Sunday, May 01, 2011

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.

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