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Friday, August 12, 2011

Theoretical Food Cost In Dispute


I own a QSR pizza franchise in Ontario, Canada.  According to the franchisor, my standard food costs should be 39 - 40%.  My food costs based on the franchisors standard recipe is 1 - 3% below this standard consistently.  What is an acceptable margin for error in arriving at this calculation?  As you know, there are many variables which affect the food cost.  One of which is we have a medium one topping pizza which sells for $4.99 which has a food cost of 55%.  This is obviously a good seller and raises the standard.  How can I interpret these results?  On average, we process over 1200 orders per week with a time guarantee or its free. Every pizza is made by hand, no pre-measurements of any toppings with the exception of cheese cups and in my opinion not very accurate when you are in a hurry.  Personally, I feel I am over using and that their standard is far too high.  I feel their calculation is designed to increase their own profitability because all of our inventory is purchased from them.  The profit margin has disappeared.  How can I tackle this issue? I look forward to your response and I thank you in advance.


Thanks for your question Mirella!

Let's take a look at the issues:

Franchisors View:
1.  Consistent portion size across the entire company.
2.  Profit motive has a link to franchisee purchasing behavior in your organization.

Franchisees View:
1.  Profit motive is highly correlated with a consistently low food cost.
2.  Portion control is a critical factor in achieving a consistently low food cost.

Taking the franchisor's side briefly, I would be unhappy if my franchisees had agreed to buy dough balls, pizza sauce and cheese from my commissary and they decided to purchase these items from alternative sources.  There would be consistency issues on each of these critical components.  They need to monitor ratios to prevent this activity.

It is evident from your letter you are watching your costs very carefully.  The franchisor's ratios may have built in inefficiency numbers.  If you run your operation more efficiently than the norm, you would beat their ratios.

I favor pre-portioning for cheese and dough balls.  In addition, all pizza bakers should use standard ladles for the pizza sauce.  The reason I favor pre-portioning is due to the peak period factor.  A tremendous percentage of sales volume is achieved during peak periods.  Sloppy portion control during these high volume periods can be very costly.

You have a second motive in pre-portioning the cheese.  The accurate portion control records may be used to support your case against the franchisors actions.

The portion work should be done during down time.

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