Theoretical Food Cost In Dispute

Joe,

I own a QSR pizza franchise in Ontario, Canada.  According to the franchisor, my standard food costs should be 39 - 40%.  My food costs based on the franchisors standard recipe is 1 - 3% below this standard consistently.  What is an acceptable margin for error in arriving at this calculation?  As you know, there are many variables which affect the food cost.  One of which is we have a medium one topping pizza which sells for $4.99 which has a food cost of 55%.  This is obviously a good seller and raises the standard.  How can I interpret these results?  On average, we process over 1200 orders per week with a time guarantee or its free. Every pizza is made by hand, no pre-measurements of any toppings with the exception of cheese cups and in my opinion not very accurate when you are in a hurry.  Personally, I feel I am over using and that their standard is far too high.  I feel their calculation is designed to increase their own profitability because all of our inventory is purchased from them.  The profit margin has disappeared.  How can I tackle this issue? I look forward to your response and I thank you in advance.

Mirella

Thanks for your question Mirella!

Let's take a look at the issues:

Franchisors View:
1.  Consistent portion size across the entire company.
2.  Profit motive has a link to franchisee purchasing behavior in your organization.

Franchisees View:
1.  Profit motive is highly correlated with a consistently low food cost.
2.  Portion control is a critical factor in achieving a consistently low food cost.

Taking the franchisor's side briefly, I would be unhappy if my franchisees had agreed to buy dough balls, pizza sauce and cheese from my commissary and they decided to purchase these items from alternative sources.  There would be consistency issues on each of these critical components.  They need to monitor ratios to prevent this activity.

It is evident from your letter you are watching your costs very carefully.  The franchisor's ratios may have built in inefficiency numbers.  If you run your operation more efficiently than the norm, you would beat their ratios.

I favor pre-portioning for cheese and dough balls.  In addition, all pizza bakers should use standard ladles for the pizza sauce.  The reason I favor pre-portioning is due to the peak period factor.  A tremendous percentage of sales volume is achieved during peak periods.  Sloppy portion control during these high volume periods can be very costly.

You have a second motive in pre-portioning the cheese.  The accurate portion control records may be used to support your case against the franchisors actions.

The portion work should be done during down time.

Using Mark Ups Instead of Food Cost Percentage

Hi Joe,
I like your site, excellent information.

I am looking for a resource that explains why operators would use ‘mark-ups’ of factors over FC%.

I teach food costing to our chef students and always use FC% to get a selling price, but now I have to explain the other options but can’t seem to find good definitions of why you would use the other options of obtaining selling price.

Could you offer any advice?

Kind regards

Mark Caves
Culinary Arts Tutor
School of Tourism and Hospitality
Faculty of Arts and Social Sciences
Eastern Institute of Technology
Hawkes Bay
New Zealand

Thanks for the question Mark.

During my corporate years, we never used food cost % since our billing method was per man per day. To get more current, it helps to use a destination resort for an illustration. Many resorts located in the mountains offer a complete package including room based on double occupancy, all meals and snacks, and optional activities.

We were big fans of these hotels and inns when we lived in Quebec. You can get a fantastic price for mid-week visits. Any operator who wants to offer a competitive all-inclusive price needs to know their costs to the penny.

Caterers should not use food cost percentage to control their costs if they offer packages. In my July 2008 post Profitable Special Events , there is a chart designed to show the impact of raising $200,000 of additional revenue. I included the % analysis to be complete but the focus was on the cost per guest for each cost component (including profit).

Many caterers and hotels negotiate a final price in a competitive environment. If the sales team does not have a hard deck figure, you may find yourself working very hard for free.

Why do percentages fail in these operations?

One of my early catering clients was barely breaking even. He was an attorney with a major investment in a catering hall. When we met the first time, he was shocked he couldn't break even although his 25% food cost number was well below the 32 or 33% figures mentioned in the book he used to put together his business plan.

I asked him what he used for the divisor.

He was dividing his net food purchases by total sales. Many of the events were cocktail receptions held in the evening hours. Guests were treated to a full bar with several stations and hors d'oeuvres served by wait staff. I asked him what his bar cost % was for the same period of time. Due to his belief in serving top shelf liquor and premium beers and wines, his bar cost percentage was 14% of total sales.

The combined cost of goods sold was almost 40%. I explained what he needed to do to cover his costs and produce a reasonable profit. He had 2 options: raise prices or reduce costs (or a combination).

Food cost percentage analysis is also mediocre for buffet management. Any all-you-can-eat buffet operation would get a better view by tracking layouts and components. There are strategies for controlling high cost proteins and promoting low cost desserts. A simple food cost % tells you very little about this type of meal service.

Menu Engineering Using Excel

During the month, three fellow restaurant consultants have contacted me about menu engineering and recipe costing with specific questions regarding Excel. Excel charts do not automatically create the popular four quadrant chart with Stars, Plowhorses, Puzzles and Dogs (or any of the other 4 quadrant variations). I have accomplished this task using a few third party utilities. In my analysis, recipe costing is accomplished using software specifically designed for this purpose.

I consider the POS system Product Mix report the source of the key data. Since menu engineering is concerned with selling price fluctuations, the PMIX report has all essential data (number sold and selling price) except the cost to produce each item. Most POS systems have Excel file export capability. If you are adept at the table look-up formula, you can place the exported data exactly where you need it in your model.

Generally, I use good old data entry to update the recipe costs using the numbers from the software. Once I have the number sold, selling price and recipe cost, the sophisticated menu engineering and analysis reports flow from Excel. The four quadrant chart is not the only report produced. You can use sorts and filters to generate a tremendous amount of valuable information.

Anyone who wants an all-in-one solution for inventory, recipe costing, purchasing, menu engineering and requisitions really needs to invest in a proper solution. Excel tables are famous for errors in formulas and there is no audit trail for your purchases (which feed all cost calculations).

Many people have asked me for a recommendation. I do not own a restaurant and I do not have a laboratory in my office with 20 different recipe costing programs loaded and ready to test. In fact, many of the popular software solutions come out with substantial improvements each year. It would be a full-time effort for anyone to honestly provide this type of service.

Many of the popular solutions target a segment and do a terrific job. FoodTrak moved from a restaurant model to a hotel/resort model around 2000. They added transfers and requisitions to the essential restaurant reports already in the program. The reasons I tend to work mostly with FoodTrak: longevity and optional cost methods. They have been around since 1980 and I started my company in 1990. If you need FIFO cost numbers, you won't find a better solution for the investment. There are other programs in the six figures range which have true FIFO but I am assuming very few of my readers would invest $100,000 plus for a solution.

There are many programs capable of decent reporting using the last cost method. I encourage anyone on a tight budget to start with one of these solutions for recipe costing needs.

Is Your Ideal Food Cost Number Real?

A veteran restaurateur asked me to check out his numbers to see if I could see a problem. Initially, he assumed the program he purchased was defective. As I started asking questions, my focus turned to yield data from his butchering department.

In addition to a very ambitious menu, this restaurant offers a top cuts of beef in a small retail shop. Along with T-Shirts and ball caps, customers can take home a filet mignon or porterhouse steak. The butchering department produces cuts of meat for both the restaurant and the retail shop.

The retail shop has a consistent cost of goods sold percentage.

After tracing the food cost percentage backwards, it became clear the restaurant suffered from butchering yield volatility. The accounting method utilized by the owner treats the butchering operation as part of the restaurant. Steaks are "sold" to the retail shop at cost. This cost is determined using a formula which has a standard yield and only varies with market price fluctuations.

The main issue is the normal volatility in yield (i.e. edible pounds as a function of as purchased pounds) is borne by the restaurant. The owner is using ideal cost data which assumes the yield is constant. One of the most popular large cuts has a "typical" yield of 61%. The actual results vary between 57% and 64%. The 61% standard occurs about 18% of the time. The rest of the time (82%), the butchering operation has a variance from the standard.


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When the yield is on the high side, the restaurant has a good week. The rest of the time, the restaurateur is scratching his head. The number one point to take from this story: he keeps tremendous records. I would never be able to explain this situation with clarity without his butchering archive. He keeps a three ring binder with a butcher yield sheet for each batch.

After I helped him tie the butchering yield data to his ideal usage model, the variance due to butcher yield declined and the problem was solved. Should we be happy with the virtual elimination of the variance? Probably not.

The previous uncertainty produced plenty of heated discussions between the production team members. These interactions produced a decent number of innovations over time. Now the calm waters have caused a level of indifference which never existed before the model was tweaked.

I personally enjoy variances. Many operators hate any variance from the ideal. They build recipe models which are designed to hide normal variances. When deciding on a yield, these people imagine the worst case scenario (57% in the operation above). By the time a variance is recognized using these reports, there is a huge problem.

The range between 57% and 64% is 7%. When expressed as a function of the low yield figure, this range is nearly one eighth. If the butcher was crooked, he could grab a box of meat for every eight when the yields are good. His theft would go completely undetected. The same restaurant may never get on the phone with the meat supplier and complain about the substandard yields. Inconsistent portion sizes would stay hidden as well.

So what is the best way to approach this situation? The restaurant needs to treat the butchering operation as a separate entity. In this entity, yield variances need to be front page news. Daily variance should be dealt with decisively and quickly. This butcher should "sell" portions to both the restaurant and the retail shop. These portions should be closely monitored using a POS system.

Butchering and the Inventory Impact

Hi Joe,
My question would also be, how do account for it in inventory. Right now we are sitting on 400 lbs of this usable trim product for grinding stewing or otherwise. We will generate revenue from it, but wonder do we count it at a discounted price per pound or the original price per lb. that we paid for it when it was a whole muscle item?

Thanks for the quick and informed response. Greatly appreciated!!

Cheers,
Ross

Imagine you have a vendor, Fabricated Beef Products, who you swap whole pieces of meat for fabricated, portion control items. You never pay this vendor any money since you swap one large item for several smaller items. If you give them $1,000 worth of whole sirloin and they return sirloin steaks and ground beef, you would treat the transaction as a wash.

Credit the inventory value of the whole piece of meat. Then debit the inventory for the steaks and trim meat. If you decide to treat the trim as free, the steaks would carry the full cost of the whole piece of meat. On the other hand, if you place a value on the trim, discount the value of the whole piece by the trim credit and then value the steaks based on the net.

The key issue here is the value of the steaks. You probably would not spend the labor cost butchering the whole sirloin simply to achieve many pounds of ground beef. If you have a true value in your operation for the trim meat (I use revenue generating menu items for my test.), go ahead use a full credit based on comparable market prices for ground beef.

The total of the steaks and trim for a specific production batch would be exactly equal to the value of the whole sirloin used in the batch. In a nutshell, your steak cost goes higher as the credit for trim goes lower.

It seems you meet the criteria for valuing the trim based on the market cost of ground beef. Your inventory value of the steaks and trim should reflect the cost of the whole sirloin used to produce these items.

Butchering and Usable Trim

Hi Joe,
Just a quick question we are having a debate about at out businesses.

We bring in our own whole sirloins of beef, trim them, and cut and portion them to our specs typically for sirloin steaks in a variety of portions 8 oz. and 10 oz. cuts.

So we have 3 items resulting from that process:
1. A usable salable product in the form of cut and portioned sirloin steaks as mentioned above.
2. We get actual waste that does not go into anything other than soups, stocks, reductions etc…
3. And we have a considerable amount of usable trim that we can manipulate into another food form and generate revenue with, i.e. burgers, chop steak, etc.

My question is we have a considerable amount of this usable salable trim in our freezer. The question is how we account for it in our inventory. At the price/ lb we paid for it upon delivery, a factored price after we it is trimmed and in the ready to use format in the freezer waiting to be utilized (essentially the same costing formula applied to the steaks we are portioning for immediate sale) or at a cost reduced price as it is no longer a part of the original piece of meat we would be using to generate sales with in the immediate as we do with the portioned steaks.

Your wealth of knowledge and assistance here would be greatly appreciated!! Get back if you can.

Kindest Regards,
Ross Munro

There are two schools of thought on this issue Ross. The first group charges the cost of the whole sirloin to the steaks. They consider all usable trim "free" and they use the total weight of steaks divided into the purchase cost of the whole sirloin to calculate the cost per usable pound. This philosophy is correct if the trim is used in employee meals, stock pots, etc.

The second school of thought credits the cost of usable trim. Typically, there are two primary trim bi-products: ground beef and stew meat. These people weigh the ground meat and cost the credit using the prevailing cost per pound for ground beef. They do the same for the stew meat. The net cost is then divided by the weight of the steaks to get a cost per usable pound.

I prefer the second method if the restaurant serves burgers, meatballs, meatloaf and entrees which utilize the stew meat. The bones may also be credited if you genuinely gain revenue from their use. If the chef had to buy beef bones for base menu items and did not need to purchase as many due to the butchering process, you can go ahead and follow suit with the bones.

Food Cost Formula Question

Hello. I just read an article you wrote concerning food cost. I follow the same formula except for one change, I account for discounts. Should I not do this? Could it sway my food or beverage cost to a less accurate percentage? I would really appreciate your insight to this matter. Thank you

Lori
G.M.

Thanks for the question Lori. I prefer to run two calculations - with and without discounts - each period. Consistency is key.

If you run the numbers with and without discounts, you'll achieve several objectives: 1. You can gauge the impact of discounts on results. 2. I'm not sure the sales figure would have been possible if a discount wasn't offered but the fantasy number for sales (i.e. discounts included in sales and treated as a marketing expense) is always popular with the people trying to achieve a food cost close to ideal. 3. A sense of reality is available for folks trying to pay the bills. Netting discounts from your sales shows the true food cost.

If you would not have made the sales target without the discount, I would definitely focus on net sales. Use the second statistic for the production people. They have no control over sales discounts and follow standard portion sizes. They should know how close they came to the standard and they should also be made aware of the impact of discounts.

Q Factor

Chefs love to see a recipe model come together in the final stages. Sole proprietor owners love this stage even more if possible. What's the lure? They see how much it costs to produce the actual menu items with all the trimmings.

The most frequently asked question at this stage goes something like "How do we tell the system our cover costs? Is there a way to enter a Q factor?"

I let them know they should enter all applicable costs to properly cost the menu. The follow up question is actually a lengthy discussion of complimentary items, starch choices depending on the entree choice, most popular options, etc.

I like to create a setup recipe which may be used over and over in every entree selection. My Q factor includes all complimentary items (rolls, butter, ketchup, mustard, soy sauce, salt & pepper, Tabasco sauce, etc.), salad portion, most popular dressing choice, most popular starch choice and the most popular side choice.

The POS system will keep track of the guest selections. If the most popular salad dressing is Blue Cheese and the POS modifier is Ranch, I like to make the recipe for the Ranch modifier equal to 1 portion of Ranch minus 1 portion of Blue Cheese. Since the Q factor already accounted for the Blue Cheese, the reduction of 1 Blue Cheese portion brings the count in line.

What's a typical Q factor in a high end dining room offering rolls, butter, salad, baked potato, more butter, and sour cream? About $3 if you use fresh baked rolls.

Basic Recipe Costing - Part 3

I started my consulting company in 1990 to help food service operators with financial troubles. Finding it difficult to get paid, I started looking for work with companies in better shape. I ran into a local consultant, Bob Kaiser, who said I should work with computers since I had a background in accounting and technology.

My first assignment was with one of Bob's clients. This company had two catering facilities and used Eatec software. The chef had zero success building recipes despite purchasing the The Professional Chef and the Food for Fifty (12th Edition) modules.



These add on modules were a huge time killer. I found myself gutting sophisticated recipes for chicken, beef and vegetable stocks and replacing the classic recipes with a package of soup base and a gallon of water. After hours of wasted time, I completely destroyed the chef's preliminary efforts and built the recipes from scratch.

I used the Professional Chef book's approach and started with Mise en Place and Stocks. Then I progressed to Soups and Sauces before starting work on entrees. After a week, I had all the major protein work done. The vegetables, starches, breakfast items, baked goods and desserts went much quicker.

During the project, my wife and I began to refer to this gig as "The $4,000 Mistake" since it consumed over 200 hours and 3 round trips (300 miles each trip) to finish.

The Food For Fifty book has a fantastic first chapter which is a must read for anyone trying this exercise for the first time. They focus on quantity food service and use the perspective of a caterer or institutional food service operator. Recipes all yield 50 portions. I took many of the chef's clippings from Bon Appetit and Gourmet and converted them to the 50 portion yield.

Before you start a project on a recipe costing program, you need to be very well organized. Create an outline. Take the most complex recipe and imagine you are building the database. You will find you need to stop work and create other sub-recipes first since you can't purchase many of the stocks, sauces, mixes and blends called for in the recipe. Each of these components requires a recipe.

These individual components called for by the complex recipes are the building blocks of a successful recipe model.

Accounting Gets Closer To The Kitchen

This month, I noticed an urgency in 3 restaurant chains which would be out of the question in the past. Top level financial officers have made the dive into inventory control including batch recipe models for work in progress inventory. Calling late at night, I found the CFO of a 35 unit chain in the office working feverishly to get the new database deployed. She was working on recipe costing and linking her recipes to the POS system.

Years ago, restaurant companies needed to be shoved into software systems to get better a handle on their cost of sales. Now, these solutions are ubiquitous. POS vendors throw them in for free to sweeten an offer. Solutions exist in every price range.

I spoke with the Executive Chef of a 6 unit group here in the DC Metro area. He was working on a solution with his brother who works in the accounting department. Each of their concepts has a unique menu and they have finished the first test. Results have exceeded their expectations. The actual food cost has now come down to less than 1% above ideal.

Recessions often force corporate staff to wear different hats.

As these financial people work closely with the chefs, purchasing agents and other key operations people, the reports have to improve. Communications are more focused and everyone has a feel for their counterpart's unique issues.

Basic Recipe Costing - Part 2

After you have your item list broken down into purchase units (e.g. case) and inventory units (e.g. #10 can), you can begin to visualize the production process. For each ingredient, make a list of units commonly called in recipes. This will vary depending on how many different recipes use each item.

Three common portion methods for recipe ingredients are weight, volume and count. Meat items are often portioned by weight and count. When portioning by the piece, you may have more than one portion size. A strip steak could be sold in two or three portion sizes. For each portion size, imagine the entire strip will be used. You need to answer a simple question. How many steaks would you expect if you only cut the one size from the strip? Repeat the exercise for each portion size.

Use the average weight for popular random weight items. Generally, each case will always have the same number of large cuts (ribs, strips, loins, etc.). The total case weight will vary. Huge weight variances from the average will impact the number of portions per piece. It helps to keep accurate records of the butchering and fabrication process.

Yields may change from week to week. If you expected a 80% yield for a particular cut and you actually hit a 70% figure, your costs would run higher by over 11%. The variance is due to the poor yield alone. Add a price variance and some spoilage and the gross margin will begin to disappear. Portion control steaks provide operators with a consistent yield - one portion. When deciding to purchase portion control meat, you need to consider the hidden costs. Look at the whole picture including labor, equipment, risk of injury, and poor yield in your comparison.

Items portioned by volume or weight are straight forward. It is helpful to know the common conversion units for each method. Volume is expressed in gallons, quarts, pints, cups, liters, fluid ounces, milliliters, shots, tablespoons, teaspoons and fractions of each. Weight may be expressed in pounds, ounces, kilograms, grams, etc. A #10 can has about 6 pints (96 fluid ounces) and often about 6 pounds. Check all weight to volume relationships.

When developing standards, you may find your specifications are different than some of the excellent books. If you trim your produce quickly, the yield will probably be lower than the expectation. One way to reduce the variance is to portion produce items by the piece. A 24 head case of iceberg lettuce will yield 144 wedges if sliced in six pieces per head. Cutting the heads into larger wedges of four per head would yield only 96 portions.

Think of this step as the recipe model equivalent of the prep process. Having accurate recipe costs depends on accurate unit and yield data. The recipe costing programs will re-cost your recipes over and over as prices change. Spend the time initially to get this critical information correct for your operation. Don't worry about benchmarks for portion size. Use your unique portion sizes in determining the conversions between inventory count units and the units called for in recipes.

Basic Recipe Costing - Part1

You may have lots of cookbooks, proprietary recipes, books with food yield statistics, market data, shopping lists, inventory count sheets, supplier quotes, product mix reports, quarterly tracking reports and other documents. A professional recipe model should be designed to integrate all of this useful information. The person working on this project needs to wear many hats: purchasing agent, steward, prep cook, line cook, and chef.

Rather than using a cookbook approach, start with your shopping lists. Use your shopping lists to create a spreadsheet with all your ingredients. Make columns for the name, category, primary supplier, purchase unit, storage area and storage unit.



Since the unit you purchase is used on orders, this is our starting point. It's helpful to know your alternate sources for each ingredient. You may want to categorize each item by the storage method. For example, frozen, refrigerated, dry bulk, canned goods, frozen goods, baked goods, etc. Feel free to add these columns. Its impossible to get too much information for your ingredient list.

[We'll eventually need to know the usage units for each ingredient and portion information. This will be discussed in Part2 (later this month).]

Once the list begins to come together, envision the flow for each item from loading dock to the table. Most items are purchased by the case and are stored as purchased. Some items are immediately transformed into other items through fabrication. Visualize the process of moving from the purchased unit of measure to the storage unit of measure first.

You may simply remove six #10 cans from a case and place the cans in a rack. The purchase unit is case and the storage unit is a #10 can. Focus on the storage unit and the divisor (6 in our example). Breaking down every item you purchase into logical storage units is one of the most important steps in creating a professional recipe costing model.

Each #10 can is valued at 1/6 of the case cost. Don't worry about the actual cost of each can. Focus on the number of storage units in each purchase unit.

Our work will eventually involve many calculations using units of measure, various blends, yield formulas, conversions, reciprocals and standard portion data. The simple exercise of developing a purchase unit to storage unit model is the ideal starting point. Once you complete this exercise, future conversion work will be more intuitive.

Food Cost and Portion Size

Would your restaurant guests welcome smaller portion sizes for a similar check average? After a week on the road dining out each day, I believe the answer is yes. The weakening economy and rising commodity costs have everyone talking about costs.

Before the trip, I ran a few errands. After picking my car up from the garage, getting a haircut, filling the gas tank and picking up some groceries, I was out over $200. My mother spent the better part of $20 stopping for milk, bread, eggs and produce. Costs for gas and every day staples have skyrocketed. People across the country are tightening their budgets and cutting out many extras.

My brother likes to go out to eat each week and has shifted from weekends to mid-week. He mentioned a recent check for $93 for a simple steak dinner for 2 with a couple beers. The portion size was huge and he would have been happy with 25% less meat. The excellent bread basket and great salad (included with the meal) would have been perfect with a smaller steak.

I paid a visit to an old friend who owns a pub. One of the waiters joined the discussion with the restaurant owner. He mentioned his tip income was down. His diners are spending less and ordering fewer extras. The tip percentage is lower and the number of diners has dropped. He now works with the guests to deliver a satisfying meal within their budget.

I brought up the portion size issue at each meal. The unanimous opinion is today's portion sizes are too large. We asked one waitress if there was a smaller rib eye steak option. She checked with the kitchen and explained the meat was pre-portioned for the menu item. They could have served us 1/6 less meat for the same price. With no refrigerator at the hotel, we left between 2 and 3 ounces on our plates.

In New York's Grand Central Station, I sat next to a couple splitting an omelet at breakfast. They ordered the special with a second cup of coffee and left satisfied. A diner nearby left 1/3 of his omelet uneaten. With the heightened awareness of dietary cholesterol, most people would appreciate a two egg option.

If your patrons were served smaller portion sizes at the current menu prices, your food cost would decline for the same sales level. This strategy may achieve better guest retention than a 10% menu price increase. Timid menu planners may want to assemble these smaller portions on a single page "Value Menu" to properly gauge popularity.

Smaller Portions or Higher Prices?

We bought a loaf of fresh baked whole grain bread at a local bakery today. Something about the loaf was different. This loaf was about the same dimension as the loaves purchased previously from the same bakery. The price was the same. The difference became apparent when holding the loaf in my hand. The weight was different - much lighter. I'm guessing they shrunk the loaf between 15 and 20% by weight.

Flour prices have been increasing significantly during the last year. The operator decided to hold prices steady and shrink the portion size. In my opinion, the change in portion size will be perceived by most of the patrons. I love the bread and I'll continue my long term loyalty. Six bucks for a great, but lighter, loaf of bread.

The bakery definitely had fewer employees today. The store traffic seemed slightly less than I remember. I'm guessing the staff has been cut 25% and the number of patrons is down 10%. If I'm close, sales are down 10% (same price per loaf), cost of goods sold are up 5 to 10% (even with the smaller portion) and labor cost has dropped 25%.

Will the patrons remain loyal given the lighter loaves? Possibly. Would they be happier with the same size loaves and higher prices? I'm not sure they would prefer the higher prices. Maybe the baker has struck the right balance for his clientele. He's always at the bakery and he knows many patrons by name. He talks with lots of people and he has a decent read on our local economy.

Whether you try smaller portions or higher menu prices, this may not be the time to do both.


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Impact of Coupons on Food Cost

Since many of you are trying coupon mailings to increase sales, I decided to review this popular topic. Frequently, I'm asked how to account for coupons in the food cost percentage calculation. This issue has no absolute answer. My preference could change depending on the length of the coupon campaign and the impact on total sales.

In general, my strong preference is to record the total gross sales and treat coupons as a method of payment. This approach provides a consistent base sales for cost % calculation. Net sales may reflect the coupon discount or you may want to record this activity as a promotional expense. It's a good idea to check with your accountant to make sure the treatment is consistent with previous periods.

Should you decide to extend the coupon campaign to a longer term, management should examine the overall impact on the operation. It's possible to keep costs in line with gross sales levels and experience rough times. If coupons represent over 5% of gross sales and the length of the campaign is indefinite, the operation may not be able to cover fixed costs.

A short term coupon campaign is a terrific way to meet new guests. Unit management should be alerted when a guest redeems a coupon. Rather than treating these customers as second class citizens, it's an opportunity to give special treatment to a potential long term patron.


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Explosive Recipe Models

Once you have decided on a menu theme, suppliers, a production team and specific menu items, it's time to develop standard recipes. Your recipes should be clear and well illustrated. It helps to take the view of a line cook when crafting plate recipes. Batch recipes are a different breed. If you want to completely understand your operation, I recommend you spend most of your time on batch production recipes.

Basic prep activities should be carefully observed. Actual yields need to be compared to industry standards. Stocks are great for using the trim from your prep items. It's OK to assign the stock a zero cost for the usable trim. Some chefs like to give a credit for trim used in stocks when calculating the prep yields for the primary purpose. If you use this approach, you'll need to monitor the cost of the stock.

Secondary production activities include setups, mixes, sauces, stews, soups, portion cuts and other line items. If you build an explosive recipe model, you can save lots of time later if you need to make changes to your menu.

For example, a pizzeria could have a pizza sauce recipe, a pizza dough recipe, a standard weight for the shredded cheese and olive oil. A pizza setup would include 1 dough ball, 1 standard ladle of sauce, a standard portion of shredded cheese and the standard amount of oil. For a simple cheese pizza, the plate recipe could simply include 1 pizza setup. Pizzas with toppings could use 1 pizza setup and one or more topping portions.

Let's say you decide to change the shredded cheese mix and portion size. Instead of rebuilding every finished pizza recipe, you could simply change the one recipe for the shredded cheese portion. This change then explodes through the entire list of pizza recipes. Since the pizza setup is tied to each pizza and the setup includes the shredded cheese portion, you have updated the entire model with one change.

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Recipes And Cost Accounting

Variance reports help cost accountants identify unprofitable production and service activities. If your dinner house served a 1 pound steak for $30 and the meat costs $6 and sides run another $1.50, your margin is $22.50. That's a profit margin of 75%.

Meat prices vary over time and the 1 pound steak can go as low as $4.50 and as high as $7.50. This rate variance has a huge impact on your profits. At $4.50 per pound, marginal profit soars to $24 or 80%. It gets tough to pay the rent for your high profile location when higher priced meat hits the loading dock. Your margin drops to $21 or 70% at the $7.50 per pound level.

In this example, our standard price per pound is $6. If our example steak accounted for 40% of dinner business, how do we measure the impact of a price increase? Using this standard rate, we will run a cost of sales of 25% on this menu item. A $1.50 rise in the cost per pound will run the cost of sales up to 30%. Since this 5% increase has a 40% impact value, this one ingredient - a 1 pound steak - is responsible for a 2% increase in the overall food cost.



Rate variances on key items have a major impact on your results. These variances may be difficult to control. Major steak chains use futures and options to reduce the risk. Minimum future requirements eliminate this option for most operators.

The industry has become focused on the usage variance since the degree of control is higher. If you sell 1,000 of these steaks a week and you closely track usage, you may experience a usage variance of 10%. Instead of using 1,000 pounds of steak, you needed 1,100 pounds. At the $6 standard cost per pound, the usage variance costs $600. Repeat this performance for 50 straight weeks and you'll be missing $30,000 of profit. Your food cost percentage for the steak will soar by 2%. Looking at the entire food cost percentage, this unfavorable variance has a 0.8% impact.

Imagine a week with the same usage variance combined with the big rate variance. The impact of serving the $7.50 per pound meat and an extra 100 steaks is $2,250. The extra steaks cost $750 and the extra $1.50 per pound on the 1,000 standard is $1,500.

Companies using variance reports wisely tend to eliminate usage problems faster. These same companies isolate key items and develop an effective purchasing strategy. Their competitors tend to run rambling meetings when food cost numbers are high. Inventory counts and extensions become their focus. In the long run, you won't solve a usage variance or a price variance through inventory value manipulation.

Basic Recipe Costing

The majority of operations I start work with do not have an operations manual. These same operators have no formal training for new hires. If you start as a line cook, you take verbal orders for most activities. The restaurant will not provide you with standard recipes. There are no photos of the production action and no information regarding weights and sizes.

When we try to develop recipe standards, I ask the manager to treat me as a newly hired line cook. I want these clients to explain in straight language exactly what they expect me to do when I cook. Do I measure? Are all the necessary sauces and prepped items available on the line? Which ladle do I use for each sauce? Most of my questions involve measurement and prepped items.



Over time, I have learned how to take almost any menu and determine what needs to be prepped ahead of time. Feed me some POS product mix data and I can start to prioritize my work. If you take the time to go through your own menu and ask simple questions, you'll come up with a comprehensive list of batch recipes which need to be created first. This task takes some time to get comfortable with but it is critical to success.

A bad place to start is often the most commonly selected menu item for recipe costing - soup of the day. Soups are often on top of most menus. This soup du jour recipe could easily take days of work to complete. There are many choices and it's unlikely the POS system archives the specific soup du jour details. It is literally many soups with complex recipes involving stocks, mise en place, etc. Then you need to weight each recipe by sales data to properly estimate the recipe cost.

Start with your entrees. Be very specific about how the center of the plate choices go from cases of raw ingredients onto the plate going out to your dining room. Do you portion by cooked weight, pre-cooked weight, portion control item, ladle or piece (rack, steak, thigh, breast, etc.)? Is there a portion control system in place to ensure consistency for both the guest and the accounting staff? You can't spend enough time in this area. This is where the major decisions are made in any recipe costing exercise.

Be prepared for the entrees to run a cost of goods sold higher than your actual food cost %. If you have a 35% food cost percentage, you may see the entrees coming in at 40%. The reason the entrees run higher than the food cost percentage is the beverages typically have portion costs far below the overall percentage. Sales of beverages are made in higher volumes than the sale of entrees. These profitable items will help to lower the overall percentage.

Chefs will get involved once they see you are factoring sides, bread and butter, garnishes, etc. into the total cost of these entrees. They have been correctly trained to price entrees to cover all these costs. In addition, they may correctly point out entrees with a high food cost percentage can produce superior gross margins (in terms of dollars). As you gain the support of the kitchen staff in your exercise, please have them proceed to cost any side, starch, bread, roll, garnish and condiment needed to serve each entree. This is the second area of focus.

Maintain a tight focus on the production and service of center of the plate items. You will find a high percentage of purchase volume is devoted to the raw ingredients needed to produce these entree items.

The Focal Point

Have you ever gone to a restaurant with two or more food service operators? I really enjoy these occasions. The insights are incredible. We're talking major critique on staff, cleanliness, speed of service, quality of food and many other insightful comments.

While these friends of mine carve up the dining room, I tend to focus on consistency. I watch nearby tables and see what is popular. I'll almost always go with the crowd at a new restaurant. Once I get my order, I'm evaluating the portion size just as critically as the quality of the food. Specifically, I want to know if I received either a bigger or a smaller portion than the norm.

One classic restaurant experience comes to mind. I invited a friend to a popular pub on a Friday. The pub specialized in seafood. He ordered sole and he never stopped talking about the fantastic experience for the next month. He was surprised at the generous portion size and the top quality preparation. In the many conversations he had with his friends, he highly recommended the pub. Let's put the experience in focus: we're talking about a beautiful 12 ounce portion of fresh Atlantic flounder broiled to perfection.



When we all went out about a month later, he insisted on returning to the pub. He ordered the same entree. This time he really received lemon sole. The pub offered a completely different presentation using 7 ounces of thin filet of sole in a lemon sauce. They lost a customer on the spot. He ate the sole and he even commented on the well prepared lemon sauce. The reason they lost his business was consistency.

The switch from a large 12 ounce portion of flounder to a petite 7 ounce portion of sole changed his mind. The focal point was the center of the plate entree. All the other meal components were fantastic. The generous salad with top notch house dressing was a winner. All classic sides of slaw and fries were prepared well and fit the entree perfectly. The negative buzz caused by the entree swap completely cancelled all the previous word of mouth promotion.

My friend never returned to the pub. He called all of his friends and told them of the switch. He is not a food service professional. He is a radiologist.

I can remember a discussion I had with my boss years 20 ago. We were changing a menu to highlight seasonal favorites. He said you have to be careful what you offer the customers. Its difficult to take away something once the expectation has been established.

Despite well executed meals on two occasions, this restaurant lost a potential frequent diner and created bad word of mouth exposure.

Food Cost - Beyond Basic

In last week's article Food Cost Basics , I outlined the traditional formula for calculating food cost percentage. At the heart of the formula you will find the simple food cost calculation: FC=(BI+P-EI). Twisting this formula slightly, we find food cost equal to our purchases plus or minus the change in inventory value:
FC=P+(BI-EI).

As your period of time increases between inventories, the purchases will become more dominant than the inventory change . On the other hand, inventory change is a huge factor in operations with daily inventory counts.

In my college days, I worked for a major fast food operation and my duties included a daily inventory of all food, beverages and paper products. We calculated a daily food cost percentage. Whenever my costs were out of line, I reviewed the inventory valuations carefully. Often, the variance could be traced to a low cost item incorrectly extended by a high price. There were many times a pricey item was extended at a fraction of the cost. Once these corrections were made it was possible to see the true picture of results.

Many operators have many more items than the 120 I tracked each day. Also, I doubt their managers are paid $160 each week and scheduled 7 days a week for 10 hours a day. Casual dining concepts often require inventories with over 1,000 items. The daily inventory calculation would be cost prohibitive.

Let's examine the formula in finer detail. The total food cost is equal to the sum of the individual item food costs. If you have 800 items to count, the food cost formula could be expressed as follows:
$FC=\sum$_n=1⁸⁰⁰ (BI_n+P_n-EI_n)

So for each item in your inventory, you add beginning inventory to purchases and subtract ending inventory. Your total food cost figure is the sum of all these numbers.

If you run these numbers on a spreadsheet, I recommend you sort the matrix in descending order using the extension column. Count the inventory every day for the top 10 items on the page. Calculate the cost of these 10 items each day. I believe you will find the cost of these 10 items (as a percent of sales) will provide you with answers to many of your food cost issues. You may want to increase the number of items tracked to 25 if you have a very diverse menu.

When the accounting department tells you the percentage is up two tenths in the past month, you will know why the cost increased. Analyze the major items and move beyond basic cost calculation.