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.

Using Food Cost for Menu Pricing

Dear Mr. Dunbar,

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

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

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

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

I have been doing this for 2 years now and I'm still getting new customers as well as my repeats.  Just doesn't seem like I'm making any money (just able to pay bills and maybe a little pocket change).  Any advice would be appreciated.    Thank you.

Thanks for the question, Eric.  I'm sure you can improve your results.  You may not be able to rely on the truck as your sole income source.  At the heart of this issue is your break even point sales level.  The break even point should include direct labor expense.  I would build in $10 base rate plus benefits for $12 per hour.

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

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

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

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

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

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

Reader Question - Banquet Food Cost Calculation

Dear Joe,

Very good day to you. 

I hope my email finds you well. I just need to know how to calculate the accurate 
food and beverage cost for weddings, banquets, coffee breaks, and breakfasts on hotels. 

I am counting on your support especially since this calculation varies depending on 
consumption volume.

Thanking you in anticipation

Elie

Thanks for the question, Elie.

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

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

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

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

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

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

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.