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.