Setting Food Cost Priorities

I was asked this question at a job interview and hope that I got them right. What is your take on this question?

Food quality control, food cost control and personnel supervision are three important responsibilities of this position. Please prioritize these in order of importance and provide your reasons.

Thanks!

I would put these three important responsibilities in the following order:
1. Personnel supervision is number one because people make the entire business model work. It's impossible to hit your objectives if you are lax with supervision.
2. Food quality control would be my second priority because quality drives sales. You can hit every other number in a restaurant and if the quality is low you're in danger. So now we have qualified, well supervised staff producing high quality menu items.
3. Let's make some money now that our guests are happy with the service and food quality. Food cost control will help insure proper portion control, lower waste, optimal stock levels (freeing cash frozen on your shelves), and optimal blend of ingredient price and quality.

On the quality issue, it's often possible to meet the food quality control and food cost control objectives simultaneously. I shop at Whole Foods for many items due to family allergies. They have a private label called 365. The 28 ounce can of the 365 label canned peeled whole tomatoes costs $1.39 here in Virginia. This is a premium over other local markets. You may pay as little as $1.09 for the same size can. When you cost the canned products by the tomato, the Whole Foods 365 label comes up a winner. Each can averages 12 tomatoes. Some of the cheaper brands have only 7 or 8 tomatoes and plenty of water or tomato juice.

Would you rather pay $1.39 for 12 tomatoes or $1.09 for 7.5 tomatoes? You pay 25% more when you buy the cheap brand.

This analysis is 100% tomatoes to tomatoes. The size is almost identical.

Finding Your Way Through The Recession

My readers have sent me a number of questions regarding the impact of lower revenue on budgeted profit. Most of these questions come from people who are front line oriented like chefs, f&b controllers and owners. They want to know how to project profits given a drop in sales and they want to know how to answer questions about NOI, EBITDA, EBITDAR, etc.

Generally, cash is king and this is especially so in a recession.

The financial people want to focus on cash flow. Typically, the quickest way to generate cash is a bank loan. Banks are not freely loaning money right now. The second quickest source of cash is paying suppliers slowly. This can be costly in the long-term. Most companies struggling to meet payrolls and quarterly tax payments have found their cash flow threshold. As sales continue to drop they have a cash crunch. These companies start layoffs, slow down payments to suppliers and other tactics in order to meet payroll, rent and taxes.

So how do you calculate the impact of a sales drop? If sales decline $10,000 or $100,000 or even $1,000,000, how does that affect your cash flow. If you are an owner, you need to look at NOI (Net Operating Income) and add back depreciation and amortization [EBDA]. You don't have any corporate colleagues to share the pain so it doesn't make any sense to add back interest, taxes [EBITDA] and rents [EBITDAR].

Let's say your current net operating income plus depreciation and amortization equals 30% of revenue. If you drop $10,000 in revenue and maintained your percentage targets for costs and expenses, you would put $3,000 less in the bank account. The same statement ratio on $100,000 would eliminate $30,000 of cash flow and $300,000 for a $1 million drop.

How do you make up for these shortfalls? You need to put the drop in relationship to your original budget. If you dropped $100,000 from $2 million to $1.9 million, the $30,000 equals 1.58% of $1.9 million. You need to trim about 1.6% from your variable costs (food, beverages, direct labor, supplies, etc.). You multiply the sales % drop by the profit % (30% X 5.26%). I use the $1.9 million instead of $2.0 to calculate my sales drop % because I need to know how to adjust current operations. In my current numbers, I don't have the extra $100,000 in revenue.

If you absolutely hate working with numbers, use the sales drop of 5% and multiply by the 30%. You'll get 1.5% and this will be close. Make it 2% to be safe.

These figures can vary tremendously as the sales drop as a % of budgeted sales increases. Some operators are experiencing drops of 20% in revenue. If you had a $5 million restaurant turn into a $4 million business, you'd be in the 20% club. Perhaps your average entree is in the $25 to $40 range. What do you need to do to survive?

You would be looking for a cost cut of 7.5%. WOW! That is huge. I'm expecting you have already cut costs to the bone and were projecting a break even year. In the short run, many operators in this position are selectively cutting management positions.

Trying to find the $300,000 bottom line short fall in food cost % is probably tantamount to slicing your own throat. If you had your food cost % in line and can't increase menu prices (which may be out of the question for many of you) a 7.5% drop is tough. Cutting portions to achieve a 7.5% of sales drop would certainly be perceived by your patrons. Operators are cutting fat from their staffs to make up most of these shortfalls. A $300,000 cut means 5 key people making $50,000 plus benefits.

For the companies growing sales at this time, your hiring woes will come to a screeching halt. There are plenty of well qualified professionals looking for work this quarter.

Number Crunching For Non-Accountants

I joined your site because I need help on self training in figuring out how to successfully manage my kitchen. I've been in this Industry for a while now, I know a lot about cooking and procedures, however, I'm in a position right now that requires me to manage all aspects of running a profitable kitchen. I can cook a steak to perfection and build complex recipes, supervise, hire and fire.....but number crunching and being responsible for food cost control and budgeting, well, looking over things, its a little more complex and overwhelming than I figured?? Would you be able to give me some pointers on simplifying the process.

A black and white of this business in one simple word is "pub" its clientele is regulars that have been swinging through the same doors for years now, however, the new owners have renovated it into a new "restaurant/bar" and are marketing it towards that atmosphere with a capacity of exactly 135 people.

Now, the menu is appetizers, two salads and a few entrees. I'd say 25 menu items tops.

I've shown the owners that I'm up for the challenge but proving that I can do this means I need a crash course in Business Mathematics, and I failed math twice during school. I really don't know where to start but I know it has something to do with inventory, food cost and budgeting.

Please help.

Chef

I would start with a simple approach. Take your steaks and create a simple control sheet. Everyday you can write down the number of steaks at opening, purchased, butchered, sold and the number at the end of the day:

Steak Control Sheet

Date:

Beginning Count(+)________________

Purchased(+)______________________

Butchered(+)______________________

Sold(-)___________________________

Ending Count(-)___________________

Over/Short________________________


When you add the purchased and butchered to your beginning and subtract the sold and ending counts, you should get a result of zero. Do this everyday! You will know where every steak went and why.

Keep your menu focused and build slowly on popular items. Make up sheets for all your popular center of the plate items. Call 2 or 3 companies who can supply these key items and give the business to the supplier with the best service, quality and prices.

Question About Spoilage

I stress to upper management the need to factor spoilage (excess / overproduction of food discarded each day) into our cost of food summary. I am told that since it is already expensed, that it doesn’t need to be considered. What are your thoughts on this subject and do you have any document or archive that discusses this topic.

Thank you,
Carlo M.

Spoilage should be closely monitored to make sure it stays in check. From the general ledger accounting perspective, the food cost is equal to purchases net of inventory change. Food disposed of in the garbage gets expensed just like the food consumed by guests. Your food cost results will improve if spoilage is kept to a minimum.

The main cause of spoilage is forecast errors. Forecasting of purchases and production involve demand estimates, inventory checks and safety factors. Waste tends to be higher when the menu requires highly perishable fresh fish and chicken. Management needs to weigh the cost of running out of an item vs. the cost of waste due to over stocking an item.

Often, the safety factor may be too large when ordering a perishable item. If you keep records of the spoilage, you will spot problems quicker. Chronic waste can be prevented with 10 minutes of effort each day. Simply keep a log of all items disposed of for any reason. Note the item name (ingredient or recipe), quantity wasted, cost and reason.

Once you start keeping a record of the waste, you will see trends and make adjustments. These adjustments will help you lower your cost of goods sold over time.

Reader Question About Pizza Shops

Dear Joseph Dunbar,
I have been doing research for an article on Food Costings on Pizza. The Article is for an Australian Pizza Magazine where I contribute from time to time as a past pizza Franchise owner.

Would you have any advice to assist me in writing this article for pizza owners of Ma & Pappa independent pizza shops. These people are the salt of the earth, compete in dog eat dog world of franchising, chain restaurants. Finding system hard to implement and follow.

So I would like to reach these type of people that work as busy fools in a business that leaves them scratching their head why they aren't doing better then they should.

What advice could you give me in approaching this article in " Food Costs & Margins"

I look forward to any advise or assistance within this important area of their business.

Regards
Stephen Millar

www.pizzanews.com.au

Thanks for your question Stephen. The pizza business is extremely competitive due to the relatively low entrance barrier. Most pizzerias have limited seating and do a tremendous level of take-out business. This is one of the difficulties in hitting a decent cost of sales. A take-out customer probably won't come back for dessert and coffee (highly profitable).

Here in the USA, there are lots of pizzerias offering appetizers like wings, garlic bread, dips, etc. Selling profitable beverages is another challenge. Many families stopping by to pickup two pies to-go don't order soft drinks. When they do order drinks, they probably prefer a bottle vs. the more profitable fountain soda.

Packaging a pizza for to-go orders is expensive. The box, napkins, bags and other consumables account for a big chunk of the pizza shop's cost of sales. The higher cost of sales may be offset by lower service labor costs. The packaging needs to be included in menu pricing formulas.

Some pizza shops have seating for at least 100 patrons. Frequently these seats are filled with customers who order one or two slices. The check average is low but a decent turnover can help drive sales. I worked in a slice shop in my college days and we turned tables every hour. If you are in a low turnover area, try to sell full pies and minimize the number of seats. Use the space to promote other items for sale.

Delivery costs may be a major part of a pizza shop business. If you offer delivery, scheduling and forecasting are very important. Some software packages help delivery operations maintain a customer database. I've seen operators use this database as a marketing tool. During the summer months, the delivery shops do a brisk business with customers at the local swim clubs. Delivery vans and cars can be seen in every neighborhood on a Friday night in most suburbs. On the other hand, the delivery driver may be under-utilized on off-peak nights.

Every pizza shop should know the cost of a dough ball, the cheese portion, a ladle of sauce and the box. Toppings may be priced individually. Many shops charge for toppings by the number of toppings when certain toppings cost a lot more than others.

The competition may come out with a 2-for-1 offer on mid-week nights. Should you match the offer? A good knowledge of your component costs will help you answer the question.