Corn's Impact on Food Cost

A brief history (7 year) of corn prices shows we have entered a new long tern pattern. In 2004, prices for corn and soybeans spiked (from 250 to 325) and the rapid increase had an impact on meat and poultry prices. The markets returned to their normal pattern and held through 2005. Markets saw constant increases in 2006 ending the year over 400.

There was a breather in 2007 and the market prices fell back to a level just above 300 in the summer before spiking to a year end close in the 500 range. We all remember the $5 gas prices in the election year of 2008. Corn futures skyrocketed to over 750 as ethanol production increased dramatically.

As the economy tanked, the corn market fell in late 2008 and briefly touched 300 before a year end close near 400.

In the most recent 2 year period, corn has traded in a range between 300 and 450. Gas prices have stayed well below $4 and this summer remained below $3 in many states.

If we take an overview, the increased use of ethanol has shifted the corn price curve by 50% from pre-2006 levels to the recent levels. We can expect any economic recovery to put upward pressure on corn prices.



Source: http://futures.tradingcharts.com/

Why is the cost of corn important?

If you are forecasting the year ahead for purposes of pricing your menu and budget preparation, you need to consider the corn price impact. Any nationwide economic growth will increase gas consumption which will increase corn consumption. Even in the recession period, corn is 50% above 2004 levels. An economic pickup will send corn prices above 400.

As national comparable cover counts increase, it is very likely your cost of goods sold will increase at the same rate or faster. Sales increases due to menu price increases would not impact the corn markets. Actual restaurant traffic across the country is the signal. There are signs pointing to solid economic growth in 2011 and beyond. This will help put more money in restaurants but you will see pressure as gas prices increase and your food costs rise.

Production Food Cost

Most restaurants purchase raw ingredients and produce and sell finished menu items. Our management accounting should be structured in a manner similar to a manufacturing operation. The wait staff should be considered the sales force. They meet the customers and help them order a delicious meal.

We find a beehive of activity on or near the production line in most restaurants. The wait staff wants to rapidly fill orders and the production staff handles orders as efficiently as possible given the equipment constraints and staff levels.

Unlike most manufacturers, a majority of food service managers do not track work in progress and finished goods inventory. Our finished goods are immediately delivered to the dining room.

The terms batch recipe, sub-recipe or prep recipe are used to describe the items produced ahead of the meal period. These items are available to the line cooks and are used to produce more complex menu items. Common prep items are sauces, dressings, stocks, casseroles and other items which take longer than the typical meal cycle to produce. Butchering, produce cleaning and other prep activities convert raw ingredients into portioned items and salad mixes.

Food service operators need clear policies to handle these inventory valuation issues. Inventory valuation is important since the cost of goods sold depends on consistent treatment to determine beginning and ending inventory values.

There are many different accounting policies employed by major food service companies. One of the largest hotel management companies in the world does not use food inventory in their balance sheet and income statements. Food cost reflects all food received from their suppliers each period. Other companies do not value any work in progress inventory. These operators use a prep cooler and management's goal is to minimize the amount of food in this zone.

Due to the increase in report complexity, we often miss the opportunity to evaluate the true cost of batch recipe production. The key reason for tracking batch recipe production, including the cost of direct labor, is the ability to compare the total cost with the available packaged goods.

Salad mixes using romaine lettuce are very popular. For many companies, the value added by cleaning and trimming the vegetables and heads of lettuce does not justify the cost increase. The packaged salad mixes offer a high quality alternative with very low labor costs.

Operators are trying to manage relatively high production costs. Salad production involves many hidden costs: transportation of unusable trim, water used to clean vegetables (often left running during the prep), garbage removal to discard the unusual trim, and higher volatility in market costs. The direct labor is not completely hidden but may be cloudy when the workers handling prep also work in other stations.

So what? Why should anyone care about these issues?

The cost of meat and seafood requiring butchering and vegetables requiring prep may be over 50% of your cost of goods sold. You may have significant hidden profit buried in your operation. The amount of hidden profit may justify a quarterly study comparing prep vs. direct purchase on several key items. If you have a policy of producing everything from scratch, you need reports which allow you to monitor production.

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.