Several of our previous restaurant cost control articles have been dedicated to the topic of recipe cost and menu development. This article will continue on that trend by examining the principles of menu engineering and how they can help improve restaurant profitability and food cost control. Today's concept of menu engineering is a product of Michigan State University's School of Hospitality, and the goal of the exercise is to comparatively rank your menu items according to both profitability and popularity and to then graph these results using the BCG Matrix. This matrix utilizes four quadrants, and though the names have changed a bit during their application to the hospitality industry, their meaning has remained generally consistent.
Quadrant Definitions:
"Stars" are those menu items that are both the most popular and the most profitable. These are often house specialties and are the menu items that you want to sell most frequently due to their high contribution margin.
"Plowhorses" are menu items that are above average in popularity, but not in profitability. Overall, these items produce consistent profit for the business, but are not stars because their contribution margin is below average.
"Challenges" are the converse of plowhorses. They are highly profitable menu items, but not very popular.
Finally, "Dogs" are those items that are neither popular nor profitable, in comparison to your other menu items. Serious consideration should be given to eliminating these items from the menu.
The Mechanics of Menu Engineering:
To determine the correct quadrant for each menu item, menu engineering looks at both the average popularity and contribution margin of your menu items. Based on the results, each menu item is plotted on a graph, using the average profitability and popularity as the x and y axes. Each quadrant corresponds to a particular menu engineering label, as illustrated below. While menu engineering labels can be assigned to menu items without actually completing a graphical representation, we do not recommend this. Completing a graphical menu analysis in addition to simply labeling each menu item with the appropriate quadrant tag will provide a more exact and complete picture into how each menu item ranks in comparison to others. A plotted menu item that is on the border of another quadrant may require a different approach than one that is firmly situated in a specific quadrant--a subtlety that is only noticeable when menu items are actually plotted on the graph. While this may seem complicated, it can actually be quite simple once you become familiar with the process. Further, by downloading our free menu engineering spreadsheet you will be able to execute many of these functions and graphs automatically.
Popularity
Determining the average popularity is relatively simple, just take the reciprocal of the total number of menu items, expressed as a percent. For example, if you have twenty menu items, the average popularity would be 5% (1/20). Any menu item that represented more than 5% of the overall product mix sold would be considered a popular item, making the item either a star or a plowhorse, depending on the contribution margin of the item. To keep things simple, both popularity and profitability are automatically calculated in our free menu engineering spreadsheet.
Profitability
Menu engineering uses contribution margin as the metric for defining profitability. To calculate the contribution margin of each item, one simply needs to deduct the ideal food cost from the menu price for each menu item. For example:
Once the contribution margin is calculated for each menu item, the average can be easily calculated--divide the sum of each menu item's contribution profit by the total number of menu items. Any menu item that has a contribution margin above this average would be considered "profitable," making it either a challenge or a star, depending on the popularity of the item. Some schools of thought advocate the use of prime costs in contribution margin calculations, including incremental labor costs into the food cost figure, but unless this is a typical internal cost accounting practice for your operation, we do not recommend it.
Once you have determined the comparative popularity and profitability of each item, you can then graph the results using the specific calculations into a four quadrant graph and identify each item with the corresponding matrix label, as discussed previously. Again, to assist with executing the above steps, we recommend that you download our free menu engineering spreadsheet
that will do these calculations for you. You can also develop your own restaurant spreadsheet with a little work or purchase one from various restaurant consultant agencies. Once this process is complete, however, the real work begins.
Analyzing the Results of Your Menu Analysis
The primary benefit of using menu engineering as your menu analysis tool is that after only a little preliminary work and calculation, you are able to get an in depth picture into how well your menu items perform in comparison to each other. With this information in hand, it becomes much easier to make strategic menu decisions aimed at improving restaurant profitability. Further, the repetitive use of menu engineering over a period of time will help you gauge the effectiveness of past menu decisions, such as price changes, re-formats, deletions & additions, position changes, etc.
Challenges: A Few Suggestions & Solutions
As we discussed before, challenges
are those items that have a high profit margin, but don't sell very well. Because of their high contribution margin, the "challenge" for these items is to think of ways that profit margins can be maintained, while making the item more appealing to customers.
What do your guests think?
If you are trying to figure out why an item is not selling, start with those that are not buying. Guest feedback is typically the most accurate method in collecting information on why particular menu items are not popular. Based on this guest feedback, changes can be made to improve the popularity of items. Collecting guest feedback doesn't mean holding hospitality focus groups sessions, of course, it just means doing restaurant table visits and talking to guests--paying particular attention to repeat, loyal guests that may be able and willing to provide valuable insight into some of their least favorite menu items.
Is the profit margin driven mainly by a center of the plate item?
If so, maybe the answer is maintaining the center of the plate menu item and portion size, but changing the preparation method. For example, chicken saltimbocca may not be a very popular dish on your menu, but by changing the preparation to chicken marsala, you may be able to create a dish that has the same profit margin as the previous dish, but is now more popular. This flexibility is very common among pasta, veal and seafood dishes, as well.
Is there a minor problem with the recipe that may need adjusting?
This issue is similar to the previous example, except that it does not call for a re-working and re-naming of the entire menu item, but rather just a tweaking of the recipe. This is an issue that is often times brought to an operator's attention through guest feedback. Typical examples of this issue are food being too spicy or bland, too tough, inconsistent in quality, inadequate portion size, etc. These are important issues to identify to ensure a consistent guest experience and satisfaction level. Once identified, operational systems and changes can be put in place to correct the recipe or preparation deficiency.
A final note on this subject is that we recommend that a log be kept of all guest feedback. Using this log will enable you to look back over a period of time and identify any menu item comment trends that may not have been apparent during each individual guest comment. Many times, these mistakes are caught only after the repeat "comping" or voiding of items off checks, but the use of a log should help identify these trends prior to this happening--saving both money and guests.
Are people aware of the item, or is it buried in the menu? Is the menu description appealing?
Putting menu items in the "sweet spots" of menus, or highlighting them with bold font or boxes, can help drive attention to those items and increase sales. Further, using your staff to suggest a dish as a favorite or feature can go a long way in getting a profitable challenge item sold. Also, attempts at promoting an item through improved menu placement, staff recommendations or re-worked menu item names or descriptions will help identify whether the menu item has a marketing or culinary problem. If it is only a marketing issue, then these solutions may be sufficient to move a profitable menu item into the star quadrant.
Is the quality specification for the menu item ingredients appropriate?
Sometimes, operators can create overly restrictive quality specifications that result in higher menu prices than guests are willing to pay. In other words, guests do not perceive enough value in the higher quality specification of a product ingredient to pay more for the menu item because of it. Think of all the quality identifiers that we see on menus: line caught, wild, choice, organic, certified angus beef, imported, free range, grass fed, kobe, sushi-grade, etc. The decision regarding when it is best to opt for a higher quality, and more expensive, product is not always an easy decision. While we never advocate lowering quality simply as a way to increase profit, the quality specification of menu item ingredients needs to consider whether the clientèle values this identifier and whether the quality level is appropriate for the menu item use. Choice strip loin, for example, may be the best product for your NY Strip, but may not be the best product for your burgers. Trying to persuade your guests to pay three dollars more for their burger because it is made with choice meat may, or may not, work. It is always nice to serve the finest available ingredients, but the necessary increase in the menu item price means that the guest must value the quality enough to pay more, as well. In short, overly restrictive product specifications for menu ingredients can sometimes create higher prices for menu items, thereby turning a potential star into a challenge due to guest price sensitivity. It is always a best practice to look at the specifications for your menu item ingredients to ensure that your are purchasing the products best suited for their use.
Is the price too high?
Recalculate your ideal food cost for challenge menu items to make sure they seem reasonable. Further, we recommend doing market research to find out what other restaurants are charging for similar menu items. It is possible that what you perceive as a reasonable ideal food cost for a particular menu item actually leaves the item priced significantly above market competition.
If your ideal food cost for a challenge menu item looks a little too good, or if competitors consistently offer a comparable product at a lower price, you may want to consider lowering the price a bit to kick start sales. Remember, your price may be higher than competitors because of either your portion sizes or quality specs. As mentioned previously, this should be examined if guests seem to be favoring competitor products at lower prices, despite a reduction in the quality or portions. Tweaking the menu item a bit and then lowering the price may put the item back in line with market competition, thus improving sales while maintaining margins.
Plowhorses: A Few Suggestions & Solutions
With plowhorses, the problem is not popularity, but profitability. The goal with these menu items, therefore, is to find ways to improve upon the profitability of an item, without sacrificing its popularity.
Is the item so popular because it is priced too low?
If so, tweaking the price a bit might improve profitability without significantly impacting the popularity of the menu item. Again, executing some basic market research will help indicate the price range and market "white space" available when deciding on a menu item pricing strategy. If a menu item is significantly priced under market standards, and is struggling with profitability, then an operator probably has some room to raise the price without seriously impacting popularity.
Is the portion size too big?
While it is important to ensure that guest loyalty is not compromised by reducing portion sizes on popular items, it is possible that too much food is being served on particular plowhorse menu items. The best place to learn whether this is the case is in the dishroom. By watching how much leftover food is being wasted, operators can quickly determine if the portion size they are serving is more than expected by guests. In this case, making an adjustment will improve profitability, without impacting the popularity of an item.
Are the right ingredients being used to produce the item?
This, again, is a question about using the right quality specification for menu item ingredients. For plowhorse items, quality and specification issues are a factor when operators use higher quality ingredients without adequately charging for the increased cost of these items. Often times, this is because they realize that guests won't pay the additional cost for a higher quality product ingredient in certain scenarios. Rather than using a different specification, however, operators use the higher quality product, but just fail to charge for it. While this is admirable, it can have serious implications on profitability. Using high quality ingredients is always a recipe for success, however, guests must pay for this added quality. So, the real goal is to use the highest quality ingredients that your guests value and are willing to pay for.
Can the preparation be tweaked to improve the profit margin?
In some cases, a popular item can be redesigned so that the price can be raised, creating a higher contribution margin. One example of this has been the increased focus on sandwiches and bistro salads as menu items. Realizing that guests desired having sandwich and salad options on the menu, and realizing that these items often times had low price points and relative small contribution margins, operators began designing large bistro salads and signature burgers/sandwiches. The end result was taking popular menu items and re-designing them so that they could fetch a higher price.
Dogs: A Few Suggestions & Solutions
Typically, our recommendation with dogs is to remove them from the menu. There is no point wasting inventory dollars on items that are neither profitable nor popular. These items just confuse the menu, drawing attention away from those items that you are trying to sell. Further, these items increase product spoilage, kitchen training and labor costs, as well as creating an overall decrease in kitchen productivity due to a more complex menu.
Stars: A Few Suggestions & Solutions
Keep selling these items! Make sure that these items stay well positioned on the menu and that you stay on top of your operational systems to ensure that these items remain consistent. Dropping the ball during execution of these items can be very dangerous, as increased inconsistency on star menu items can lead to a decline in popularity--which can have very negative effects on profitability.
In conclusion, nine out of ten times, each dollar of profit is generated from an order off the menu. Whether you are a quick service operation with menu boards and combo meals, or a five-star, relais gourmand restaurant with tasting and pre fixe menus, the choice of what menu items make the lineup, what their price will be and how they are positioned and delivered to your guests will determine how well your menu is able to drive revenue through to your bottom line. The right menu lineup, like the right sports team starting lineup, is what creates the potential for success and profitability. It all begins with the right menu items, at the right price, delivered in a manner that makes them attractive to your customers. The fundamentals of our game--pricing, cost control systems, etc.--are there to protect and support this potential success and natural menu "talent" by ensuring that the hard work of the menu items is not lost to simple execution errors. Without the right menu, however, the best pricing and food cost control systems in the world will not be able to make a profitable restaurant.
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When it comes to food and beverage purchasing management, Food Buyers Network has often found both hotel and restaurant operators unfamiliar with how to construct the best purchasing programs for their operation. As purchasing management is a critical component of food cost control and overall hotel or restaurant profitability, these operators fail to maximize their potential food service or hotel operating profit. To be clear, we find that while every operator recognizes that purchasing best practices are integral to cost control, many often do not invest the time to research and execute these procurement best practices. While any successful operator will want to get the right product at the best price, we have found that there are as many hotel and food and beverage purchasing methods in use as there are operators. Often times, we find that operators simply do not address or fully recognize everything involved in a comprehensive procurement program—for both food and beverage, as well as hotel categories such as engineering, amenities, linen, chemicals and office supplies. The following will take a look at several considerations when looking at food and beverage purchasing management.
Food Cost Control Begins with Understanding Your Needs. The first critical step in good purchasing is to develop specifications for all product needs. Each product has a set of specifications that makes that product unique--sometimes these specifications make the quality better or worse; sometimes it just makes the product different. In addition to the taste and quality differences—varying specifications also impact the product’s price. If an operator does not identify the proper product specifications, then it is probable that both consistency and price will fluctuate. If products being purchased by an operation are consistent, it is critical to thoroughly examine the specifications of these products to ensure that what is currently being ordered is the best for your operational needs. Often times, this consistency may be due to either product decisions that were not researched or because the supplier chose a product that seems to have met an operator’s needs.
While this may seem good, it is possible that other products would also be suitable for less cost. For example, we recently on boarded a new member that was very happy with the quality of oranges that they were consistently receiving from their supplier. This made sense, as they were top quality oranges without any exterior blemishes. However, because these oranges were being used by the kitchen to produce fresh squeezed orange juice, there were other oranges available that, while having exterior blemishes, were just as well suited for making orange juice as the expensive ones that their supplier had been shipping to them.
Whenever we execute these specification analyses for new Food Buyers Network members, we find examples of this practice.
Lower Supply Chain Costs (should) Lower Operator Costs. Food Buyers Network often finds operators that believe hard negotiation and bidding out products is the best way to purchase. We believe this is often the case simply because it provides an operator with certain benefits, along with a sense of purchasing control, with limited time invested. The truth is that while negotiation is certainly important, tough negotiation, alone, will never produce the best possible results. Operators truly seeking to manage either food cost control or hotel cost control should recognize that getting the best price is also about lowering the cost for distributors and suppliers of the operator. Some may be wondering why that should be the concern of the operator. Here is an example:
If an average case costs $20 from the manufacturer and it costs the distributor $3 to deliver that case, then even the best negotiator will not get the price of the case below $23—this is simply an economic reality of doing business. While there may be times that an operator is able to push the distributor down on certain products, at the end of the day the distributor will always ensure that they cover both their cost and desired profit. While negotiation may help control the desired profit piece, it does not address the distributor’s cost, which is the other influence on the invoiced price. Now, in this example, if an operator is able to purchase in a manner that lowers the distributor's cost to deliver a case from $3 per case to $2, then that operator has created an opportunity to save an additional dollar on every case by reducing the distributor’s cost to service. The following are a few ways to achieve this.
The issues with "cherry picking".
We recognize that many operators bid out products among multiple distributors or suppliers in an attempt to get the best price. Dividing volume, however, simply adds costs to the supply chain that are passed on to the operator. Ultimately, choosing the most economically efficient way to receive product should always result in reduced costs for the operator. More specifically, operators should consider working with a single distributor so that volume can be consolidated, reducing the cost per case to deliver. Of course, we recognize that with this operators now have to worry about whether they are getting the best price since they are not getting the visibility provided by utilizing multiple suppliers. The best way to manage this is through a prime vendor agreement that commits volume to a single supplier in return for a contract that establishes pricing margins. Alternatively, many hotel and restaurant operators become Food Buyers Network members and take advantage of our national prime vendor agreement, currently through Sysco and a host of hotel suppliers, that provides the same national pricing for all members across the country based on our $1 billion in purchasing leverage.
Drop Size.
Similar to "cherry picking," inefficient drop (delivery) sizes add costs to the supply chain because it takes more deliveries to transport the same amount of product. Obviously, adding an additional delivery will increase the average cost per case to deliver, which will ultimately be passed on to the operator. Setting realistic drop sizes will help whenever you negotiate a distribution program.
Payment Terms.
In today's economy, we are all aware of the cost of credit—which is a consideration for any supplier when an operator chooses to not be a “C.O.D.” account. Having payment terms other than C.O.D. is never just a benefit of being an established business, as the supplier will always factor in the cost of extending credit based on expected repayment—even if the terms are “net 30” and for the best accounts. Ensuring that you stay within your established payment terms with your distributor is essential when it comes to getting the best possible pricing, as well as negotiating a supplier contract. While you may not get pressure from your distributor for paying late, you can be sure that you will pay more for your products or that you will be unable to get the most advantageous supplier contract. Also, you may be able to work with your distributor to get early pay incentives. For example, the Food Buyers Network program provides members with 7 day, 14 day and 21 day early-pay incentives, reducing our supplier invoices when paid early.
Online Ordering.
If you walk into a Whole Foods or similar high-end grocery store, you will have no problem finding a staff member to provide any necessary service. Walk into a Costco or similar volume operation and it may be a bit more difficult. Of course, the prices are not the same, either. Having a distributor sales representative take each order in person or over the phone is certainly nice, but this process is inefficient and adds costs to the distributor, which are passed on to the operator. It is because of this that Food Buyers Network provides all members with a dedicated account manager from their local Sysco distribution center to provide customer support and product information, but requires members to order their products online. Doing so has cut out a major distribution cost and has resulted in a distribution agreement that provides significantly lower pricing. If you are not a Food Buyers Network member, it is most likely possible to get setup using an online order system and may be possible to negotiate a lower pricing structure.
Proper Ordering and Receiving.
Finally, it is absolutely critical that operators execute ordering and receiving best practices to ensure that sufficient product is ordered and that it is delivered as expected. Failing to execute inventories when placing orders by using a clear order guide will lead to missed product that requires additional distributor deliveries or recovery trips from the distributor representative--both of which add costs to distribution that will be passed on to the operator. Often, we find that operators will have more scheduled deliveries per week than necessary not because they don't have the room for storage, but because they like the flexibility of having extra deliveries to cover them when they forget to order product. Unfortunately, this practice will drive up an operator's costs.
Sometimes It Is About Good Old-Fashioned Leverage. Up to this point, we have discussed how leverage alone will not produce the best possible product pricing. While true, leverage is certainly important. Using your volume to negotiate the best distribution program is critical in developing the best possible contract. In fact, a significant factor in Food Buyers Network being able to provide members with a "best in nation" distribution contract, is because of our $1 billion that we have as leverage.
Manufacturer Contracting. An additional purchasing consideration is the need to negotiate deviated product pricing directly with the manufacturers of your products. Unfortunately for many operators, doing so requires time, expertise and significant volume, which are often not available. Even more unfortunate is the fact that no purchasing program can ever come close to maximizing opportunities if the operator does not put manufacturer contracts in place. Very simply, while it is absolutely critical to negotiate a strong program to control your distribution costs, the available margin for distributors is relatively low due to intense competition among distributors—limiting the actual savings that can be gained by negotiating only with hotel suppliers or food service distributors. While savings can certainly be obtained through good distribution management, the majority of available savings comes from the manufacturer. Because barriers to entry are significantly higher for manufacturers, due to brand recognition and capital expenses, manufacturers enjoy a much higher profit margin. Because of this, if an operator is truly interested in establishing the most beneficial purchasing program, then negotiation with manufacturers on top products will be necessary. Again, this can be extremely difficult for operators because of the time, expertise and required volume necessary to put these contracts in place. To effectively achieve this it is often necessary to employ teams of internal procurement professionals to oversee and manage this process. Of course, this is only possible if the operator has the volume to justify this expense and meet the manufacturers’ minimums for engaging in such contracts. Alternatively, Food Buyers Network members of all sizes and volumes are able to benefit from our procurement expertise and product category experts by getting access to over 20,000 products that have been negotiated back to the manufacturers by our team. For our members, these products are available at prices 10-20% cheaper because of the manufacturer's deviated price contract and our "best in nation" distribution program. If operators have the ability to execute this internally, then these savings can also be achieved through that method.
"Trust But Verify." The last consideration that we will examine in this article is the need to audit invoices, as well as your distributor and manufacturer contracts. As this is a routine part of the Food Buyers Network program, we can attest to the fact that pricing mistakes are common. To be fair, in almost all cases these mistakes are not malicious and are just the result of clerical or careless mistakes. Regardless, these mistakes can be costly for an operator. Unfortunately, executing these audits can be a costly practice in terms of both time and money. Our recommendation for operators is to invest in a technology partner that will electronically monitor your invoices and contracts to ensure that billing is accurate. Again, another possibility is to become a member of Food Buyers Network, as every line item of every invoice for each member is compared to our contracts using bleeding-edge technology to ensure that every price is correct for our members. This, combined with our routine supplier and distributor audits, ensures that our members are always invoiced based on our national supplier pricing.
When you think about all that goes into running a hospitality or food service operation, it is amazing that operators find a way to create successful businesses. It is no wonder why hospitality and food service operators are known for working long hours week after week. When you add the intricacies of running great shifts, managing staff in a high-pressured environment, controlling easily lost and often perishable inventory and ensuring guest satisfaction, even the most well-staffed operators will often find that they do not have enough time to address all of the purchasing considerations that we examined in this article. That being said, failing to execute a proper purchasing program can result in significant loss in potential profit.
Should you be interested in learning about how Food Buyers Network can provide your operation access to our procurement solutions and reduce the time and expense burden of managing this process internally, we would be happy to hear from you. You can contact us here and a Food Buyers Network Membership Director will be happy to explain our program and answer any questions. If you prefer, you can call us:
John Schalow
Director of Group Development
(800) 518-0727 x101
If you have been in food service or hospitality management for a while, you have probably come across the cliché about managing a shift like a duck swims in water. The adage goes something like this: from above, a duck seems to effortlessly glide along the water, but if you look below the surface, you will see the duck feverishly paddling his little legs to navigate about. The lesson of the metaphor is that the hospitality and food service manager should have a similar style. While to the guests and staff the manager should look as if he is just floating around calmly working the shift, underneath this cool exterior, the restaurant or hotel manager should be hard at work strategically supporting and controlling the direction of the operation.
I open the article with this cliché because I think the same lesson could be applied to another facet of the hospitality and food service industry--restaurant and hotel financial management. Food Buyers Network often encounters resistance when attempting to facilitate adoption of common financial best practices with independent and regional hospitality operators. Running successful shifts and producing happy guests is a difficult job, but one that all successful operators excel at. Unfortunately, this is not enough to produce a profitable business. Just like successful shifts take hard work, running a profitable business also takes dedication--neither happy guests nor strong income statements happen on their own or by accident. We recognize that many independent and regional operators prefer that their focus remains on daily operations and that they do not want to manage from the office or from a spreadsheet--often feeling that this focus is what differentiates them from national chain operators. While the importance of being engaged in operations and present during shifts is absolutely critical, it is not a substitute for strategic financial analysis and planning. Our recommendation is that even the most engaged operator needs to actively adhere to financial management best practices, even if this aspect of his daily routine goes unnoticed by everyone else--like the duck that seems to just effortlessly glide along the water.
The intricacies of financial management make it impossible to execute this role through gut reactions and "in the moment" decisions. While the intuition of a seasoned operator is critical in achieving profitability goals, this intuition must be harnessed through the use of commonly accepted financial best practices if optimum profitability and performance is to be achieved. The remainder of this article will attempt to highlight a few key reasons to adopt these best practices, as well as to provide a
free excel spreadsheet that can be used for sales projections, budgeting, declining budgets and performance review.
1) The practice of budgeting provides a high-level picture of the financial performance of an operation and allows the operator to understand how a change in one cost or revenue area affects the overall financial picture. It is important to realize that we are talking about relationships between expenses within an operation, not simply looking at each financial factor in a vacuum. For example, a rising food cost when examined as an isolated trend may evoke concern. What if this trend is examined in relation to other financial factors, however? Maybe there was a shift in the product mix towards higher priced items with a higher contribution margin, or maybe there was a menu change that had the same effect. The result of either of these may be a higher price point, resulting in a higher food cost, but more bottom line profit. In that case, maybe the higher food cost is desirable! But what if this higher price point, which produces more per guest profit, actually reduced the number of overall guests, reducing total revenue and profit? Maybe the new menu requires more staff to execute, increasing labor costs and negating any benefit from the higher contribution margin. This is just one of many scenarios that could occur on any given day in the hospitality or food service industry. So, while any seasoned manager could give a thumbs up or down on any financial indicator when examined in a vacuum, it gets much more complicated when trying to understand the financial relationship among each indicator and quantify the result if budgets are not utilized.
2) Another fundamental benefit of budgeting is that it forces operators to make tough business decisions by prioritizing expenses. This is a benefit often overlooked among operators, causing them to forego budgeting. Their thought process goes something like this: "I don't need to budget because I only spend what I need to." Budgets, however, are not designed to differentiate daft decisions from smart ones. Budgeting is a process of prioritizing expenses based on financial realities, regardless of whether each expense when examined on its own seems to be justifiable. The truth is, each expense, examined in a vacuum, may very well have seemed like a good expense, but when the overall impact on the bottom line is understood, it becomes much easier for operators to prioritize and eliminate expenses or to creatively uncover alternative solutions that reduce the initial expense. One of the ways this is achieved is through the use of declining budgets, as you will see in the attached budgeting spreadsheet.
3) Budgeting also provides valuable insight and data to help operators make decisions about future business initiatives. Should you open for breakfast? Should you build a patio? Should you expand the kitchen? Should you renovate the restaurant? All of these could be great ways for operators to improve their businesses, but investing in such initiatives can create huge financial burdens if they fail to perform as expected. Through the use of budgeting, break-even and ROI analyses can be completed that will better define the necessary components of achieving success when looking to undertake such initiatives. Again, the benefit of budgeting in these scenarios is that it looks at the relationship of a given initiative on each of the other expense and revenue areas, rather than judging the merits of a project in a vacuum.
4) Budgeting also creates objective goals that can be easily communicated to the entire management team and staff to ensure everyone is working in concert. The benefit of setting specific, measurable goals has long been understood. When it comes to budgeting and countering negative financial trends, it is much better to provide specific, quantifiable goals than to provide vague direction. For example, setting a weekly labor cost goal of 15% will have a much more significant impact than telling the team to "do better on labor." The objective goals used in budgeting also makes the process of performance review much easier and can create a sense of competition among motivated managers that are determined to "hit the number."
5) The budgeting process often can improve service and operational consistency. As a goal of budgeting is to get a picture of the financial future, operators can use this knowledge to plan accordingly. Specifically, operators can allocate for future expenses ahead of time to ensure that they are able to meet the needs of the operation while maintaining consistent profitability. Too often, mostly in corporate operations, we find businesses that fail to accurately budget and, therefore, overspend at the beginning of a financial period, forcing the drastic cutting of staff and supplies at the end of the period to try and hit the established financial goal. With proper budgeting, however, operators should be able to consistently and continuously deliver on operational needs while maintaining financial performance goals.
6) Lastly, Food Buyers Network sometimes works with operators that see value in budgeting for new businesses, but not those that have been around for a long time. Their thought is that they have continuously honed and sanded each facet of their operation over the years so that it is always running at maximum efficiency. This might be true if restaurants operated in a vacuum. Instead, restaurants and hotels operate in an ever-changing environment. From labor cost and food cost to economic pressures and political influences, the external environment can drastically alter the financial performance of even the most well run business. The extent of these influences on profitability is often difficult to quantify or understand unless actual performance is gauged against established budgets based on previous financial history.
These are only a few of the reasons that Food Buyers Network recommends that operators adopt budgeting as a financial best practice. To help those interested in pursuing this practice, you can download a free budgeting program here that will enable you to execute sales forecasting, budgeting, declining budgets and performance analysis.
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For those that have followed the food cost control articles previously published by Food Buyers Network, you are probably aware that we attempt to cover a wide range of related topics. We often run in to operators that are surprised that our articles don't focus entirely on purchasing management as the key to food cost control, since this is the core focus of Food Buyers Network. We strongly believe, however, that food cost control is not about procurement alone, but rather that it requires a holistic approach that examines all areas of an operation to manage this expense. This article is about one of these topics--executing routine line checks prior to the start of each shift.
The idea of the "line check," which is often an integral function in quick-service and casual dining chains, had far more sophisticated beginnings. While the concept was most likely around before, Auguste Escoffier is most often credited as the one who codified the concept of the line check, though the terminology was a bit different--mise en place. For culinary students and graduates or fine-dining kitchen apprentices, the idea of mise en place is probably very familiar. Literally, mise en place is a French term meaning "in its place." While a bit of a simplification, the goal of mise en place is to make sure that the staff is able to execute a flawless shift by ensuring product has been prepared to specification and that the product, supplies and equipment are ready and where they should be prior to the start of service. For example, Mise en place would check the quality and quantity of sauces on line, that the plates are polished and in sufficient supply, that the ovens are at the right temperature, etc. Chain concepts and casual operators have adopted this practice, often calling it a line check, and have trained managers to be able to execute it, as well, so it is not solely a function of a trained chef.
So, what effect does this practice have on food cost? In our opinion, line checks (both front of the house and back of the house) are the single most important practice that an operator can execute to ensure that a shift runs smoothly. Since bad shifts are costly shifts, the execution of line checks have a huge impact on food and other costs, as well as revenue.
A few of the issues that line checks seek to address:
- Is there sufficient portioned product to cover the entire shift, or will we run out and start doing it "on the fly" during the shift--often using the product without portioning?
- Is a scale available for product that should be weighed during the shift? Spot checking French fry portions, for example.
- Have the weights of portioned and prepped products been checked to ensure the correct weight.
- Has the temperature of product in a bain-marie or steam table been checked to ensure the correct temperature, such as sauces, soups, pre-cooked vegetables or rice, or will the first guests be getting luke-warm food.
- Will steaks be overcooked because the grill is set too high?
- Is the fry oil old and dirty?
- Is the sanitizer in the dish machine empty?
- Will the kitchen printer run out of paper or ink?
These are just a few of the issues that executing restaurant line checks can help avoid. The goal of the line check is to ensure that a shift is "setup for success" with the necessary product, equipment and supplies so that things run smoothly and profitably. To be clear, there are many additional benefits to line checks other than food cost control, such as guest satisfaction, product quality, consistency, product safety and employee morale. Bad shifts negatively impact all areas of an operation, including the bottom line, and line checks are the best defense in ensuring that each shift stays on track. The following are recommendations on how you can execute your own line checks.
1) Line checks are designed to ensure shift preparedness, so a separate line check should be done before each shift/meal period.
2) Don't use line checks as a way to "catch" your staff unprepared. Educate them on what you are looking for during the line check and then communicate when you will execute it. This provides staff with an opportunity to check their station prior to the line check.
3) Be consistent. To create positive staff behaviors, your staff needs to know that this practice is consistently executed so that proper preparation for shifts becomes routine.
4) Check portion sizes by using a scale
5) Use an excel spreadsheet printout to record the line check results and then save them in a three-ring binder.
6) Try using a line check kit to stay organized. The line check kit should include spoons (for tasting product to check quality), sanitizing naps, a thermometer/biotherm, line check forms and sanitizer test strips). Often, operators will keep all of these inside a metal contractors clipboard.
7) Check the freshness of all product, preferably by looking at a "day dot" sticker that has been used during the product preparation process and comparing it to the established product shelf life (hopefully your operation has adopted these practices).
8) Using the line check sheet that lists all product that should be ready for the shift, visually ensure sufficient supply. You should include all necessary items on the line check sheet. Chocolate syrup which is kept on the service line may seem small, but it won't to the server who is scrambling to make chocolate milk during the dinner rush.
9) Taste and visually inspect as much of the prepared product as possible to make sure it is acceptable.
10) Take the temperature of chilled and hot product to ensure it is at an acceptable temperature.
11) Check the settings for all equipment--pay special attention to grills, broilers, ovens, flat tops and fryers.
12) Check refrigerator and freezer unit temperatures.
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Proper product storage procedures are critical in controlling food service costs, as well as managing restaurant product quality and consistency. While not the most interesting of food cost control topics, any restaurant cost control efforts that fail to include proper storage procedures will fall short of their mark. To better understand both the importance and details of correct food service storage procedures, it is helpful to first outline their goals.
Firstly, a fundamental goal of storage procedures should be to ensure that product is safely maintained until it is ready for production. Fulfilling this responsibility means working with approved suppliers, maintaining proper receiving procedures, ensuring correct cooking and handling behaviors and observing recommended storage practices. Often times, these storage practices are overlooked by operators as a possible key contributing factor in the spread of food borne illness, and failure to understand the impact that this can have on product safety can lead to significant financial losses for a food service operator, not to mention the ethical issues associated with the negligent spread of food borne illnesses.
Secondly, storage procedures should also be designed in a manner that enables inventory visibility and control, ensuring that on-hand product can be accurately counted and ordered. Failure to command this inventory visibility can lead to improper orders, resulting in a surplus of inventory that can result in spoilage and employee pilferage. Improper orders can also lead to insufficient product levels that can cause poor guest service because of out-of-stock product, as well as increased product costs and inconsistency as operators attempt to acquire product, last minute, at grocery stores or neighboring restaurants. In either case, failure to maintain accurate inventory levels can have significant negative effects on a business, and the first step in avoiding this is to understand what product is on the shelves. Instituting storage practices can help provide this inventory visibility.
Thirdly, storage procedures should facilitate easy access to products by those responsible for production and service. By properly organizing storage areas, personnel will be able to more easily locate the correct product needed for shift execution. Improper organization can mean not only delays for staff seeking product, but often also results in employees removing the wrong product from storage, as they fail to locate either a previously opened container of product or the oldest product container on the shelves that should have been utilized first. If you want to test the level of organization within your storage areas, we recommend taking a stroll through the walk-in and dry storage to see if there are multiple opened containers of like product. To be fair, this is not always due to improper organization, but also because of improper staff training. In fact, it is much more common to find multiple opened containers of product utilized by front of the house staff, such as dressings and bags of grated parmesan, than those products utilized by kitchen employees—not that front of the house staff are less trained, but rather that their focus and training is geared more towards service, whereas kitchen staff are typically better trained on product management. Getting products organized and grouped together, however, is a first important step in modifying this behavior.
Fourthly, storage practices should seek to secure product to reduce theft and pilferage. According to the National Restaurant Association, 75% of inventory shortages are attributable to food service employees, which is roughly equivalent to four percent of food service revenue. This means there is over $25 billion in annual food service employee theft. According to the US Department of Commerce, seventy-five percent of employees steal from their place of business at least once, with half of them stealing repeatedly. So, even if you have the most trusted and experienced food service team at your operation, statistics indicate that it is important to have systems in place to monitor behaviors and reinforce ethical practices.
Fifthly, proper storage procedures should help reduce product spoilage, which can result in both increased costs and diminished quality. The manner in which product is stored has a direct correlation to shelf life and quality. Most operators are very selective about the quality of products that they purchase to ensure a proper fit with how the product is utilized within the operation, as well as to ensure the best guest experience. As there is a cost associated with ensuring a specific product quality, it is critical that storage procedures are able to maintain this quality until the product is utilized for production or served to the guest.
Now that we have identified the main goals associated with restaurant product storage, we will attempt to highlight what we believe to be food service industry storage "best practices" for optimizing food cost control. When identifying each best practice, we will attempt to explain how they can be achieved and how they help reach one or more of the previous outlined goals.
1. Keep storage areas clean
Maintaining clean storage areas is critical in promoting the service of safe food. Not only does maintaining clean storage areas help fight illness causing bacteria, but it also reinforces the importance of cleanliness and safety as a priority for the business among your staff. To achieve this goal, it is recommended that operators utilize daily and weekly cleaning schedules for all storage areas. A few ‘must-haves’ on any cleaning schedule would be the daily mopping of storage area floors, routine cleaning of storage shelving and walls and the changing out of drip pans used to collect any blood/liquid from stored or thawing product.
2. Put products away immediately after receiving them
The first opportunity for product quality loss is directly after receipt of the product. To help prevent this, it is critical that product is immediately stored in its proper location once it has been received. Failure to do so can cause those products requiring refrigeration or freezing to be exposed to ambient temperatures that can reduce product quality within a relatively short period of time. Further, as product thaws, it will more easily contaminate other products surrounding it, creating both safety and quality concerns. Finally, until product is safely stored in its proper location, there is an increased likelihood of pilferage or utilization of the new product for production needs, rather than staff going into storage to procure the correct product. The key to executing this best practice is to ensure adequate staffing on delivery days, as well as managing the times of delivery with your suppliers.
3. Follow health/safety guidelines for shelf storage, including keeping items off the floor and following recommended storage room temperatures.
Maintaining proper temperatures and ensuring that products are stored in a manner that prevents cross-contamination is critical in the safe storage or products. There are a number of resources that outline these procedures, including HACCP materials and the NRA's ServSafe program, as well as our safe food temperature chart which can be downloaded form our website. Temperature is typically the most influential factor in product quality and spoilage reduction. It is critical that storage units are maintained at optimal temperatures and, for refrigeration and freezer units, their gaskets are in good repair and that doors are not left open. Next to temperature, the most critical storage safety concern is ensuring that products are zoned in a manner to help prevent the cross contamination of potentially hazardous foods from spilling or dripping. The materials previously referenced can provide acceptable product zoning procedures to help reduce the effects and possibility of cross contamination, or you can download our refrigeration storage chart from our website.
4. Follow recommended storage “zones” to maintain optimal product quality.
Depending on the storage limitations of a particular business, operators may wish to store products in product-specific coolers, such as separate meat, produce, seafood or dairy coolers. While this is often not possible because of space and financial limitations, at least segregating these items within a shared cooler can help maintain product quality, as these products have varying optimal temperatures and can suffer from being stored too closely to other products that can influence their flavor—fresh fish stored near butter, for example. It should be noted that this is a refinement of the previous best practice. While there are product zones that should be established to ensure safe product and limit cross contamination, there are also products that require separate zones to maintain quality, even if there is not a food safety concern, as in the previous example of the neighboring butter and fish. Ensuring all product is properly sealed can help prevent this quality issue, as well.
5. Store product in labeled "zones"
It is highly recommended that operators label storage areas and shelving so that personnel know the correct “home” for each product. The most common brand of storage shelving, Metro, makes a label clip that can be attached to the shelving unit so that a label can be affixed. Regardless of the method used to label product zones, be sure that labels will adhere to the surface over a long period of time. Once shelves are labeled, it should be clear to personnel where product should be stored, and much easier to train staff on how to routinely organize storage areas. Labeling and zoning storage areas will also help ensure that safety and quality objectives are maintained, even by staff members not familiar with the reasoning behind the specific zoning.
6. Do not store products in the shipping box/case, if product is stored in smaller boxes within the shipping case.
Unless product is utilized for production solely by the case in which product was received, product should be stored in the smaller product pack units of each case. Doing so helps conserve space on shelves, enables personnel to quickly grab a container of product as needed and enables an operator to better see what products are on the shelves at any given time. For example, #10 cans of product should be stored out of the cardboard container in which they were received.
7. Do not store product in opened containers, cans or boxes.
Once product is opened, it should be removed from its original container and stored in one that can be sealed and labeled--such as a cambro or lexan-style container. Following this practice will help personnel easily identify open product that should be utilized first, as well as prevent the exposure of product that can lead to quality loss or cross contamination.
Operators should also consider transferring product to heavy-duty containers for those products received in packaging that is susceptible to damage, such as bulk bags of sugar, flour or rice. As these bags can become easily punctured or exposed to moisture, using large, plastic sealable storage bins for these, and similar, products is recommended.
8. Sufficient refrigerated storage to enable proper thawing of frozen product.
Properly thawing product is critical to ensuring that product safety and quality is maintained. In keeping with this, it is important that operators have sufficient space set aside in walk-in coolers to enable the safe thawing of product—often referred to as “pull thaw”. Further, it is highly recommended that “pull thaw” pars are set so that personnel know how much given product to pull from the freezer on a given day to ensure sufficient time for product to thaw before being required for production. It is also important that personnel use drip pans for thawing products so that product does not rest in liquid or blood, nor drip onto products below.
9. Properly cooling product before storage.
It is important that prepared, hot product be either brought to a safe temperature prior to storage, or stored in a manner that will enable the safe cooling of the product. This can be done through ice baths, blast chillers or breaking the hot product down into smaller pieces or batches. Regardless of the method used, it is important that hot, prepared items are cooled down and stored so that they do not remain in the temperature danger zone for more than four hours once placed into storage. More information and recommendations on this are available through the NRA’s ServSafe program or HACCP, or by downloading our food service safe temperature chart from our website.
10. Label all opened product with the date the product was opened, as well as the name of the item.
Once a product is opened, it is important that product is labeled with the name of the product and the date the product was opened. For those operators that want to go a step further, it is not a bad practice to also label the expiration date of the opened product based on established shelf lives. There are a number of ways to complete this, but one of the easiest is to purchase dissolvable “day dots” that your staff can use to label product, and will then dissolve in the dishwasher when the pan is washed. Labeling products will enable operators to follow through on established shelf lives.
11. Establish shelf lives for your products and post these charts for staff to reference.
Products will most likely need to have an unopened shelf life and an opened shelf life. Establishing product shelf lives is critical in ensuring the safest and highest quality products. Further, it is essential that these shelf lives are communicated to operational personnel. A good way to help with this is by creating shelf life charts that can be posted in various operational areas, especially those used for product preparation. In most cases, products will need to have two shelf lives: one for unopened containers and one for opened product. Many of these shelf lives can be obtained from your suppliers. Based on these charts, employees can label product they open with the expiration date to ensure adherence to these dates or, at a minimum, dated product can be compared to posted charts to check shelf life.
12. Date each box placed into storage with the receiving date.
Just as product that is opened should be "dated" to ensure it stays within established shelf lives, unopened containers of products should be labeled with their receiving date to ensure that they not only are used before their shelf life expires, but also to ensure proper product rotation is being observed and that ordering pars make sense based on the usage of particular products. The easiest way to complete this is by using a “price gun,” similar to those used in stores to affix prices to products. Making this process as easy as possible will increase the likelihood that staff consistently executes the standard.
13. Restrict access to storage areas to only those that require it.
Every operator must find the balance between restricting access to product and the need for personnel to quickly access this product during production. For example, operators may wish to restrict access to liquor storage to management only, but may find this policy difficult to adhere to on busy shifts. As a general principle, however, operators should try and restrict access to product to only those personnel that require the product. For costly product, operators may wish to limit access to management only--such as for liquor, steaks and some seafood. If separate coolers are not possible for high-cost product, we recommend the use of product cages that can be setup within storage areas. Again, Metro is a common manufacturer of product cages.
14. Utilize the proper storage equipment and containers.
Setting the right standards with your staff will only be effective if they have the right tools to execute the established standards. This means that operators should be sure to have sufficient storage containers and lids, thermometers for storage areas, sufficient cleaning suppliers, enough drip containers/pans so that they can be routinely changed out, labels for containers, date "gun" for new product, etc. Having sufficient supply of these products requires an investment, but will help ensure that your product is being stored in the safest manner possible to protect your product and guests. Further, there is no better way to reinforce negative behavior in your personnel than setting a standard and then not supplying the necessary tools to achieve the standard--it is almost guaranteed that the standard will never be met.
This may be a good place to note that it is important that the storage equipment designated for particular products needs to work with the storage zone designated for the particular product. To do this, it is helpful to establish the maximum par of each product, figure out the number of containers needed to store that level of product and to then ensure that the established zone has the necessary room for the containers.
15. Periodically organize storerooms to return products to the proper zone.
One of the most critical, routine practices in restaurant storage management is having personnel regularly assigned to spending thirty minutes in each storage area organizing the room according to the established product zones and standards, as described in this article. This practice will prevent storage areas from getting too disorganized over a series of busy shifts, and will again stress the importance to your staff regarding the organization of the storage areas, as well as creating a “sense of ownership.”
16. Store products in a neat and organized manner, with labels facing up and forward and product stored towards the front of the shelves.
It is important that product, in addition to being stored in zones, is stored in a neat and uniform manner. This should include labels facing up and forward, as well as product being stored to the front of the shelves, leaving room towards the back for new product that may be received in the future. Storing product in this manner makes it much easier to view what is on the shelves, as well as execute orders, inventories and receive new deliveries.
17. Rotate product upon receiving.
Another critical factor in ensuring fresh product is the rotation of product upon delivery. It is essential that older product be moved towards the front of each product zone, making room in the back for newer product. This practice will help ensure that older product is utilized first, a practice commonly referred to as FIFO—first in, first out. FIFO, of course, is also an accounting practice that values inventory using the same philosophy. Labeling product upon receipt is a good way to validate this practice. While product rotation is relatively easy for some items, you may find staff avoiding this practice on heavy, bulk freezer items that require the movement of significant product in order to store new product. It helps to ensure that product pars are properly set so there is only a limited amount of each product on hand, making the rotation process a bit easier.
Hopefully, we have been able to successfully outline storage best practices, as well as the reason for their importance. We began this article stating that the subject matter is not very interesting. This is not only true of articles about restaurant storage procedures, but about the practice itself. Often times, operators overlook the importance of dedicating staff and time to this critical function because there seems to be many more important operational areas to focus on. That being said, we hope that we have been able to convey why following these best practices is important for food service operations and how executing them is critical in any comprehensive food cost control program.
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The past year has seen the emergence of many new food service distribution trends. Among these trends is the growing desire by restaurant owners and operators to gain access to the available pool of food service manufacturer rebates, along with the corresponding rise in food service buying groups. Unfortunately, this rising trend has often resulted in little more than frustration by all parties involved--restaurant owner, distributor and manufacturer. A closer examination of the rebate driven, non-committed procurement model as a food cost control technique, along with the history of this practice, reveals serious and inherent flaws in the system.
The underlying principle behind this reality has been addressed in a previous Food Buyers Network blog article, Strategic Relationships in Food & Beverage Management. The primary thesis of the article was that effective procurement strategies are not based on leveraged negotiation alone, but rather through a combination of negotiation and an understanding of the cost structure in the supply chain. In other words, to get the best price, operators need to not only negotiate pricing based on their available purchasing leverage, but to also try and reduce factors that inflate costs throughout the various points in the food service supply chain. Examples of such costs are delivery drop sizes, non-committed volume, cost of extending credit and the level of in-person customer service required. In short, our belief is that any effective procurement strategy will attempt to reduce costs throughout the supply chain, rather than adding to them.
The inherent failure of rebates as a procurement strategy is due to the fact that manufacturer rebates increase supply chain costs, rather than reducing them. As mentioned previously, the economic realities of such practices are the inevitable increase in costs for everyone--including the restaurant operator. To understand this, it is helpful to briefly examine the historical supply chain landscape that has led to the current rebate frustration. Over the years, distributors have served a role beyond that of merely shippers of products. Because manufactures had no direct access to the end consumer, manufacturers have turned to distributors to market their products. Specifically, manufacturers looked to distributor sales representatives to leverage their customer relationships and market products. To promote this relationship, manufacturers offered rebates to distributors, also known as allowances and earned income, that were based on the case movement of their products.
While under the original supply chain model these trade spend practices were logical, the supply chain landscape has shifted over the years, making the execution of rebates, as they were intended, inefficient and ineffective. As distributors began to offer far more private label products, manufacturers realized that distributor sales representatives no longer marketed the manufacturer's branded products, but rather the distributor private labels. This shift from partner to competitor has caused many manufacturers to question the effectiveness of their distributor allowance programs and seek alternatives. While distributors have continued to collect these rebates, it has become increasingly apparent by manufacturers that these rebates are being paid out on volume that would have existed regardless of any rebate programs, as the purchases were not the result of marketing efforts by the distributor.
The logical evolution of this practice was for manufacturers to try and provide these rebate incentives directly to the consumer and bypass the distributor as a means of marketing. Again, this seems to be a logical solution for manufacturers trying to influence consumer purchasing behaviors, once they were unable to rely on distributors to execute this role. Manufacturers, again, often had no access to the consumer to promote these rebates, other than food shows, so they required a replacement to the distributor sales representative. As a result, purchasing cooperatives and buying groups began to spring up to fill this roll, offering rebate incentives to influence member behaviors. The emergence of these buying groups, however, came with their own set of problems that has rendered them ineffective as a procurement management tool.
First, the emergence of these buying groups, also know as group purchasing organizations (GPO), have directly impacted distributor revenue, as rebates that are paid by manufacturers to the end consumer through buying groups are deducted from the allowances they pay to the distributor--this volume is known as non-qualifying volume. Normally, the distributors are the default recipients of these manufacturer rebates, but this revenue stream is reduced every time a manufacturer pays a rebate directly to the consumer through a buying group program. From an economic perspective, the manufacturer position makes perfect sense--they are willing to offer marketing rebates to whomever can drive case movement, which was the intended goal from the very beginning.
On the other hand, it is understandable that distributors do now wish to see their allowance revenue decreased--no company wants to lose an existing revenue line. Even so, a very strong and compelling argument could be made that this is simply an economic readjustment and that distributors will need to cope with the loss of this income, as it was not a direct result of their fundamental business model to begin with. This statement would be easier to make and execute, if it were not for prior distributor business decisions that now make the loss of these allowances impossible for the distribution model. Specifically, as consolidation and increased competition among distributors has increased over the years, distributors began to offer master agreements and street pricing that factored in this rebate revenue on the back end, as most rebates are considered "off-invoice" and do not factor into the cost of the product for the purposes of determining the customer sales price. For example, if a distributor had a break-even point of 8% over cost, they may be willing to extend an 8% contract to a potential new customer to gain their business, because they know the resulting volume will generate an average of 2% in allowances from the manufacturer, providing them the necessary margin to service the new business. So, while the master agreement extended to a consumer might be at the break-even mark, or a slight loss, this is balanced out by these manufacturer allowances. In our opinion, this is where a lot of the current trouble can be traced. Over the years, this type of practice became more prevalent among distributors, despite that as a business practice it was probably unwise for distributors to manipulate pricing in such a manner if they had considered the likely long-term possibilities. Regardless of its prudence, this practice has added a layer of complexity to the supply chain that needs to be more closely examined to uncover whether rebates will, in the end, provide any benefit to the restaurant operator, as it is unrealistic to expect that any business will operate at a loss.
As more consumers elect to participate in rebate buying groups, distributors are faced with losing the revenue that they relied on to make the master distribution agreements and street pricing they extended economically viable. In other words, their prior business model is seriously undermined if the economics of trade spend are realigned, as the growing popularity of buying groups is trying to do. The astute reader should begin to see the inherent flaw behind these rebates--that any operator savings resulting from these rebates will be countered by the necessary increase in distributor pricing so that they can continue to operate at a profit. A big part of the current acrimony between restaurant operators and distributors is due to the fact that most operators (those that have negotiated programs in place) are unaware that their current prices have typically been artificially lowered by the distributor because of these off-invoice allowances. It is worth noting, however, that we are looking at larger macro principles and that there are no doubt countless examples of distributors that are both charging a hefty profit, as well as collecting these rebates. Our goal in this article, however, is to address the economic weaknesses of rebates and trade spend, as well as the reality that rebates are not effective for those operators looking to seriously manage their procurement practices, because of these weaknesses.
The result of this reality is that distributors have recently made a concerted effort to block the growth of buying groups. This attempt by distributors has, in fact, proven to be highly successful in many cases. As buying groups often require the electronic transmission of client purchasing data directly from the distributor to process rebates, by refusing to provide this data feed, distributors are able to basically block an operator's ability to participate in these programs. By so doing, distributors are able to stave off the inevitable, uncomfortable reality of having to raise their prices because of this shift in trade spend.
There is another issue that has developed with the emergence of buying groups, as well. In the beginning, buying groups were setup to represent larger hospitality companies. Manufacturers would extend rebates to these groups because they would then work with the members to ensure purchases were aligned behind the participating manufacturers. As the strength of these group purchasing organizations grew, along with their book of manufacturer rebate deals, many of these groups decided to extend their programs to smaller, independent and regional operators. By so doing, these groups were able to increase their overall case movement and capture more manufacturer rebate dollars--some of which are passed on to the operator and some of which are kept by the group purchasing organizations as a fee. While this seems like a wise business strategy on their part, it often altered the spirit of the existing manufacturer rebate programs because these buying groups were reporting this independent and regional volume to collect available rebates, but they were doing little, if anything, to modify operator behavior in favor of participating manufacturers. In the end, manufacturers ended up with the same predicament that they had with distributors--they were paying rebates to operators for volume that they would have had regardless of whether they paid the rebates. The result is the failure of rebate buying groups to be an effective, long term solution because it fails to address the needs of the manufacturers, again adding costs to the supply chain.
Because of all these issues, we are seeing an increased pressure by both manufacturers and distributors to curb these rebate and trade spend programs. To be clear, it is not that either party is against offering valuable procurement programs to operators that provide mutual benefit, but that these programs are inefficient and ineffective at producing mutual benefit. Our belief, and recommendation, is that this non-committed trade spend should be removed from the supply chain ecosystem so that costs can be accurately assigned to each supply chain partner and the true cost of goods and services understood. From that point, more efficient practices and programs can be implemented that will result in benefit for all.
While there are undoubtedly operators that have been able to benefit from these rebate programs, we believe that the value derived from these programs is misleading. The very inefficiencies created by these trade spend practices, as defined above, should indicate to operators that there are better ways to manage procurement that will result in significantly higher savings. In fact, the average savings that an operator receives from rebate buying programs is 1% of their total spend--2% at best. That being said, there is incredible tension in the industry at the moment due to fighting over whom this 1% belongs to. The reality is that almost 100% of this trade spend is simply increasing supply chain inefficiencies, driving costs up for everyone--including the consumer. By focusing on these programs, operators are missing many procurement opportunities that can deliver actual procurement value. In other words, attention is being incorrectly directed towards rebate programs as a way of reducing procurement costs, rather than focusing on those programs that truly offer value by avoiding all of the inefficiencies described in this article.
We refer to these rebate programs as misleading, because operators often feel that they are extracting value from the supply chain by joining these buying groups--which are everywhere now. In reality, they are leaving about 13% in savings on the table because they are using a program that works against supply chain efficiencies and basic economic principles. In contrast to these rebate programs, procurement solutions, such as those of Food Buyers Network, work with restaurant owners, as well as manufacturers and distributors, to provide operators with procurement strategies that are able to significantly lower costs. The end result of programs such as ours are savings directly off the invoice, rather than rebates, of 10-15%. The point here is not to market the Food Buyers Network program, but to try and combat the rising industry tension surrounding rebate programs and offer some visibility through this current rebate tempest. For all of the previous reasons, operators should be wary about using any rebate program as part of their procurement strategy. Whether they decide to use Food Buyers Network as their procurement solution, or whether operators decide to manage their own procurement, our advice is to work with your suppliers, not against them, to get access to true procurement savings that will drive double digit savings--far beyond any non-committed rebate program.
If you are interested in learning about how Food Buyers Network is able to provide invoiced savings of 10-15% of your total spend, we would welcome you to join our Webinar next Tuesday, September 29th at 1:30PM Eastern time, to learn the details of the program. Regardless of whether you join Food Buyers Network, the supply chain and procurement principles discussed during the webinar should be highly valuable to any food service professional.
-Wednesday, September 29, 1:30-2:00 (Eastern Daylight Time)
Countless times, Food Buyers Network has been engaged by food service operations of all sizes to help uncover the reasons behind apparent food cost control and profitability issues. When we begin to investigate potential causes, however, it often becomes quickly apparent that the primary problem is not with restaurant cost control practices, but rather with the restaurant inventory data and food cost accounting methods used to generate the restaurant cost accounting figures. Unless restaurant inventory best practices and proper restaurant cost accounting methods are being observed, food cost control figures will not be able to provide any accurate picture into restaurant performance and profitability. The following article will examine some of the critical restaurant inventory and food cost accounting best practices to ensure reliable restaurant cost control figures.
Deciding What to Count & Remaining Consistent
One of the most important best practices in creating accurate food cost figures is remaining consistent with what items are counted during each restaurant inventory. When it comes to making the determination of what should be counted, there is a wide range of industry practices. Some operators believe in counting every item in the restaurant, whereas others focus only on high dollar and sensitive products, such as meats, seafood and poultry. Regardless of your particular inventory methodology, the important thing to remember is that the decision must be consistently executed during each inventory. In other words, make a decision about what gets counted each inventory, and stick to it. Altering what gets counted will create anomalies in your inventory value delta between two consecutive periods, skewing the actual food cost figure.
The Right Time & Date
Achieving accurate restaurant inventory figures is greatly dependent on ensuring the correct date and time of the physical restaurant inventory. Specifically, it is critical that inventory is valued prior to the use or consumption of any product for revenue attributable to the next food cost accounting period. Further, it is equally critical that inventory is valued after all product has been consumed for all food revenue that will be attributed to the current food cost period. For example, if a restaurant manager wanted to calculate a food cost for the month of August, then inventory should occur once all food production has ceased on the last day of August, but before any food is consumed on September 1. Simply put, this means that the inventory should be either taken after the close of business on the last day of the period, or before the start of production on the first day of the following period. Unfortunately, this typically means late night or early morning counts.
There are additional benefits, as well, to executing inventory during non-operating times. Counting during these times, while not enjoyable, typically enables those executing the restaurant inventory to focus on the task at hand, which is ensuring that an accurate restaurant inventory is executed. Attempting to take an inventory during operating hours means trying to manually adjust and contend with products being removed from storage as needed or put back into storage during end of shift procedures. Further, if a manager is involved in the counting process, it is very likely that there will be frequent interruptions to the inventory process because of other operational needs that require attention.
The Right Tools & Technology
The days of the black inventory ledger used to manually count product, update pricing and calculate extended values is gone. At least, they should be. Today, restaurant managers and operators have access to a wide range of food cost control and restaurant inventory tools: from the ultra-expensive and complex food cost control and restaurant inventory software programs, to the do-it-yourself Excel spreadsheet program. With the relative ease of creating a restaurant inventory program in excel, this should be the bare minimum for restaurant operators. To save some time, restaurant managers and operators can download either our simple restaurant inventory template or the more complex product management program from our website. Both of these tools are free.
Using Proper Inventory Count Sheets
Accurate inventory figures begin with count sheets that are designed properly. First, inventory count sheets should be in storage shelf order. This eliminates the need to shuffle around looking for the right product on the count sheets. This not only saves time during the inventory process, allowing for a more concentrated focus on the task at hand, but also helps to ensure that inventory is being counted in a shelf-to-sheet fashion, which will be discussed shortly. Second, inventory count sheets should display not only the product name, but also the inventory unit of measure and the price associated with that unit of measure. This information enables the counter to ensure that they are counting product by the correct unit of measure.
Often times, products will be stored in various locations. In such cases, these products should be listed multiple times on the inventory count sheets. Again, this will help ensure the critical process of counting in shelf-to-sheet fashion.
Organizing the Storage Areas Prior to Inventory
One of the best ways to ensure accurate counts is to spend about an hour prior to starting the inventory organizing all storage areas. Specifically, products should be grouped together in "zones" and organized with labels facing forward and in a straight line, as much as possible. For those highly motivated operators, we recommend labeling these zones to make it easier for others to store product, organize shelves and take inventory. Taking the time to organize storage areas prior to beginning the inventory process will not only
expedite inventory and ensure more accurate counts, but
affords the opportunity to "touch" each product and
get a feel for what is on the shelves--a critical component to ongoing product management.
Further, product should be stored on shelves in the unit in which they are removed from storage during operations. For example, unless entire cases of #10 cans of tomato sauce are used at once during prep procedures, they should be stored on the shelf in cans, not in the original case. The same methodology should be applied to all products in storage. Storing product in these smaller units will ensure that proper inventory and product orders are taken and will make it much easier for operators to quickly look at shelves and notice any anomalies or potential shortages.
Two People Completing the Inventory
As inventory values are used for the calculation of financial figures, it is always recommended that two people work together to execute an inventory. This helps avoid the temptation of manipulating inventory figures to gain advantageous results, as well as helps avoid any counting oversights.
Following the Proper Order: Shelf-to-Sheet
To ensure that all inventoried products are counted, we highly recommend that operators start at the top left of a storage area and work their way to the bottom right, using what is on the shelf to determine what gets counted next, rather than using the product order on the count sheets to determine this. If the inventory count sheets are in order of shelf storage, then this should be a relatively easy process. This is the number one cause for counting errors, in our experience.
Accurately Counting the Inventory Unit of Measure
As we discussed previously, restaurant inventory count sheets should display the inventory unit of measure, as well as the associated cost, to ensure that product counts reflect these specific units and costs. For example, counting pre-portioned steaks by the "each" will have disastrous effects on food cost accuracy if the inventory unit of measure used to determine the inventory product value is "pound."
Further, it is important that operators accurately represent the on hand value of each product by accurately measuring the product based on the assigned unit of measure. This, of course, is relatively easy for those items whose inventory unit of measure can be visually identified, such as those counted by "each." However, if the unit of measure is a weight, then a scale should be used to create the on hand value. Every restaurant operator should have a heavy duty scale that can be used during inventory to count such items. It is worth noting that ensuring accurate weight counts is critical not just for creating accurate food cost figures, but so that accurate product usage variances can also be calculated. You can learn more about how to create product usage variances here.
Price Changes
It is imperative that before valuing a current inventory, that product prices are updated to reflect current costs. While there are several pricing methods, such as first-in-first-out (FIFO), last-in-first-out (LIFO), and average price paid, our recommendation is to use the simplest method, last price paid. Using the last price paid pricing model for calculating inventory means that all products inventoried will be assigned a cost based on the most recent invoiced price for that product. To ensure that inventory values are correct, though, the cost of each inventoried product on the count sheets or inventory program must be adjusted to reflect the most recent invoiced cost of the product.
New Items
Prior to beginning the inventory process, new items should be added to the inventory count sheets. If they are forgotten, however, and those completing the inventory are following the "shelf to sheet" counting process, then these items should be detected during inventory, though they will need to be written down in margins until they can be added to the count sheets at a later time. We highly recommend that any new products are immediately added to the count sheets when they are brought into inventory, as it is not uncommon for us to look at historical inventory count sheets when doing operational audits and to find the same products written in the margins month after month because the time was never taken to update the inventory count sheets. This will often result in counting inaccuracies.
Determining the Inventory Unit of Measure
Determining the inventory unit of measure should be aimed at creating the most accurate inventory figures. Therefore, we recommend that product be counted in the smallest whole unit in which it is stored. So, in the previous example of the tomato sauce, an operator should use "can" as the inventory unit of measure, and ensure that the corresponding inventory cost for this product reflects this unit of measure. In other words, it is critical that the cost associated with tomato sauce is the cost per can, not case. It is not uncommon for us to find unit costs on inventory sheets that do not reflect the inventory unit of measure used for counting. For example, we often find items inventoried by the "each," but that have a unit of measure cost by the "case." Obviously, issues such as these create huge inventory value issues, greatly skewing food cost.
As previously mentioned, specific products are often stored in multiple storage locations and in different storage containers. For example, the tomato sauce from the above example may be stored in cans in dry storage, but in plastic 1/3 pans in the walk-in. In cases such as these, we recommend using multiple inventory units of measure. As we already mentioned, products that are stored in multiple locations should be listed multiple times on the inventory count sheets, and the inventory unit of measure in each instance should reflect how the product is stored in that specific location.
Invoice Cut-Off Dates
Another critical mistake is the failure to assign invoices to the correct accounting period. More specifically, the amount of an invoice needs to be posted to the correct food cost accounting period based on the exact date that the product was physically received into inventory. Usually, this date is the date of the invoice, unless it was a drop-shipped item.
We often find problems with this at the beginning and end of food cost accounting periods. Rather than posting invoices to the correct food cost period based on the date the product was received into inventory, invoices are posted to the day they are recorded in the general ledger, accounting system or inventory program. Often times, we will find this is being inconsistently practiced--the accounting department codes the invoices correctly in the general ledger, but the inventory manager codes them incorrectly in the inventory system. In either case, these mistakes will lead to incredibly inaccurate food cost figures.
Proper General Ledger Account Coding
Another common restaurant cost accounting issue we run across when executing audits is the inconsistent coding of invoices to the correct general ledger/P&L account. While the actual number and methodology of these general ledger accounts will differ from operation to operation, the key to accuracy is ensuring that once they are established, invoices are coded accurately, month after month, to the established accounts.
Often times, single invoices will contain products attributable to multiple general ledger accounts, such as food, paper and chemical. This is especially true for broadline invoices from suppliers such as Sysco and US Foodservice. Because of this, it is critical that operators review each invoice carefully and create coded sub-totals that reflect the specific general ledger accounts represented on the invoice. We often find that operators will mistakenly code the entire invoice to a single general ledger account, creating inaccuracies in the resulting income statement figures.
Reviewing & Verifying the Results
Once an inventory is complete, it is important to review the results to ensure their accuracy. There are a few red flags that may indicate possible errors.
1) The overall food cost percentage changed, in either direction, by a significant amount--usually by more than 1.5% without any known explanation.
2) A scan of the product extensions uncovers particular products that have an unusually high on-hand value. Often times, this will be due to data entry mistakes or improper costs assigned to the unit of measure.
3) A scan of the product extensions uncovers products with a zero value, indicating that the product may have been missed during inventory.
4) There are major on-hand dollar fluctuations in food cost categories, such as produce, meats, grocery, etc. Such shifts may indicate a counting error in an item within that category. Examining the category on-hand amounts makes it a bit easier to target possible counting mistakes.
5) There is a major shift in the total inventory on-hand value.
As a final take-away, operators should always be able to explain WHY a food cost figure changed during a given period, regardless of whether it was a positive of negative shift. It is not enough to get excited about a good food cost if the reason behind it is unknown. It is very possible that an unexplained shift in food cost is due to an inventory or accounting error, rather than improved food cost control practices. If the shift is accurate, it is critical to understand the underlying reasons so that behaviors can be altered or duplicated, depending on the direction of the shift.
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When it comes to food and beverage procurement strategy, it is highly recommended that a restaurant, hotel or food service operation consider establishing a distributor prime agreement to manage their food service distribution costs. The typical distributor prime agreement will require eighty percent of purchases to be made from the prime vendor, along with other contractual considerations that seek to address supplier costs. By working with a food service distributor to address these costs, mutual benefit can be achieved that will result in lower costs for the food service operator. Once executed, distributor prime agreements enable food service operators to focus their efforts on running the business, rather than constantly bidding out products and tracking price fluctuations. Further, a distributor prime agreement will typically improve overall operational and product consistency. There are a number of critical considerations, however, that should be addressed during the negotiation of any food service distributor prime agreement.
Pricing Structure
Obviously, one of the most important considerations in negotiating a food service distributor program is establishing an advantageous pricing structure. There are two common distributor prime agreement pricing strategies: "cost plus fixed price" and "cost plus percentage."
Under the fixed price model, the distributor adds a fixed amount to each product purchased. For example, if an operator negotiated a $2.30 per case mark up, then each case would be marked up by this amount over the distributor's cost. In other words, if an operator bought a case of canned tomatoes that cost the distributor $20.00, then the invoiced price to the operator would be $22.30. This is a very common pricing structure for national food service chain distributor master agreements, but is much more rare in street level food service programs. Sometimes, a distributor prime agreement will incorporate both pricing models; fixed price for price-stable products and percentage mark up for those products with volatile pricing. Whenever possible, Food Buyers Network recommends that operators try and negotiate a cost plus fixed price agreement. Having a fixed cost agreement has the benefit of not resulting in increased distribution costs when product prices trend upwards. Further, a cost plus percentage prime agreement creates an incentive for the distributor to sell more expensive products to a food service operator than what is necessary.
When negotiating a fixed price contract, it is important to determine the average price per case so that the effects of the proposed agreement can be better understood. Calculating the average price per case can be easily achieved by dividing the total amount spent on food for a previous quarter and dividing it by the number of cases received during that time period. For example, if a restaurant spent $500,000 in food during the prior quarter, and the number of cases purchased during this period were 20,000, then the average price per case would be $25. Calculating the average price per case will provide a better understanding of any proposed fixed price mark up. If in the above example a distributor proposed a $2.50 fixed price mark up, then this would translate into an average 10% mark up. Unfortunately, it is not always as cut and dry when determining these figures. If a prime agreement establishes varied mark ups by product category, then the previous analysis would need to be calculated by category, rather than total spend. Once the average mark up percentage is established for each category, it is relatively easy to calculate the overall percentage mark up by looking at the category blend.
Mark Up versus Margin
While a percentage mark-up is the difference between the product cost and the invoice price, the margin is the percentage difference between the invoice price and the profit. This may seem very confusing, but the example below will illustrate this critical difference.
Exhibit 1.
Mark-Up Contract
Markup Percentage = Gross Profit Margin/Unit Cost
Cost Mark up Invoice Price
$40.00 15% $46.00 ($6.00 gross profit margin)
Margin Contract
Gross Margin Percentage = Gross Profit Margin/Sales Price
Cost Margin Invoice Price
$40.00 15% $47.06 ($7.06 gross profit margin)
As Exhibit 1 indicates, a 15% mark-up contract will be $1.06 cheaper per case for a $40.00 product than a 15% margin contract. When negotiating and reviewing distributor prime agreement contract bids, it is critical to understand whether a contract is based on a mark-up or margin. For example, a distributor 15% margin contract may seem better than a 16% mark-up because of the lower percentage, but, in fact, the 16% mark-up contract is the better option. Not understanding this distinction can result in a 2-3% loss in profitability.
Defining Cost
Once the pricing structure is determined, the next big hurdle is defining cost. In almost all cases, a distributor prime agreement will define cost as the distributor's cost before deducting any off-invoice discounts they receive. These off-invoice discounts are allowances that distributors receive from the manufacturer for the specific products purchased by the food service customer. These allowances, or rebates, are "off-invoice" so that all cost plus contracts are not based on the distributor net cost after the allowances are deducted, but rather on the larger invoiced cost of the products.
In some cases, operators will be able to negotiate a prime agreement that defines cost as the net product cost after these allowances have been deducted, but this is very rare for restaurant street level agreements. Because of the impact that these back end allowances can have on distributor profitability, prime agreements will also typically state that operators are not eligible to take advantage of supplier rebate programs. This is because the rebate allowance earned under these supplier programs will typically reduce the supplier allowance received by the distributor. Operators can typically get such a clause removed from a prime agreement during the negotiation process, however.
Market Basket
Determining only the prime agreement pricing structure is not sufficient when evaluating the overall strength of a particular distributor prime agreement contract. Two competing prime agreements that have the same mark up and the same cost definition will not result in the same product pricing. Each distributor is able to negotiate different manufacturer pricing based on their overall product purchasing volume. Because of this, certain distributors may be strong in some categories and weak in others, based on the specific purchasing profiles of their food service customers. Therefore, it is important to ensure that a potential supplier is positioned best in the market for the specific product needs of a restaurant or food service operation.
The best way to determine this is by requiring a market basket report during the negotiation process. A market basket report will look at your top twenty to thirty products and provide the theoretical pricing under the proposed contract for a historical time period (usually the last complete month). It is important to ensure that each distributor submitting contract bids completes the market basket for the same historical time period so that accurate pricing comparisons can be done. Using these reports, operators can compare the value of competing contracts, as well as compare the contracts to past pricing.
Drop Size Thresholds
Negotiating a valuable prime agreement is only possible when a food service operator considers the food service distributor costs, as well. By lowering supplier costs, operators are able to achieve additional value. One of the most effective ways that an operator can reduce distributor costs is by managing the delivery drop size. This often means that an operator will agree to order less frequently to increase the amount of each delivery. In other words, a restaurant that was ordering three days a week prior to the prime agreement may agree to limit deliveries to only two days a week. Further, it is common for a prime agreement to create drop size bracket incentives which lower the mark up of products based on the drop size of each delivery.
Supplier Deviated Prices
It is absolutely critical that any prime agreement provide a restaurant or food service operation with the right to negotiate pricing directly with manufacturers, and that any negotiated manufacturer pricing will be respected by the distributor and invoiced as deviated prices. By negotiating pricing directly with suppliers, operators are able to get product pricing on key products that is often better than the distributor cost (before backing out the off-invoice allowances). Because these deviated prices often reduce or eliminate the off-invoice allowances that a distributor receives from the manufacturer, a standard prime agreement will not allow this practice unless an operator negotiates for it.
Audit Privileges & Data Rights
It is important that any distributor prime agreement include audit privileges by the restaurant or food service operator. In a standard audit privilege clause, an operator will be able to provide notice to the distributor that they wish to audit the cost of specific products to ensure that the restaurant is being billed properly. Often, the distributor will provide a limit to the number of products that can be audited.
As technology advances in the food service industry continue to be made, it is important to include a data rights clause that will require a distributor to provide your purchasing data to any third party that you engage to audit your invoices. Specifically, several companies, including Food Buyers Network, provide invaluable services to operators by automatically auditing each invoice line item to ensure proper billing. To enable this process, distributors must provide the purchasing data via an EDI feed to the third party contract monitoring company. Even if you are not sure whether you will utilize such services, it is important to include this clause in the contract so that you have the flexibility to use such services in the future.
Term/Out Clause
It is our recommendation that every prime agreement have a thirty or sixty day out clause that enables the termination of the agreement for any reason. That being said, you may be able to get a better contract with out such a clause. If you are willing to lock in for a period of time without the option of switching distributors, our advice would be to negotiate the best agreement you can with the out clause in place, and then ask for a better deal at the end if you agree to strike the clause.
Payment Terms
Understanding the cost of extending credit to a restaurant needs to be taken into consideration by the food service operator. Agreeing to shorter payment terms will typically result in the ability to achieve a reduced mark up on your products. Further, it is recommended that an operator negotiate an incentive for payments made quicker than the contracted payment terms call for. For example, a contract that requires the payment of invoices within thirty days should have an incentive clause that reduces the mark up should the business pay specific invoices within fourteen days. Having this incentive enables a business the flexibility to pay faster when cash flow allows and reduce the cost.
Special Orders & Slotting
The prime agreement should require the distributor to stock particular products required by a restaurant that are not normally stocked in the distributor warehouse. Typically, there will be minimum usage requirements that an operator will need to abide by for such products. Twenty cases per month is a typical threshold.
Substitutions
It is recommended that the distributor prime agreement address the substitution policy for products that are out of stock. Typically, operators will require notification prior to delivery of substituted products when the cost of the product exceeds a set threshold, such as two percent. Further, it is not uncommon to set an acceptable threshold for how often products can be substituted.
If you are interested in taking advantage of a distributor prime agreement, we would invite you to take advantage of the Food Buyers Network Prime Negotiator program. With this program, Food Buyers Network will provide you with prime agreement bids from local distributors by negotiating on your behalf. Learn more here.
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A Note About This Blog:
The following short blog is
written to explain the benefits of a new, comprehensive Excel
spreadsheet that we just made available for download. This program
uses the collection of key data to automatically generate actual food
costs, ideal food costs, recipe card price changes and product order
guides. On Monday, we will be posting a more general blog that once
again returns to our food cost control focus. In the meantime, if you
are an independent or regional food service operator that is not
currently able to execute these critical cost control practices, you
may find this free restaurant spreadsheet program and article useful.
In
the past two months, Food Buyers Network has published whitepapers
about various restaurant food cost control topics, such as yield
management, recipe costing, menu engineering, product specification
development, product usage variances and ideal food costs. While
executing these restaurant cost control practices takes focus and
commitment, they also require the processing and management of
operational data.
While all of the data required to execute food
cost control practices is readily available, many operators often
access this data during specific food cost control tasks, rather than
systematically processing it in a manner that makes it
available for multiple food cost control reports. One example of this
is the often neglected practice of recipe costing through the use of
standardized recipe cards that are updated frequently to ensure the
most current pricing. While most operators update their product prices
prior to executing a food inventory, as this is a critical best
practice to ensure the proper valuation of inventory, they do not
manage this process in a manner that enables them to simultaneously
update both their inventory product prices and their recipe card
prices. Rather, mangers spend twice the time necessary by updating prices in two
separate areas or, more likely, the practice of updating menu item
recipe prices gets forgotten.
Quite frankly, getting access to
many of the powerful food cost control reports can be achieved
relatively easy, if key data is entered in a single location. To help
independent and regional food service operators achieve this, we have
developed a free Excel program that you can download from our site. By
creating a series of spreadsheets that collect key operationaldata,
such as product prices, menu item recipes, menu item prices, on-hand
inventory figures and the menu item sales mix, restaurant managers are
then able to easily generate ideal food costs, actual food costs, order
guides and recipe cards in a systematic fashion. Of course, executing
this process still requires a time commitment, but by utilizing a single
program to process key operational data, it will become much easier and
more efficient to generate these reports.
You can download this restaurant spreadsheet on our site. There are instructions, but this program is still in BETA, so there may be some glitches. If so, please shoot us an email or give us a call so we can fix them and get out a new version. As always, we hope you find these tools helpful.
Download Spreadsheet Here
Almost every restaurant and food service operator in the country shares a similar monthly routine—the completion of a product inventory and the subsequent generation of a food cost percentage. This process not only enables the creation of a restaurant profit and loss statement that illustrates the financial health of the business, but can also uncover emerging operational performance issues. Unfortunately, not as common among restaurant operators is the routine generation of a theoretical food cost that can supplement an actual food cost percentage by providing a food cost target, or baseline. This article will examine the practice and benefits of routinely generating an ideal food cost as part of a holistic approach to food cost control management.
If you stood on the floor of Chicago’s McCormick Place during the National Restaurant Association show and polled attendees to uncover the universal ideal food cost, you would probably get a myriad of responses, quickly discovering that there is no universal ideal food cost consensus. This, of course, is because a theoretical food cost, also known as an ideal food cost, is determined by the particular performance characteristics of a business; specifically, the menu pricing, product costs and menu sales mix of a given restaurant. Not only is it impossible to pinpoint an industry-wide universal ideal food cost, but it is also equally impossible to determine a restaurant-specific, consistent ideal food cost percentage. If this were not the case, the process of evaluating actual monthly food cost figures would be quite easy, as one could simply compare the actual food cost to the restaurant’s established ideal food cost policy. Achieving this, however, would require an operator to establish their desired ideal food cost percentage and then price every menu item accordingly. Stated differently, every item sold would need to have the same mark-up margin that would produce the ideal food cost percentage goal. This is both an unrealistic and undesirable pricing strategy, as it does not take into consideration market pressures, competition and menu item contribution profit. Further, it would also require the constant re-pricing of menu items to compensate for the slightest shift in specific menu item product costs. Since doing so is obviously not advantageous or realistic, it should be understood that a particular restaurant’s ideal food cost will continuously fluctuate, and that routine re-calculation of the ideal food cost must occur if an accurate performance evaluation of the actual food cost is to be established. Armed with the increased knowledge and visibility provided by this information, an operator can efficiently target cost control efforts in the proper direction. Specifically, a significant variance between these two numbers will indicate a behavioral and performance issue, while a slim variance will indicate a change in the product costs or menu item sales mix.
Rather than routinely generating an ideal food cost percentage to serve as a baseline, as previously described, restaurant managers and operators often look at historical food cost percentage trends to evaluate current monthly food cost performance. While using historical data to generate actionable trending information is highly valuable in both food cost control and restaurant profit and loss management, it can also lead to misleading results if this practice is not supplemented by the use of a theoretical food cost. While historical data does serve as an indicator of food cost performance, this indicator can be misleading, as using historical data as a benchmark, or ideal target, does not address a possible shift in the product cost, menu pricing or menu sales mix, as we previously illustrated. If any of these variables change, then using a past food cost percentage, as a measure of current employee food cost control performance, would be misleading. It would, likewise, be just as misleading to use the same information to write off an increase in the actual food cost percentage as simply a result of rising product costs.
In addition to using historical trends, managers will often also rely on their operational experience, awareness and knowledge when evaluating an actual food cost percentage. While operational familiarity is critical in uncovering restaurant cost control issues, our experience has shown that there are too many variables involved for gut-reaction management to be effective in gauging food cost control performance. The algorithm used to determine an ideal food cost looks at three variables, each of which is determined by a multitude of factors. Quite frankly, attempting to determine the cause of a rising, or lowering, food cost percentage without the baseline provided by a theoretical food cost is, at best, an educated guess.
It is worth noting that a rising food cost percentage is not always cause for alarm. If both actual and ideal food costs trend upward, then further investigation may uncover that this upward trend is due to a shift in the menu sales mix, rather than product cost increases or behavioral issues. Because products with a higher food cost percentage often have a higher contribution profit, a rising food cost due to a shift in the menu sales mix could be a positive trend, as it may result in higher profits. For example, while a significant increase in the number of lobster or filet mignon dishes sold may increase the overall food cost percentage, it may also result in increased bottom line profit, as these items provide higher contribution profits despite their higher food cost percentages. Uncovering such intricacies, however, is very difficult if ideal food costs are not calculated and used as a baseline when evaluating current food cost. Imagine the time wasted and the morale issues created if an operator reacted negatively to a rising food cost that was simply the result of different guest choices, creating additional profit for the business. This issue is very common among businesses that have frequently changing menu offerings and product mixes, such as hotels, caterers and conference centers.
The actual process of calculating a theoretical food cost is not overly complicated and can be routinely executed with some minor preparatory work. The first step in creating an ideal food cost is to collect the data necessary to complete the theoretical food cost equation; specifically, the menu item recipe costs, menu item prices and menu item sales mix. For most operators and restaurant managers, the menu item prices and menu item sales mix information is relatively easy to acquire, as almost all restaurant POS computer systems offer a detailed reporting of menu items sold. Menu item recipe costs, however, are not always as easy to come by. Access to this data requires routine recipe costing that includes the ongoing maintenance and updating of menu item recipe cards. It is important to note that calculating an ideal food cost using menu item costs that are outdated will produce significantly skewed results that may not reflect the true ideal food cost. While completing and maintaining recipe cards does require a time investment, it is absolutely critical to complete recipe costing to ensure that menu item cost trends are tracked. Once all of this data is collected, calculating the ideal food cost is easy. The theoretical food cost formula is simply the total ideal food expense, divided by total ideal revenue, which is easily calculated using the data previously mentioned. To greatly simplify this process, we recommend that you either create your own spreadsheet to perform the calculations, or download our free ideal food cost calculator from the Food Buyers Network website.
As a final note, operators should be realistic in their attempt to execute this critical food cost control practice. Determining a perfectly accurate ideal food cost is very time-intensive, as it is necessary to cost every single item sold. As you can imagine, this would be a very difficult process, as an operator would need to track and cost every side-item, add-on and special order sold during a given period. Fortunately, a highly accurate ideal food cost can be generated by focusing efforts solely on the items listed on the menu, including frequent specials. While not completely accurate, the aggregate volume of these items will rarely be affected by the ideal food cost of those items that you did not track. Just keep in mind that the ideal revenue figure that is used in the calculation is the ideal revenue of only the items being tracked, and not the total food revenue, as one would find on a restaurant income statement. The end result of this process is an ideal food cost that is sufficiently accurate to gauge food cost performance, without spending too much time on calculating an exact number.
Hopefully, this article has effectively communicated the need to routinely calculate theoretical food costs as part of a larger food cost control management program. Again, we recommend that you download our free spreadsheet to make these calculations easier.
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