The Profitable Butcher - Part 1

Our goal is to keep the cost per portion as low as possible while maintaining the current standard.  The focus is on the center of the plate.  Most people break down their current meat and fish using a cost per ounce model. 

There are many limitations to this approach.

Your cost per ounce may be 50 cents.  If you take a piece of meat which costs $6 per pound and you lose 25% in unusable trim, your cost per pound is $8 and your cost per ounce is 50 cents.

Our first issue is the 25% unusable trim.  This implies a 75% yield when we focus on our center of the plate portion.  What happens if a particular piece of meat yields 80%?

Instead of 50 cents per ounce, we would only pay 46.875 cents per ounce.  Is this meaningful?  Do people actually see the impact?  I would argue they don't see the impact clearly.

If the piece of meat weighs 10 pounds, the 50 cent per ounce model assumes 120 ounces.  We would expect to yield 15 - 8 ounce steaks.  The 80% yield would increase the number of steaks from 15 to 16.  The same numbers are in play with only a slight change in yield.  The piece of meat weighs 10 pounds and the cost per pound is $6.  Only the yield changes from 75% to 80%.

The extra steak is the true benefit.  Monitoring a 3.125 cents per ounce change won't be easy to explain in meetings.  "we should have a slightly better profit this weekend because our cost per usable ounce decreased by 3.125 cents..."

The extra steak would cost $4 using the 75% standard at $6 per pound.  Our goal is to save this $4.

Perhaps we could find a supplier who usually delivers meat which yields 80%.  If we expect to purchase 10,000 - 10 pound pieces per year, we would save $40,000.  The savings would occur 1 steak at a time as we gain the extra steak from each batch.  Using our POS system, we can make sure we get the sales for the extra steaks and the gross profit increase will appear in our bank account.

Rather than tracking 3.125 cents per ounce, we can track these extra steaks.

What Should My Food Cost Be?

Every month, I receive emails asking for benchmark information in every segment of our industry.  Benchmarking food cost is a meaningless pursuit.  Every menu has a unique set of criteria which have an impact on the gross margin.  Rather than looking for a target number outside your organization, I would suggest a simpler and much more accurate way to answer the question:  What should my food cost be?

People really want a method to bring their gross profit back to previous levels.  

The first step in finding the answer lies in your current sales mix, food purchases and the resulting gross margin.  Nobody offering a diverse, a la carte menu to their guests can expect to have a food cost % close to a utopian figure.  Also, this means your competition is far from perfect.  Don't focus on an unobtainable goal.

Review your purchasing data thoroughly including a month by month analysis of all key items (typically your top 25 items ranked by purchase volume in monetary terms).  I would go so far as to construct a matrix to track the purchase cost of these key items on a monthly chart.  Look for sharp shifts (inflection points) on the chart.  Can you find the logic behind these shifts?  Perhaps you have significant seasonal price changes.

You will definitely see a major shift higher in any items which require consumption of grains in their production.  This is not just baked goods but also the protein items.  Our animals consume the same grains we now see used in the production of the fuel we consume at the gas stations (ethanol is anywhere from 10% to 85% of the fuel at most service stations).

Find the top trends in these key items.  Apply the findings to your food cost formula.  If the top 25 items account for 40% of your purchases, a 10% shift higher in the cost of these items will produce a 4% increase in your purchases.  If your purchases have actually increased 5.5%, the 1.5% implies the other 60% of your purchases have increased 2.5%.  Every operation will have a unique profile.

Start with your top 25 items and try to cover the 4% increase in purchases.  Can you lower the figure through tighter controls?  Weigh the cost of tighter control against the potential gain.  Implement these controls whenever the benefit outweighs the cost.

Carefully monitor waste, spoilage, theft, portion size and purchasing trends.

In the example above, a sales increase of 1.65% would cover the 5.5% increase in purchase costs if your target food cost % was 30%.  You don't need to raise menu prices 5.5% to cover the increase if your goal is to maintain gross margin.  A food cost % of 31.14% would produce the same gross profit as before if your cover count  is stable and your check average increase hits your 1.65% target.

Can Higher Sales Offset The Rapid Food Cost Inflation?

As operators find more diners in their restaurants, they are seeing major increases in their invoices for food and supplies.  Higher prices for food, utilities, gas for vehicles, paper, linen and other supplies are shrinking margins.  Can your higher sales numbers offset the rapid rise in food cost?

A 10% rise in your invoices will cost you 3.5% of sales at a 35% previous food cost level.

This may be too much to take if you rely heavily on coupons and discounts to attract patrons.  On the other hand, most operators would gladly part with 3.5% of sales to see more revenue.  Many of these people will eat the cost increases for some time.  They will follow their competition in any price increases.  Fearing a drop in business just as they see a pick up, restaurant managers are holding prices in check at many locations.

Is this a good strategy?  Happy to have survived the recent bloodbath, many people I speak with are happy to wait the competition out.  They quote $5 foot longs, 2 entrees and an appetizer for $20, 2 pizzas for 1 nights, and numerous competitors offering a meal with full service for $9.95.  Patrons have downsized from prime steaks to upscale burgers.  Burger places are popping up everywhere I go.

If you decide to lead in the price increase game, I would expect your competition to follow pretty quickly.  Everyone sees higher prices at the supermarket and gas pump.  Many patrons expect increases.  By taking the lead, you can set your own pace for price increases.

Forecasts For Better Food Cost Results

Most restaurants have an automated ordering system (POS) which can be queried for menu item counts for any given data range. This data is quite helpful for the forecasting team in restaurants using a limited menu or a menu with a central focus (either by cuisine or main ingredient). Unwieldy menus do not allow a quick menu item count forecast (using historic POS data) to effectively buy most key items.

At the core, most forecasts begin with the cover count or number of guests expected to arrive in a given time period. Adding the check average to this cover forecast will provide the people designing a shift schedule with a target. Simply take the covers times the check average times the target labor percentage. This is the budget for the period.

Food cost control is not a percentage game in the planning phase. Although most use food cost percentage to measure results, the number won't help you predict what food to order, store, prep and bring to the line for any given period. Cover counts and check averages will provide a broad target. Making the target work is a tougher task.

For many raw ingredients, the ability to use unsold product in future meal periods has a significant impact on your food cost results. Limited menus put a short list of ingredients in play every single day. They don't need to worry how to use any leftover cheese at Domino's Pizza. Pizza is on the menu tomorrow. In contrast, operators using menus relying on daily specials for a major share of sales will have a much more demanding job to use up leftover stock.

The purchasing forecast depends on par stock targets for many shelf stable items. In a typical kitchen, a much greater share of the food cost dollar is spent on perishable meat, fish and produce. The error penalty for over ordering a shelf stable condiment is minimal when compared to fresh white fleshed fish. You will often see seafood specialists with chalkboards. Late in the dinner shift on a busy night, they want to run out of fish if the next day's forecast is for a slow Sunday or Monday.

My favorite Italian restaurant in New York does not offer fish on days when the fish market is closed (Saturday and Sunday). Some chefs pay air freight to get fresh fish in the door as fresh as possible. You want to avoid over buying any highly perishable raw ingredient. Just ask your self a simple question: "If I order more than I can use today, will I be able to sell the leftovers tomorrow?"

Once you move away from fresh fish and poultry, dairy and produce are highly perishable and are frequently purchased by specialists. If your operation doesn't justify hiring a specialist, tracking produce waste can help you adjust your pars quickly. I favor either a two-tier or three-tier par stock model. Order more before busy days and less on slow days.

I believe using sophisticated software (with menu item counts, standard recipes, standard yields and other recipe model factors) are most useful for companies who have never explored these tools. Often, my clients tell me they wish they had analyzed their menu item costs years ago.

The knowledge gained from yield analysis really improves future forecast accuracy. If you learn to translate purchase units of measure into the number of standard portions, you will have a competitive advantage. Your forecast model can now go well beyond covers, check averages and percentages. Take your top 25 items and buy more precisely. The impact is huge.

Production Food Cost

Most restaurants purchase raw ingredients and produce and sell finished menu items. Our management accounting should be structured in a manner similar to a manufacturing operation. The wait staff should be considered the sales force. They meet the customers and help them order a delicious meal.

We find a beehive of activity on or near the production line in most restaurants. The wait staff wants to rapidly fill orders and the production staff handles orders as efficiently as possible given the equipment constraints and staff levels.

Unlike most manufacturers, a majority of food service managers do not track work in progress and finished goods inventory. Our finished goods are immediately delivered to the dining room.

The terms batch recipe, sub-recipe or prep recipe are used to describe the items produced ahead of the meal period. These items are available to the line cooks and are used to produce more complex menu items. Common prep items are sauces, dressings, stocks, casseroles and other items which take longer than the typical meal cycle to produce. Butchering, produce cleaning and other prep activities convert raw ingredients into portioned items and salad mixes.

Food service operators need clear policies to handle these inventory valuation issues. Inventory valuation is important since the cost of goods sold depends on consistent treatment to determine beginning and ending inventory values.

There are many different accounting policies employed by major food service companies. One of the largest hotel management companies in the world does not use food inventory in their balance sheet and income statements. Food cost reflects all food received from their suppliers each period. Other companies do not value any work in progress inventory. These operators use a prep cooler and management's goal is to minimize the amount of food in this zone.

Due to the increase in report complexity, we often miss the opportunity to evaluate the true cost of batch recipe production. The key reason for tracking batch recipe production, including the cost of direct labor, is the ability to compare the total cost with the available packaged goods.

Salad mixes using romaine lettuce are very popular. For many companies, the value added by cleaning and trimming the vegetables and heads of lettuce does not justify the cost increase. The packaged salad mixes offer a high quality alternative with very low labor costs.

Operators are trying to manage relatively high production costs. Salad production involves many hidden costs: transportation of unusable trim, water used to clean vegetables (often left running during the prep), garbage removal to discard the unusual trim, and higher volatility in market costs. The direct labor is not completely hidden but may be cloudy when the workers handling prep also work in other stations.

So what? Why should anyone care about these issues?

The cost of meat and seafood requiring butchering and vegetables requiring prep may be over 50% of your cost of goods sold. You may have significant hidden profit buried in your operation. The amount of hidden profit may justify a quarterly study comparing prep vs. direct purchase on several key items. If you have a policy of producing everything from scratch, you need reports which allow you to monitor production.