Food Cost Control Framework Part 2

The table below recaps the information required for all items with an Impact rating of A (A, B, C scale).  At the bare minimum, you will want to know the correct specifications.  The table can also include multiple purchasing specifications if you use more than one supplier.  Some suppliers sell meat by the box with the weights written on the side.  Other suppliers sell by the piece with the weights on the packages.  It is very important to understand your options and then make an effort to restrict your purchases on these key items.

You won't want the specifications to be loose since these items (by their nature) have a very big impact on your food cost results.

The consistency issue is number one with regard to your key items.  Your customers make the trip to your restaurant specifically to order these popular items.  They expect a consistent portion size and quality level.  You can't expect a highly consistent end product if you buy different quality or specification each time you order.

The portion size information will help you forecast the number of cases or boxes to purchases.  I have seen certain pieces of meat used to cut steaks with a high yield variance.  In one example, the yield was 62% for the high and 54% for the low.  The average yield was 60%.  If you receive an entire box of meat with a low yield, you could require an extra piece of meat.  This is rare but possible.  Definitely mention the poor yield results to your supplier.  You may be entitled to a credit.

We will be exploring the purchasing model in the Part 3 section.

Food Cost Control Framework Part 1

The essential table required to begin a professional food cost control system is the item list.  This table needs to have the same information you see on the order guides from any national distributor, storage information and vendor information.  In addition, I add several columns to help classify the manner items are purchased including frequency, bid (buy from lowest bidder) and impact.  Impact data can be simplified into the classic A B C model.

The A items are high volume and high cost per pound or volume, the B items are either high volume or cost but not both, and the C items are low volume and cost.  You will see a higher return on your invested time spent controlling A items.

A typical food item would have the fields below for each record:

Name:  BEEF TENDERLOIN PSMO CHC 12-5#UP

Category:  MEAT
Purchase Unit: CASE
Pack/Size:  12/5#UP
Catch Weight: YES
Weight/Case (AVG): 72.0
Cost/Pound: $8.00
Storage Method: REFRIGERATED
Inventory Location:  WALKIN COOLER 1
Frequency: 7
Primary Supplier:  Premium Meat Company
Bid: NO
Alternate Suppliers:
Impact:  A

This records tells us we have a high impact meat item which is ordered by the case and invoiced based on catch weight.  We use a single supplier and we order weekly.  Based on our contract, we now pay $8 per pound.  The tenderloin is stored in the main walkin cooler.

These essential fields help us with the food cost control in several ways.  Beef tenderloin is a high volume item for this restaurant and the $8/pound is a relatively high cost.

This data is sufficient for general information.  We would want to add fields to help out the staff working on ordering the meat.  Demand forecast data is preferable to a par stock level for your A items.  If you expected to serve 2,000 covers and on average 25% of patrons choose beef tenderloin, you need 500 portions of filet mignon for the week ahead.  Depending on the size of the steaks, this case will yield either 72 steaks or 60 steaks.  Our data shows 60% of patrons will choose the smaller steak (72/case) and 40% will choose the larger steak (60/case).  We'll need 3 1/3 cases for the larger steaks and 4 1/6 cases for the smaller steaks.  Since we can't order fractions of a case without a split penalty, we would order 8 cases.

Seasonal operators should not rely on par stock averages to purchase any A items or high volume B items in their inventory.  Accurate forecasts are essential.  Fortunately, the counts in your busy season will be higher and more reliable.

We will develop a data table to recap the information required to analyze A items in the next article - Food Cost Control Framework - Part 2.

Higher Food Costs Can Lead To Higher Profits

As commodity prices have leveled recently, we have consumers modifying their food purchases due to much higher prices for many staples.  The financial press has featured plenty of articles on the high prices for gold, oil, corn and other key commodities.  Many restaurant chains have increased their menu prices to offset the higher cost of goods sold.

In the short term, savvy restaurant managers can boost profit through strategic menu engineering analysis.  Imagine your food purchases are 5% higher for the same sales level.  If you raise selling prices by 5%, you can cover the higher cost of sales and increase profits by holding overhead and labor costs low.  With a check average of $18 and a 33% food cost, your cost of sales is $6 and your gross profit is $12.  Raising the $18 by 5%, you would expect a check average of $18.90.  The cost of sales would go to $6.30 in the same 5% rise.  Your gross profit would increase by $0.60.

In terms of the original $18 check average, this $0.60 is an additional 3.3% of gross margin.

The Profitable Butcher - Part 3

With the recent rapid increase in meat prices, operators are discussing the merits of smaller portions.  If they serve an 8 ounce steak, they may be considering a 7.5 ounce portion.  For operations with large portions, the change may be from 16 ounces to 15 ounces.

A change from 8 to 7.5 ounces is a 6.25% reduction.  Everyone is familiar with the coffee cans at the local market.  It is rare to find a one pound can.  Actual weights are often less than one pound.  Sometimes, the size of the can stays the same but the net weight changes.

Would your customers notice their serving is only 93.75% as big as last time?

They may not notice a small change in the serving and they may not care.  If you notice the plates coming from the dining room have uneaten meat or fish, your current portion size may be too large.  Consider a slight drop in size.  The profit potential is significant.

Take a look at the big picture.  If you use 800 pounds per week at $6 per pound, a drop from 8 to 7.5 ounces will save $300 (around $15,000 per year).

This strategy should not be combined with an immediate and significant price increase.  Raising the price and decreasing the portion size doubles the risk of your customers objecting to your strategy. 

[For my loyal readers, the bakery I wrote about when flour prices went through the roof is now under new management.  They made the changes too obvious.

The size of the loaves decreased by 20% for the same price which was perceptible.  They eventually raised the cost per loaf by 15%.  Traffic suffered and they never regained their gross margin.]

The Profitable Butcher - Part 2

Tracking butcher yields is essential if you decide to trim your meat and fish rather than buying portion cuts.  Too often, managers treat the process with a lackadaisical attitude.

"We use the trim in ravioli.  They're free."  "This week's meat was fatty."  "Our butcher doesn't slice the steaks evenly."  "We only pay $6 per pound and the portion control cuts would cost $7."  "Nothing is wasted.  We make all of our stocks from scratch."

The common theme is a lack of clarity.  You can't afford to butcher meat in your operation if you do not closely track the process.  Butcher yields can fluctuate widely.  The differences in yields need to be monitored closely.

I know an operator who carefully tracks each batch.  The starting weight and number of pieces of meat are recorded.  The log contains the cost per pound paid to the meat supplier.  After trimming the meat and slicing the steaks, the butcher records the number of steaks, usable trim and waste.  All costs flow from the starting weight and cost per pound.

This person has a well documented 3-ring binder with each butcher batch sorted by date.  I went through the history and found the overall yield was very close to the restaurant's standard.  More importantly, the yield from batch to batch varied by plus or minus 5%.  This is a 10% spread.

Most operators do not keep these records.  The time to record the batch is minimal and the gain in information is tremendous.  Understanding your standard yield is key to tracking usage and gross profit.

The Profitable Butcher - Part 1

Our goal is to keep the cost per portion as low as possible while maintaining the current standard.  The focus is on the center of the plate.  Most people break down their current meat and fish using a cost per ounce model. 

There are many limitations to this approach.

Your cost per ounce may be 50 cents.  If you take a piece of meat which costs $6 per pound and you lose 25% in unusable trim, your cost per pound is $8 and your cost per ounce is 50 cents.

Our first issue is the 25% unusable trim.  This implies a 75% yield when we focus on our center of the plate portion.  What happens if a particular piece of meat yields 80%?

Instead of 50 cents per ounce, we would only pay 46.875 cents per ounce.  Is this meaningful?  Do people actually see the impact?  I would argue they don't see the impact clearly.

If the piece of meat weighs 10 pounds, the 50 cent per ounce model assumes 120 ounces.  We would expect to yield 15 - 8 ounce steaks.  The 80% yield would increase the number of steaks from 15 to 16.  The same numbers are in play with only a slight change in yield.  The piece of meat weighs 10 pounds and the cost per pound is $6.  Only the yield changes from 75% to 80%.

The extra steak is the true benefit.  Monitoring a 3.125 cents per ounce change won't be easy to explain in meetings.  "we should have a slightly better profit this weekend because our cost per usable ounce decreased by 3.125 cents..."

The extra steak would cost $4 using the 75% standard at $6 per pound.  Our goal is to save this $4.

Perhaps we could find a supplier who usually delivers meat which yields 80%.  If we expect to purchase 10,000 - 10 pound pieces per year, we would save $40,000.  The savings would occur 1 steak at a time as we gain the extra steak from each batch.  Using our POS system, we can make sure we get the sales for the extra steaks and the gross profit increase will appear in our bank account.

Rather than tracking 3.125 cents per ounce, we can track these extra steaks.

What Should My Food Cost Be?

Every month, I receive emails asking for benchmark information in every segment of our industry.  Benchmarking food cost is a meaningless pursuit.  Every menu has a unique set of criteria which have an impact on the gross margin.  Rather than looking for a target number outside your organization, I would suggest a simpler and much more accurate way to answer the question:  What should my food cost be?

People really want a method to bring their gross profit back to previous levels.  

The first step in finding the answer lies in your current sales mix, food purchases and the resulting gross margin.  Nobody offering a diverse, a la carte menu to their guests can expect to have a food cost % close to a utopian figure.  Also, this means your competition is far from perfect.  Don't focus on an unobtainable goal.

Review your purchasing data thoroughly including a month by month analysis of all key items (typically your top 25 items ranked by purchase volume in monetary terms).  I would go so far as to construct a matrix to track the purchase cost of these key items on a monthly chart.  Look for sharp shifts (inflection points) on the chart.  Can you find the logic behind these shifts?  Perhaps you have significant seasonal price changes.

You will definitely see a major shift higher in any items which require consumption of grains in their production.  This is not just baked goods but also the protein items.  Our animals consume the same grains we now see used in the production of the fuel we consume at the gas stations (ethanol is anywhere from 10% to 85% of the fuel at most service stations).

Find the top trends in these key items.  Apply the findings to your food cost formula.  If the top 25 items account for 40% of your purchases, a 10% shift higher in the cost of these items will produce a 4% increase in your purchases.  If your purchases have actually increased 5.5%, the 1.5% implies the other 60% of your purchases have increased 2.5%.  Every operation will have a unique profile.

Start with your top 25 items and try to cover the 4% increase in purchases.  Can you lower the figure through tighter controls?  Weigh the cost of tighter control against the potential gain.  Implement these controls whenever the benefit outweighs the cost.

Carefully monitor waste, spoilage, theft, portion size and purchasing trends.

In the example above, a sales increase of 1.65% would cover the 5.5% increase in purchase costs if your target food cost % was 30%.  You don't need to raise menu prices 5.5% to cover the increase if your goal is to maintain gross margin.  A food cost % of 31.14% would produce the same gross profit as before if your cover count  is stable and your check average increase hits your 1.65% target.

Can Higher Sales Offset The Rapid Food Cost Inflation?

As operators find more diners in their restaurants, they are seeing major increases in their invoices for food and supplies.  Higher prices for food, utilities, gas for vehicles, paper, linen and other supplies are shrinking margins.  Can your higher sales numbers offset the rapid rise in food cost?

A 10% rise in your invoices will cost you 3.5% of sales at a 35% previous food cost level.

This may be too much to take if you rely heavily on coupons and discounts to attract patrons.  On the other hand, most operators would gladly part with 3.5% of sales to see more revenue.  Many of these people will eat the cost increases for some time.  They will follow their competition in any price increases.  Fearing a drop in business just as they see a pick up, restaurant managers are holding prices in check at many locations.

Is this a good strategy?  Happy to have survived the recent bloodbath, many people I speak with are happy to wait the competition out.  They quote $5 foot longs, 2 entrees and an appetizer for $20, 2 pizzas for 1 nights, and numerous competitors offering a meal with full service for $9.95.  Patrons have downsized from prime steaks to upscale burgers.  Burger places are popping up everywhere I go.

If you decide to lead in the price increase game, I would expect your competition to follow pretty quickly.  Everyone sees higher prices at the supermarket and gas pump.  Many patrons expect increases.  By taking the lead, you can set your own pace for price increases.