Urner Barry Is Now Expana Markets

 A few of my butcher savvy clients were fans of Urner Barry.  They would receive yellow sheets in the mail with market prices for many popular meat cuts.  Urner Barry is now part of Expana Markets.  I like the graphs on the new platform.  Now subscribers can get their updates online.

I heard a Marketplace (American Public Media) episode on July 14 "Inflation Came Down in June. Will It Stay That Way?".  The main focus was slowing inflation.  There were specific segments I found interesting including an analysis of the drop in pork prices.  There is a good supply of pork and lower demand.  Also, a segment on egg price fixing was excellent.  The DOJ found egg suppliers manipulated the egg clearing house to fix egg prices. The egg discussion mentioned Urner Barry-now Expana.

The egg fixing scheme was only a part of the egg price story.  The Avian flu epidemic was definitely the major influence on higher prices.

I find myself avoiding eggs priced too low in the supermarket.  I like the whole "buy local" movement in my community.  Local farmers tend to use organic grains and let their birds run free at least part of the day. I pay from $4 to $5 a dozen.  In contrast, I have seen eggs priced at 89 cents a dozen at a meat specialty shop I frequent.  I passed for the nice brown eggs from a local farmer.

Key Restaurant Profitability Numbers

In my experience, profitable restaurants have a gross profit of 40% of sales or higher and an occupancy cost of 10% of sales or lower.  It's important to track gross profit and occupancy costs consistently.

Many operators spend great time and expense analyzing a number of items with a relatively minor impact on gross profit including:

Employee meals;
Allocation of lemons, cooking wine and olives between the kitchen and bar;
Complimentary food items;
Credit card fees;
Returns due to customer complaints.

Your gross profit calculation involves net sales, cost of sales and direct labor costs. 

Whether you prefer to allocate employee meals to direct labor or cost of sales, these expenses will impact gross profit.  The lemons, cooking wine and olives will show up in cost of sales regardless of the department bearing the charge.  Complimentary food served to patrons without a charge on their bill will be included in cost of sales.

It may be helpful to begin subtracting credit card fees from gross sales before calculating your cost of sales percentage.  The goal is a better bottom line profit.  If you net the credit card fees in the sales number used in calculations, you will build in a safety cushion.  This simple change will force you to operate more efficiently. 

Food returned to the kitchen due to customer complaints is a serious issue.  Any restaurant with enough returns to have a big impact on cost of sales is in dangerous territory.  You are in the business of providing your customers a superior meal.  These returns demonstrate the dissatisfaction of your audience.

When you find yourself in financial difficulty despite a 40% gross profit (using the conservative approach of netting credit card fees from sales), you will often see your occupancy cost above 10%. 

Since your occupancy cost is often fixed, a high number puts tremendous stress on management.  I have seen operators with restaurants packed nightly in constant danger of not breaking even.  Usually, they are sloppy with low gross margins or they just don't have enough sales to justify their occupancy cost. 

Frequently, we see famous restaurants closing due to a pending lease renewal.  These operators understand the risk of trying to operate with an unacceptable occupancy cost.

Finding Your Ideal Food Cost Number

I find attempts to benchmark food cost overly simplistic.  My favorite factors in determining food cost benchmarks are annual sales, competition and monthly occupancy cost.  These factors vary widely by market segment and geographic zone.

There are times when a higher food cost percentage is desirable.  Operators suffering from minimum wage laws and mandatory employee health care costs may improve their operating profit by purchasing prepped food items.

A fresh vegetable prep team with three full time workers can cost well over $100,000 in cities and states with $15 minimum wage laws.  Qualified butchers are only justified in a small number of restaurants.  Multi-unit operators may create commissaries to butcher and prep items for their entire chain.

Commissary operators need delivery vehicles and personnel.  In addition, they need tight controls over commissary transfers.  Auto insurance rates are higher in urban and suburban areas.

A savvy operator will create a profit and loss statement designed to show a subtotal used to net sales, cost of sales, direct labor and occupancy costs.  This number should be at least 30% of sales.

There are plenty of ways to get the 30% net.  Restaurant managers in urban areas with high rents need to offset their high occupancy costs with higher sales and lower percentages for cost of sales and labor.

If you are in a city with high rents, $15 minimum wage laws, and have recently offered your entire staff health care insurance, you most likely need a low food cost %. Some of you may face a 15% occupancy cost.  If you can manage to hit a 25% cost of sales and a 30% labor cost, you can deliver a 30% profit before your other operating expenses.

You may operate over an hour from the nearest city in a mortgage free restaurant.  The local minimum wage laws may allow you to pay a premium wage in the $12/hour range.  A large kitchen with adequate storage capacity could allow you to purchase farm delivered produce and large cuts of meat and fish.

The best strategy for the operator with low occupancy expenses is to always price menu items below the competition.  You can make it impossible for competitors to attack using borrowed capital.

Waste Calculation in Food Cost

Dear Joe,

I hope my mail finds you well.

I would like to know how to take into consideration the waste calculation while determining the food cost %.

Our formula:

Food Cost% =(opening inventory+purchases-ending inventory-staff meals-entertainment)/sales

So where is the place where we can add the calculation of wastage in the above formula?

Thank you. 
Best regards,
Elie

Thanks for the question, Elie.  This is a popular issue with many food cost controllers. 

In your operation, the purchased food should be consumed by guests when they order a menu item.

If the actual ingredient used to create a menu item requires fabrication, it is possible to experience a much lower yield than you expect.  You may also purchase too much of a perishable item and suffer a loss due to spoilage.  Finally, you may produce too much of a batch recipe used in a menu item which is not part of the base menu.

All of the food purchased, whether consumed by guests, lost in fabrication and poor yields, or lost due to over production or spoilage, is included in the "purchases" component of the formula.

The goal of the food cost control team is to explain to management the causes of food cost success and failure in the period of the report (week, month, quarter or year).

If you use standard recipes and standard yields, your variance reports will highlight the difference between actual usage and ideal usage.  Focus on the high volume items when you analyze variances.

In order to have the right information available, you should keep records for the ways each key item is used.  Purchases, butcher yield sheets, portion control records, and spoilage sheets are the building blocks for your variance analysis report.

In 2015, the high cost per pound or kilo for protein and fresh fruits and vegetables is a main driver of high food costs.  Only menu price increases can help with the higher purchase costs.

By developing a solid usage analysis for all key items, you will gain an advantage.  Over time, you will see trends in waste and spoilage.  If the management team communicates effectively, waste and spoilage will decline over time.

Restaurant Cost Allocations

Most dinner houses with a full bar have a difficult time deciding how to allocate food, beverages, labor and other expenses.  Since the tight control of cost of sales and labor are critical to success, the allocations in these prime costs are a central focus.

Before you begin to drill down into the truly fine cost details, make sure you define all the individuals who support key activities:  management, financial and administration.  The costs associated with the top management staff should not be allocated to any operations departments.  These operations departments are tougher to control.  There may be several workers who move between the kitchen, bar and dining room.  These flexible employees fill in where they are needed.

Some examples of flexible workers include bartender/wait staff, wait staff/general kitchen helper and bar manager/hostess.  Sometimes, these employees move between departments in a single shift.

The cost of sales issues break down by food and beverage in most restaurants.  The biggest decision involves which department receives the revenue for sales of soft drinks.  If sales of soda, bottled water, coffee, tea, juices and milk are included in food sales, the allocation of cost of sales can be tricky.  The bar will use all of these beverages as mixers and in dessert course beverages.

Most bars use olives, onions, cherries, lemons, limes, celery, fruit and vegetable juices, and many sauces (tabasco, Worcestershire, soy, etc.).  Some bars serve drinks with bacon, bouillon, horseradish, and purees.  Back in the kitchen, many chefs cook with beer, wine, and liquors.

The employee meal decision is a common concern.  Many restaurants allow all employees to enjoy a meal for each shift worked.  A common question involves whether to treat employee meals expense as a labor cost or a cost of sales for the kitchen.

In general, the net cost associated with food used in the bar and alcoholic beverages used in the kitchen will be comparatively low.  A best practice I have seen in my client's operations is to use a different brand of alcoholic beverage for the kitchen.  Examples include wine purchased in a gallon container and an economy brand of vodka which differs from the well brand.

Tracking flexible employees and isolating management and administrative staff are important cost issues.  The treatment of soft drink revenue and expenses is very important.  Employee meals can be a major expense. (e.g. 100 employees consuming five $3 meals per week represent a monthly cost over $6,000).

If the kitchen does recognize the revenue and cost of sales for soft drinks, the gross profit will help offset the employee meals cost.

The best solution for handling all of these cost allocation issues is an excellent system for transferring costs between departments.  Flexible employees generally earn the same hourly pay.  Most payroll systems allow hours to be charged to more than one department.

It is important to see report distribution ahead of time.  Imagine the managers who will review the monthly department report.  If your company genuinely utilizes a strong segregation of duties with separate managers for each department, you will benefit from the investment in a robust cost management system. 

On the other hand, your company may use a flat structure with many key people reporting directly to a single owner or general manager.  My experience with less complex operations shows the time and expense involved with cost segregation won't be justified.

Before you start a project for tightly tracking these cost allocations, make sure the benefit will outweigh the cost.  You may be able to mitigate the impact of these secondary issues through a simple offset system.  Most vendors will allow a single location to have more than one account.  For example, the bartender could order lemons directly from the produce supplier.  By performing a cost/benefit analysis, you may save significant time and expense.

Restaurant Management - A Best Practices Approach

In 1991, my wife Jackie and I spent two weeks in the Finger Lakes area of New York State. We decided to stay at a hotel in Ithaca. Near Cornell University, we found a terrific bookstore with a big red dot on the door. Once inside, I went hunting for books on food purchasing and restaurant cost control.

After a half hour of browsing through the available books, I purchased two excellent selections - SPECS by Lewis Reed and Controlling and Analyzing Costs in Foodservice Operations by James Keiser and Frederick J. DeMicco. My goal in working with these two books was to develop a set of spreadsheets to help clients improve their food cost performance.

During the next 3 years, I learned how to build recipe models using four different software systems. The number crunching needed to calculate ideal food costs was out of reach for many restaurant owners and managers. The software made this possible.

At the same time, I used WinFax Pro to deliver a newsletter - POSitive ROI - to New York City restaurants. I had time to chat with my early New York clients, as the slow computers worked for hours to get the ideal use report. These restaurant owners would ask me about my background and for any tips to improve profitability. Many times, I recommended the two books I had purchased from the book store in Ithaca, NY.

A few years ago, I received a phone call from Dr. Fred DeMicco, the co-author of the book on controlling and analyzing costs. He invited me to join a team he was organizing to create an e-book for restaurant management. I accepted the invitation with great enthusiasm and we began the project.

After many months, the book has been published by Kendall Hunt. The team at KH has done a wonderful job of editing the book and giving it the right look. This book is designed to help current and future restaurant owners and managers improve their knowledge of essential restaurant management skills and techniques.

The final two chapters in the book focus on budgeting and break even analysis. Most restaurant professionals can benefit from the advice in these two chapters. In today's volatile environment, restaurants need to deal with wage inflation, increased health care costs, big swings in food costs and tremendous competition.

Year to year comparisons can be difficult due to weather events, business interruptions, natural disasters, droughts, diseases and many other factors which we see on the news. A well prepared budget can be quickly modified to reflect actual operating conditions when you face an unanticipated change in your business environment.

Your break even point can change in a hurry with a minimum wage boost or a new group health care plan for your employees. Should you open a second location? What will be the impact? Break even analysis can help provide answers to these questions.

The book may be purchased directly from Kendall Hunt's website in paperback or e-book format.

Food Cost Tips - Fabrication and Butchering

BASIC BUTCHER YIELDS
Many restaurants purchase large wholesale cuts of meat.  Generally, these cuts offer a lower price point to the skilled butchers.  They take advantage of their diverse menu selections and utilize the trim associated with these cuts.  Packers offer restaurants a selection of quality grades including prime, choice and select.  It is important to purchase prime or choice cuts for steaks and chops. 

Stew meat and ground meat do not require prime cuts.  If you butcher a prime cut and are left with stew meat and ground meat trim, how should you treat this in your food cost?  The best way to determine the proper credit is to pretend you needed to buy stew meat or ground meat.  This purchase price should be used to determine the credit.  You need to know the current cost per pound of ground meat and for stew meat.

Most butcher yield sheets have one to three primary uses for the meat.  In addition, these sheets record usable and unusable trim weights.  The key to success is following the total price paid for each wholesale cut (or box of several pieces) all the way through to the cost per portion for each primary use.

It really isn't necessary to track unusable trim in the portion cost calculations.  You may want to record these weights for future negotiations with your meat suppliers.

The total amount paid for the meat put into production needs to be assigned to the products yielded in the fabrication process.

If you weigh the usable trim and use the current prices for stew meat and ground meat, you can determine the credit to be applied to the total amount paid.  The net amount, after applying the credit, needs to be assigned to your portions produced. 

If you have only one objective, for example filet mignon 8 ounce steaks, you simply divide the net amount by the number of portions you produced.  The total of all portions valued at the net price per portion and the value assigned to the trim must equal the total amount paid for the meat.

COMPLEX BUTCHER YIELDS
Many wholesale cuts of meat produce more than one end use.  These cuts may produce roasts, steaks, chops, shanks, scallopini, and cutlets.  The process of assigning the proper value to each unique end use is more art than science. 

Start with the primary reason you purchased the wholesale cut of meat.  Just like the trim meat, we need to know the price per pound for this retail cut.  Once you have this information, you can properly value all of your meat in this butcher yield.

The total amount paid for the wholesale cut remains our starting point.  From this number, you need to subtract the value for the trim meat to determine the net cost to assign to the main cuts.  Using the retail price per pound for the primary item produced, you multiply the weight by the price to determine the total for this cut.  Subtract this from the net amount after assigning the trim credit.  This calculation will supply the dollar value to assign to the other main cuts produced.  You also need the weight of these other cuts.

We are now ready to determine portion costs for each of our main cuts.

Trim weight is valued using the current prices for stew meat and ground meat.  The primary cut portion cost is calculated next.  You have the total weight and the cost per pound from current prices.  Multiply these two numbers to find the total cost to assign to primary cut portions.  Divide the total cost for this cut by the number of portions produced.

Finally, we can determine the value for all other cuts using the total dollars after subtracting the trim credit and the credit for the primary cut.  Take the net dollar value and divide this amount by the total weight of all other cuts.  This will determine the cost per pound and the cost per ounce for these cuts.  Depending on the portion sizes for each cut, use the cost per pound or ounce to determine the portion cost.

To check your work, make sure the total dollars for trim and portions of the primary cut and all other cuts equal the total amount paid for the meat purchased.

INVENTORY CONTROL
When you butcher meat, the goal is to remove the cost of the meat you purchased from your food inventory and assign this total to the portions produced.  You will credit the value of the raw product taken from stock and debit the value of the products produced.  If you had a vendor called BUTCHER, you would have an invoice with a net amount of zero.  You would send this vendor the raw meat as a credit or negative number.  For each cut produced, you would buy the number of portions at the price per portion from your yield sheet.  The invoice total would be zero.

Most inventory control systems allow you to handle credits using a negative number for the quantity (pound, portion, etc.).  They always use a positive number for the price.  The process is similar to handling deposits and returns, short shipments and other credits.

SUMMARY
Using well documented butcher yield sheets, actual purchase prices for wholesale cuts, current retail prices for trim items, and current retail prices for primary use items, you will be able to accurately track portions produced by your butcher.  If you use a system which has ideal cost reports, the techniques above will allow you to eliminate poor yields as a source of variance.

Your inventory will reflect the proper cost for each wholesale cut (not yet butchered), each portion and the trim weight.

NOTE:  You may have meat with bones.  If the bones are not served to customers, they are trim.  Only credit the bones if you would have to purchase bones to create a base menu item.  Otherwise, you should treat the bones as unusable trim.

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.

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.

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.

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.

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 

Elie

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.

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.

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.

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.

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.

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. 

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.

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.