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Cornell’s Center for Hospitality Research has released “The Eight-Step Approach to Controlling Food Costs,” by J. Bruce Tracey, which will help restaurant managers identify and eliminate extra food expenses. The training materials, which include a trainer’s manual, a participant’s guide, and a self-assessment workbook, are all available at no charge from the Center for Hospitality Research at www.hotelschool.cornell.edu/research/chr/pubs/tools/.
“I designed this program so that managers of all types of restaurants can use it. Each step builds on the previous one, so that the manager can gain full control of food costs,” explained Tracey, who is an associate professor of management at the Cornell School of Hotel Administration. “The key point of this program is to involve all employees in watching for waste and controlling costs. This is the most effective way to make sure that food costs don’t get out of hand.”
Using handouts and exercises, the program helps participants gain expertise in each of eight steps of food-cost control. The eight steps are: ordering, pricing, receiving, storage, issuing, production, portioning, and cash collection. Beyond that, the training program explains the critical step of how to enlist all employees in the effort to control food costs.
Exercises include how to determine the cost of each item in a recipe, how to store food properly (and identify storage issues), and how to ensure proper cash control. Once the program is complete, participants work with their supervisors to improve daily operations based on the cost-control principles that they have learned.
About The Center for Hospitality Research
A unit of the Cornell School of Hotel Administration, The Center for Hospitality Research (CHR) sponsors research designed to improve practices in the hospitality industry. Under the lead of the center’s 78 corporate affiliates, experienced scholars work closely with business executives to discover new insights into strategic, managerial and operating practices. The center also publishes the award-winning hospitality journal, the Cornell Hospitality Quarterly. To learn more about the center and its projects, visit www.chr.cornell.edu.
A major part of your prime cost is food cost.
Food cost can be calculated as follows:
Net food purchases ÷ Net food Sales (Net means after the change in inventory)
Costing out the menu is crucial to controlling food costs. The easiest place to begin is at the bar due to price control. From there, move on to the food.
Each category should be broken down into more useful ratios. Have the chef, sous chef, or kitchen manager cost out the menu since they deal the most with the product.
A few tips to help lower food costs are:
If food cost is a consistent problem, an operator should start taking inventory weekly. At one particular restaurant, our client requires his kitchen staff to know daily food cost.
He ignores inventory and uses purchases over sales. He even makes the kitchen track each entree sold. So if only one lobster is sold, the staff better not order lobster the next day. Any operator can take this one step further by tracking daily sales and purchases.
A dollar budget can be set based on projected demand. For example, if an operator expects to do $50,000.00 in food sales for the week, the chef should be given a budget of how much to spend. If the operator’s food cost goal is 30%, they can order $15,000.00 worth of food ($50,000 x 0.3). If the operator tracks purchases daily, he or she can let the chef know how close he is to the budget.
Food cost has a direct impact on a restaurants operating profit. Because no two operations are identical, it is necessary to calculate the food cost of your particular restaurant at least monthly – we always recommend weekly. Industry averages cannot be used as an accurate standard.
The concept of food cost must be examined at several different levels in order to take into account any and all variables. For example, one variable is your menu sales mix. When one menu item sells better than another, there will be variances in your overall food cost and you should know how this affects your profits.
Essentially, there are four aspects of food cost that must be individually calculated for each operation
The maximum allowable food cost figure determines the food cost percentage an operation needs in order to achieve its profit objectives. It is calculated from the actual operating budget of the business. To calculate the maximum allowable food cost percentage, select a representative accounting period and determine the amounts for: payroll related expenses (salaries, wages, taxes, and fringe benefit), overhead expenses (advertising, utilities, maintenance, other supplies excluding food costs)
Also include a target figure for profits before tax. Convert the dollar value for these three areas to a percentage of the total sales. Remember that food cost is not included.
Now subtract these numbers from 100 to determine the maximum allowable food cost percentage.
If you are working with following percentages of sales, payroll 27%, overhead 20%, profit 15%, then the maximum allowable food cost percentage is 37 % (100 minus 63 ).
The actual food cost percentage appears on the monthly income statement. This is the cost of the food consumed by your guests, and does not include employee meals or waste. Although the actual food cost indicates what the food cost is currently running, it has little value unless the operator knows what the target percentage should be.
Potential food cost is a theoretical or ideal percentage which indicates what the food cost should be in a perfectly run restaurant, given the sales mix. It reflects the fact that the most popular menu items will have the greatest influence on the overall food cost percentage. To calculate the food cost percentage of each dish: Multiply the food cost per item with the number of portions sold. Add both columns and then multiply the total cost by 100 and divide it by the total of the sales column. This will result in the potential food cost. If then your total cost is $ 3,000 – and your sales $ 10,000 – your potential food cost percentage will be 30.0.If the sales mix produces a potential food cost that exceeds the maximum allowable cost, profit objectives cannot be realized.
Management needs to adjust the potential food cost to include waste and spoilage that occurs during normal preparation, as well as an allowance for complimentary or discounted meals to employees and guests. An acceptable variance will range from half to three percentage points of food sales. The exact percentage is determined from management studies. The standard food cost percentage is calculated by adding this variance percentage to the potential food cost. The difference between actual food cost and standard food cost reflects inefficiencies that should have been controlled by management.
Bringing all four aspects of food cost together shows the importance of each in examining food costs
Assume that you have a maximum allowable food cost percentage of 35. The month-end food sales and inventory figures for the same period result in an actual food cost percentage of 34.0. If the food cost analysis stops at this point, one may conclude that the cost of food is in line because the actual food cost is slightly below the maximum allowable food cost percentage. However, further analysis using the weighted sales mix analysis reveals a potential food cost percentage of 29.4. The variance that exists between the actual and potential food cost percentage is 4.6 percentage points, much too high for the existing menu sales mix.
Management has set a standard food cost percentage of 2% to take into account as acceptable food waste, etc. The actual food cost percentage is still 2.6 percentage points higher than the standard food cost percentage. Thus minimum profit objectives are being exceeded, but they are not being optimized. Investigation is required and its results could improve the financial performance of the restaurant in the future.
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How to save a few more bucks on food costs
When the P&L comes out and we’re surprised that the food cost is out of line, it’s often due to key issues such as vendor price increases, bad inventory controls, even pilferage. But what do you do when food cost comes in at budget? Does that mean food costs are under control?
Keep in mind that your food cost budget is likely padded to accommodate a difference between theoretical food cost (based on the recipe costing and budgeted prices) and the actual cost (what the P&L says). That padding generally covers errors and mistakes that happen in any operation. Your goal as managers is to reduce the padding. One of the easiest ways to do this is to undertake a simple 30-minute preemptive audit.
Your goal is to catch errors and mistakes before they make an impact on your bottom line in essence, treating the root cause, rather than the symptoms. Here are a few key questions to ask yourself as you take your tour that might help you find a few additional dollars of food cost savings that you can drive to the bottom line.
First stop: The kitchen
How frequently does your preparation staff use recipes?
Too often recipe cards can be found relegated to some beat up binder on an unreachable shelf in the chef’s office. It’s surprising how recipes evolve unintentionally over time when they are not driven by a written guide. Recipes are real tools with real benefits beyond cost accuracy. In most cases, the confidence inspired by following a well-written recipe will actually increase the speed with which it can be completed.
Whether the staff uses recipe cards or not, how do they actually measure quantities? In many cases, the staff may be fine with using recipes, but are there adequate supplies of measuring equipment, or are they simply guessing at quantities? Not supplying an adequate amount of measuring tools is a classic case of being penny wise and pound foolish scales and measuring cups are inexpensive when compared to the ingredients they are used to measure. The accuracy, consistency and speed gained by having adequate quantities of measuring devices can easily pay for these items and allow more money to go to the bottom line.
Look in kitchen trash receptacles; what do you see?
Garbage cans can be the hiding ground for errors, and with them, a fair share of food cost. Looking at wasted foods may expose problems. But rather than placing blame on the staff, ask yourself, what did you do to prevent the mistake? Was it a system problem? Equipment failure? A training deficiency? The contents of a garbage can are a reflection on management.
What signs do you see of error control in action?
Items like bacon and nuts are high cost items that often are burnt and then trashed, directly impacting food costs. What signs do you see of your staff trying to avoid this common problem? Do they use the timers that are in the kitchen for these purposes, a timer that is incorporated into the standard operating procedure for cooking bacon, placed on the oven door to remind the cook to pull it before it burns? Setting a timer for certain items should be a part of the culture of your restaurant.
Second stop: The dining room
How much do your servers care about food cost?
Not all the food cost issues happen in the kitchen. Looking to the area where servers are doing their set-ups can expose things that are set-up to save time yet cost the operation money. Pre-filling all the creamers to the same amount seems like a good idea, but if they are all filled to the same amount, a table of one gets a full creamer every single time and is costing as much as a table where four hot beverages are ordered. Butter portions should be scrutinized as well. And what happens to these set-ups at the end of the shift?
What systems are in place to track returned food orders?
While you might have a system to financially account for the value of a mistake that was served to a customer and returned, what does your system do to prevent that error from re-occurring?
Are returned orders coded into groupings that can be measured, tracked and analyzed to reduce their frequency?
Third stop: The dishwashing area
Have you asked the dishwashing staff about your portion sizes?
You’d be surprised how much your dishwashers know about what items on your menu are over-portioned or come back uneaten for other reasons. Look at items such as sides, salad dressings, condiments, garnishes, etc. In this day of tight competition and high expectations for customer value, your portioning should be a key concern in menu planning. You should be just as concerned about how your plates look when they come back from the dining room as you are about how they look when they go out.
Last stop: Your office
What did you learn, and what are you prepared to do?
It happens all the time. We see things we need to work on, but we simply don’t get around to it. Your role in being preemptive about your food cost is to turn thought into action. Write down a list of items that caught your attention on your tour and paste it somewhere where you’ve got to look at it till you’ve resolved those issues.
It’s real dollars and your profitability can suffer if you think otherwise
Did you ever pay an invoice to one of your suppliers with a check that had the amount being paid expressed as a percentage? I didn’t think so.
When we pay for food (aka, our food cost), we don’t spend percentages we spend dollars and we also deposit our profit as dollars into the bank. Percentages are just one of many analytical tools we should consider in evaluating the financial performance and profitability of our operation. But too often those percentages as analytical tools get more attention than the real dollars they represent and that’s where profitability can get hurt. This is especially true of the dynamics of food cost and menu engineering.
MANAGER ONE
For illustration, let’s take a look at a series of simplified menu abstracts from three different managers pricing the same menu. In the first example, you’ll see that this manager budgeted for a 33 percent food cost and took the safe route to achieve that goal by setting the pricing on each of the individual menu items to meet that same percentage. Safe, because no matter what the customers order, theoretically his food cost should come in on budget and everyone should be happy. Right? Well, before we answer that, let’s look a little further.
MANAGER TWO
Our second manager used a different approach to menu pricing. Using the same menu items, but raising the price on the chicken by $3 and lowering the price on the veal by $12 the natural reaction of her customers was for them to buy less chicken and more veal. And what about the food cost percentage? It went up of course, to a whopping 40 percent, but the profit went up as well, in fact, by quite a bit. She deposited more money in the bank even though her food cost comes in at five points higher than that of manager number one. Manger number two focuses on real dollars, not just percentages.
MANAGER THREE
Okay, so maybe our second manager is a bit more aggressive than you’re comfortable with. Manager number three takes a more conservative approach. Some of his customers consider that $9 chicken dish as an entitlement so he decides to leave that dish and its price alone. However, our manager has simply decided to reduce the price on the veal enough to increase its appeal, moving some customers (two in this example) who would have ordered the chicken to get the veal. The food cost again goes up, this time to 37 percent, but even still, this manager’s profit continues to be better than that of the first manager.
Menu pricing should be more dynamic than setting a percentage based on the budgeted food cost percentage and using that same pricing factor across all items. A lower food cost percentage does not mean higher profitability. And finally, the next time you hear someone brag about their low food cost percentage, you cannot be so sure that their profitability is high.
Our goal is to make as many customers as happy as we can while maximizing profits in real dollars. Setting menu prices and budgeting food cost percentages is more complicated than many think. When we talk about food cost, we must keep in mind that overemphasizing percentages without understanding the dynamics behind them, can actually reduce real profits.
