Urner Barry Is Now Expana Markets

 A few of my butcher savvy clients were fans of Urner Barry.  They would receive yellow sheets in the mail with market prices for many popular meat cuts.  Urner Barry is now part of Expana Markets.  I like the graphs on the new platform.  Now subscribers can get their updates online.

I heard a Marketplace (American Public Media) episode on July 14 "Inflation Came Down in June. Will It Stay That Way?".  The main focus was slowing inflation.  There were specific segments I found interesting including an analysis of the drop in pork prices.  There is a good supply of pork and lower demand.  Also, a segment on egg price fixing was excellent.  The DOJ found egg suppliers manipulated the egg clearing house to fix egg prices. The egg discussion mentioned Urner Barry-now Expana.

The egg fixing scheme was only a part of the egg price story.  The Avian flu epidemic was definitely the major influence on higher prices.

I find myself avoiding eggs priced too low in the supermarket.  I like the whole "buy local" movement in my community.  Local farmers tend to use organic grains and let their birds run free at least part of the day. I pay from $4 to $5 a dozen.  In contrast, I have seen eggs priced at 89 cents a dozen at a meat specialty shop I frequent.  I passed for the nice brown eggs from a local farmer.

Key Restaurant Profitability Numbers

In my experience, profitable restaurants have a gross profit of 40% of sales or higher and an occupancy cost of 10% of sales or lower.  It's important to track gross profit and occupancy costs consistently.

Many operators spend great time and expense analyzing a number of items with a relatively minor impact on gross profit including:

Employee meals;
Allocation of lemons, cooking wine and olives between the kitchen and bar;
Complimentary food items;
Credit card fees;
Returns due to customer complaints.

Your gross profit calculation involves net sales, cost of sales and direct labor costs. 

Whether you prefer to allocate employee meals to direct labor or cost of sales, these expenses will impact gross profit.  The lemons, cooking wine and olives will show up in cost of sales regardless of the department bearing the charge.  Complimentary food served to patrons without a charge on their bill will be included in cost of sales.

It may be helpful to begin subtracting credit card fees from gross sales before calculating your cost of sales percentage.  The goal is a better bottom line profit.  If you net the credit card fees in the sales number used in calculations, you will build in a safety cushion.  This simple change will force you to operate more efficiently. 

Food returned to the kitchen due to customer complaints is a serious issue.  Any restaurant with enough returns to have a big impact on cost of sales is in dangerous territory.  You are in the business of providing your customers a superior meal.  These returns demonstrate the dissatisfaction of your audience.

When you find yourself in financial difficulty despite a 40% gross profit (using the conservative approach of netting credit card fees from sales), you will often see your occupancy cost above 10%. 

Since your occupancy cost is often fixed, a high number puts tremendous stress on management.  I have seen operators with restaurants packed nightly in constant danger of not breaking even.  Usually, they are sloppy with low gross margins or they just don't have enough sales to justify their occupancy cost. 

Frequently, we see famous restaurants closing due to a pending lease renewal.  These operators understand the risk of trying to operate with an unacceptable occupancy cost.

Finding Your Ideal Food Cost Number

I find attempts to benchmark food cost overly simplistic.  My favorite factors in determining food cost benchmarks are annual sales, competition and monthly occupancy cost.  These factors vary widely by market segment and geographic zone.

There are times when a higher food cost percentage is desirable.  Operators suffering from minimum wage laws and mandatory employee health care costs may improve their operating profit by purchasing prepped food items.

A fresh vegetable prep team with three full time workers can cost well over $100,000 in cities and states with $15 minimum wage laws.  Qualified butchers are only justified in a small number of restaurants.  Multi-unit operators may create commissaries to butcher and prep items for their entire chain.

Commissary operators need delivery vehicles and personnel.  In addition, they need tight controls over commissary transfers.  Auto insurance rates are higher in urban and suburban areas.

A savvy operator will create a profit and loss statement designed to show a subtotal used to net sales, cost of sales, direct labor and occupancy costs.  This number should be at least 30% of sales.

There are plenty of ways to get the 30% net.  Restaurant managers in urban areas with high rents need to offset their high occupancy costs with higher sales and lower percentages for cost of sales and labor.

If you are in a city with high rents, $15 minimum wage laws, and have recently offered your entire staff health care insurance, you most likely need a low food cost %. Some of you may face a 15% occupancy cost.  If you can manage to hit a 25% cost of sales and a 30% labor cost, you can deliver a 30% profit before your other operating expenses.

You may operate over an hour from the nearest city in a mortgage free restaurant.  The local minimum wage laws may allow you to pay a premium wage in the $12/hour range.  A large kitchen with adequate storage capacity could allow you to purchase farm delivered produce and large cuts of meat and fish.

The best strategy for the operator with low occupancy expenses is to always price menu items below the competition.  You can make it impossible for competitors to attack using borrowed capital.

Waste Calculation in Food Cost

Dear Joe,

I hope my mail finds you well.

I would like to know how to take into consideration the waste calculation while determining the food cost %.

Our formula:

Food Cost% =(opening inventory+purchases-ending inventory-staff meals-entertainment)/sales

So where is the place where we can add the calculation of wastage in the above formula?

Thank you. 
Best regards,
Elie

Thanks for the question, Elie.  This is a popular issue with many food cost controllers. 

In your operation, the purchased food should be consumed by guests when they order a menu item.

If the actual ingredient used to create a menu item requires fabrication, it is possible to experience a much lower yield than you expect.  You may also purchase too much of a perishable item and suffer a loss due to spoilage.  Finally, you may produce too much of a batch recipe used in a menu item which is not part of the base menu.

All of the food purchased, whether consumed by guests, lost in fabrication and poor yields, or lost due to over production or spoilage, is included in the "purchases" component of the formula.

The goal of the food cost control team is to explain to management the causes of food cost success and failure in the period of the report (week, month, quarter or year).

If you use standard recipes and standard yields, your variance reports will highlight the difference between actual usage and ideal usage.  Focus on the high volume items when you analyze variances.

In order to have the right information available, you should keep records for the ways each key item is used.  Purchases, butcher yield sheets, portion control records, and spoilage sheets are the building blocks for your variance analysis report.

In 2015, the high cost per pound or kilo for protein and fresh fruits and vegetables is a main driver of high food costs.  Only menu price increases can help with the higher purchase costs.

By developing a solid usage analysis for all key items, you will gain an advantage.  Over time, you will see trends in waste and spoilage.  If the management team communicates effectively, waste and spoilage will decline over time.

Restaurant Cost Allocations

Most dinner houses with a full bar have a difficult time deciding how to allocate food, beverages, labor and other expenses.  Since the tight control of cost of sales and labor are critical to success, the allocations in these prime costs are a central focus.

Before you begin to drill down into the truly fine cost details, make sure you define all the individuals who support key activities:  management, financial and administration.  The costs associated with the top management staff should not be allocated to any operations departments.  These operations departments are tougher to control.  There may be several workers who move between the kitchen, bar and dining room.  These flexible employees fill in where they are needed.

Some examples of flexible workers include bartender/wait staff, wait staff/general kitchen helper and bar manager/hostess.  Sometimes, these employees move between departments in a single shift.

The cost of sales issues break down by food and beverage in most restaurants.  The biggest decision involves which department receives the revenue for sales of soft drinks.  If sales of soda, bottled water, coffee, tea, juices and milk are included in food sales, the allocation of cost of sales can be tricky.  The bar will use all of these beverages as mixers and in dessert course beverages.

Most bars use olives, onions, cherries, lemons, limes, celery, fruit and vegetable juices, and many sauces (tabasco, Worcestershire, soy, etc.).  Some bars serve drinks with bacon, bouillon, horseradish, and purees.  Back in the kitchen, many chefs cook with beer, wine, and liquors.

The employee meal decision is a common concern.  Many restaurants allow all employees to enjoy a meal for each shift worked.  A common question involves whether to treat employee meals expense as a labor cost or a cost of sales for the kitchen.

In general, the net cost associated with food used in the bar and alcoholic beverages used in the kitchen will be comparatively low.  A best practice I have seen in my client's operations is to use a different brand of alcoholic beverage for the kitchen.  Examples include wine purchased in a gallon container and an economy brand of vodka which differs from the well brand.

Tracking flexible employees and isolating management and administrative staff are important cost issues.  The treatment of soft drink revenue and expenses is very important.  Employee meals can be a major expense. (e.g. 100 employees consuming five $3 meals per week represent a monthly cost over $6,000).

If the kitchen does recognize the revenue and cost of sales for soft drinks, the gross profit will help offset the employee meals cost.

The best solution for handling all of these cost allocation issues is an excellent system for transferring costs between departments.  Flexible employees generally earn the same hourly pay.  Most payroll systems allow hours to be charged to more than one department.

It is important to see report distribution ahead of time.  Imagine the managers who will review the monthly department report.  If your company genuinely utilizes a strong segregation of duties with separate managers for each department, you will benefit from the investment in a robust cost management system. 

On the other hand, your company may use a flat structure with many key people reporting directly to a single owner or general manager.  My experience with less complex operations shows the time and expense involved with cost segregation won't be justified.

Before you start a project for tightly tracking these cost allocations, make sure the benefit will outweigh the cost.  You may be able to mitigate the impact of these secondary issues through a simple offset system.  Most vendors will allow a single location to have more than one account.  For example, the bartender could order lemons directly from the produce supplier.  By performing a cost/benefit analysis, you may save significant time and expense.