I'm going to use an example steak house with current annual covers of 50,000 and sales of $2,000,000. The average sales per cover is $40. Management has decided to introduce two new entrees priced $10 above the current average entree price. These entrees are costlier and will raise the food cost percentage.
Let's say 20% of patrons choose the new entrees and covers remain stable. Sales increase $100,000 and food costs go up $50,000. We should have another $50,000 going in the bank account. It's a good thing...right? Maybe.
All too often, managers forget to follow through with the dollars vs. percentages concept in the other cost components. If they track labor cost and other operating expenses on a percentage basis, a big chunk of the $50,000 could leave the bank even though operating reports look solid (percentage viewpoint). These cost components are fairly difficult to manage on an entree basis. Few companies track utilities on a per cover basis.
If we had variable labor costs of 25% and other operating expenses of 15%, you could see $40,000 (40% of $100,000) in higher labor and operating expenses creep into the income statement over time. We'd still be $10,000 ahead of the status quo.
If the raw ingredients used to prepare the pricier entrees are more volatile in price, you could actually see months with zero change in the bottom line despite a nice sales jump. How often do you read articles about publicly traded restaurant companies with higher check averages and average unit volumes with little to show on the bottom line? Management explains the disappointing profits are due to higher prices for key entree items. It happens all the time.
I'm all for more dollars in the bank. Don't ignore percentages when implementing these strategies.
