Don't overlook sales when reviewing your food cost results. There are several important reasons to scrutinize the divisor in the formula as much as the net purchases total. Your sales figure depends on covers, check average, promotions, coupons, discounts and lost revenue.
Lost revenue is related to menu items your service staff can serve a guest with no order entered in your POS system. Typical examples include slices of cake or pie, small pastries, coffee, tea, cocoa, soup, rolls and ice cream. Less common items include modifiers normally ordered through the POS system which have a small charge to the guest.
A second source of lost revenue involves unauthorized voids and price adjustments. I remember working with a family restaurant with a special price for ice cream sundaes for dinner patrons. Anyone visiting the restaurant for dinner was offered a sundae for 99 cents. After reviewing several POS data tables, I noticed late shift changes on many $3.99 items to $0.99. These patrons did not have dinner. They all paid cash. Their orders were changed from the full charge for the sundae to the dinner special price.
My annual estimate for this activity was $10,000. As you can imagine, these changes had to be made by a manager. The wait staff did not have the authority to amend closed checks. If the managers on shift were pocketing cash, you can be 100% confident the wait staff felt comfortable serving items not ordered through the POS system.
Chronic lost revenue won't show up in check averages. If this theft has been going on for years, the check averages will be consistent.
Friday, April 23, 2010
Wednesday, April 21, 2010
How Much Do We Need To Charge?
I received an email from a company with a large buyer of their tamales. The buyer pays $1.50 and they want to price the tamales to have a 30% cost of sales. Currently, they charge less than $3.00 for the tamales.
At $3.00, the cost of sales is 50%. If they could sell the $1.50 tamales for $5.00, they would hit their target. This is a 67% increase in selling price.
The tamale manufacturer could re-engineer the tamale at a $1.20 price point. If the seller raised the price to $3.60, they would be close to the target 30%. Do you think the customers would stand for 20% decrease in portion size and a 20% price increase?
The tamale manufacturer could offer a volume incentive. If the buyer hits a volume target, they could offer a discount. This discount could be paid monthly or quarterly. They could continue selling the tamales at $3.00. If the manufacturer produces the smaller portion for $1.20, they would have a 40% cost of sales.
Let's use a 20 cents incentive as an example. The buyer would achieve a 33% cost of sales if they hit the volume target ($1.20 minus $0.20).
At $3.00, the cost of sales is 50%. If they could sell the $1.50 tamales for $5.00, they would hit their target. This is a 67% increase in selling price.
The tamale manufacturer could re-engineer the tamale at a $1.20 price point. If the seller raised the price to $3.60, they would be close to the target 30%. Do you think the customers would stand for 20% decrease in portion size and a 20% price increase?
The tamale manufacturer could offer a volume incentive. If the buyer hits a volume target, they could offer a discount. This discount could be paid monthly or quarterly. They could continue selling the tamales at $3.00. If the manufacturer produces the smaller portion for $1.20, they would have a 40% cost of sales.
Let's use a 20 cents incentive as an example. The buyer would achieve a 33% cost of sales if they hit the volume target ($1.20 minus $0.20).
Thursday, April 01, 2010
Impact of Beverages
Most of my clients love to see the cost of their entrees, appetizers and sides come to light as we build the database. After completing the entrees, it is common to hear the managers state: "So our food cost % is in line."
The ideal cost of the entrees tend to be equal or slightly higher than the actual food cost %. Actual food cost % should be higher than ideal food cost % since no operation is perfect. If your actual food cost is below your ideal cost, your recipes need work.
Before answering the benchmark question, I like to ask whether non-alcoholic beverages are included in food sales or beverage sales. If the coffee, tea and soft drinks are included in the calculation of food cost %, the ideal food cost % will be much lower. As an example, a steak house with an overall food cost of 38% actually had an ideal entree food cost of 41%. The wait staff did a terrific job selling a low cost dessert course with pastries and hot beverages.
The overall ideal food cost was 35%.
Entrees tend to have a much higher ideal food cost % since they bear the cost of complimentary items like rolls and butter and they use large portions of the expensive protein items. Non-alcoholic beverages typically produce a favorable impact on food cost % when they are included in the calculation.
The answer to the "in line" question in the example was NO. Their 38% actual was lower than the 41% ideal entree cost. They should have been closer to the overall 35% target. Any number above 36.4% would mean a 4% variance or higher.
Should you eliminate non-alcoholic beverage sales from the calculation of food cost % each period? This will require some extra time evaluating use of milk, cream, sweeteners, lemons, etc. I find it is worth the effort. There are 2 benefits. You'll find some lost revenue in the non-alcoholic beverages category due to unauthorized comps. Food cost variances in the critical entrees won't be hidden by the impact of non-alcoholic beverages.
The ideal cost of the entrees tend to be equal or slightly higher than the actual food cost %. Actual food cost % should be higher than ideal food cost % since no operation is perfect. If your actual food cost is below your ideal cost, your recipes need work.
Before answering the benchmark question, I like to ask whether non-alcoholic beverages are included in food sales or beverage sales. If the coffee, tea and soft drinks are included in the calculation of food cost %, the ideal food cost % will be much lower. As an example, a steak house with an overall food cost of 38% actually had an ideal entree food cost of 41%. The wait staff did a terrific job selling a low cost dessert course with pastries and hot beverages.
The overall ideal food cost was 35%.
Entrees tend to have a much higher ideal food cost % since they bear the cost of complimentary items like rolls and butter and they use large portions of the expensive protein items. Non-alcoholic beverages typically produce a favorable impact on food cost % when they are included in the calculation.
The answer to the "in line" question in the example was NO. Their 38% actual was lower than the 41% ideal entree cost. They should have been closer to the overall 35% target. Any number above 36.4% would mean a 4% variance or higher.
Should you eliminate non-alcoholic beverage sales from the calculation of food cost % each period? This will require some extra time evaluating use of milk, cream, sweeteners, lemons, etc. I find it is worth the effort. There are 2 benefits. You'll find some lost revenue in the non-alcoholic beverages category due to unauthorized comps. Food cost variances in the critical entrees won't be hidden by the impact of non-alcoholic beverages.
Wednesday, February 24, 2010
Menu Analysis: Quick Checklist
Do you keep your old menus? If you have a stack somewhere in your office, try to locate the menu from 2004. I would suggest you put your current menu side-by-side and perform the following checklist:
1. Count the number of choices in each major category for both menus. Fewer is better in this environment. If your current menu has more selections in the appetizer and entree zones, make a list of the items added in the last 5 years.
2. How do the prices compare between the two menus? Normal inflation over the 5 year period was low but food commodity markets had tremendous volatility during the oil price boom and bust. Perhaps you have cut menu prices to encourage more customers. Look for the highest and lowest priced entrees and put this information in perspective.
In 2004, proper pricing of the highest priced entree was very important. Diners were spending more 5 years ago. Today, the lowest priced entree is quite important. Many diners are searching for value. You may not be charging enough for your budget selections.
3. Try to remember your previous pricing strategy. Look back 5 years ago and think of your game plan. Were you raising menu prices 10% each year? Maybe 5%. A 10% annual increase will add up to 60% over 5 years. The 5% annual increases amount to 28% over the same 5 years.
If your current prices are looking similar to 5 years ago, your average increase for the 10 year period is about half of the number from the 2004 strategy. Should you bring your costs in line with this new reality? In the short run, most companies have been forced to make drastic cuts. Take a long term view and decide what the future holds for the next 5 years.
In summary, this is a great time to review your most recent 5 years. Sometimes people look at the future through an optimistic lens. Other times (like now), the pessimistic lens is used. By looking at the complete picture, you will see things as a realist.
1. Count the number of choices in each major category for both menus. Fewer is better in this environment. If your current menu has more selections in the appetizer and entree zones, make a list of the items added in the last 5 years.
2. How do the prices compare between the two menus? Normal inflation over the 5 year period was low but food commodity markets had tremendous volatility during the oil price boom and bust. Perhaps you have cut menu prices to encourage more customers. Look for the highest and lowest priced entrees and put this information in perspective.
In 2004, proper pricing of the highest priced entree was very important. Diners were spending more 5 years ago. Today, the lowest priced entree is quite important. Many diners are searching for value. You may not be charging enough for your budget selections.
3. Try to remember your previous pricing strategy. Look back 5 years ago and think of your game plan. Were you raising menu prices 10% each year? Maybe 5%. A 10% annual increase will add up to 60% over 5 years. The 5% annual increases amount to 28% over the same 5 years.
If your current prices are looking similar to 5 years ago, your average increase for the 10 year period is about half of the number from the 2004 strategy. Should you bring your costs in line with this new reality? In the short run, most companies have been forced to make drastic cuts. Take a long term view and decide what the future holds for the next 5 years.
In summary, this is a great time to review your most recent 5 years. Sometimes people look at the future through an optimistic lens. Other times (like now), the pessimistic lens is used. By looking at the complete picture, you will see things as a realist.
Tuesday, February 09, 2010
Three Classic Menu Engineering Approaches
There are 3 classic menu engineering models taught in hotel/restaurant management courses. These models produce much different results when applied to a restaurant with a large number of entree choices.
Many people are familiar with the Star, Plowhorses, Puzzles, and Dogs approach which was developed by Kasavana and Smith. This model uses popularity as a function of gross contribution to split entrees into 4 quadrants. The popularity cutoff is 70% of the average number sold. If you sold 1,000 entrees and had 10 choices, any entree with over 70 sold is either a Star or a Plowhorse. The contribution test uses the mean. If the average contribution per plate is $12, items with higher profit would be labeled as a Star or a Puzzle (depending on popularity).
The second popular method was developed by Miller. He uses a similar popularity test but focuses on food cost % instead of gross margin. His Winners are popular menu items with a low food cost %.
Finally, Pavesic's menu engineering approach uses weighted statistics and looks at profitability as a function of food cost %. There is no 70% applied to his figures since the numbers are weighted by their overall impact on results.
I used the 3 methods to evaluate the menu at a seafood and steak dinner house with 41 entree choices. Comparing the ratings to my initial recommendations to the owner, I find myself most in sync with the Pavesic method. I tend to focus on profitability improvement through tighter food cost control. Someone employing the Pavesic method with reliable recipe cost data would come to many of the same conclusions I reached without running the statistics.
Miller rated a block of popular menu items as Winners when the Kasavana/Smith approach rating was Plowhorse and the Pavesic rating was Standard. Although I like the Miller approach for the current recession, entrees with lower gross margins may not rate a Winner class unless they achieve a low food cost % figure.
[My test data came from work I did in 2008 and the recession was mostly an autumn event in this seashore restaurant. The summer figures were in line with previous boom years and this season dominates the annual sales volume results.]
If I were advising the same operator today, the Miller approach would factor heavily in my recommendations. Since there is a ceiling on menu item prices imposed by the thrifty diners of 2010, restaurants need to rely more heavily on tight food cost control to achieve profits. I would expect to see fewer sales of high ticket menu items with high gross margins and high food cost % figures since the high selling prices which would support this profile have declined in popularity. Fewer diners are trying to impress with their choices. More diners are looking for a lower check at the end of the meal.
Many people are familiar with the Star, Plowhorses, Puzzles, and Dogs approach which was developed by Kasavana and Smith. This model uses popularity as a function of gross contribution to split entrees into 4 quadrants. The popularity cutoff is 70% of the average number sold. If you sold 1,000 entrees and had 10 choices, any entree with over 70 sold is either a Star or a Plowhorse. The contribution test uses the mean. If the average contribution per plate is $12, items with higher profit would be labeled as a Star or a Puzzle (depending on popularity).
The second popular method was developed by Miller. He uses a similar popularity test but focuses on food cost % instead of gross margin. His Winners are popular menu items with a low food cost %.
Finally, Pavesic's menu engineering approach uses weighted statistics and looks at profitability as a function of food cost %. There is no 70% applied to his figures since the numbers are weighted by their overall impact on results.
I used the 3 methods to evaluate the menu at a seafood and steak dinner house with 41 entree choices. Comparing the ratings to my initial recommendations to the owner, I find myself most in sync with the Pavesic method. I tend to focus on profitability improvement through tighter food cost control. Someone employing the Pavesic method with reliable recipe cost data would come to many of the same conclusions I reached without running the statistics.
Miller rated a block of popular menu items as Winners when the Kasavana/Smith approach rating was Plowhorse and the Pavesic rating was Standard. Although I like the Miller approach for the current recession, entrees with lower gross margins may not rate a Winner class unless they achieve a low food cost % figure.
[My test data came from work I did in 2008 and the recession was mostly an autumn event in this seashore restaurant. The summer figures were in line with previous boom years and this season dominates the annual sales volume results.]
If I were advising the same operator today, the Miller approach would factor heavily in my recommendations. Since there is a ceiling on menu item prices imposed by the thrifty diners of 2010, restaurants need to rely more heavily on tight food cost control to achieve profits. I would expect to see fewer sales of high ticket menu items with high gross margins and high food cost % figures since the high selling prices which would support this profile have declined in popularity. Fewer diners are trying to impress with their choices. More diners are looking for a lower check at the end of the meal.
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