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Monday, December 30, 2013

Outlook 2014 - American Food Service Industry

We can expect more major weather events in 2014.  These events will have a major impact on some pieces of the food cost puzzle.  In 2013, the early South Dakota blizzard had a huge impact on beef prices during the fall.  Corn crops rebounded from the 2012 drought to record an above average harvest.

The weather was kinder to New Jersey and Long Island in 2013.  The hurricane season was relatively mild when compared to recent years.  Here in the Mid-Atlantic states, we are experiencing a cold finish to 2013.

I expect the unemployment rate to continue declining due to several factors: the trickle of early baby boomers electing early retirement; the recent budget deal approved by Congress; increasing capital projects by US corporations; and, a shift in service sector labor force composition to more part time workers and fewer full time workers.  A one percent improvement is likely.  We may see a 6% rate by early 2015.

The political battles for control of the House and Senate should help media companies.  It's incredible how much a hard fought campaign for a Senate seat costs.

Government is a major employer in my region.  Restaurants took a hit during the shutdown.  Hopefully, 2014 will have no adverse impact from a shutdown.  If uncertainty wanes, the entire country will benefit from higher confidence - both consumer confidence and corporate confidence.

As the employment picture brightens, the restaurant segment will see higher demand.  Health care coverage remains a very hot topic with restaurant owners and partners.  Demand for labor saving equipment should see excellent growth in the near term.  Increased selling prices, productivity improvements and flexible staffing will help keep margins from crashing due to the increase in health insurance costs.  Many disagree but I do not envision a crisis.

Thursday, December 26, 2013

Reader Question - Average Per Cover Calculation

Dear Sir,

Hope you are doing well, i need one clarification. When we calculate the Average Spend for the Food and Beverage, if the guest consumes Food and Beverage whether we take the cover only for food or both?

If we calculate the cover twice (both for food and beverage) it will be duplicate when we calculate the total F&B spend? or If we take for food only then the beverage average spend wont be correct?

Can you please check and let me know,what is the best practice followed in the Industry.

Thanks & Best Regards,


Thanks for the question, Harees.

The revenue per guest, commonly referred to as the average revenue per cover, includes both food and beverage.  It is perfectly acceptable to report the average food revenue per cover, the average beverage per cover and the average revenue per cover.
  In fact, I prefer the components to be reported along with the total revenue. 

We can see the method more clearly with an example.  A restaurant has total sales of $2,000,000 comprised of $1,400,000 of food sales and $600,000 of beverage sales.  They served 100,000 guests.

Our average food sales per cover is $14.00 and our average beverage sales per cover is $6.00.  The Average Spend per Cover is $20.00.

We use the same denominator in all 3 calculations.

The reason we use the same denominator is we always have the same number of covers.
  A guest could spend nothing on beverages and still be included in our cover count.

Wednesday, December 18, 2013

Does Going to a Locally Sourced Strategy Lead to a High Food Cost?

Everywhere you go this year, restaurants are featuring locally sourced foods.  You'll find lots of locally grown produce when in season.  Here in Northern Virginia many area artisans sell their vegetables, fruits, cheeses, breads and pies at the excellent weekend farmer's markets. 

We recently enjoyed breakfast at the Silver Diner in Springfield.  Here guests find a smooth blend of 1950s diner decor and all the hot food trends.  While waiting in line, guests are entertained by a singer who is letting them know the biscuits are coming out of the oven.  The diner has a bakery on the premise.  Silver Diner has made a commitment to healthier food.  They feature nitrate-free bacon and sausage from local suppliers, agave sweetened fruit toppings, organic produce, free range poultry raised without antibiotics, and farm fresh eggs raised by an Amish farmer.  The terrific coffee was freshly brewed with locally roasted beans.

Our check came to $60 for four people.  Everyone was very pleased with the food quality and the service was excellent. 

The locally sourced trend began heating up in 2010 and is very much a factor in many menus.  Organic produce is everywhere now and many guests restrict their restaurant visits to places with an all organic policy.  These trends are popular in every style of service from QSR to fine dining and continue on a path of solid growth.

Do restaurants featuring higher quality, locally sourced foods experience higher food costs?

The answer is yes if you focus on the cost of food per guest.  Some ingredients may cost three times more than a mass produced alternate.  To offset the higher cost of food per guest, a restaurant needs to sell the menu items for higher prices to enjoy the same profit margin.  Local competition and guest perception of quality will determine just how high you can raise your prices.

I personally appreciate the high quality coffee served at the Silver Diner.  I'm willing to pay extra for the hot, fresh beverage, and the aroma of properly roasted beans used in the brew.  We all enjoyed the jelly produced with sugar cane and the organic ketchup.  We let the singing baker know his biscuits were wonderful.  The $15 check average seemed reasonable for the quality of both the food and the service.

The line we stood in shows other people feel the same way.  I estimated the cost of serving each of our four breakfast meals at between $2.50 and $3.50.  Using an average of $3.00, the food cost % would be 20%.  Breakfast traditionally has a lower food cost %.  Frequently, the labor cost % is higher for breakfast. 

The labor cost was clearly higher than many local competitors.  They run the bakery on premise.  The fresh produce used in the menu items needs to be prepped.  All meals are prepared to order and the wait staff encourages their guests to speak up regarding special requests or allergy restrictions.

In summary, I feel the use of locally sourced, higher quality, healthier food ingredient options will cause your food cost per guest to increase.  If your operation is fighting with competition on price alone for market share, you need to understand the risk involved with a substantial increase in menu prices.  Your market may demand locally sourced items.  Make sure you cover your higher costs with higher menu prices.  Try to feature menu items and beverages which your guests can readily notice the quality.  A positive customer perception is critical.

Monday, December 02, 2013

Using Food Cost for Menu Pricing

Dear Mr. Dunbar,

I am a bit confused about my menu pricing.    I have a small BBQ trailer in DE and do all the labor myself. 

I have been pricing items by way of food cost x 2.5 to 3 depending on the item. 

As I read online about pricing, I fear I may be too low on some things.  In your opinion, if I have a pulled pork sandwich that costs me 1.90 to make:  How much should I charge?   

It always amazes me how cheap BBQ joints sell food for.  How do they make money with so many people working there?  

I have been doing this for 2 years now and I'm still getting new customers as well as my repeats.  Just doesn't seem like I'm making any money (just able to pay bills and maybe a little pocket change).  Any advice would be appreciated.    Thank you.
Thanks for the question, Eric.  I'm sure you can improve your results.  You may not be able to rely on the truck as your sole income source.  At the heart of this issue is your break even point sales level.  The break even point should include direct labor expense.  I would build in $10 base rate plus benefits for $12 per hour.

Make a spreadsheet with all your annual expenses except food cost and disposables (napkins, straws, etc.).  Add the labor cost for yourself using the $12 per hour rate times your hours.  Add a profit of $500 per month to the total.  This will cover any negative surprises.  You can treat this total as your nut.

Do your best to calculate the number of customers you serve per year.  Divide this number into the total from the above formula.  For example, if your annual expenses net of food and disposables were $54,000 and your profit is $6,000, the total is $60,000.  If you serve 15,000 customers per year, you need $4 of gross profit for each customer. 

Cost out each sandwich and add $4 to the cost of food and disposables.

I would not sell chips and soda separately.  Create bundles with a sandwich, chips and soda for a value meal price.  Add $5 to the cost of each bundle.

Your pulled pork sandwich would be priced at $5.95 in this example.  ($1.90 + $4.00 plus $0.05 extra).

The key to success is the customer count.  If you use this formula and you do not envision enough customers to pay yourself a modest income, you need to change the concept to attract more customers.

Monday, November 18, 2013

Reader Question - Banquet Food Cost Calculation

Dear Joe,
Very good day to you. 
I hope my email finds you well. I just need to know how to calculate the accurate 
food and beverage cost for weddings, banquets, coffee breaks, and breakfasts on hotels. 
I am counting on your support especially since this calculation varies depending on 
consumption volume.
Thanking you in anticipation


Thanks for the question, Elie.

Most hotels experience a significant portion of their food and beverage revenue from special events, banquets and buffets.  For this category, it is common to comprise over 50% of the total volume.

The food cost percentage method often applied to a la carte sales is a poor tool for controlling banquet cost of sales.  It is common to see a flat fee per guest which includes many items beyond food and beverage.  Examples include flowers, entertainment, decorations, ice carvings, special bar arrangements and related services.  Guests may be offered a discount for rooms which is stated in a full package price.

To properly control the costs for special events, I recommend a spreadsheet which would have details of all menu items, beverage options, and all add on items and services.  Enter a budget amount for each line item in total dollars (or local currency).  Find the total cost for the event.

For the revenue component, take the expected final count and multiply the figure by the price per guest.  Deduct the usual room charges from the total revenue.

Finally, you should net your revenue and cost numbers to arrive at a expected profit for the event.

Do your best to keep all the actual expenses for the event separate.  Enter the actual expenses in the column to the right of the budgeted costs.  Calculate the difference for each line item.  Ask for explanations if any line shows a large variance.   

Sunday, November 17, 2013

Food Cost Control Tips

If you own or manage a restaurant, you know controlling your food, beverage and labor costs are critical to success.  Labor costs have been inching up during the recovery and this has put increased pressure to lower food cost.  Many operators specialize in one or more techniques to lower their cost of goods sold.

Some companies focus on purchasing and employ competitive bids and tight par level trigger points to help buy high quality food as cheaply as possible.  The excellent POS systems make perpetual inventory and theoretical cost calculations possible.  Many companies now link their POS system to their purchasing and inventory systems.  Monitoring batch recipe production is the specialty of many regional chains and they save money by producing in bulk at a commissary.

It is important to understand the true goal.  You want to lower your food cost by spending less for food for a given sales volume.  You can spend less by finding a lower price and by consuming the proper amount of food with minimal waste.

It helps to analyze your menu item counts monthly.  This is a standard report in most POS systems.  There are two scans you should do to get the most from this report.  Look for high dollar volume items which will generally include your most popular entrees and sandwiches.  Also, look for items with the highest counts regardless of sales volume.  These items will include complimentary bread, salads, coffee, starches and modifiers.  Identify all these high volume items.

Focus your cost control activities on these items.

If you are spending tremendous time bidding on food items and placing orders based on par stocks, save some effort and increase your efficiency.  You can buy better by analyzing fewer items.  I have seen companies utilizing sophisticated software and frequent inventory counts on items which have a very low impact.  Find a reliable grocery supplier who can meet your needs for all your staples and give them your business.  It makes very little sense to get 3 bids for a spice or condiment used sparingly in your operation.

On the other hand, you need to aggressively bid for all high volume protein items.  Par stocks on these items should vary with day of the week and season of the year.  This is the best place to spend time and effort controlling waste and getting the absolute lowest prices.

Commissaries should never become warehouses for all items consumed in your operation.  The major suppliers have superior inventory control and you can save on power, shipping costs, delivery personnel and warehouse theft.  Use your commissary to strip out labor cost from major prep items.  You should strive for the best consistency and lowest cost on these high volume batches.

Make sure your store level staff execute all high volume activities well.  Coffee should be produced so your guests enjoy a freshly brewed cup with a minimum level of waste.  Salad mixes should be ordered frequently to minimize spoilage.  Portion control on all complimentary items is a great way to improve your food cost results.  You should vary the bread basket by the number of guests at a table.  Ask guests ordering a sandwich if they want complimentary bread.  Many will say no.

High volume meal periods are the key to success.  You need the proper staff level, a well stocked line, easy to use portion control devices and a well trained expediter.  Executing orders in an efficient manner during your peak meal periods will have the greatest impact on your food cost results.

Tuesday, November 05, 2013

Food Cost Control CBA

Any food cost control project or organization should be designed to produce a positive outcome.  You want your cost savings to be greater than your control costs.  Cost benefit analysis (CBA) is the name given to the simple formula.  We can see our actual net benefit by subtracting the expenses we incur in tracking food costs against the improvement in food costs.

CBA has some assumptions which can be tightened or relaxed depending on your organization.  The first assumption is the cost control environment from the previous period would produce the same results in the future period if there are no changes.  Any marginal changes in the cost control system, including investment in technology, measurement equipment, security cameras, increases or decreases in staff allocated to the tasks and management efforts, should be budgeted and closely tracked.  These marginal expenses will be compared to the food cost results.

My preference is to use dollars of investment in cost saving resources vs. dollar savings in food cost.

If an operation with $2,000,000 in food sales experienced a food cost percentage of 36% in the previous year, their food cost is $720,000. 

This same operation invests in a cost control system with interfaces to the POS system and their top supplier's online ordering system.  The investment includes equipment, software, implementation costs and a cost accountant.  If the turn key system costs are $30,000 and the useful life is 5 years, we have a marginal technology cost of $6,000 per year.  Most systems need support and 20% or $6,000 should be budgeted to handle this need. 

Our cost accountant has a cost of $60,000 which includes a base salary, health care insurance, workers compensation insurance, employer's share of social security and medicare, holiday and vacation pay, etc.  If you already employ a cost accountant and you are arming this person with the new tool, you can eliminate this expense from your marginal analysis.

Assuming we need to hire a new person, our total annual cost for this increase in control is $72,000.  We would need to buy 10% less food for the same revenue level to break even.  On the other hand, the cost to provide an ill equipped accountant is only $12,000 per year.  We start providing a net benefit once our costs decline by the same $12,000 or 1.67%.

I recommend investing the necessary money in this type of cost control system if your operation enjoys at least $2,000,000 in annual food sales.  For operations with no cost control at the present time, you will reap the biggest reward.  Routine savings average over 10%.  I have seen declines of 25% in food purchases in out of control restaurants.

For operations with a hit or miss spreadsheet cost analysis, you will find the total cost to provide a professional cost control system will be repaid in a fraction of a year.  The entire investment of $30,000 and the annual support will be covered by the expected savings.  From experience, I would conservatively estimate an annual savings between $60,000 and $90,000 in an operation of this size.

Wednesday, October 30, 2013

Sales Volatility - Impact on Food Cost

Revenue swings exert a tremendous influence on food cost results.  We can find these swings in almost every operation. 

Dinner houses in the suburbs often enjoy a full house on Fridays and Saturdays.  The same locations may be empty on a early weekday night.  Sundays and holidays often vary by the season.  Resorts and restaurants in tourist areas experience tremendous moves up and down as they change from the peak season to off season.

Urban restaurants often see steady business from Monday to Friday with a major drop on weekends.  There are exceptions when a center city zone has affordable housing options.  A strong Sunday brunch can help utilize the week's leftovers.

Generally, the greater the sales volatility the higher the cost of sales.  The highest food cost results come to restaurants who rely on a busy season or a major event whenever the volume is lower than expected.  Operators of Monday to Friday luncheonettes generally see lower sales volatility and even food cost numbers.

Better than expected sales levels can have a very positive impact on food cost results.  Waste and spoilage will decline as safety stocks are used to create more items for sale.  Employee meals cost declines as a percentage of sales as revenue increases.

Major weather events can cause sales declines.  The forecast team needs to pay attention to the 5 day forecast.

If you have a great sales week and a lower food cost percentage, your gross profit can increase dramatically.  These weeks can happen for many in May due to Mother's Day, Cinco de Mayo, milder weather, graduations and outdoor dining options.  If managed properly, your gross profit in May can equal twice as much as in a down month like January.  Ski resorts can flip these 2 months since they are busy in January and fading or closed in May.

The number one issue in tracking food cost results in volatile operations is to maximize gross profit when conditions are in your favor.  Don't be content to have a good month.  Try hard to achieve a great month. 

Many operators are quite good at slashing staff and closing dining rooms when business is slow.  Since it may be difficult to pay the bills, everything is scrutinized carefully and costs are tightly controlled.

You should have a well rehearsed plan in place to help maximize gross profit when sales are at or near peak.

Sunday, September 22, 2013

Food Service Trends - Major Chains Show Mixed Results

NOTE: All of the data used in this article is available to the public in mandatory annual reports which can be accessed at free of charge. The data used was taken from audited year end financial statements. This article is NOT aimed at predicting the stock prices for any of the companies mentioned. In fact, the stock prices are not relevant to the discussion.

Base Year Most people will remember the year 2008 as a very poor year from an economic standpoint. By year end, the stock market was in free fall and mortgage banks were struggling to remain solvent. The bad economy had a major impact on the presidential election. We are using 2008 as our base year for comparison.

Three Restaurant Companies - Four Year Record The most recent year end reports for Chipotle, Darden and McDonald's show earnings per share results have improved over the 2008 results. Chipotle has shown the greatest % increase in earnings per share with a 271% rise. McDonald's had a solid 42% gain. Darden, which has acquired several chains in recent years, had a gain of 20%.

Several factors impact the results and it is important to put the data in context. Maybe the most dominant issue is the meal service style. Americans, in reaction to the rough economic conditions, made fewer visits to full service, casual dining establishments. For those households where the dollars spent in dinner houses declined, a shift to fast casual and QSR concepts helped fuel growth.

We don't have enough information to evaluate the success of Darden's acquisition strategy. Surely, they paid less for locations acquired than they would have before the economic decline. Former competitors are now part of the Darden group of concepts. The dividend paid to shareholders has increased to $2.00. Clearly, Darden feels most comfortable operating in the dinner house segment. Rather than targeting fast concept chains, they have acquired other full service concepts.

Chipotle pays no dividend. They continue to grow along with the entire fast casual segment. Americans now are willing to pay a bit more for perceived quality. They continue to spend a large part of their meals away from home dollar in restaurants which offer low to moderate check averages.

McDonald's has seized this opportunity to capture more revenue from sales of menu items with a higher perceived quality. Patrons now have many options from the popular value menu to the higher end wraps, angus burgers, and the improved cafe and smoothie drinks. While on vacation in the Canadian Maritimes, my daughter ordered a McLobster - a very good lobster roll.

All restaurant companies are wrestling with the options to determine the best strategy for employee health care insurance. Our industry has always relied on large pools of part-time workers earning entry-level wages. I'm sure many independent owners will look for answers by following the lead set by major chains. It will be interesting to observe how well each of these 3 companies handle the changes ahead of us with regard to labor costs.

Friday, September 20, 2013

Food Service Trends - Restaurant Catering Options

Many restaurants have scrambled to increase their catering business. For many of these companies, a party simply requires an estimated guest count and a reserved table or room. The guests order off the menu and drinks are all charged by the drink. Rarely, the host may restrict their guests to specific entree choices. Usually, a printed menu is prepared with the limited choices specified with prices.

Some restaurants offer catering services with no catering menu. How do they operate as a caterer? They simply let a party reserve a much larger table than usual (sometimes an intimate room off the main dining room). The guests do not order ahead of time and they are served from the dinner menu. 

Is this truly a catered affair?

Some restaurants charge a set price per person for food but let the orders go through to the kitchen on the POS system. Often, these companies have separate PLU numbers to handle these orders. In this manner, the revenue is generated per person and the menu items selected are tracked to the specific party. These PLUs may be grouped to show party activity at-a-glance.

Most restaurant operators using their facility for parties do not shut down their normal operation unless the group wants the entire space for the event. Occasionally, you will see an apology sign in the window letting guests know the restaurant is closed for the evening due to a party.

Since a party could have been booked with a catering specialist, these special events are clearly catered affairs. Restaurants with no catering menu do not typically book huge parties during their prime hours. There are exceptions to this rule.

If the restaurant does not ask for the order ahead of the seating, the event is strictly a large party. However, some restaurants ask the guests to order ahead of the party. In my mind, this is a truly catered affair. The restaurant provides a comfortable venue and the room is configured to focus on the party. The kitchen has a predetermined menu allowing the culinary team to execute the event well.

A third option involves establishing a fixed price amount charged per guest and limiting the menu item options. These operators allow the party guests to choose their appetizer and entree options once they arrive. Although the restaurant has a firm sales number, the profit potential won't be as high as the event with a predetermined menu.

Although the restaurant is still seating regular dining patrons, the act of putting the special menu on the agenda is key. The food order is less uncertain and the proper staff level is easier to forecast. These are two of the advantages caterers have over an a la carte dinner house.
Generally, the manager adapts the service staff to the number of guests. The final count for the party is added to the base forecast. Since the guests often order items which are also on the regular menu, the meal period is treated as normal with a higher covers forecast.

Extras like photographers, flowers, special invitations, etc. may be handled by the host or the restaurant. If the restaurant provides these services, they are usually added to the bill.

Caterers often have profit and loss statements with very low food costs. A 25% food cost is at the high end because they divide the total revenue into their food cost. Beverage costs are treated similarly. Most restaurants show the traditional food and beverage cost numbers. Extras will be treated as other income.

While it is not always the case, caterers tend to use job costing principles and restaurants stick with periodic reports. Restaurants could increase catering profit by creating suggested packages. If guests were offered packages with higher gross margins, the positive impact of special events could increase.

Food Service Trends - Labor Cost in Focus

Around 18 months ago, I posted an article on the Professional Catering blog regarding a interview with the CEO of Paychex on CNBC. (see full article below) The interview was focused on the Paychex business model and this company serves as the payroll department for many small businesses. Many of my clients use a service for payroll processing and it is very cost effective.

Paychex is focused on small business and 98% of their customers have fewer than 100 employees. I find the second statistic more interesting in light of the Affordable Care Act (ACA) which is on the minds of many operators. Mr. Mucci stated 82% of the Paychex customers have fewer than 20 employees. I believe many restaurants and caterers fit this profile. These companies will avoid most of the penalties which keep small business owners up at night.

Original Article:

Should You Hire Now?


The Paychex CEO, Martin Mucci, was interviewed about the lack of movement in his company's stock. Mr. Mucci stated new business formation was flat. He mentioned 2 statistics which show the importance of small businesses in any business turnaround.

He stated 82% of the Paychex customers have fewer than 20 employees and 98% have fewer than 100 employees.

Paychex stock may be ready to make a move upward as American small businesses stop hibernating and begin hiring again. Should you be hiring now before the inevitable rise in salaries and wages? The job market is starting to add more jobs and first time unemployment claims are in decline. If your sales are perking up or your summer pipeline looks promising, it may be the time to hire.

Wednesday, June 19, 2013

Innovative Uses to Increase Your Return on Investment in Technology

Most restaurants with revenue above $1 million have invested in a POS system.  These systems track the entire sales cycle and provide tremendous reports to help managers understand their business.

Popular reports show customer counts, server productivity, menu item popularity and scheduling efficiency.  Since all customer orders are tracked by time of day, the same data can be used to track arrival rates and average service time.  This information combined with your seat count can be used to predict the length of lines on busy nights.  Your host staff needs this data when communicating approximate wait times.

Guests counts by day of the week can be used to improve your orders for highly perishable items purchased daily.  If you offer a complimentary bread basket, you can use the information to reduce waste.  Standard recipes can be combined with expected menu item sales counts to help forecast demand for expensive protein items.

There are reports which show menu item counts by meal course.  Dividing these category counts by your covers will provide percentage data which can be used in developing a customer profile.

Restaurant chains have developed pricing strategies built around a dinner for two including one split appetizer and two entrees.  The data used to develop this strategy comes from the menu item reports.  You can use the recap sales by meal course to find out what percentage of your guests choose a dessert.  A server contest could help raise this percentage and your POS system will provide the name of the winner.  Menu item sales may be tracked by server.

For longer periods of time, including weekly, monthly and annual reports, the system tracks your check average.  This number equals the total revenue divided by the total number of guests served.  Some systems allow you to enter the number of seats.  The total number of guests served divided by the total number of seats equals the turnover rate for your dining room.

Sales equal the number of seats times the number of turns times the check average.  Should you expand your dining room?  What will help raise the check average?  Are we losing business?  These questions can be answered with standard reports used together to see the whole picture.

If you track the number of prospective guests who decide not to wait for a table during busy periods, decisions regarding your capacity can be made using this data.  This information is particularly important for restaurants in resort areas or which depend on sales from just one day a week.

Many restaurants build their menu each day using items available in the local marketplace.  A significant share of the daily revenue is derived from sales of specials.  If your chef has an eclectic approach, you will find it more difficult to predict customer behavior.  Your covers forecast may be accurate.  However, you won't have a wealth of data on specific menu item popularity.  Expect a higher number of sold out entrees and greater spoilage despite the use of market fresh ingredients.

POS systems can be setup to track more than just Special 1, Special 2, Special 3, etc.  You can create galleries of specials to track the preferences for specific entrees.  This data can be used to create seasonal menus which will reduce the number of daily specials while simultaneously offering the most successful menu choices.  This menu approach can help chefs and managers improve forecasts and increase guest satisfaction.

Focused menus are generally used by ambitious companies with a national strategy.  It is much easier to order food for a limited menu built around burgers, pizza, chicken, burritos, or stir fried Asian combinations.  Your POS system manufacturer may offer enterprise reporting with many of the best reports available for a region, state, metropolitan area or the entire company.

These restaurant management groups track benchmark statistics including average unit volume, food cost percentage, labor cost percentage and gross profit.  Stores which are not meeting company objectives receive more attention from the headquarters staff.  The enterprise data can be sliced in more creative ways to make comparisons more meaningful.

The location profile can be used to create logical groupings including interstate exit stores, airport stores, mall food court stores, urban locations, locations near schools, etc.  Using targeted benchmark data can provide useful information for improving operations results and in selecting future sites for expansion. 

Tuesday, June 18, 2013

See Your Menu Through the Eyes of Your Customer

Pretend you are dining at a restaurant for the very first time.  You have just opened the menu handed to you by your host.  The front cover has a picture of a boat, the name of the restaurant in large font, and the family name of the owners.  A short subtitle contains the words seafood, fine and dining printed in italics.  The back cover explains the restaurant's history, the address, phone number and the same information for a sister restaurant.

Opening the menu, you unfold an 11" x 17" sheet of paper.  Each side offers 8.5" x 11" of space.  The half inch margin all around offers 150 square inches of space.  The restaurant owners use this space to create a guide to help you through the order process.  They want you to enjoy your experience.

Where do you begin to look for information?  The center feature box on the right side?  Maybe you direct your eyes to the upper left hand corner.  You may scan the entire document quickly to make sure the term fine dining promised on the front cover doesn't mean too expensive.  Once the pricing scheme is mastered, you'll try to solve the main puzzle.  What should I order?

The menu may have photos, feature boxes bordered in bold colors and other eye catching magnets to grab your attention.  One of these feature boxes may offer specialties of the house or family favorites.  Perhaps, the menu reflects a Mediterranean theme.  It is common to see the various meal courses in separate boxes including appetizers, entrees, salads, soups and side dishes.

In a short time, your waiter will arrive and ask if you have any questions.  In addition, they may describe the specials of the day.  They should ask if it's your first time dining in the restaurant.  Hopefully, they will make you feel at home while describing the popular dishes and cooking techniques employed in the kitchen.

Normally, you will be given a few moments to make your preliminary short list.  The waiter will return and ask if there are any other questions or possibly a simple "Are you ready to order?"

Depending on your selections, there will be different options and you will be asked to make more decisions.  Options will include desired dressings, toppings, side dishes (complimentary and additional charges), cooking method and temperature.

Remember, the owners want to help you truly enjoy your dining experience.  They have a major investment in the marketing tools used to get you through the front door.  They designed the menu to insure their guests order and receive great meals, return again often and tell others of their excellent dining experiences.

If the owners accomplish their objective, you have an excellent chance of enjoying your meal including the atmosphere, your food and the companionship of your fellow diners.

Some restaurants do a great job accommodating parties wishing to share their selections.  They offer their guests additional plates and silverware.  Restaurants specializing in shellfish dishes often offer bibs, special equipment and instructions for separating the food from the shells.

Since the number one financial objective of the restaurant is to make a profit, your entire experience will be designed to help you spend money.  Generally, starters (including appetizers, salads and soups) are more profitable on a % basis than the entrees.  Guests who are made to feel welcome may linger for a dessert course.

The dessert course is more profitable than the starters.  Commonly, you will be handed a separate dessert menu and the waiter may have strong opinions.  Everyone wants you to leave with a great taste on your tongue.

Some restaurants use the valuable space in the menu to highlight additional charges for splitting entrees, minimum dollar limits, and charges for items generally offered for no additional charge.  You may see a $10 charge for splitting an entree.   Bleu cheese dressing may cost you an extra $1.  Guests seeking a meal during the dinner period may be asked to spend at least $25 each.

Seafood market prices can change significantly from week to week.  Some restaurants use the phrase "market pricing" on dishes which feature raw ingredients with the most volatile prices.  Lobsters and whole fish may be sold by weight.  Other shellfish may be sold by the dozen.  A three pound whole fish sold for $25 per pound will show up as a $75 charge on the check.

Your guest check may seem too high for the meal you were served.  Take a look at the line items with the highest prices.  I have been charged $100 for a mixed shellfish appetizer in a restaurant featuring entrees between $25 and $40.  The waiter never mentioned the price when describing the presentation and optional sauces. 

Ask for a full accounting if anything appears to be amiss prior to handing over your credit card or cash.

Monday, June 03, 2013

Managing Wait Time in Food Service Operations

A restaurant can significantly impact both sales and profit results through effective management of the guest experience.  Specifically, the number of guests served is dependent on the number of people who arrive at your restaurant to have a meal and the service time required to prepare and deliver great meals.

Restaurant patrons spend lots of time waiting for service.  They may wait to speak with the hostess.  After negotiating with the hostess, there is often a wait to be seated.  Once seated, guests wait for the server to explain specials, take preliminary drink orders and answer menu related questions.

Once the guests have decided what they wish to order, there is a wait to place the order and another wait while the food and drinks are being prepared.  The initial delivery starts a process of enjoying the meal and giving the wait staff feedback.

There could be a second order if the initial order was limited to appetizers and drinks.  Guests wait again for the main course to arrive.  Often there are waits for food to be cooked again or for a requested condiment.

At the end of the main course, many guests are interested in either a dessert or an after dinner drink.  These items arrive faster than the main course and patrons interested in the dessert course are often not in a rush to leave.  On the other hand, some patrons just want a cup of hot coffee delivered quickly along with the check.

Once the final course is over, the guest will look for the wait staff to request the check.  Time waiting for the check to arrive should be short.  Too often, guests wait for many minutes before the check presentation.

Picking up the cash or credit card and completing the transaction also takes time.

Out in the kitchen, the number of orders in the queue can get out of control.  Busy dining rooms produce hundreds of printed orders to be filled.  Delays in the appetizer course can dramatically impact the customer experience.  Attention to customer preferences often impacts the success of the main course execution.  Communication between the wait staff and the kitchen staff is documented on POS system printouts.  Expediters may see special instructions on when to fire an order.

Excellent servers are true artists.  They anticipate the guest's needs and insure the overall experience is top notch.  At the same time, these servers tend to understand the link between efficient service and their compensation which is predominantly provided by diners.

If your operation offers very large entree portions and generous side dishes, your guests may not have room for dessert.  Often guests will be willing to stand in line to receive great value for their dining dollar.  Portion size and food quality are key factors in the decision to stand in a long line.

Restaurant revenue in a value operation is highly dependent on table turns.  The faster tables are turned, the more guests are served per hour.  Since these guests have waited in the long line, they are expecting a different service environment than a fine dining experience.

It is possible to push guests through early plate pick ups, dropping the check earlier than expected and other speed tactics.  Don't make your guests feel they are being processed.  Service should be efficient but not rushed. 

Buffet guests avoid many wait time issues.  They may have to wait to be seated.  Normally, there is a wait for the beverage order.  Once the beverage order has been placed, they may find another line at one or more buffet stations.  Some buffet operators handle the checkout before the guest is seated.  This tactic eliminates the wait for a check from the server.

Labor Costs and the Affordable Health Care Act - Sole Proprietors

Many employers have focused like a laser beam on the penalty clause for not providing minimal essential coverage.  These employers may be subject to a penalty.  The penalty is significant and employers need to carefully craft a strategy to avoid the cost associated with non-compliance.

For sole proprietors with a single restaurant, the penalty most likely will not apply.  There is no penalty for not covering part-time employees.  Most server staff employees work part-time on high volume shifts starting on Friday and ending on Sunday.  The kitchen may also employ part-time general help for the busy shifts.

Full-time employees, including management, make up the backbone of the restaurant team.  Taking the view of avoiding the penalty, sole proprietors would need to have at least 31 full-time people with none covered to be subject to any penalty.

The penalty provision requires employers with more than 30 full-time employees who are not offered health care coverage to pay a penalty.

Penalty= (Total number of uncovered full-time employees - 30) x $2,000

For example, a restaurant with 33 full-time employees who were not offered coverage would pay $6,000.  This works out to $182 per full-time employee or nine cents per hour.

Let's take a look at employee morale.  Savvy companies, who realize they have an opportunity to attract top talent, will offer key employees better pay and health insurance coverage.  It's not too difficult to imagine hard working part-time staff striving to attain full-time status.  Health care coverage and a bigger paycheck are their reward.

What about growing beyond the first location?  Will the new law inhibit small business growth?

As a company grows from a single restaurant into a small regional chain, management should review their organization options.  Often chains use separate corporations or LLCs to limit the risk of one restaurant weakening the financial health of the entire group.  Every restaurant is a separate company.  The management group is also setup as a separate company.  This same risk avoidance strategy works well with the health care act's penalty clause.  Few restaurants need more than 30 full-time employees.

Thursday, May 30, 2013

User Friendly Financial Statement Analysis

Assets burn cash.  Loans, credit lines, credit card balance transfers and shareholder investments produce cash.  Managing the sources and uses of cash is crucial to surviving in any business.  Most restaurants fail due to inadequate capital infusion during the start-up phase.  Some people never get the door open for business due to lack of cash.

Cash is king for many restaurants.  Many managers and owners do not understand how to read a balance sheet.  Assets other than cash require cash.  If your receivables, inventories and prepaid expenses increase your assets go up but your cash goes down.

Many restaurants have a difficult time paying suppliers on a timely basis. The impact is significant. Suppliers will add late payment fees, offer tighter credit terms, charge higher prices and in the worst case scenario require cash payment on or before delivery. 

For those readers who do not love accounting and financial statement analysis, there are a few key ratios and formulas which can bring a big benefit with a small effort.

Working Capital Considerations
Ability to pay suppliers is often difficult due to the nature of cash flow in the restaurant industry. Sales turn into cash on the spot or a few days later as credit card charges are wired to bank accounts. Employees are paid with a 7 to 10 day lag (sometimes longer) and suppliers are paid in 30 days.

Using employee and supplier financing works OK until the sales tax payment is due. Cash is plentiful until these statutory payments come due (often with big late payment penalties).  If your company has a rough time making the sales tax payment, a beginner's level grasp of financial statement analysis can help.

Where do you go to help monitor this important issue?  Balance Sheet

The current ratio is calculated by dividing the current assets total by the current liabilities total. Unfortunately, inventory bloat makes the current ratio useless in our industry.

Avoid over stocking your shelves to improve cash flow and reduce spoilage. Substitute the Quick Ratio for the current ratio.

Quick Ratio = (Current Assets - Inventories)/Current Liabilities

A quick ratio below 1.0 is very dangerous. A good ratio is 1.25 or higher.

Capital Expenditures and Financing Options
Capital expenditures are made in the operation to produce a positive future value.  Increases in liabilities, including longer times to pay suppliers and employees, increase cash flow.  Liabilities are a risky way to finance your business.  Managing financial risk will help you grow your business at a sustainable rate.

Compare your equity accounts (common stock, paid in capital, retained earnings) with your total net fixed assets (property, plant and equipment net of depreciation).  A company with a low financial leverage will have more shareholder's equity than net fixed assets.  If a company employs financial leverage, they will have a long term debt figure which reflects loans required to invest in the company.  There are two ratios which you can use to monitor your long term financial health.

Debt to Equity Ratio = Total Liabilities/Shareholder's Equity

Try to stay below 1.0 if possible.  A major manufacturing company (auto plant) may have a ratio of 2.0.  Restaurants should be much lower.  There are publicly held restaurant companies with a debt-to-equity ratio above 10.0.  These companies want to maximize return on equity by using financial leverage to acquire assets.  They may be buying restaurant companies or opening lots of new restaurants. 

Fixed Assets Ratio = Net Fixed Assets/Long Term Debt

Picking an ideal fixed assets ratio depends on your appetite for debt financing and your business health.  One company may have a ratio of 1.0 where the long term debt equals their net fixed assets.  In theory, the ability to repay the debt is high.  I recommend removing net leasehold improvements from your net fixed assets.  If you lose a leased premise, the value of these improvements may be very low.  Equipment may be worth far less than the book value due to a vibrant after market for restaurant equipment.

By performing simple division using a handful of numbers on your balance sheet, you can determine your ability to pay suppliers on a timely basis and keep your long term debt in line with the money raised from shareholders while prudently investing in fixed assets needed to run your restaurant business.

Should You Use Last Year or Budget in the Profit and Loss Statement?

Most accounting programs produce comparative reports using pre-built templates. Restaurant operators need a compass to guide them through the year's tremendous number of ups and downs. Two excellent comparisons are the most popular profit and loss statement formats: Current Year/Last Year (or Prior Year) and Current Year/Budget.

My strong preference is to use Current Year/Budget. The reason I prefer this format is the implicit need to actually construct a budget. Most budgets actually begin with the previous year's figures.

Many companies work on next year's budget at the end of the third quarter (or slightly earlier). They use the results from current year's operations as the foundation for the budget. By making educated guesses for the remaining months in the current year, they obtain a full year profit and loss estimate.

All budgets should address every line in the P and L. For restaurants, the most important number in the budget is revenue. At a minimum, you should break the revenue into food, beverage and other.  Beverage revenue may be more detailed with Beer, Wine, Liquor and Soft Drinks sub-totals in the beverage total. 

If possible, I recommend using both Revenue - Food Catering and Revenue - Beverage Catering for restaurants with significant catering volume.

Cost of goods sold is a very important budget issue.  Food cost and beverage cost are prime costs. QSR and Fast Casual concepts with a high percentage of take-out business should also include disposables in their cost of goods sold.

Direct labor is a high profile item for 2014 budgets.

The federal health care affordability laws will impact direct labor expenses when they go into effect next year. Companies are grappling with issues involving the total number of employees, percentage of part-time employees, seasonal hiring quotas, etc. Because of the magnitude of the health care legislation, comparisons to prior year will not be as effective as comparison to budget.

When you begin getting the budget team prepped this summer, try to get a head start on many key issues: do we have a strategy for company health insurance coverage? what will the additional cost be to offer health care to valued employees who are not covered now? do we need to raise menu prices to cover these costs?

If you decide to retain talented people by offering a top flight health care plan, the premium cost can be used in salary negotiations. Most uninsured or under-insured employees will gladly take a pass on this year's salary bump once they know the cost of their premiums.

If menu prices are required, you need to calculate the impact on check averages, covers and total revenue. Restaurant diners have recently spent less in reaction to increases in fuel costs, higher payroll taxes and slower income growth. Of course, restaurants could benefit from their customers having more disposable income due to their own benefit from new company health care coverage in 2014.

Newly covered people who had been struggling to pay for individual health care premiums will see increases in their income net of taxes and health care premiums.Some uncovered self-employed individuals will have to cover themselves or pay a higher tax.

Understanding your customer base is critical.

Higher menu prices should translate into a lower cost of goods sold %. If you felt the impact of health care coverage could raise your labor costs by 10% and your current labor costs are 30% of sales, you need to budget for a 3% sales increase just to break even.

If your cost of goods sold is 33%, you would expect a decline of 1% since 33% divided by 1.03 is 32%. Again, you would need to carefully budget all expense categories (every line on your profit and loss statement). I'm using the prime costs and revenue figures because of their relative impact on the bottom line.

I see 2014 as a great year to shift from a current year vs. prior year statement format to a current year vs. budget format.

Sunday, May 26, 2013

Food Cost Variances in Regional Chains

Many of my regional restaurant clients show significant differences in the food cost % from unit to unit. It is always easy to find anecdotal excuses for these variances. Examples include: customers at each location have different dining habits, higher sales volume hides some mistakes which surface at lower volume locations, and the higher volume locations have better personnel. Which units should be used as a benchmark? Should the lower volume units be par? Or are these units below the standard? For purposes of growing a chain, I would use the higher food cost % in projections. If a chain always look at the best case scenario in five year plans, they will never hit their target figures due to rosy assumptions.

High Beef Prices Will Impact Food Cost

The drought from 2012 and the major storm damage in both 2012 and 2013 is causing record high beef prices. Current prices are close to levels during the mad cow disease outbreak. As contracts wind down for major chains, decisions will need to be made whether to go long at higher prices or just play the commodity markets using short term future contracts. I just returned from the National Restaurant Show in Chicago. Chicago has plenty of upscale steak houses and most of these restaurants charge enough to offset some of the food cost increase. Value based menus will be impacted as ground beef prices are well above recent years.

Tuesday, April 16, 2013

Professional Recipe Model - Forecasting Key Items

Many companies stop cold once they build a standard food cost recipe model.  These operators are happy to see the true food cost of each menu item.  They benefit from the ability to see the change in recipe cost totals whenever they update ingredient prices with current purchase data.

I recommend a phase two project once the initial recipe model is complete.  It is possible to build a powerful forecasting tool with a fraction of the effort required in phase one.

Hopefully, your software allows you to build a new recipe using a recipe already in the system.  Many programs have this feature.  You simply load the base recipe, edit the name and ingredients, and save the new recipe.

Before you dive into the recipes, take a look at all ingredients in your item list.  Every item should be classified as a par stock item or a volume dependent item.  An example of a par stock item is all purpose flour.  This shelf stable item needs to replenished whenever the reorder trigger is pulled in your inventory model.

Many items are not ordered based on a par stock system.  Several examples involve high cost, perishable food ingredients including protein featured in popular entrees and specials, fresh fruits and vegetables, baked goods and special order items.  Protein items include meats, seafood, dairy and poultry products.  These perishable items need to be ordered more carefully than all purpose flour.

When you load a current recipe in your editor, change the name by placing an "F - " at the beginning of the current recipe name.  For example, a recipe for Shrimp Scampi would be changed to F - Shrimp Scampi.  The "F" stands for forecast.

Now load the ingredients editor.  Delete every ingredient which is ordered based on a par stock model.  Salt and pepper can be deleted along with all other dry spices.  If your scampi is served on rice or pasta, you can delete the starch ingredients.  Shelf stable garlic, butter and olive oil can be deleted.

The goal is to have a skeleton recipe with only volume dependent items.  Shrimp 16-20 would definitely remain.  Save the new recipe once all the deletions are completed.

Repeat this process for all recipes needed for entrees, appetizers, salads, soups and protein rich side dishes.  Desserts are optional.  Once you have a full set of recipes with the prefix "F" in your tool kit, you can harness the power of the recipe model.

The next phase varies depending on whether you have a POS system or a catering oriented system.  Those who use a system for catering cost control will have an banquet event order orientation.  The forecast will be entered using a BEO form.  The form will only call recipes beginning with "F" to prevent ordering shelf stable par stock items.

To generate a forecast for your volume dependent ingredients, simply enter a sales mix using your best estimate for each menu item.  Don't worry about safety factors in this stage.  Run the purchase requirements report for this "event" and you will see the counts for each perishable ingredient.

Companies with POS systems and a la carte menus have ideal usage reports.  We want to use the ideal usage report to help us order food in advance.  Using previous product mix reports, current covers forecast and a list of specials, do your best to estimate the sales counts for each item.  If you are about to order food for the weekend, use your weekend item sales forecast to create the sales mix.

The mechanics of entering the sales estimates will vary depending on your software.  Every system has a method for manually entering a sales order.  The goal is to enter the estimated sales counts to use the ideal usage report.  The report's ideal column will show the quantities required to order.

We used this method to forecast purchases in a high volume college football stadium for the luxury suites orders.  The reports accurately calculated the quantities needed based on preliminary orders and management estimates.  Last minute game day emergency trips were dramatically reduced.

Sunday, March 17, 2013

Managing Restaurant Food Cost

I started this blog in late 2005 to help food cost wizards improve their craft.  Blog visitors include cost accountants, chefs, cooks, food service directors, professors, students, stewards and other food service workers and executives.

In May 2006, a series of articles were posted to rip apart the conventional food cost model.  The series explored each factor of the food cost calculation.  Since blog posts follow a chronological order with the most recent posts at the top, it can be difficult for new visitors to follow a thread.

If you are new to the blog, I suggest I quick tour of the May 2006 posts beginning with Food Cost Percentage-Decomposed which shifts the focus from the inventory valuation to purchasing control.  There are many other posts which delve into storage of food.  Generally, your food cost is your cost of food consumed divided by the revenue received from food menu items.

Inventory does play a major role in the food cost formula.  Accurate cut-offs are required to track consumption.  You will find a new approach to inventory control in the second post in the series, Inventory Control-Decomposed.  The perishable nature of our product requires extra attention to items stored in refrigerators and walk-in coolers.  Frozen items have a major impact on food cost.  Yet you will find the greatest accuracy in many inventory valuations on the dry spice page.

Since the dry storage areas are warm and open, count teams often spend too much time on relatively low impact food items.  They may rush the freezer counts due to the cold environment.  When was the last time you weighed every item in your freezer at month end?  Do you open the boxes of meat and seafood to make sure they are full? 

The final article in the series, Food Purchasing-Decomposed, examines a ranking method for food items using an ABC approach common in manufacturing operations.  This article is aimed at shifting energy to the high impact items which have the greatest weight in your food cost results.

In summary, your guests come to your restaurant to order your most popular menu items.  These items use food ingredients which we call key items.  You spend a large percentage of your total purchasing dollar on these key items.  If you buy too much food, there is a high risk of loss through spoilage, theft and over production.  Over production creates higher food costs and higher labor costs.

Thousands of readers have sent emails with questions about the food cost formula.  Many of the questions involve issues which are central to effective control in a particular segment.

Recently, I received a phone call from a chef who needed help with a course he was taking to improve his menu pricing skills.  He actually had the correct answer but he was not able to find any source other than the blog and he just wanted to be sure he got an A in the test.  It is better for all the readers if the questions could come as blog comments since everyone can join the discussion.

All comments on a industry specific topic are given a thoughtful answer and all readers are welcome to include a hyperlink to your email or website.

Tuesday, February 12, 2013

LinkedIn Top 5% for 2012

As many of you know, I went inactive on Facebook in late 2011 and invited everyone to join me on LinkedIn.  Thanks to all my connections and curious profile viewers!

Professional Recipe Model - Substitutes and Sides

It is very important to understand your POS setup with regard to the many items which do not have a selling price.  Buried in the data, you will find counts on substitutes, extras, holds, etc.  Customer choices, for starches, sides, toppings, dressings and condiments, attract the attention of the experienced eye.

A popular substitute can be exploited.  One of my clients offered a lackluster potato salad with any burger or sandwich.  The wait staff would ask their guests a simple question:  "Would you like fries instead of the potato salad?"  Most regulars knew the correct answer was "Yes."  The shoestring fries were excellent.  The fries substitute was an upgrade which added $1.25 to the check.  If you decided you should have ordered the fries once your sandwich arrived, the same up charge price of $1.25 would appear on your check.

When building the recipes to handle the burger and the fries upgrade, I prefer to approach the task from the view of my favorite POS report - Product Mix (PMIX).  The counts from the POS tally will be used to calculate ideal usage and to update perpetual inventory counts.

Let's start with the burger platter.  The plate consists of a dressed burger patty on a bun, the potato salad, two leaves of iceberg lettuce, a tomato slice, three pickle chips and a sprig of parsley.  I create two sub-recipes to handle the batch of potato salad and the burger setup.  The burger setup can then be used to create recipes for cheeseburgers, pastrami burgers and bacon burgers, etc.

The burger menu item would be tied to 1 burger setup, 1 portion of potato salad and 1 portion of average condiment usage.

Moving forward, we need to address the fries upgrade.  This substitute has a separate key on the POS.  We will get the exact count of substitutes ordered for any given time period.  In this operation, it is possible to order fries as an a la carte side dish for $2.95.  The recipe for the substitution requires 1 portion of fries.  This portion would include shortening and salt used in the preparation and 1 ounce of ketchup.  To account for the substitute, you should subtract 1 portion of potato salad.

If the net cost of the fries minus the salad is $0.25, the cost of sales is 20%.  More importantly, your burger customers are contributing an extra dollar of gross profit.

This approach calculates the ideal usage perfectly since the potato salad is counted in the burger order and subtracted in the substitute.  The net potato salad consumption is zero in the real world and in our recipe model.

Wednesday, January 09, 2013

Outlook for 2013

In 2012, we saw all the predictions from last January were accurate:

The economy did strengthen; value oriented customers are paying a premium for added quality; commodity markets remain volatile due to weather and oil prices; most restaurant operators have been able to past cost increases on to customers by increasing their menu prices; and, unemployment at year end was below 8%.

We expect interest rates to remain low for the first half of 2013. Consumers will most likely refrain from using home equity lines of credit to pay down credit card balances as the recession is still fresh in their mind. Possible rate increases would come in the second half if employment data continues to improve.

Unemployment rate will continue to gradually decline in 2013. Our year end forecast is for a 6 1/4% rate.

Severe weather events are now expected by most people. Droughts, floods, wind damage and other factors will impact insurance premiums. Restaurants will increase their coverage by adding riders for previously uncovered outcomes.

Companies will experience higher employee turnover as better jobs open up for previously downsized workers unhappy with their current pay.

Restaurant Data Pros

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