Major Drop In Food Cost

Fall is in full swing and the days are getting shorter in the Northern Hemisphere. Here in the Mid-Atlantic, it is now soup season. Soup sales have a tremendously favorable impact on food cost percentages. There are many ways soup helps the operators.

When I worked in the remote site camps, we always had huge stock kettles full off peelings, bones, trimmings and other bi-products of the prep process. The chefs made highly profitable soups, sauces and gravies with the stock.

Slow cooked roasts and mashed potatoes make a comeback on football game days.

In addition to the favorable seasonal impact, gasoline prices are now in the $2.25 to $2.75 range (down from over $4 per gallon this summer). Lower fuel prices help our industry in many ways.

We should see drops in the fuel surcharges and in the case costs from broad line distributors. Customers will see their disposable income pickup as they pay less for filling their gas tanks.

As corn prices continue lower, we'll enjoy better prices on beef, poultry and pork. These lower prices come to the patient as it is common for beef rib 109 to spike during the Christmas season. Watch the markets for buy signals.

Consumers are looking to save during the week. If you can engineer profitable budget meal options for dining in or for take-out, you'll have an edge.

The stock market just had its best week in years. Some of the people who had their 401K slashed to a 201K will begin to feel better about their retirement years. Hopefully, we'll see less pessimism in the press.

Squeezing The Lemon

Operators are working the monthly income statements searching for ways to generate more profit. Many operations are running just above or just below the break even point. Profit improvement efforts produce a huge impact at the break even point. A 1% drop in costs may be the difference between profit and loss.

Sales are tougher to come by this year. If you find you continue to break even once sales volume improves, its time to implement an aggressive cost cutting campaign. You can't afford to miss these opportunities to put money in the bank. A 1% rise in sales won't equal the profit produced by a 1% drop in costs. Every dollar of sales requires food and beverage to be served to guests. This cost of sales reduces the income produced by the gain in sales volume.

With guest counts down and average checks off, there may be a huge temptation to fill seats through huge discounts. This strategy risks losing profitable seats on a busy night. Discount lovers take seats which could have produced superior profits. Rather than offering discounts at every meal, you could offer busy night patrons a discount for a slow early week meal period.

Cost cutting efforts produce profits faster than incremental sales improvements at the break even point. Many managers have already cut their cost of sales to the bone just to stay afloat. If you have squeezed all the juice from the lemon, try some new ideas. I'd start with direct operating expenses. Check on linen usage, sewage bills, utilities, garbage pickup, paper and disposable usage, and other costs which do not help produce additional sales.

You may be able to reduce your costs by closing earlier on many slower nights. Late night hours on slow nights are very unprofitable. Late night sales potential may not justify the labor costs. Compare your final hour's sales less the cost of goods sold to the labor costs for the same hour. If you can't cover labor, you'll save by closing earlier.

By finding cost savings and improving the quality of sales volume, operators can gain an edge over the competition.

Leveraging Your Investment in Food Cost Control

The current economy presents a once in a lifetime opportunity for the operators who have an effective food cost control system in place. Imagine adding rampant commodity price increases to an out of control food cost mess. Can you picture the meetings in operations with soaring food prices, theft, poor ordering, waste and lousy portion control? Obviously, the managers who were already abusing the lax system will contribute all the bad news to the market conditions.

If you are on top of your costs, you can see the usage variances and the rate variances and put each in perspective. You have an enormous advantage over many of your compeitors. Many operators are avoiding the tough issues and calling attention to the rise in corn prices. Certainly, corn price increases have fueled a quantum leap increase in many food stocks. However, at this time corn prices have been trending lower and many companies are losing money despite menu price increases.

The companies who recognize the opportunity offered by their tight cost controls will prosper in difficult conditions. Look at McDonalds. Their stock is up over 15% in the last 365 days. They have always employed a tight cost control environment. Their perceived menu value and tight cost controls put them in the driver's seat.

Contrast the value menu concepts with the upscale, casual dining segment. How would you like to manage an upscale casual restaurant with the cost of sales completely out of control? Look at the industry press and you will see plenty of failures.

So you are in control. How should you take advantage of the weak competition? I would offer tremendous value to your guests. Use your advantage to make sure the competition isn't even close to making their menu a value proposition. Don't play games with menu prices and don't beg people to come to your restaurant. Let them come for the quality and value. Once the guest arrives, give them lots of extras. Get some buzz going through word of mouth.

Fresh baked rolls and desserts could get rave reviews with a minimal increase in food cost. Take advantage of the perceived major price hike in flour to create a competitive advantage. When bakers are in the news due to high flour prices, you can offer top notch baked goods as a complimentary extra.

I'm just using one example. You know your strengths. Use your tight cost control system as a weapon to win this war. Pick a few of your kitchen's advantages and feature these menu items and extras to defeat your competition.

Food Cost Control ROI

If you've invested the time and money to build a food cost management system, this year will give you an above average return on investment. The reason your ROI will be higher is the edge may keep you in business. Many of my clients have seen their sales decline from 2007. Certainly, everyone has seen an increase in their cost of sales. Energy costs are soaring and the impact is seen in every delivery.

Management's #1 challenge is to survive 2008. Once a solid short term strategy is in place, the entire organization can work together to meet weekly goals.

In the longer term, many companies will emerge stronger and with fewer genuine competitors. If you follow the industry news, you've seen plenty of failures. Stale concepts and red hot brands have faltered. The future will be quite profitable for companies with profitable business models today.

The ROI from an investment in a food cost management system is greatest now - in a downturn. The reports you see each week give you an edge. This edge could be the difference between a profit and a loss. Reports which show price fluctuations are very useful. While your competition sees higher food cost percentages, you will understand these increases better. Menu analysis and recipe costing tools help with pricing decisions.

What is the impact of a smaller portion option? How are my top 25 items performing this year? If I raise prices, should I do it across the board or on specific menu items? Reports from your food cost system will help to answer these questions.

Some programs have reports with a gross margin analysis. The reports use standard recipes and current purchase prices to calculate gross margin by menu item. The calculation subtracts the recipe cost from the selling price and multiplies the result by the number sold (from your POS system). You can now see where your profits are produced. Menu engineering models use this data to help you with pricing decisions. I like to treat the menu as a portfolio of profit generators.

Purchase history reports will help you see price trends on your high volume items. You may not be in a position to buy differently but you will be able to measure the impact. This information puts you in position to make better decisions.

The perspective of the manager who is armed with a food cost management tool is superior. Your profits will grow tremendously as the economic conditions improve. Your ROI from the investment may just be a solid future for your company.

Food Cost Benefit

As we see oil prices beginning to drift lower (after threatening to go above $200 per barrel this summer), corn just hit a one month low. Prices of certain commodities are still near historic highs but this decline is a positive for restaurant operators.

On the micro-economic front, the industry has focused intensely on food cost control. Restaurants are buying less expensive ingredients and watching their storage areas closely. I hear lots of stories about tight cost control each week. The energy is moving beyond cost of sales. Operators are looking at power bills, sewage usage and garbage pickups. No expense category is ignored.

In the long run, the macro-economic conditions will improve and sales will rise. Smart operators will continue to control costs tightly. Future operating margins will be better than before the current downturn.

The coupon fever in our region has cooled a bit. Beverage sales are still off from the peak but a greater % of patrons are ordering drinks. Budget conscious guests are loosening up a little and splitting a dessert item again.

I was in the field last week and flights seem fuller. Airport restaurants were doing a brisk business in Washington and Miami. Fellow travellers seemed to be willing to pay for a meal before going to their gates rather than purchasing a sandwich on board. Portion control can be seen everywhere as kitchens carefully monitor the center of the plate ingredients.

Investments in cost control systems and tighter policies will payoff for years to come. Lower commodity costs and a drop in energy prices could accelerate the speed of the profit improvement in 2008.