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Tuesday, March 29, 2011

Restaurant Profit and Loss Statements 2011

As predicted in our Outlook 2011, we are experiencing an upside bias in the grain markets. The current global uncertainty has driven oil prices higher. Grains are highly correlated to oil prices.

In the most recent month, the impact of higher grain prices is hitting the bottom line in a negative fashion at many restaurants. What we see in our client's P&Ls (profit and loss statements) are higher cost of goods sold percentages. Generally, the rise has been in the 1 to 2.5% range depending on the menu.

This increase in costs has hit restaurants in their challenging winter season. Usually, we expect lower oil prices in this slow travel period and much higher prices around Memorial Day weekend in late May.

You may be experiencing the double negative of higher % labor costs due to lower seasonal sales and the increase in cost of sales. Margins are tight and some operations are seeing red ink again.

What are the options available? To get the picture framed properly, you need to be aware of your local competition. The Plan A option is to go with an across the board price hike for your menu items. This may not be the right time to take this step. Plan B involves further cost cutting actions. Many restaurants have been continuously cutting fat since late 2008. Should you cut portion sizes? If the smaller portion is offered at the current menu price, the answer is NO.

My recommendation is to disconnect from the percentage view and look at dollars. Find the dollar increase in cost of goods sold. The goal is to cover this increase or absorb the increase in a very visible marketing campaign designed to increase market share. Definitely let your customers know you have decided to absorb the increases if this is your decision.

For those who wish to cover the increases with higher selling prices, I would spread the dollar increase in cost of goods sold over each entree, sandwich, entree sized salad and appetizer on your menu.

For example, if you expect the cost of sales to increase by $5,000 (2.5% of $200,000) each month and you sell 20,000 menu items in the categories above, the increase is 25 cents per item. Make sure you use a lower labor target % since labor costs do not fluctuate with the oil markets. Maybe it's time to increase your profit margin. Add additional amounts to cover this need at the same time. If you want to cover the cost of sales increase and produce another $4,000 in gross margin, raise your prices 45 cents (using the same example).

This "cover your butt strategy" is easy to implement. You need a forecast of menu items sold in each of the target categories, and the increase in cost of goods sold in dollar terms. Simply divide the cost increase by the item count to get the increase per menu item.

Sunday, March 06, 2011

Is My Food Cost Too High?

Some of this month's emails have questions regarding a food cost benchmark. Generally, you will meet many operators who have been trained to cost their menu items with all garnish, sides, and sauces. They then multiply the cost by a factor of 3 to achieve a 33% food cost. This method won't maximize profit.

If you use a 33% food cost target, how do you treat monthly price fluctuations, shifts in guest preferences, and a myriad of other variables which impact the food cost formula?

Use the food cost target as your projected food cost but take a hard look at the actual results. Your food cost is too high if you haven't implemented tight portion control. Maybe your garbage bags are loaded with spoiled food due to ordering too much product. Your cost is too high. Try to locate all the food cost issues in your restaurant. These are opportunities to improve.

Your food cost percentage does depend on your menu pricing strategy. Your pricing factor may not be 3 times the recipe cost. There are sophisticated menu pricing models which are designed to increase gross profit in dollar terms. Before the ink on the new menus is dry, the recipe costs used in your model will have changed.

Use your current food cost as the guide. Look for ways to improve. Create simple action plans. Improve by executing the plans.

Economy Showing Positive Signs

The weather in many regions was tough in February but the economy showed an advance over last year. Grain prices have risen tremendously and many operators are wondering whether to pass the higher costs along to guests. This is a difficult call to make nationally since competition varies by region, city and even by neighborhood.

If you decide to pass along the higher costs by raising your menu prices, there are 3 ways to cover the increase:

1) Increase the price of major entrees by an amount which will cover just the additional cost.

2) Increase the price of all menu items across the board to cover just the additional cost.

3) Strategically increase prices over several quarters to cover costs and produce a profit large enough to cover the risk of further price volatility.

Many operators wonder whether they should lower the prices when the commodity markets retreat. I wouldn't let the commodity markets dictate pricing policy in the long term. As the economy heats up, energy consumption increases will produce additional volatility. Constantly changing menu prices up and then down with each shift is a mistake.

If you decide to establish a policy of steady and more gradual price increases over several quarters, your guests won't see you twisting in the wind. Competition will guide you in determining how much of an increase the market will allow.

Many restaurants have been offering reduced entree prices of $9.95 and below. Should you go over $10 if your menu fits this profile? I'd recommend a move now above $10. With the press reporting the big run up in grain prices, many people have been conditioned to expect price increases.

10 Ways to Reduce Your Food Cost

I'd like to thank Ron and RoseAnne from ReedExpo for inviting me to speak at the International Restaurant Show in New York City this week. The show was well attended and there was excellent energy. This show is without question THE New York City restaurant show.

We had a great group attend the presentation "10 Ways to Reduce Your Food Cost Without Jeopardizing the Guest Experience" and I want to thank all the attendees.

In the New York tradition, the 10 slides are presented in reverse order, #10, #9, #8, #7, #6, #5, #4, #3, #2, and the Number 1 way to reduce your food cost:

Restaurant Data Pros

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