Last Updated on March 16, 2020
There’s little that a fireman loves more professionally than putting out fires. So, imagine a fire brigade getting an emergency call that there’s a fire, but no indication of where it is and no way of tracing back the location; no smoke on the horizon, no glare in the night sky, just darkness and the knowledge that there’s trouble.
In a similar way, many restaurant companies — and not just small shops, even well-established and successful multi-national restaurant chains — have pains with costs, consistency, profitability, and tattered or broken links all throughout their supply chain. In large systems, just a few ounces or minutes of waste in a preparation method can lead to tens of millions of dollars in lost profits when extrapolated across the company.
The following set of questions does not serve as a fire brigade for food cost reduction. But for those looking to lower restaurant food cost, they will provide the clues and insights you and your team will need to find and put out the fires burning through your profits.
1. Do we know what our actual food cost is? Not vaguely, and not just with an “it’s too high” answer, but with precision requisite to assess actual versus theoretical cost variance analysis?
2. If our food cost is too high, do we have the right tools, paperwork, documentation, and reporting to diagnose why?
3. Are our recipe guidelines and product standards/specifications accurate and up-to-date? Are received products being audited for compliance with specifications?
4. Are we regularly updating theoretical food cost worksheets and have we checked them for accuracy in the last inventory and accounting cycle? Is this an automated or manual process?
5. Have we conducted a make/buy analysis in the context of recent increases to labor costs and product pricing?
Food for Thought
It’s not always just about a cheaper product-price, because you must also factor in labor and other variables to get a true cost. Every operation is going to have its own nuances and unique set of circumstances. But, generally, just because beef is cheaper by the pound to have a whole cow dropped off at the backdoor of the kitchen doesn’t mean it’s better to buy a T-bone steak this way. A lot of variables need to be worked into the math like yield, utilization, volume, staff competencies and capacities, equipment plans and kitchen layouts, and so much more.
6. Are we effectively looking at opportunity buys and developing LTOs & LSOs in a strategic fashion?
7. Are we analyzing/predicting commodity markets? Forecasting, hedging, and taking a position?
8. Are we evaluating our own purchasing against a commodity price index?
9. Have we recently looked for new supplier/product consolidation opportunities?
10. Do we have the right KPIs in place for purchasing, distribution, stock rotation, receiving, spoilage, waste, breakage, voids, and returns? How do we perform relative to industry benchmarks and best practices for comparable concepts and companies?
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11. Are we fully utilizing our point of sale (POS) system to maximum effect? Does the POS provide necessary reports, and are we evaluating these reports with the right frequency?
12. Have we enlisted our suppliers as true strategic partners (versus evaluating primarily on price and convenience)? Have we recently asked our top 3 (or 5) suppliers for support in product development, creating cooperative opportunities for improving cost, yield, utilization, and lowering landed cost and building a win-win partnership? How often do our top people meet with their top people (not just salesman to buyer)?
13. Are we consistent on compliance with regard to recipe preparation, production, plating, and presentation?
Food for Thought
Bonus systems driven primarily by bottom-line performance and managers measured with the primary focus of food cost reduction solely will often backfire. The incentives, while not out of alignment with the business, are at odds with a holistic approach, which is requisite for sustainably and responsibly reducing food costs.
As an example, if a manager’s performance is measured based on a target food cost of 30%, and in one week he has a food cost of 32%, then gets in trouble for that at the start of the following week, oftentimes he will over-adjust and food cost will come in at 28% for the week after that. While this may look good in a monthly P&L in that food costs all balanced out to the target, the reality is that in that second week, most of the customers got less cheese and pepperoni on their pizzas. And the loss of customers and attrition of the lifetime value of those customers bled out to competitors with more consistent food cost and product quality far out-weighs less significant cost variance that was due to mismanagement in the first place.
14. Have we evaluated our kitchen layouts and equipment plans to identify potential yield and efficiency gains? Is there new and more modern equipment that, while a capital investment, would improve efficiency and operating margin? Can we reduce CAPEX on new openings with a better configuration?
15. Have we conducted industrial engineering practices (time/motion studies, spaghetti diagrams, etc.) to determine station- and position-level production capacity and performance standards and metrics?
16. Have we conducted a proper sensitivity analysis to calculate the potential impact on food costs?
17. Are we conducting theoretical food cost versus actual food cost variance analysis? If so, do we know which areas and items are most significantly and consistently contributing to the variance?
18. Have we conducted capacity analysis for each work station, in the context of workloads, demand, peak capacity levels, and par levels of inventory and individual/station performance?
19. Do we have measures in place to quantify the skill and competencies required of back-of-house positions? Are we collecting information to analyze these skills and competencies regarding waste, spoilage, breakage, returns or voids to identify operational concerns?
20. Is our menu properly aligned with existing and emerging consumer dining behaviors and trends that could impact purchase price, frequency, check average and product preferences?
Food for Thought
Menu items that provide a unique value and experience with additional components of labor and manufacturing already included in the purchased product inherently perform at a higher profitability level. Products with low value-add compete mainly on lower price, with margins that more closely resemble a commodity.
21. Have we completed a true competitive menu analysis to evaluate comparable pricing, portioning, variety/number of items, and brand differentiation in the last six months?
22. Have we conducted a menu mix, daypart mix, and profit center mix analysis to identify potential opportunities in the last six months?
23. Are we taking inventory properly (if at all)? Are we able to define stock levels, rotation, product velocity, and total inventory value in relatively real-time?
24. Do we have proper systems in place to prevent and control theft (i.e., understanding the chain of custody of product, cash handling procedures, receiving, requisitioning and reconciliation of product movement)?
25. Can any correlations/patterns be seen in data to help diagnose if a particular unit type, geography, season, preparation method, product, station, specification, or supplier is contributing to an increase/decrease in food cost?
The Better the Question, the Better the Answer
Organizations looking to reduce costs and improve profitability and productivity should have solid answers to the questions above.
Keep in mind also that “if you can’t measure it, you can’t manage it,” and while this focused solely on lowering food costs, you can’t save your way to success.
Short-term cost savings efforts will not allow for growth and success in the long-term unless cost-savings decisions are informed through the lens of the guest. Sustainable success can be achieved when effectively managing costs while maintaining or enhancing the guest experience.
About Aaron Allen & Associates
Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in research, analytics, growth strategy, marketing, branding, commercial due diligence for emerging restaurant chains and prestigious private equity firms. Aaron has personally lead boots-on-the-ground assignments in 68 countries. Collectively, his clients around the globe generate over $200 billion annually and span six continents and more than 100 countries with significant experience in the MENA region in particular.`