HOW DO OUR CUSTOMERS MAKE MONEY? What do our customers know that we need to know? Presented by: Alan Rosenblatt We need to be good consultants The better we understand how they make money, the better we can help them make money The more money they make the longer we can continue to sell them Create a Win/Win situation! What is profit? For our customers it is the following simplified Profit = Sales - COG - Labor (including taxes and benefits) - rent and utilities Simple right? Control the Controllable From the previous equation, what are the things that they can control? Food Cost Labor Cost RESTAURANT BREAK-EVEN ANALYSIS NAME WEEKLY BREAK-DOWN ACTUAL % PROJECTED % PROJECTED % SALES FOOD SALES $ 800,000.00 80.00% $ - #DIV/0! $ - #DIV/0! BEV SALES $ 200,000.00 20.00% $ - #DIV/0! $ - #DIV/0! TOTAL SALES $ 1,000,000.00 100.00% $ - #DIV/0! $ - #DIV/0! VARIABLE COST FOOD COST $ 212,000.00 26.50% $0.00 #DIV/0! #DIV/0! #DIV/0! BEV. COST $ 57,000.00 28.50% $0.00 #DIV/0! #DIV/0! #DIV/0! NON. INGRED. COST $ 12,000.00 1.20% $0.00 #DIV/0! #DIV/0! #DIV/0! LABOR COST $ 360,000.00 36.00% $0.00 #DIV/0! #DIV/0! #DIV/0! TTL VARIABLE COST $ 641,000.00 64.10% $0.00 #DIV/0! #DIV/0! #DIV/0! FIXED COST DIRECT OPERATING $ - 0.00% $ - #DIV/0! $ - #DIV/0! MARKETING $ - 0.00% $ - #DIV/0! $ - #DIV/0! UTILITIES $ - 0.00% $ - #DIV/0! $ - #DIV/0! GENERAL ADMIN. $ - 0.00% $ - #DIV/0! $ - #DIV/0! REPAIR & MAINT. $ - 0.00% $ - #DIV/0! $ - #DIV/0! OCCUPANCY $ - 0.00% $ - #DIV/0! $ - #DIV/0! OTHER EXPENSE $ - 0.00% $ - #DIV/0! $ - #DIV/0! DEPREC. AMORTIZATION $ - 0.00% $ - #DIV/0! $ - #DIV/0! TOTAL FIXED COST $ - 0.00% $ - #DIV/0! $ - #DIV/0! PROFIT OR LOSS $ 359,000.00 35.90% $ - #DIV/0! #DIV/0! #DIV/0! What is Food Cost? When a customer talks about Food Cost what is it and how is it calculated? WHAT IS FOOD COST? Food cost is a mathematical calculation showing the cost of the menu item to the sell price of said item (cost/sell). For example: Menu item costs $3.33 to put onto the plate and it sells for $10.00 on the menu. Calculation of food cost is $3.33/$10.00 or 33%. WHAT DOES A 33% FOOD COST MEAN TO US? It basically means that if we are selling all of the components of the item to the customer, the customer is marking up the item 3X’s ($10.00/$3.33). So if we raise our price to the customer say 1%, does their food cost go up 1%? WHAT WOULD IT GO UP TO? It would go up 1/3rd of 1%. $3.33 X 1.01(1% increase) = $3.36 If the sell price stays at $10.00, the new calculated food cost is 33.6%. FOOD COST QUESTION Assuming the infamous 33% food cost that so many chefs or owners claim that they are achieving and we sell them everything: How much would you have to raise their prices across the board to increase their food cost 1%? THE ANSWER In order to increase the food cost 1% in this example we would have to raise our prices a full 3%. Calculation is as follows: $3.33 X 1.03 (3%)=$3.43 $3.43/$10.00= 34.3% Food Cost FOOD COST WRAP-UP So if a customer tells you that their food cost skyrocketed 9%, how much would you have had to raise their pricing? YES, YOU WOULD NEED TO RAISE IT : 27% SOME THINGS THAT AFFECT FOOD COST: Portioning Waste Date of doing inventory Quality of inventory done Lost or misplaced invoices Theft Theft Theft!!!! When Owners Focus on Food Cost alone what can happen? Many Chefs/ Purchasers are compensated only on their food cost. Some restaurants will feel that they cannot sell certain items because they can’t sell it to their customer at 3 or 4 X’s their cost. Customers put so much effort into holding down their Food Cost, that they end up spending more labor to put the product out on the plate or putting out a poor quality product because they sacrificed quality for price. EXAMPLES OF LOWERING FOOD COST PROBLEMS Customer feels cost of French fries are too high: So they buy a less expensive fry but use more because there are less portions in the case so they saved $4 on the case but lost 16 portions selling at $1.50 a portion. They actually lost $20 ($24-$4 increased cost). Or they decide to cut their own fries because the cost of the potatoes is even cheaper. But now their costs increase due to labor and yield, and they spend more on shortening. Labor Cost- Components Hourly Workers Wages Salaried Employees Wages Social Security costs Federal, State and Local Taxes Benefits- healthcare, retirement etc. How to control labor Allocate resources (staff) to the amount of business that they are doing Look at the peak times of business and schedule accordingly Each week review the sales verses the controllable labor (hourly individuals) This is very important Make certain that the costs are on target and adjust as needed. Problems associated with just controlling labor? Bad Service Inconsistent experiences of the guests Poor quality due to being hurried Save yourself out of business LABOR PROJECTION Better way to evaluate business PRIME COST WHAT IS PRIME COST? Prime Cost takes into account the Food Cost as well as the Gross Labor Cost, including all of the salaried and hourly employees wages plus payroll taxes, worker’s compensation and any employee benefits. PRIME COST CALCULATION Cost of Goods + Labor Cost/ Sell Price WHAT IS A “GOOD” PRIME COST? 65% and less is good for a Full Service type restaurant. 60% and less is good for a Quick Service type restaurant. THERE ARE OTHER FACTORS In high rent areas, like malls and airports, where there is heavy volume, it probably needs to be substantially lower. Other high Occupancy Costs areas like high insurance costs or equipment rental need to be evaluated. CALCULATION EXAMPLE: Sales $100,000 F&B Costs $30,000 30% Payroll Salaried $10,000 Hourly $18,000 Taxes/ Benefit $ 5,000 Total Payroll $33,000 33% Prime Cost $63,000 63% WHY IS THIS SO IMPORTANT? Prime Cost allows the Customer to better analyze their entire cost to produce an item Now they can decide what trade offs that they need to do. Everything gets more realistically reviewed and better decision making can happen. An owner now doesn’t pay the chef to get their Food Cost lowered, they create incentives based on Prime Cost. MENU CALCULATION EXAMPLE Menu item costs $3.33 (Cost of Goods) + $2.67 to prepare the item (Labor Cost)/ $10.00 price on the menu. ($3.33+$2.67)/ $10.00 or $6 / $10 . Prime Cost in the above example is 60% HOW CAN WE HELP? We need to train our customers to pay incentives to their staff based on Prime Cost. Value added products can cut labor costs, we need to show alternatives. Higher quality items do not necessarily mean that they cannot afford to menu it. WHAT DOES THIS MEAN? Some lower labor cost operations like a Buffet can actually sell higher costing quality items because their labor cost is low and the Prime cost will still be in line. Casual Theme Restaurants that won’t consider higher quality steaks that take the same amount of time and handling to prepare, because of food cost, might be able to offer these and offset it with other lower costing items that have a higher perceived value. Loaded baked potato, for example. HOW DOES IT HELP THE CUSTOMER? By increasing some quality they will be perceived as better value than competition. Can utilize further processed products and possibly use less staffing. Customer can make better decisions as to what they can offer. Different perspective to running their business more profitably. DARE TO DREAM Do you think that you could make money with Food Cost at 42%, Labor Cost at 23% and Occupancy Cost at 25% while you are doing $12,000,000 sales annually? That is $1.2 million bottom line profit! Cheesecake Factory runs even better numbers than this on average! Customer Realities They are in a very difficult and demanding profession Many were good chefs or good idea people but have little management skills Many do not understand how they make money Managing cash flow and the business is very challenging Good help is very difficult to find and keep Restaurants fail at an alarming rate. How Can We Help? The Business Resource Department has many tools to assist our customers Training Materials- front and back of house Menu Analysis Menu Engineering Marketing Tools Menu Consultation Overall consulting THANK YOU!
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