Why Controlling Food Costs is More Important Than Ever Right Now, and How to Do It Right

A Datassentials survey of 400 restaurant operators, conducted at the end of October, found 58 percent of operators were nervous but confident about surviving the pandemic. Thirty percent of operators were cautiously optimistic; in fact, some thought they'd emerge stronger than ever, at a time when many restaurants are getting 60-70 percent of "normal" traffic, at best.

How can restaurant operators increase their odds of not only surviving but thriving going into a winter when pandemic case counts are rising across the U.S.?

Of course, part of the answer is to keep doing what's been working so far, keep on top of cleanliness and sanitation, conserve cash until there's another aid package, and curb the highest costs, namely, food and labor. Controlling food costs can yield savings on both fronts.

Keeping the lights on through the winter months might include reining in rising food costs. In this article, we explore best practices advised by leading consultants and suppliers.

Getting food costs under control starts with accuracy in inventory and accounting. Whether you're using automated software or entering data by hand, if you're not taking accurate measurements, you can't really understand your true expenses.

Common Mistakes

Sydney Lynn, director of client advisory services with Restaurant Solutions, Inc., says the most common mistake she sees is operators who "don't record all their purchases ... in the time frame that they completed their inventory counts for," which throws off cost of goods sold (COGS). Another common mistake? Employees who forget to update the count sheets to show the most recent purchase price for items. Getting diligent about logging data is the first step before operators can dig into costs. Without accurate data, you're just guessing.

When operators do have the data to examine food costs, they frequently focus on numbers that don't tell the whole story, such as item price and cost per plate. While item price is helpful when it indicates pricing trends week over week, it doesn't tell you much examined in isolation.

To make headway, you'll need to cost out the entire menu, then compare the theoretical food cost (i.e. your expenses in an ideal world, where nothing is ever wasted, sent back, or dropped) and your actual food cost, which is the cost of items once shrinkage, waste, improper portioning, and other variables are factored in. Knowing the variance between ideal and actual food costs can result in actual cash savings, just by figuring out what's reducing yield and correcting the problem. For example, you can't control the price of ground beef, but you can control the cook who overportions each patty.

Software makes it simpler and faster to review food costs, track trends, and spot problem areas. Automated food cost software will usually show updated prices, the plate cost, and both ideal and theoretical food costs, says Sue Straughan, business development manager and restaurant specialist at broadline food distributor Ben E. Keith.

Ben E. Keith's software flags price spikes above a certain threshold in red, providing a visual cue to operators. "One can't manage what one can't measure, yet so many independents don't have this measure," Straughan explains. Having complete, accurate data at a glance means that operators can make decisions quickly, with no costly delays and no sticker shock when something costs too much.

When item prices spike, operators have several options. They can identify substitute products that cut costs but not quality, shrink portion sizes, purchase preformed patties or precut produce to save on labor, look for rebates, or raise guest prices, Straughan explains.

While operators might have to accept a price hike of a crucial ingredient for a signature menu item, there may be opportunities to lower costs for other offerings. Both Straughan and Lynn advise operators keeping up with changing prices is as important, if not more important, than getting a one-time snapshot of food costs.

THEY'RE A RESILIENT BUNCH. These independent entrepreneurs are fighters. Our customers are currently closed at less than 10 percent. That could tick upward in the winter months but we believe it's going to be much less of a permanent closure than some media has reported…

Says Lynn, "Stay on top of item analysis. Make sure you are paying attention to rising commodity pricing and be ready to pivot ... if you have a product that costs are running too high on."

When everything is made from scratch, food costs are cheaper, but labor costs are high. By purchasing more convenience foods, operators can reduce labor costs. Food items that "are prepared in such a way that it makes it easier for your kitchen staff versus having to do a lot of prep work," can be the smart choice now, recommends Sysco's Shannon Mutschler.

While operators are rightly focused on stabilizing or reducing costs, some become too hung up on bottom-line numbers and may miss the proverbial forest for the trees. Yes, food cost is important, and vitally so in these times.

"A lot of people try to sell the items that carry the lowest food cost as a percent of the cost of the item," says Jim Laube, founder & CEO of RestaurantOwner.com and a restaurant accounting expert. "Sometimes it's better to sell a higher food cost item and have higher food costs if you're taking in higher gross profit dollars," he says. It takes fewer sales of the more expensive item to move the needle toward profitability. Customers who order out may be looking for something they can't make at home; thus, a more expensive item could feel like a treat.

Once operators really understand their food costs (including how to calculate them correctly), a range of tried- and-true techniques can further reduce expenses. The best places to start are menu engineering, employee education, and cost-cutting measures.

Restaurant consultant Chris Tripoli, FCSI, suggests operators should never assume what sells well and what doesn't. Instead, dig into sales reports to learn what customers are ordering and, equally vital, what they're avoiding. Their preferences tell operators how to shape a menu that customers will love. When revenue is low, Tripoli suggests operators select "a limited menu… [that represents] the best of our concept…[and] helps us cut back on prep, production, and inventory."

Operators should consider what food items will travel well, given that a majority of customers are doing takeout and delivery right now. Temporarily removing those items that don't travel well will cut costs and maintain the integrity of the brand.

A pared-down menu should be small, with a select group of core ingredients appearing across dishes. That said, it need not be boring.

Tripoli recommends cross-utilizing proteins through "interesting daily specials, family packages and things that might boost sales [without] increasing inventory" to give the sense of variety without added expense.

With a smaller menu, operators may need less labor. They should be able to reduce ordering after reducing the menu. Laube suggests that's a good habit for these times anyway.

Rather than keep a full storage room, Laube recommends that operators only buy what they need "with a bit of a safety, because you may have a run of a product." When the storage area is packed with backups, "employees tend to use more product and don't handle it as carefully," says Laube. They're not purchasing the items, so they're not really thinking about costs. Keeping the pantry lean encourages thrift and careful portioning.

Staff education during a daily pre-shift meeting is a prime opportunity to keep everyone accountable for following best practices that reduce costs. "Staff [impact] profitability more than anything the operator can do, assuming they're charging what they should be and have a good pricing structure," says Straughan.

"A broken plate takes a penny from the nickel profit the operator gets." Employees are directly responsible for food through waste, spoilage, shrinkage, and improper portioning. Operators should remind them during pre-shift meetings; then, tell them how they can do their part to keep costs low. This can boost morale and teamwork.

Next-Level Solutions

Operators who are efficient on labor, food, cross-utilization, and serving what customers want (and what travels well) and still struggle with food costs need next-level solutions.

Here's what experts recommend.

Lynn's number-one recommendation for controlling costs and cash flow is to switch to a declining spending budget. "[Forecast] out what their weekly anticipated sales are for the week and the cost percentage they are trying to attain on each...category" to get the total dollar spend that will keep costs in line, which then becomes the week's budget. "As purchases come in each day, it reduces the amount they have left to spend," says Lynn. While this can be tricky when demand and prices are unpredictable, it's a way to prevent overspending.

If costs have been optimized using every variable possible, the best action is to increase revenue.

The first place to look to is takeout and delivery. While "takeout was just if you really had to" pre-COVID, says Tripoli, "now it's becoming the experience and not too many operators have grasped that yet."

In a time when consumers still want the safety and convenience of takeout and delivery, the experience needs to be a positive one with touchpoints of digital hospitality: "everything is well branded, the checklist is followed, make it promotional with a flyer/insert that is reminding people of the website, the easy online ordering, next week's specials. Think of it as marketing, not a coping mechanism," explains Tripoli, who says he's seen owners write printed thank you notes expressing their appreciation or dangle incentives for customers who order directly from the restaurant.

More customers are aware of the extra costs of third-party delivery; some are choosing to order directly rather than through an online app. To capture a greater percentage of direct orders, operators should make it as easy as possible for customers to find the menu, place an order (online or by phone), and view any daily specials. "Stepping up your online digital presence" and "driving all [your] business to their website" are foundational to capturing as much takeout and delivery revenue as possible, says Lynn.

With takeout and delivery optimized, it's time to shift focus to new revenue streams that leverage what operators already have in place so as not to increase costs.

Successful operators may already be doing a lot of what works well these days, but Tripoli recommends to-go cocktails, meal kits, and family dinners, and package pricing (say, turning core proteins into a new mixed grill entree which sells for a higher price) to capture additional revenue.

Jim Osborne, senior vice-president of customer strategy & innovation at US Foods, thinks operators have been extremely creative thus far, and will continue to be creative in winter. He's seen independent restaurants find success with meal kits, including meal kits for the holidays, virtual brands and ghost kitchens, and to-go alcohol sales. Osborne recommends US Foods' web resources including a recent webinar on driving incremental revenue with merchandise and gift cards, the ghost kitchen playbook, and a guide to increasing holiday sales for operators who are looking for inspiration and actionable ideas to build revenue streams. Those resources are available at: US Foods

While increasing prices can cover rising food costs, it should never be the go-to move. Otherwise, operators may get into a cycle of feeling as though they need to raise prices anytime profits dip -- and that is never sustainable for business. As a general rule, Tripoli suggests that menu prices should be raised anytime an item's "profitability triangle" (i.e. cost, sales mix, and price) is "out of whack."

He recommends surveying the local landscape. "If you can get $0.50 more for coffee -- and everyone else already is -- get it because you're selling more of that than the other items and that offsets the cost on items you don't feel like you can increase, like paper and packaging."

While many operators have added separate fees to cover the increased costs of packaging, paper, and cleaning supplies in these times, Tripoli recommends rolling the added cost into COGS, if possible, and turning to fees as a last resort.

The market bears this out: restaurants that added separate fees related to COVID-19 faced public outcry; many later walked back the separate fees (and raised menu prices). If you feel you must add a fee to cover these extra costs, a flat fee is better than a percentage, suggests Tripoli, as there's less resistance from customers. Over 50 percent of customers support restaurants charging delivery fees or higher prices due to the extra costs, per Datassentials, so that's another option for operators to consider.

Helping Hands

Broadline distributors are here to help, and they're not the only resource out there. Here's how the distributors we talked to in the July 2020 issue continue to support independent restaurants through the next phase of operations.

Sysco recently announced several changes that make it easier for independent operators to get what they need in a flexible and affordable manner. The distributor recently eliminated order minimums for regularly scheduled delivery days. Being able to order only what's needed without padding the order to meet minimums helps operators stock only the inventory they need, encouraging thrifty purchasing.

New too are credit card payments. "A lot of our smaller customers had been asking to make payments on credit cards, says Mutschler. As credit card payments can be deferred, this may help with operating cash flow. The American Express "Plum" card provides 1.5% back on all purchases from US Food and other vendors. American Express does not report to the credit bureaus as it is a business card. If you use a credit card geared for consumer transaction, try to obtain the card in your business's name, as late payments or -- forbid -- default, could damage your personal credit score.

While any payment terms are handled locally, Sysco has been helping operators who are having a hard time as a result of COVID-19. As Sysco CEO Kevin Hourican told Bloomberg News recently, "[our customers] don't have the financial strength that we as a large company do and we are extending ourselves meaningfully to be able to help them."

Hourican made special mention of independent operators in the same briefing: "They're a resilient bunch. These independent entrepreneurs are fighters. Our customers are currently closed at less than 10 percent. That could tick upward in the winter months, but we believe it's going to be much less of a permanent closure than some media has reported," he said.

Sysco representatives are reaching out to their customers to "make sure customers know about the services we offer to help their business succeed, including marketing services," explains Mutschler; these representatives should be the first point of contact for operators with questions about any of these incentives.

Ben E. Keith touts a partnership with Menu Drive (https:// www.menudrive.com), a third-party delivery solution that takes 4.5 percent of the sale, vs. the 30+ percent taken by other third-party delivery systems. Menu Drive secured relationships with PostMates and DoorDash to get the food delivered for less, Straughan explains. Keeping 25 percent more of delivery orders by making a switch like this can have a dramatic impact on revenue.

At Ben E. Keith, special payment terms for operators tend to come down to the pricing agreement, the circumstances, and relationship. "If they're running into issues... something could be worked out, but if they're buying from six different distributors, a distributor is less likely to work with them through tough times," explains Straughan.

US Foods has a similar partnership with ChowNow, a low-cost online ordering system with a "fantastic customer experience," says Osborne. More information about ChowNow is at: ChowNow

While you don't have to be a US Foods customer to watch their webinars (one recent recommendation: "a speed scratch webinar that helps [operators] think about different ways to manage their menu to reduce cost and labor and still maintain a quality product") or review their recently released ghost kitchen playbook, only members have access to Food Fanatics Chefs® and ROCS, restaurant operations consultants.

Best Practices

While webinars and food cost calculators can help an operator better understand their expenses and brainstorm options, sometimes there's no substitute for talking it through with someone who has applied best practices. The RestaurantOwner.com Discussion Forum can be a great resource to ask for advice from fellow independent operators who have overcome similar challenges.

BEWARE FALSE ECONOMY

While thriftiness can be a valuable virtue for independent operators, they need to be wary of false economies. Operators often feel like they need to maintain relationships with multiple distributors "to keep them honest" on their prices, but this isn't always advantageous.

Sue Straughan, business development manager and restaurant specialist at broadline food distributor Ben E. Keith. says she's seen operators spend hours poring over price lists from multiple sources on a quest to stretch dollars, and wasting time that would be "better spent on efforts that would drive sales and profits." For this reason, she recommends operators secure a pricing agreement with one main distributor. This locks them into a set markup, stabilizing food cost and saving time.

A pricing agreement offers incentives that further reduce expenses: things like "special consideration with most favorable delivery times, service consistency, sourcing [of] special products, rebates, [and] value-added resources like automated technology programs which [would cost] thousands on the open market for free as long as they continue their distributor relationship," Straughan says. One more reason to lock down a preferred distributor? If you need a favor on payments or special orders, you'll get better treatment from someone you've committed to through a pricing agreement.

ALWAYS LEARNING…

Menu Costing Basics

Knowing what each of your menu items costs you is one of the most basic yet over- looked aspects of running a profitable restaurant. Costing out your menu can be an arduous task, but you must know your menu cost before you can make intelligent decisions on cost-cutting, price increases or other changes to your menu.

The first step in attaining predictable profitability is to cost out your entire food menu, including all recipes and prep items. The next step is to implement a simple system to keep it up to date.

In this 60-minute recorded webinar, Restaurant Owner.com presenter Joe Erickson will introduce you to one of our most popular systems, Menu and Recipe Costing, using our downloadable template. We'll also show you easy to use best practices for keeping your menu and recipe costs up to date.

WHAT YOU WILL LEARN:

• Quick-start tips for using the Menu and Recipe Costing Template.
• Overview of the Menu Costing Basics Online Course.
• How to set up a single master inventory list to use for both recipe costing and inventory counts.
• How to properly cost out your ingredients, batch recipes and menu items.
• Simple method for maintaining up-to-date pricing on everything you buy.
• Why knowing weight vs. measure is essential for accurate menu cost.