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FOODSERVICE OPERATIONS INFORMATION FOR THE HOSPITALITY INDUSTRY by R.O.I.

www.ro-i.com

(ISSUE #57)

Feature Article:

Understanding Food Cost

Just the other day it was driven home to me by example that there are many people in the foodservice business that really do not understand Food Cost! I won’t go into what the example was but the end result was that a foodservice executive who could talk the talk was over purchasing by approximately $90,000 per year. How could someone who claims to understand food cost do this. Well, he thought he understood food cost, and theoretically probably does but from a practical perspective he could not see the ingredients to managing food cost. First we are going to look at the theoretical aspects of food cost then look at the practical applications that make or break food cost.

The formula is straight forward: Food Cost = (opening inventory + purchases – closing inventory) divided by sales. Food cost can range from 20% to 45% depending on the concept but today’s norm for most restaurants is about 30%. Most operations then budget and target a set food cost based on history and what they want the food cost to be. If you ran a 32% food cost last year then it should be the same this year. This is the first mistake made in many people’s understanding of food cost. It would be great if we could budget a 30% food cost and price everything to 30% but it does not work this way. Protein dishes will run a higher food cost, pasta dishes a lower food cost and beverages an even lower food cost. This is were sales mix comes into play.

What is sales mix, it is the analysis of your sales and what the food cost is based on your mix of sales. This is usually called your theoretical food cost. Say you sold nothing but hamburgers with a 30% food cost and coffee with a 15% food cost. If you sold no hamburgers and only coffee for the previous month you would have a 15% food cost for the month (and a 30% food cost if you sold no coffee and only hamburgers). So depending how much you sold of each you could have a food cost ranging from 15% to 30%. The only way you can really know what your food cost should have been is by doing the math with up to date costing on your products. Once you know your theoretical food cost you can compare it to your actual food cost and only then do you know if you are controlling your food cost. Have a look at the following simple chart:

Café ROI - January Food Cost Analysis    

        

Item            # Sold     Selling    Recipe      Recipe    Total         Total

                                   Price       Cost          Cost %    Sales        Cost

Burgers      1000     $ 9.95     $ 2.98            30%       $ 9,950    $2,980

Coffee        1500     $ 1.50        0.23            15%       $ 2,250    $   345

                                                                     Total:      $ 12,200    $3,325

      

    Theoretical Food Cost: 27%

    Actual Food Cost: 29.5%

    Variance:  2.5%

      

So if your budget was a 30% food cost you would be slapping the chef on the back for beating budget rather than giving him hell because he was over 2.5% in food cost to what he truly should have been. This is the theoretical side of food cost.

Now for the practical side of food cost. If your food cost is too high you can only blame yourself. Don’t blame suppliers, the price of chicken or the fact romaine is at $60 per case. Food cost is too high because you haven’t dealt with your food cost in a scientific and focused manner. When I start to look for food cost problems there are a number of things that I look for. The first is how many suppliers are they using. More suppliers does not mean lower prices rather it usually has the opposite effect of creating higher prices for goods coming in the door. Why, well it costs money to deliver product and the less product you deliver each run, the less profit on that order there is so higher prices must be charged to cover the cost of delivery.

Second, are there expensive ingredients being used that can not create value. When I see rack of lamb or 11-15 count prawns on a menu I immediately know that the chef is creating a menu for his ego not for food cost control. Chefs who are out of control love certain items and will do anything to have them on the menu. There is no food cost value in the very high-end items unless you are a very high-end restaurant and can charge the price. Have a look at your high-end items and cost them out yourself. Does it make sense or has the wool been pulled over your eyes.

Third thing that I look at is specials. If ingredients are being brought in just for specials I will guarantee that you have a food cost that is close to 2% higher than it should be. Although specials often carry a lower food cost they also carry a large waste factor with them. Combine this with the fact the staff love to eat the specials and food cost is higher. The golden rule for specials is if you have to use ingredients we already carry for specials. If you can’t create a great special from the 600 or so ingredients we carry you shouldn't be in the foodservice business. I had a client with a food cost problem and I finally convinced the chef to follow my philosophy on specials. Yes, his food cost did drop by 2% and I created a believer out of him!

Fourthly, purchasing plays a huge role in your food cost. Having a high inventory on hand creates higher food cost. Not buying proper pack sizes for produce does the same. If your purchaser is not running a tight ship food cost will be adversely effected. Look at stock levels, if you are always running out of product or never have enough room to store your product then your purchaser is probably a major part of your food cost problem. Your purchaser may be your chef, sous chef or even you. Paying attention to purchasing will lower your food cost.

Finally, there is software out there that can help you greatly control your food cost. You don’t have to spreadsheet yourself to death to get your theoretical food cost. Most point of sale companies have inventory control packages that come with there systems but we strongly recommend Optimum Control which interfaces to almost all point of sale systems. For a demo of Optimum Control go to www.restaurantsoftware.com. Once the database is up and running maintaining the system will not take any longer than filling in the spreadsheets you currently use. If you would like a demo do not hesitate to contact ROI. The effort is well worth the 2 to 4% you could save annually in food cost.

Focus on your food cost and you will not have a food cost problem!

QUOTE OF THE DAY:

"There's no reason to be the richest man in the cemetery. You can't do any business from there." - Colonel Harland Sanders

TIP OF THE DAY:

Cash flow can be a tricky thing when operating a business and the although money seems to be in the bank it can leave in big chunks with government remittances, loan payments, taxes, rent etc. A great way to make sure you can pay all your commitments on time is to put money aside into a savings type account. In today’s electronic age many banks have to ability for you to electronically move your money in and out of a savings account. The money collects interest in the account and you can set it up so that money is automatically taken from your business account on a regular basis. The best part is that if you don’t need the money when the big payments come you have extra cash tucked away for a rainy day.

SITE OF THE DAY:

http://www.golfbc.com/courses/furry_creek/about/virtualtour

I hate to say it but I have become a bit of a golf fanatic. I blame my kids because they are the only reason I golf. Take a virtual tour of my kids favorite golf course and admire the view… The point is there is more to life than work and you must have a balance in life. Be it sports, painting, macramé or … you need to make sure you take the time to smell the roses. I golf because I get to spend time with my kids in a totally positive environment so make sure you are taking the time to enjoy life.

Learn From Other People’s Mistakes…:

If we could learn everything there is to learn from other people’s mistakes we would be pretty near perfect. Here is an example of someone’s mistake that I recently witnessed that we can all learn from. The bathroom of an establishment had plugged sinks in the bathroom. The cleaner, to unplug the sinks, put drano in one sink and bleach in the other. When the two chemicals met in the common drain all hell broke loose. The plumbing basically exploded and the fumes from the chemical reaction sent a number of people to the hospital. Luckily everyone will be okay. Have a look at your cleaning chemicals, read the labels, determine if any need special handling and remember rule number one: NEVER MIX CHEMICALS!

A Book Worth Reading:

When I get the chance I try to educate myself a bit more by reading business books. The last book that had a great impact on me was The Popcorn Report by Faith Popcorn. Unfortunately this book is now out of date but recently Nick from Micros recommended reading "The 22 Immutable Laws of Marketing". I picked up the book and couldn’t put it down. Although the book is angled more towards large corporations the laws in the book can help every foodservice operator better their business. Since reading the book I quote from it theories all the time with clients. Go to your local bookstore or order from Amazon.com.

Feedback:

I had a long chat with someone who does not think food safety is going to be our number one problem in the future. He firmly believes that it will be personnel. Well, personnel depends on the ability to manage people so it is a problem that can be overcome but food safety is out of your hands! In the last month there hasn’t been a week go by that hasn’t had a couple of news events about food safety from farmed salmon to avian flu infecting pigs. Time will tell if I am right or not.

WHAT R.O.I. DOES:

R.O.I. is a full service Hospitality Operations consulting company. If your company WANTS TO BECOME MORE PROFITABLE then you should be talking to R.O.I.

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