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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.

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