Using Mark Ups Instead of Food Cost Percentage

Hi Joe,
I like your site, excellent information.

I am looking for a resource that explains why operators would use ‘mark-ups’ of factors over FC%.

I teach food costing to our chef students and always use FC% to get a selling price, but now I have to explain the other options but can’t seem to find good definitions of why you would use the other options of obtaining selling price.

Could you offer any advice?

Kind regards

Mark Caves
Culinary Arts Tutor
School of Tourism and Hospitality
Faculty of Arts and Social Sciences
Eastern Institute of Technology
Hawkes Bay
New Zealand

Thanks for the question Mark.

During my corporate years, we never used food cost % since our billing method was per man per day. To get more current, it helps to use a destination resort for an illustration. Many resorts located in the mountains offer a complete package including room based on double occupancy, all meals and snacks, and optional activities.

We were big fans of these hotels and inns when we lived in Quebec. You can get a fantastic price for mid-week visits. Any operator who wants to offer a competitive all-inclusive price needs to know their costs to the penny.

Caterers should not use food cost percentage to control their costs if they offer packages. In my July 2008 post Profitable Special Events , there is a chart designed to show the impact of raising $200,000 of additional revenue. I included the % analysis to be complete but the focus was on the cost per guest for each cost component (including profit).

Many caterers and hotels negotiate a final price in a competitive environment. If the sales team does not have a hard deck figure, you may find yourself working very hard for free.

Why do percentages fail in these operations?

One of my early catering clients was barely breaking even. He was an attorney with a major investment in a catering hall. When we met the first time, he was shocked he couldn't break even although his 25% food cost number was well below the 32 or 33% figures mentioned in the book he used to put together his business plan.

I asked him what he used for the divisor.

He was dividing his net food purchases by total sales. Many of the events were cocktail receptions held in the evening hours. Guests were treated to a full bar with several stations and hors d'oeuvres served by wait staff. I asked him what his bar cost % was for the same period of time. Due to his belief in serving top shelf liquor and premium beers and wines, his bar cost percentage was 14% of total sales.

The combined cost of goods sold was almost 40%. I explained what he needed to do to cover his costs and produce a reasonable profit. He had 2 options: raise prices or reduce costs (or a combination).

Food cost percentage analysis is also mediocre for buffet management. Any all-you-can-eat buffet operation would get a better view by tracking layouts and components. There are strategies for controlling high cost proteins and promoting low cost desserts. A simple food cost % tells you very little about this type of meal service.

Purchasing and Food Cost Results

Hi Joe,

Your site is the best thing I've ever found on food cost.

I have a question and was hoping you could help me clarify something:

Is my food cost percentage affected by high purchase amounts? I understand that my Food Cost will be high as the value of my inventory will be high, but in terms of % versus sales does it really affect it?

Let's say theoretically, I do over purchase, but none of what is purchased spoils and I don't waste anything except for my usual amount of waste in production. Essentially my food cost should stay near to where it usually is correct?

Thanks,

Steve
Operations Manager

Yes. Just don't make it a habit. Chronic over ordering will certainly impact your food cost results in a highly unfavorable manner.

Your food cost always equals net purchases. The percentage simply relates the net purchases to your sales volume. In fact, most operators do over purchase food. Their #1 concern is running out of stock. Most ordering models have a safety factor built into the formula.

Problems often show up in an indirect way. I have seen employees served crab cakes and roast filet mignon for lunch. Freezers packed with protein items originally purchased fresh and stored in the refrigerator show a high ending inventory total. "Blowout specials" are used to "burn off" perishable items lowering sales and increasing the food cost percentage.

Like any industry, we suffer from a lack of flexibility anytime our ending inventory is inflated. Simply stated, your chef won't be able to take advantage of future opportunities if he becomes concerned with proper use of the current stock. In fact, this focus can really produce catastrophic results when you start to look at rehashing protein items.

I will offer an extreme example. This example happens to be a true, real-life story. A chef gets a call from a seafood salesman in Alaska. The salesman knows the chef enjoys working with fresh caught Alaskan salmon and halibut. The deal involves an order of 25# of fish with free air shipment.

On the delivery day, the UPS driver was sick and his replacement went to the restaurant at the wrong hour (they are a dinner house). The fish made the complete route tour before landing back in the UPS warehouse.

The chef had a person try to locate the driver on his route most of the afternoon. This employee drove over 30 miles in Friday rush hour traffic. Eventually, he went to the warehouse and waited for the fish. At 6 PM, he got his hands on the box and the chef had the salmon at 7 PM. Of course, he was compensated for his time and gas used.

The wait staff began pushing the salmon special later in the dinner shift since the fish needed to be prepped and the manager needed to add this special to the POS system. The special was not included on the original printed specials page. It was immediately added to the chalkboard. Menu pages were reprinted.

They sold 75% of the fish over the weekend despite the problems. By Monday, the remaining salmon was frozen. Did the chef get a good deal?

To his credit, he did not offer a "blowout special" on the slow Monday. Alaskan salmon changes dramatically in taste and texture once you freeze and thaw the fish. The frozen product was eventually used in a fish soup.

The story illustrates some of the issues you need to consider. A small amount over purchased in your low point of the week will be consumed in a special during the busy times. However, a large buy for the busy days will not be consumed on a slow night. When the salmon was eventually used in the soup, there were plenty of local fish species available for a fraction of the price paid for the air shipment.

As you increase the number of protein options on your menu, the likelihood of waste and spoilage does increase. Your assumptions may not jive with reality once the number of protein options hits 10. If you serve a diverse menu, you expect to live with a manageable level of spoilage and waste. When this level becomes too high, the food cost percentage will suffer.

Food Cost Formula Illustrated

I have been active using email with HT this week. His company does not track food cost using a percentage target. This is the way we were trained in my role as operations auditor with Sodexo on remote site feeding projects.

HT works on a drilling rig. Although most North American remote sites from my days in the 1980s are now cities and towns with airports, shopping centers and good roads, drilling rigs will always need support services.

We have emailed each other in order to clarify the billing policies on his contract. Unlike our contracts which allowed billing for a full manday as long as a resident attended at least one meal, on HT's jobs they only bill for the meals attended. The clarifications and a revised spreadsheet follow.

Clarifications:
Q. So 1.5 is 15% of 10. We expect breakfast to be 15% of food consumed. This is what I call a target (a goal).
A. OK

Q. The count for each meal just explains how many showed up for the meal. What if someone only came to a single meal but ate like a horse, do we get a complete manday? or only the 1.5 divided by 10 if breakfast?
A. He will be calculated at the times he would eat.

If he attends breakfast only then YES 1.5 divided by 10 for the numbers who have attended the breakfast then the number of those attending lunch and so on then we add up all and this would be the MEN ON BOARD count since there is a price for each of the meals.

Q. On our jobs, if they ate even one meal we billed the entire day. This is one part I do not understand for your project.
A. You see, that's why the lunch is the most expensive cause we would have low numbers and even near to steady numbers on all meals except for the lunch where there will be visitors.

The resulting control model carefully tracks the budget per meal applying the correct target cost per meal. This analysis shows the maximum food cost total which will meet our budget target. The actual food cost is determined by the traditional formula [Beginning Inventory + Purchases - Ending Inventory = Food Cost].

Returning to our previous example, I have added the actual cost data and a variance field.

For those of you who live and die by the FC%, you may find the meal method helpful. I like the meal method to test the impact of dayparts on the food cost results. The focus is on dollars (or your local currency) vs. percentage. Your percentage results will improve by adding this tool to your kit.

When you track your costs by meal, you will develop a food cost system which will produce a true variable cost. Fluctuations caused by seasonal issues and busy day/slow day issues will be eliminated. You may need to track your employee meals more carefully. We treated each employee meal the same as a billable meal. The idea is to track your food used based on a budgeted cost per meal.

Most POS systems will have a report which recaps the check average by meal period. These check averages will help you develop a per meal budget. Changes in customer habits (like a shift from soft drinks to complimentary tap water) are easier to track. Customer profiles will help you think through the menu pricing decisions in a strategic manner. The QSR operations have done a great job developing value meals. I have always been a fan of the table d'hote option for dinner houses.

Try tracking your costs by the meal or guest and you will see your food cost in a new light.

Calculation of Food Cost Per Man Per Day (Man-Day)

Hi Joe,

I am really grateful for your prompt answer and the time you dedicated to answer my query. I apologize for not presenting full information as I had serious doubts I would receive an answer!

Allow me to present these facts:

1-My objective is to calculate the cost per man/ day ( breakfast, lunch, dinner and midnight)

2-The known facts every day are :
a) the number of meals presented to the client which you have inserted in the first matrix
b) the total cost of the food ingredients for all meals together.

3-If the 4 meals presented every day cost = 10 then the Company base its calculation on the following ratio: Breakfast = 1.5, Lunch = 3.5, dinner = 2.5 and midnight = 2.5

Once again, I thank you dearly and look forward receiving your feed back.

Best regards
HT

I worked in the remote site feeding and support services division of Sodexo for 9 years. We tracked all of our costs per man-day. If you carefully track your cost of all ingredients each day and divide this sum by your manday count, you'll arrive at an actual cost per man-day.

The other meal level information is your standard cost data. You need to hit 10 per man-day and you have targets for each meal period. I would recommend you divide the day into two parts - Midnight/Breakfast (target is 4) and Lunch/Dinner (target is 6). You can isolate most operational problems and focus on a solution if you get closer to the actual variance.

You may find the 1.5 breakfast target is too low but the lunch target of 2.5 is too high. Of course, you could look at each meal independently each day.

On our camps, we served large beefsteaks twice a week. Workers (our customers) consumed over 5,000 calories per day. They were working hard in the frigid regions of Northern Canada and Alaska. Steak Nights were a major component of our food cost results. We knew the cost of the steaks served and the average number of steaks consumed since the impact was high.

We served buffet style meals in an all-you-can-eat format. Our guests were served the entree and sides by one of the chefs or cooks. All salads, desserts, rolls, etc. were self-serve. Beverages were self-serve.

Our team knew the cost of the salad bar, the dessert station, the beverage station and average condiment usage. The cost of the items served by our main line varied based on a cycle menu.

If your operation is similar to the one I described, I recommend using a week as your report period. Most cycle menus will begin to track a tight cost range for each week of the cycle. You will find great variations on the dinner meal period based on the day in the cycle and the cost of the protein and produce items.

Calculating Average Food Cost for Multiple Meal Periods

Hi,

Thank you for your article "Food cost basics" which is published in foodservice resources.

I have an inquiry related to food costing and I hope you could help me figure it out:

If I am serving 20 Breakfast, 30 lunch, 50 Dinner and 10 midnight meals for the same customer , how could I calculate the average food cost per person knowing that the cost of the meals are as follows : breakfast =1.50, lunch and dinner = 3.00 and midnight meal is 2.50?

I hope you can help me on that.

Thank you and best regards,

Hesham

Let's take a look at the information you supplied. This information is essential to answering your question. To illustrate my first view, I have created a quick spreadsheet:

We have enough information to calculate the average cost per meal. The spreadsheet shows the process which involves 3 steps:
A. Multiply the cost of a meal by the meal count for each meal period.
B. Add the total meals and total costs.
C. Divide the total costs by the total meals to find your average cost per meal.

Food cost percentage involves relating the average cost per meal to a sales per meal. Since I don't have this data, I have used sales prices which would produce a food cost equal to one third (1/3) of my costs (33.3%). If I had the actual sales prices, I would have constructed a second spreadsheet:

Your food cost percentage depends on your sales and your costs. For each meal period, you need to multiply the price times the count to get your sales for each period. Add the sales and divide your total costs by your total sales.