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Tuesday, December 30, 2014

Outlook 2015 - US Food Service Industry

Our industry has absorbed the impact of the supply chain adding health insurance coverage.  Most distributors now have complied with the ACA provisions.  The food distributors have passed these increases on to restaurant owners and caterers.  The record drought in 2013 and the related poor corn crop had a major impact on protein prices during the first 3 quarters of 2014.

Fortunately, the corn crop in 2014 was robust and we can all expect a positive impact on protein prices in 2015.

Given the high 2014 food prices, current low grain prices and the supply chain's early compliance with the ACA requirements, I expect low or negative food cost inflation in 2015.

Minimum wage legislation at the state and municipal level has raised labor costs for many operators.  Health care expenses are on the rise as companies offer minimal coverage to previously uninsured employees (skinny plans and low cost HMOs).  Labor costs will rise in 2015 in dollar terms.

The current oil glut has had a major impact on transportation costs.  Distributors will pass along energy savings to restaurant operators.  Delivery concepts will benefit from lower prices for gas.  Customers will have more disposable income.  The drop in energy prices will provide a needed boost to our industry in 2015.

As the unemployment rate continues to fall, consumer confidence rises.  I expect modest improvement in the employment market with a drop to 5.5% for the unemployment rate. 

Americans are slowly experiencing growth in wages.  The new college graduates will enjoy a better job market.  Previous graduates have adapted to their rough start by staying single in higher numbers.  Take-out, delivery, fast casual and bakery cafes will continue to see plenty of sales growth.

In January, I resolved to lose 12 pounds during the year.  My success in accomplishing this goal came at the expense of beef consumption.  Personally, I did not go out to have a steak dinner in a restaurant during 2014.  Even at home, my family has opted for seafood for most celebrations.

Many of my fellow baby boom generation are increasing their consumption of vegetables.  Locally sourced, organic vegetables will continue to attract diners in 2015.

Tuesday, November 25, 2014

Reader's Industry Information Request

Good afternoon Joe,

Thank you for such fantastic content in your emails and blogs, I have always found them very useful.
I have been in food services for almost 20 years with the exception of the last few, I have started working at hotels.

I am looking for hotel researchers or consultants like yourself whom I could follow or read their blogs and or hospitality case studies.

Would you know anyone that you could suggest and provide an direction?

Thank you once again for your time and patience and hope you are doing well and are in the best of spirits.


Thanks for your interest, Zafar!

My favorite industry sites are listed below:

Hotel Food & Beverage Observor

Hospitality Trends

Profitable Hospitality

The Center for Hospitality Research

Penn State Index of U.S. Hotel Values

UNLV Gaming Research & Review Journal

National Restaurant Association News & Research

Monday, November 24, 2014

Menu Price Question

Dear Mr. Joe,

Since New Year’s Eve is around the corner, we are planning this year end in our restaurant chain to use set menus.  I have saved all my free offers from suppliers as well as my credit notes year to date.  We are going to get all our beverage items (mainly wine) free of charge from our suppliers.

So how do I calculate my beverage cost using such free goods without any charges?

For the food items, I have no problem because I have to buy menu items ingredients and post the menu item name on my POS.  I just have an issue for the beverage.

I am counting on your advice.  Thanking you in anticipation.


I would ignore the free items when setting menu prices.  These items are actually discounts earned throughout the year on the items purchased from the same vendors.  There are several issues supporting my recommendation.  The top issue involves the cost to replace these items.  You will not be replacing the free wine with more free wine.  Use the replacement cost in your calculations.

A second option you may want to consider is using an average cost when determining the true cost per bottle.  You would use the free wine along with all the wine purchased to calculate the true cost per bottle.  Use the total purchase cost and divide by the complete bottle total (including free wine).  Adjust this per bottle cost for inflation to determine the menu price. You will be close to the replacement cost.

Optional Food Cost Formula

Hi Joe,
I am trying to help a colleague at another hotel in our chain.  He is F&B Controller at a new property.  They do not have a food store.  All purchased items are entered as direct purchases. 
At our property we calculate a weekly Flash (food & beverage cost check) and at the month end the food & beverage cost.

The weekly formula is:
Direct Purchase to Kitchen + Store Issues – (Complimentary Items + Employee Meals)= (Cost of Food/Total Sales)% = Food Cost %

The month end calculation is:
Opening Balance + Purchases – Closing Balance = Gross Consumption – (Complimentary Items + Employee Meals) = (Net Consumption/Total Sales)% = Food Cost %

In the case of my colleague's operation what should be his formula? Since he has no store all his purchases are direct to the kitchen.  So, unused items (that should be stored)  are included in the food cost calculation.  This resultant cost percentage does not represent actual consumption and a bloated food cost percentage is the result, I imagine. Am I correct?  I thought about it and it should be the same formula as a fast food operation that does not have a store.  I surfed the Net and could not find any such animal.  

I'd appreciate your feedback.

Thanks for the question, Brian!

Actually, the food cost formula is straight forward:

Food Cost = Purchases - Inventory Change

I prefer to include the cost of complimentary items and employee meals in the calculation.

Your weekly report utilizes a perpetual inventory model with tight control over issues of stock.  Your friend would need to count inventory weekly.  His formula would be very similar to your month end calculation.

If he wants to allow credits for complimentary items and employee meals, these items would be deducted from the actual food cost.  The key issue is consistency.

Weekly inventories provide excellent feedback to management.  Operations benefit from this added control with lower cost of goods sold.  Problems are spotted quickly.


Friday, October 31, 2014

Should We Include Labor In Our Standard Recipes?

A frequent reader question topic involves the addition of direct labor in all standard recipes.  Before giving a firm recommendation, I'm going to explore the pros and cons of this approach.

On the plus side, recipes which include a labor component will make side-by-side gross profit comparisons between daily specials menu options more informative.    Many restaurants enjoy a major profit contribution from their specials.  Knowing the expected gross profit is a big plus.  By their nature, specials are designed to provide a spark and they should be priced to deliver a decent profit margin.

If we feed the recipe model a week or month of actual menu item sales counts, the recipes with a direct labor component will show the number of expected hours (and dollars) of direct labor .  This figure may be compared to actual labor cost data.  This is one of the benefits desired by operators who adopt this approach.

Switching to the minus side, the addition of a direct labor component to standard recipes makes variance reporting more complex.  Recipe costing software is designed to quickly calculate the impact of price changes for major ingredients.  This impact may be muted by any pay changes. 

The payroll rate increase issue also impacts ongoing use of the recipe model.  While the software is designed to enter food purchase orders, invoices, stock issues, etc., it does not have a robust payroll data link. 

In fact, operators need to "purchase" hours of direct labor with the most recent rate per hour.  The hourly rate is a single figure and it needs to include burden (vacation pay allowance, worker's compensation insurance, unemployment insurance, disability insurance, etc.).  The explanation on how the model handles labor can be confusing to anyone without a degree in accounting or management.

 Some operators use central production (i.e. commissary) for a group of restaurants.  They may have a dedicated team producing food which is packaged in standard containers and shipped by tray or case.  If the commissary team produces a similar volume of finished product each week, the addition of labor (and possibly an overhead factor) may be useful in billing the units.

I would recommend operators examine their true reporting needs carefully before adding a direct labor component to their standard recipes.  The extra work involved in the setup and ongoing maintenance needs to be justified by the benefit derived from the reports.  Most companies control labor with time clocks, schedules, productivity software and employee incentives.  The addition to the recipe model may not offer a good return for the time invested.

Thursday, October 16, 2014

Banquet Guests Choose Most Expensive Items

Dear Joe,
I hope this finds you well.

Please tell me, what happens when you offer a banquet package for a flat price and the clients consume only the most expensive item?

You have no right to stop them because the package is quoted with a specific time (1 hour, 2 hours).  Also, what do you consider when you cost from 1 hour to 2 hours?

Jean Claude

A great number of banquet packages are offered to guests on an all you can eat basis for a time period specified in the contract.  There are ways to control your costs without bringing attention to your tactics.

Many caterers offer a package with a high profile protein item.  In order to restrict access to this item, for example Prime Rib, many give each guest a token or a ticket to hand in when they order their serving from the carving station.

I have worked on cost control for steak night in an operation at a construction camp.  Our guests consumed over 5,000 calories daily.  We expected each guest to consume 2 steaks.  Most guests ate exactly 2 steaks, there were almost an equal number who ordered either 1 or 3 steaks.  We did not have anyone who ordered a 4th steak.

In our contract, the cost of this steak night was weighted highly in our estimates. 

For your operation, it is essential to forecast the number of portions consumed by guests as accurately as possible.  As the meal service goes on for the second hour, your consumption experience will change.  During the first hour, you will have greater consumption than in the second hour.  If the service continues, this trend will continue.

Some tips from my clients include:
Creating a portion size which matches the guest behavior.  For example, you may want to offer a smaller portion size if you believe most guests will return for a second portion.

Budget around 70% of the typical male portion size for the female portion size.

Create a special station for the key item and stage displays of top quality pastry items along the path to this station.

Offer an absolutely irresistible second choice.  Many guests will try each entree and will be satisfied.

You can structure your event differently when you go beyond 2 hours.

For years, I partnered with a restaurant owner to offer traditional Clam Steams in Upstate New York.  These events are pretty standard in the New York Capital District.  Guests are offered a steak or chicken option.  Often, the steak price is $2 to $3 higher than the chicken.  Other than the entree, the event is entirely all you can eat.

At the start of a 5 to 6 hour event, the guests are offered clam chowder, hot dogs, Italian sausage with peppers, and burgers.  In addition, a selection of salads, baked beans, rolls and salty snacks are available.

Around one hour later, raw clams are available to guests.  They shuck their own clams.  Traditional condiments are offered.  The raw clams are available for around 90 minutes and the other items are available all day.

Generally, there are activities and games to break up the food service as the day progresses.  Either a band or a DJ provide music for dancers.

Later in the day, the guests line up for their steamer basket which consists of one dozen clams, one potato, 2 links of breakfast sausage, and an ear of corn.  Guests are encouraged to enjoy unlimited clam broth straight from the steamer.

The grill station is limited to guests with tickets.  They present the grill master with their chicken and steak orders.  This service is restricted to one steak or one half chicken per guest.  Very few people have room for dessert.

The secret to success is an awesome Manhattan Clam Chowder.

Monday, October 13, 2014

Reader Question: Margin vs. Percentage?

This month, Adam from New York wrote an email asking whether it is better to use contribution margin or food cost percentage.  As many readers know, I prefer using contribution margin.  My early experience in remote site support services showed me the value of tracking all costs by the number of patrons served.

Percentage analysis is better than nothing at all.  It is definitely a good start.  You won't get answers to many questions with simple percentages but over time you will see trends develop.

A little bit of extra work will provide operators with a better view of profitability.  The contribution method will illuminate how an operation makes money.  Caterers, on site feeders, clubs and other non-restaurant food service operations normally use the contribution method.

Restaurants equipped with a top notch POS system can make the shift from percentage analysis to the contribution method.  There are several key data points available on your standard POS reports.  You need to track the number of guests served (covers), the sales per guest (check average), a category breakdown of menu item sales (PMIX report by category) and a ranking of your menu item sales (PMIX ranking report).

For any given period, your food cost divided by the number of guests served equals your cost of sales per cover.  You can subtract this figure from your check average to yield the gross margin per guest served.  I recommend a 3 month time frame for both the check average and the food cost per cover.

In addition to your total food cost, take the time to break out the cost of all protein items including meat, poultry, seafood and cheese.  You now have your food cost separated into the protein cost and the cost of all other food items (including non-alcoholic beverages).

Armed with your number of covers, the average sales per cover and the cost of sales per cover, you can assemble a simple but powerful report.

In our example, we served 25,000 guests in the most recent quarter.  The food sales per guest averaged $20 producing $500,000 in food sales.  Our food cost per cover of $6 produced a cost of sales of $150,000.  We earned $14 per cover and a total of $350,000 in gross margin.

Protein sales per guest averaged $12 and other food and non-alcoholic beverage sales per guest averaged $8.  Our $150,000 food cost has a $100,000 protein component and a $50,000 non-protein component.

Our gross profit per guest is made up of $8 from sale of protein items and $6 from sale of non-protein items.  Smart operators have their server staff well trained in sales of non-protein items.  These items may include extras like a side salad, a cup of coffee, garlic bread and a slice of pie.

Most guests will order a single protein item (entrees, sandwiches, appetizers) and they will order 2 or 3 non-protein items (beverage, soup/salad, dessert).

It is common to have a higher contribution from protein items.  You may want to keep your direct labor and direct operating expenses equal to your protein item contribution.  The profit from non-protein items will offset occupancy costs and help put money in the bank.

Monday, September 01, 2014

A Margin of Safety for Restaurateurs

In an earlier post, High Food Cost Due to Inflation, I recommended an across the board increase in menu prices. During the month of August, I received several calls and emails asking how big the suggested increase should be for most restaurants.

Anyone considering an across the board menu price increase should first conduct a thorough competitor analysis. If you find your competition has already raised prices, you should go ahead with the increase.

Every menu has a unique cost composition. I can only speak to general market conditions. Two key components of gross profit have shot higher in 2014. The impact on labor costs of the Affordable Care Act has been estimated at between 1% and 2% by operators here in the Mid-Atlantic. Food Costs have risen 7.5% in the protein category.

If your food cost percentage was 30% before the 2014 cost increase, your current percentage would be around 32.25% (30% * 107.5%). We can also add 1.5% to your labor cost. If your cost before the ACA was 30%, we can estimate a new labor cost of 31.5%. In order to achieve a profit of 40% after cost of sales and direct labor, we would raise menu prices by 3.75%.

The ACA will continue to cause general price levels to increase as employers provide employees with the mandated health care coverage. I'd recommend additional menu price increases on a quarterly or semi-annual basis to cover the additional costs. A 1% quarterly increase would provide a 6.75% increase in a 12 month period. My previous range for the increase was between 3% and 10%.

Restaurants Continue To Struggle With High Protein Costs

The market prices for beef, pork and chicken remained high this summer.  In the most competitive markets, restaurant operators have had a tough time building higher costs into their menu prices.  Consumers continue to carefully manage how they spend their discretionary income.  These consumers see the higher food prices when they shop in the grocery stores.

Restaurants need to take a long term view and develop a strategy to deal with the challenging environment.  I remember when McDonald's first came to our area in Upstate NY around 50 years ago.  You could purchase a meal for $0.40.  This meal consisted of a hamburger, a order of fries (similar to today's small portion) and a soft drink.  For shake lovers, the meal cost rose to $0.50.

If you visit a McDonald's today, you may find a similar meal for $3.00.  They have a separate dollar menu in many locations.  This is an increase of $2.60 in 50 years.  The average annual increase is around 4.1%.

How long has your operation been in business?  If you saved your original menu and check average information, it would be a great exercise to compare today's prices with your oldest menu.  Create a spreadsheet and enter the years in column A.  Label column B "Meal Cost".  Column C "Growth" will have 1.041 in every cell.  Column D should be labeled "New Cost".

Columns B and D will be filled with calculated values.

Cell B2 will have the price of a meal in your first year of business (or the first year you kept solid records).  Cell D2 will have a formula as follows:  =B2*C2.  Cell B3 will have a simple formula as follows:  =D2.  You can copy the formula in B3 all the way down.  Repeat this with cell D2.

The final value in column D will yield the cost of a meal this year if you steadily raised prices 4.1% each year for every year you have been in business.

I ran a catering operation in my sophomore year of college.  The sale prices for whole chickens back in the 1970's was $0.29 per pound.  Today, I can buy chickens for around $0.99 per pound on sale.  These sale prices are tough to find for fryers and broilers.  The $1.49 per pound every day chicken prices do reflect a 4.1% growth rate.

Restaurant operators can increase profits steadily, over a long time period, by implementing a slow growth policy for menu prices.  A 4.1% growth is roughly a 1% increase each quarter.  Today's high protein costs provide cover for restaurants who need to increase prices by a much higher percentage.  Make sure you know your competition thoroughly before implementing any large price increase.

Thursday, August 28, 2014

Operators Are Watching Portion Sizes Carefully

I have been traveling through New England and Upstate New York this summer. While driving on major highways, the meal choices are limited to major chains for the most part. Menu prices tend to be 10% higher at the rest area food courts.

Most of the popular concepts have strict portion control built into their service. I did not notice many changes in portion size. The main observation in the chain concepts was the tight control over complimentary condiments. Gone are the handfuls of ketchup and mustard. Napkins are also being strictly controlled at the grab and go locations. You need to ask for cream for your coffee at every place I visited.

My favorite meals were in off the beaten path locations.   Most operators were watching the portion sizes.

We stopped for a chicken BBQ at a church near Keuka Lake in Hammondsport, NY. For $8, they served one half chicken, one roll, one butter patty, one serving spoon of salt potatoes and one container of cabbage salad (similar to cole slaw).

The utensils and napkin were carefully distributed - one per guest. The lemonade was technically unlimited but the cup size was designed to limit consumption. It was a very satisfying meal and I complimented the pit crew on my exit.

I want to emphasize the portions were carefully controlled. This does not mean they were small. On a trip from Amherst to Concord, MA, we stopped for fried clams. I decided to order one quart for three people. We were overwhelmed with clams but the portion was controlled. The way the operator handles portion size is as follows: a waxed one quart container with flaps for the cover is placed in a paper bag. The server fills the container all the way to the top of the flaps.

We would have been satisfied with a pint. However, I observed the same paper bags at the picnic tables nearby. The amounts seemed exactly the same.  The parking lot was completely full and the seasonal shack had an impact on the local traffic patterns.

The server handed me three containers of tartar sauce (one per person) and let me know more was available if needed. Guests helped themselves to napkins.

We enjoyed a terrific breakfast of Eggs Benedict in Concord. This dish was carefully put together with one english muffin, two poached eggs, two slices of back bacon, a serving spoon of hollandaise sauce and 3 ounces of home fries. We were all offered a second cup of coffee or extra water for the tea. The potatoes were excellent and we all had exactly the same size portion.

Massachusetts has world class ice cream stands and terrific donut shops. It's impossible to travel through the state without stopping at least once for each temptation.

While the medium cup of ice cream would have been called large in the Mid-Atlantic, every customer was served the same overloaded cup. Donuts are easy to portion. The napkins were self-serve at the ice cream stand. We each received a single napkin at the donut shop. Control of napkins, sugar and cream was the norm at several coffee shops we visited.

Amherst, MA is part of the five college consortium between the Berkshire Mountains and the Quabbin Reservoir. Although we were in town when school was out for the summer, the main street shops were open for business.

We enjoyed one of the best roast beef sandwiches in many years at a sub shop and bakery. The fresh baguettes were sliced in half and the freshly sliced beef was weighed (5 ounces). The lettuce and tomatoes and the condiments were all carefully portioned. We received two napkins per sandwich. I noticed the baked goods were all pre-sliced. Some cookies were wrapped in 3-packs.

Our favorite spiedie pit in the Southern Tier area (near Binghamton, NY) serves generous portions. The spiedies are portioned prior to cooking on skewers. The meat is served on a single pita with one spoonfull of sauce. All condiments and vegetables are measured carefully.

We split a large french fries order. They use a bag method similar to the fried clams stand but smaller. All of the patrons at the tables near ours had the exact same bag size filled to the brim. For beverages, they hand you a cup and you can refill the cup.

There is an outdoor market/bazaar operation outside Penn Yann at the top of Keuka Lake. We were told to see the Polish Princess for her pierogies. She was sold out of everything except the pierogies since we arrived near closing time.

We each received five pierogies and we were allowed to spoon on the sour cream and dill sauce. She chatted with us and encouraged us to enjoy the sauce. The orders sold for $5.75 per portion or $1.15 per pierogie.

She looked like she had a busy day.

With so many restaurants wrestling with tactics to lower their food cost this year, it is important to watch your portion sizes like a hawk. Make sure you are consistent. If you are known for generous portion sizes, it is important to meet your customer's expectations.

Thursday, August 07, 2014

High Food Cost Due To Inflation

The June Consumer Price Index (CPI) shows a 7.5% increase in the category meats, poultry, fish and eggs (see chart below).  This category is very important for most restaurant operators.  The protein component of most restaurant meals has the highest weight.

Over many months, protein costs have been on the rise.  The trend may correct later this year since the 2014 corn crop is excellent.  Corn futures have been in a free fall since early May 2014.

Source: US Bureau of Labor Statistics - June 2014 - CPI Summary

Should you increase your menu prices to cover the significant rise in your invoice costs?

The answer is yes for almost every operator.  Unless you face very stiff price competition in a market with a steep decline in restaurant visits, it is essential to raise menu prices.  Many operators have increased menu prices to help offset increases in labor costs due to health insurance premiums.  Your guests see the increase in food prices 

If you never prepared a budget for 2014,  you may have a tough time putting the food cost inflation in perspective.  A rise in the cost of goods sold of 10% (e.g. from 30% to 33%) can completely wipe out profit at many restaurants.

Should you raise menu prices across the board?

I would vote for an across the board menu price increase in 2014. 

It has become more difficult to hide profits in non-alcoholic beverages and extras.  Restaurant visitors are looking for a high quality meal for a price that meets their budget.  Many diners are opting for tap water.  Guests are taking a close look at their checks and they are modifying their behavior as they see pricey drinks and charges for extras.

If your current check average is $20, an across the board increase of 3% would raise the check average to $20.60.  An aggressive 10% increase would take the check average up to $22.  You need to study your local competition.  You need to know your guests.  Will your guests adjust their menu choices to keep the check average at $20?  If you think a 10% increase will drive your guests out the door or cause them to order fewer items, you should go with a modest increase.

One thing is for certain.  This is a very tough year to discount menu prices.  If you depend on deep discounts and coupons to fill your dining room, the current rise in protein costs will wipe out your profit.

Saturday, May 10, 2014

Food Cost Tips for Excel Pros

Lots of restaurants control their food cost using a target food cost percentage combined with a purchase recap and an ending inventory value.  They use Excel to do the calculations for the ending inventory.

If you use the calendar for inventory cutoffs, you will be counting the stock on various days of the week.  You need to make sense of the count for any given day of the week.  For example, we'd expect to find high inventory levels closer to the weekend and lower levels early in the week at many dinner houses.

One simple exercise can greatly improve your knowledge of how your food cost varies.  You need to get a feel for the 25 items you spend the most amount of money on over the entire year.  Vendor tracking reports and invoice reviews can quickly isolate these items.

Closely track the cases purchased for each of these 25 items in a separate Excel file or worksheet.  The data would include the date, number of cases and the cost (use the extension figure).  Each month, you need to recap the purchases for each item.  All we need is the summary data:  total cases and total cost.

On your inventory matrix, add a column for PURCHASED to the right of the inventory extension column.  For each of the top 25 items, add the total purchases amount in the new column.

Create another column to the right of PURCHASED called DAYS.  For each of the top 25 items, you will divide the inventory total by the purchased total in parentheses and multiply by the days in the month.  For example, if your inventory for burger patties was $1,200 and you purchased $3,000 in a 30 day month, your number of days would equal 12 days.

Put the number of days for each of the top 25 items in context.  Is the item frozen, fresh, canned or dry?  Most fresh items should yield a low number of days.  You would not want to see 45 days of fresh boneless, skinless chicken breasts.  The freezer may have been stocked due to an especially low cost on a small number of selected items.  Make sure the cost per case for all over stocked frozen items justifies the quantity purchased.

Fresh fish, poultry and meat should have less than 7 days in stock.  Remember all over stocked items are using cash which could be used in other areas.

Friday, April 04, 2014

How to Cover the Higher Cost of Food Items

We are in a difficult year for protein purchases.  The bad weather, diseases and continued use of grains in fuel for autos will make 2014 a challenging year for purchasing managers.  If you missed the chance to sign a long term contract before all the bad news, your company will see a significant food cost increase this year.

How should you react to this year's higher cost of food?  The higher prices are not restricted to restaurant operations.  Grocery stores are charging higher prices for many protein items.  Your customers are paying these higher prices along with you.  There is an expectation of higher menu prices.  Major weather events and the porcine epidemic diarrhea virus were front page stories.

The question is not whether to raise your menu prices.  A better question to ask is "How high should I raise my menu prices?"

The answer to this question will depend on your specific market conditions.  Highly competitive restaurant markets offer value menu customers very low prices on many popular menu items.  If you operate in a price sensitive market, you need to be careful with price increases on your high volume items.

One strategy involves a small increase in a beverage ordered by a high percentage of patrons. 

We'll use an example to illustrate.  Our top menu selections include a protein item with a $2 per portion cost.  We expect the cost per portion to increase 10% to $2.20.  Our annual sales of these menu items equals one million portions.  This is a $200,000 increase in our costs.  Our customers purchase two million portions of fountain beverages each year.  If we increased the selling price of fountain beverages by ten cents, we would cover the increase in the protein portions.

If the most popular menu item currently has a selling price of $6, we could raise the price to $6.20 to cover the increased cost of sales in our example.  This price increase will generally have higher visibility than the increase in fountain beverages.  If you sell a high percentage of value meals, I'd recommend leaving the price of the sandwich at $6 and increasing the value meal price by twenty cents.

All of your food and beverage menu items need to be adjusted on a routine basis (either quarterly, semi-annually or annually).  You may operate in a seasonal market.  Timing of the menu price increases should be in sync with these routine adjustments.  Your customers may balk if you increase prices too frequently.

Some restaurant owners and managers fear a major business loss from setting menu prices too high.  I have seen prices freeze near many popular price points including $0.99, $1.99, $4.99 and $9.99.  If you can demonstrate a quality advantage to your customers, they will be willing to pay the new price.  Once you break through these barrier price levels, I think you will find it easier to adjust prices in the future.

Hopefully, we will see better crop conditions this year.  If protein prices take a drop later in 2014, you can put the profits in the bank to cushion you from the next upturn. 

If you are confident in your knowledge of the market, you could find an opportunity to lock in lower prices later this year.  A significant price decline could offer you an opportunity.  Most major distributors and manufacturers can help their customers with these issues.

One mistake to avoid is going long when prices are already high.  This locks the higher prices in for a longer time period.  Be patient and pay the market prices until you see a significant drop.  Pretend you have a huge freezer behind your restaurant.  When would you want to fill the freezer with product purchased on sale?  This is a good way to decide when to go long.

Thursday, March 20, 2014

Food Cost Control in Catering Operations

If you ask a wedding caterer for their menu, you will often be presented with several documents.  Most caterers in this field offer many options for every course.  The prospective guest may select a custom designed meal by making choices for each course (soups, salads, entrees, side dishes and desserts).  Generally, the guest is asked to choose from 2 to 3 selections for each category.

The selections available are usually extensive.  It is common to see over 100 menu items on a wedding menu.  In addition to the menu items, guests will often be served rolls and butter, coffee and tea, and all appropriate condiments.  Most wedding caterers run a food cost % between 20 and 25% of total revenue.  It is important to understand the revenue amount needs to cover many other expenses including beverages, decorations, music, flowers and direct labor.

A 20% food cost percentage in an operation with an average revenue per guest of $100 indicates each guest consumes $20 of food.  A common menu item served to wedding guests is beef tenderloin.  Many caterers allow 8 ounces of trimmed meat per guest.  If an untrimmed beef tenderloin sells for $12 per pound and we have a yield of 50%, each portion will cost $12.  This is 12% of $100.

Careful control of the beef tenderloin would help us achieve a 20% food cost % in our operation.

An operator who pays too much for the beef tenderloin may also purchase too much meat for the expected number of guests.  Every dollar per pound over budget equals 1% of additional food cost.  A 10% safety factor is often used by people purchasing food.  Final guest counts can be higher than expected but often the count is lower.  Caterers can require a minimum count for a particular event when the exact guest count is unknown.

Imagine we over pay for the beef tenderloin by $2 per pound and we purchase 10% extra weight.  The cost per serving skyrockets to $15.40 (Cost = 1.1 x $14).  This would send our food cost percentage up to 23.4%.  Add a generous level of over purchasing in produce and dairy products and it is very easy to imagine a 25% food cost percentage.

Suppliers want to maximize their profit.  You need to be precise when stating the specifications for the protein items served in your operation.  In my experience, wedding caterers spend from 8 to 15% of their food dollar on beef tenderloin.  Salmon, shrimp, chicken breasts, lamb racks and other expensive protein items are popular.  Work carefully with your suppliers to get the very best quality for the budgeted cost per serving of meat and seafood.

If you find your food cost percentage is increasing over time, look carefully for possible causes.  The following issues are 100% real and I witnessed each personally:

1)  Supplier charges a 20% up-charge for splitting cases.  The chef orders 6 pieces of beef tenderloin averaging six pounds each.  The warehouse has a box with 12 pieces and a small box with two pieces.  The price per pound is $12.  The salesman puts the orders in for the chef.  He orders one half of the 12 piece case (a split!).  The cost per pound is $14.40.

2)  The same chef orders 20% more meat than the expected count multiplied by one pound per guest.  Employees at the office are served cold roast beef tenderloin for lunch in lieu of burgers.

3)  A walk-in cooler in a kitchen specializing in prime rib has 7 partial ribs cooked to medium rare.  The policy is to restrict use of leftovers to alternate dishes including soups, sandwiches, salads, and side dishes.  These partial ribs have a total of 22 portions which were never served.

4) Alaskan salmon caught by line and shipped by air are served to guests.  The cost per serving is 30% over budget.

Since catering menus are often diverse with many different guest options, it is difficult to accurately estimate food cost without a professional food cost control solution.  If your operation is experiencing a high food cost percentage, you should consider the investment in a top notch system.

Examine your protein costs carefully and check all invoices for prices, extensions and quantities.  Compare the quantity purchased to the guest count.  Ask the chef for the expected yield for any large piece of meat or fish.  You can lower your cost the quickest by studying protein usage.

Monday, March 10, 2014

Implications of a High Food Cost Percentage

If you find your self explaining away two consecutive months of poor food cost results, you need to dig into the numbers and locate the problem.  Persistent performance problems can point to a serious issue.

In calculating your food cost percentage, there are three factors:  sales, purchases and inventory change.  Many operators focus entirely on the inventory change when they look for solutions.

While inventory calculation errors are common, a complete focus on the inventory figure can become a distraction.  Lost sales, chronic waste, inconsistent portions and ordering too much food are major problems which need to be identified quickly.  The end of period inventory figure needs to be eliminated as a factor.

The best way to eliminate inventory errors from your food cost formula is to increase the frequency of inventory counts.  If your food cost percentage is too high, switch to weekly inventories if you currently count monthly.

In a typical kitchen, you will find two weeks of usage in the inventory.  If you had to discard your entire stock, the loss is roughly 4% of the entire year's food cost.  You may have a chronic waste issue with perishable protein items.  In an operation with protein items accounting for 40% of the food cost, a 10% waste problem is the same as discarding your entire inventory once a year.

The point is you shouldn't always look for food cost problems in your ending inventory calculation.

Check your labor cost percentages as a check for lost revenue.  If you have a problem with food and beverages being served to guests without a POS system order, you will find both food and labor cost percentages over budget.  Make sure complimentary food and beverages are entered in the POS system with the comp used as a payment method (approved by a manager).  Eliminate the service of desserts, soups, coffee and tea without a documented order.

Honest waste and spoilage winds up in your garbage.  The garbage can also gives feedback on customer satisfaction.  One of the most costly tactics commonly used in casual dining restaurants involves selling an over stocked protein item which is past peak quality.  These menu items are found in the specials.  The POS system will point to a low number served to guests in relation to the line production.  Now the raw ingredient which was over stocked has been transformed into a finished menu item which has been over produced.

Eventually, the walk-in cooler will contain several pans full of these mistakes.  How will this food leave your restaurant?

Generally, leftover food will be served to employees, discarded or reinvented as a new special of the day.  The last option is the most risky tactic.  First, the demand for the protein item was incorrectly estimated.  This error caused the raw ingredient to hit the specials board.  The company loses the wages paid to prepare the original portions which make it back to the refrigerator. 

A second use of kitchen staff to create a new special adds to the labor cost.  Any over production on the second round needs to be discarded.  If any of the unsold food is served at a later date, the chance for food poisoning increases.  Even if no one gets sick, the quality of the meal will be low.  You can lose valuable customers.

When you find your food cost percentage is too high, remember to count more frequently, check for a higher labor cost and always check your garbage cans and walk-in coolers.

Thursday, January 30, 2014

Better Food Cost Control Using POS Information

Earlier this month, I had the privilege of speaking with Ken Burgin via Skype.  Ken is a seasoned food service industry veteran.  He has a website, Profitable Hospitality, which is loaded with useful forms and other restaurant management tools.

Our conversation is available for download as a podcast(or for play online).CLICK HERE TO GO TO THE PODCAST

Ken and I worked on an outline before the discussion:

Questions for discussion:

•    How has POS capability and use changed in the last few years – what have you noticed?
•    What are the most useful reports for your work when you ask for POS data from a client?
•    What are the reports every operator should be watching on a daily or weekly basis?
•    What are some useful ones that most operators are NOT watching?
•    You said your favorite POS report is Product Mix (PMIX) – please expand.
•    Best ways to use POS data for forecasting?
•    Linking POS to inventory systems – how is that best done?
•    Linking POS to recipe costing – how are smaller operators doing this best?
•    Linking POS with bookkeeping systems – what is best practice?
•    Using POS data to track staff sales and calculate bonuses – any good examples you’ve seen?
•    Tracking theft and errors – best reports?
•    If you could make some changes to the way most people use their POS, what would you advise?
•    New POS systems using iPads are becoming popular – is the data analysis behind them still more or less the same?

Can a Losing Restaurant Become a Profitable Business?

Dear Sir,
Trust you are well & fine? This is Sanjeev from Bahrain, Arabian Gulf. 

I'm working as Cost Control Manager. We are connected through linkedin and I'm taking the privilege to write to you.

One of our board members, who is a business man here in Bahrain, runs a small restaurant which is showing a big loss. 

What could be the basic reasons for it? 

Please see the details of the restaurant below:

Seating Capacity - 12 to 15 pax
Average sale per day - $335
No recipe costings or selling margins have been established.
Total staff :- Kitchen (4) & Front (2)
*Kitchen cost is very high at the moment.
All purchases are from local suppliers.
Salary (All Staff - $2,660)
Rent - $2,393

I would appreciate if you could give me some ideas or bullet points to improve this restaurant's business & making it profitable.

Thanks a lot for your valuable time. Take good care.
Sincere regards & yours truly,

Thanks for the question Sanjeev!  I know the restaurant has opened recently and I appreciate the urgency.

At this time, costing recipes and calculating gross profit per menu item takes a back seat to marketing and promotion activities.  Sales are too far below the minimum level required to produce a profit.  This is the reason so many restaurants close in the first year.

If the monthly sales are $10,000 and the rent is $2,400, our occupancy cost is 24% of revenue.  This indicates sales need to double for the restaurant to be a going concern.  Keep in mind a 12% occupancy cost is still relatively high.  The goal is 10% or lower.

The breakfast strategy could be part of the solution.  In addition, you could create a carry out menu and search for delivery customers in the vicinity.

Keep the staff level as tight as possible.  The current 26% is good.  As your sales rise, you may be able to reduce the labor % to 25%.

Your cost of goods sold needs to stay below 35% of sales.

How to Calculate Food Waste in Production

Dear Joe,
Good day to you.

I would like to know how to calculate the food wastage percentage in any food production area.  Also, how it is calculated as a deduction from gross sales to determine gross profit in the Profit and Loss statement?

Thank you in anticipation 

In the production area, the loss in fabrication is a factor in the standard yield calculation.  When you develop a standard yield, it is best to use a large sample.  Keep accurate records of the purchased weight, cost and the net weight.  The standard yield formula is used to properly cost the usable food.

If we buy 10 kg of meat with the bone-in for $10/kg, your cost is $100.  After the meat has been trimmed and portioned,  we have 8 kg of product.  The cost is $12.50 per kg trimmed.  When we count our inventory, the raw, untrimmed meat should use $10/kg and the trimmed meat should use $12.50/kg.

Our cost of goods sold would be calculated as follows:

COGS = BI A.P. + BI E.P. + Purchases - EI A.P. - EI E.P.

COGS is Cost of Goods Sold
BI A.P. is Beginning inventory as purchased (before trim)
BI E.P. is Beginning inventory trimmed (edible portion)
EI is Ending inventory

The gross profit calculation uses the cost of goods sold total as a reduction.

Gross Profit = Revenue - COGS  

If you follow the steps in our meat example for all trimmed items, you will properly account for the standard waste experienced in the process.

Restaurant Data Pros

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