost of complimentary items like rolls and butter and they use large portions of the expensive protein items. Non-alcoholic beverages typically produce a favorable impact on food cost % when they are included in the calculation.

The answer to the "in line" question in the example was NO. Their 38% actual was lower than the 41% ideal entree cost. They should have been closer to the overall 35% target. Any number above 36.4% would mean a 4% variance or higher.

Should you eliminate non-alcoholic beverage sales from the calculation of food cost % each period? This will require some extra time evaluating use of milk, cream, sweeteners, lemons, etc. I find it is worth the effort. There are 2 benefits. You'll find some lost revenue in the non-alcoholic beverages category due to unauthorized comps. Food cost variances in the critical entrees won't be hidden by the impact of non-alcoholic beverages.

Restaurant Data Pros

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