by Donald Burns, CDMP, CMEC, CHt
If you’re like many working in the restaurant industry, you may have been told and accepted some so-called “undeniable truths” about how certain things ought to be done in this business. Like a lot of common “urban myths”…many of these might be holding your restaurant back for reaching it’s full profit potential.
In this article I take a close look at the 7 so-called profitable restaurant practices that many of us were exposed to and probably came to accept. I am going to question these practices and expose them as what they are: urban myths of profitability and show why they are anything but good or acceptable and why practicing them may, in fact, be costing you money right now.
Myth 1: The Most Important Part of Pricing the Menu is to Determine Each Item’s Food Cost
Being trained in the culinary arts, most chefs have been taught the “formula” or “percentage” method of pricing. The premise is that the primary determinant of price is the cost of the ingredients required to prepare a menu item.
For example, let’s say a restaurant wants to put a new appetizer on the menu: avocado egg rolls. Based on the recipe, cost of ingredients and portion sizes, the raw food cost of making one order of avocado egg rolls is $1.25.
A chef with a food cost target of, say, 30 percent may take the $1.25 cost and, using the formula method, do a little arithmetic and come up with a sales price of around $4.15.
SIDEBAR: The national average for food cost in restaurants today is around 32-35%….a big change over the last 5 years.
While this method may in fact help the chef achieve his food cost objective, you need to ask yourself, what is the chef ignoring? He’s ignoring the fact that his customers may be very willing to pay more, possibly much more than $4.15 for a specialty appetizer like avocado egg rolls.
Perceived value pricing. While calculating the cost of producing a menu item should be one aspect of the pricing process, it isn’t the most important component. The critical consideration is determining the “perceived value” of an item in the eyes of your guests and how much they will likely be willing to pay for it.
A restaurant in a market where specialty appetizers typically sell for $4.95, $5.95 and more could be losing close to a dollar or more every time they sell an appetizer with a higher perceived value than just $4.15.
How to Determine ‘Perceived Value’
- Consider your competition. At least once a year it’s good to see what your local competitors are up to and this includes analyzing the price points in each section of their menus. How does your restaurant stack up in the pricing continuum of similar restaurants in your area? This should provide you with at least some guidelines of what types of prices your market will bear.
- Consider your customers. What are the characteristics of your customer base? Are they a broad mix of income levels and other characteristics or are they predominantly affluent empty nesters, families on tight budgets, folks on fixed incomes or professionals on expense accounts? While it may be hard to generalize, you probably have a sense of the price sensitivity of the people who are attracted to your restaurant.
- Consider what’s selling at your existing price points. This can be a very eye-opening experience. Compare the popularity of your menu items in each section of your menu in light of each item’s price. The objective is to get a sense of how price sensitive your customers are based on what they’re buying (or avoiding).
For example, let’s say a restaurant tracks its sandwich sales for a month. See the graph “Monthly Sandwich Sales” above, showing the sales for each sandwich, which are positioned according to menu price.
Notice that the two bigger sellers are also the highest-priced sandwiches. This would seem to suggest that many of the restaurant’s customers are buying based on what they want, not price. Understanding this when adding a new sandwich to the menu would provide at least one reason to consider pricing it toward the top end of the sandwich pricing range.
Involve your staff. Some operators engage their servers in the pricing process. Think for a minute about the people working in your restaurant who are closest to your customers.
Chances are it isn’t you or your managers; they’re your servers or host. They have hundreds and even thousands of interactions with your guests while their buying decisions are being considered and made.
Not all, but some of your employees develop a keen sense of your customers’ buying habits and sensitivity to prices. But in most restaurants, who are the last people to find out about menu changes or new prices? Right, it’s usually servers.
Some operators make a point of including their service staff in the pricing process. For example, when new menu items are evaluated, the service staff is shown the plate presentation; they sample the product and then indicate on a comment card the price they believe they could sell that item for.
Involving your service staff in the pricing process can be a real double-win because not only are you getting valuable pricing information to help you with your pricing decision but you’re also including your employees in the process. They’ll feel more involved in your restaurant, knowing their opinions and insights matter. It can be a genuine morale booster for your people as well.
Myth 2: Keeping Food Cost Low Means Larger Profit Margins
Having a higher food cost percentage isn’t always a bad thing, nor does it always indicate a food cost problem of some kind. For example, assume we have a small restaurant with just two menu items. In the comparison of Case #1 with Case #2 above, you can see the menu prices, the raw product cost of serving each item and the sales mix or number of unit sales for each item for a one-week period.
With this information, we can calculate the very best food cost this restaurant could have during this period assuming there is no waste, spoilage, perfect portioning and no other food cost problems. This is often referred to as “theoretical” or “ideal” food cost and in this case it’s 29 percent.
Now let’s change just one factor: the sales mix. If this restaurant instead sold 750 hamburgers and 2,000 steak sandwiches, the ideal food cost goes from 29 percent to 36 percent. If this was your restaurant, which would you prefer, a food cost of 29 percent or 36 percent? Compare the two scenarios.
I’ve used this example in seminars before and I always get a few knee-jerk “29 percent” responses. However, by selling more steak sandwiches this restaurant would be making nearly $1,000 more in gross profit despite having a much higher food cost of 36 percent.
This is also the case with many operators. When they see an increase in their food cost percent, it’s automatically assumed that they have a food cost problem. Maybe, maybe not.
That’s why it’s smart to look at the change in gross profit dollars before going any further. It’s very possible that if food cost is higher, along with gross profit, the restaurant had a shift in sales mix and sold a larger number of menu items having a high-percentage food cost but that also generated more gross profit dollars.
Myth 3: Buying Larger Quantities to Get Volume Discounts Saves Money
It’s common for suppliers to quote products at one price for a small amount of a product and a lower price per unit for purchasing a larger amount. After doing the math it may appear to be an easy way to save some money but if it leads to purchasing more food and more products than are needed, this practice can easily lead to higher food cost and less profit.
Carrying an excessive amount of inventory often leads to the following problems:
- Having excess inventory ties up your valuable cash. Every dollar of product on your storage shelf is a dollar you don’t have in the bank or that can’t be used for other purposes.
- Having excess inventory leads to over-portioning.When storage shelves are stocked with more than enough product, employees tend to be less careful in how they use and handle your valuable inventory.
Think about it this way: At home, after opening a new tube of toothpaste, many, if not most people will put a bigger portion of toothpaste on their toothbrush than they did when the last tube was starting to run low. Most of us do this because when we have a lot of anything, be it toothpaste, shampoo, shave cream, etc., we value it less and tend to use it more liberally, because we have an abundant, plentiful supply with no worry of running out any time soon.
Now take that mind-set into your kitchen, with hourly employees who are among the lowest-paid people on your staff. Do you think that if your storage rooms are always filled with product and they rarely, if ever, need to be concerned with running low of anything, do you think they will use more product? Guaranteed. Do you think they will be less careful with the products they handle? Guaranteed, again.
A very successful operator with annual sales in excess of $10 million in one restaurant said, “If you buy salad dressing in 5-gallon containers instead of 1-gallon containers, employees don’t measure as strictly.” He’s convinced that the way to save money with his food is to buy only what he needs and then make the most of it, not buy more than he needs to get a quantity discount.
- Having excess inventory encourages theft.Imagine an employee in your walk-in who notices 12-15 boxes of New York Strips. He knows that’s enough steaks for the next 2 1/2 weeks and that one or two boxes would probably not be missed. But what if there were only four boxes on hand, just enough to get through to the next delivery, the day after tomorrow. Do you think having more than enough steaks on hand might embolden some employees to help themselves to a box or two? You bet. Limiting the amount on hand to what’s actually needed until the next delivery would go a long way to reducing the perceived opportunity for theft.
- Having excess inventory results in more waste and spoilage. A good many products in a restaurant have a limited shelf life. If the products are not used within a certain time frame, the products become unsafe for consumption and must be thrown out. The more products a restaurant keeps on hand, the greater the risk of more products exceeding their safety date.
There aren’t many absolutes in this business but if there is one this is it: Consistently, ordering more products than you really need will cost you money. In fact it’s one of the most expensive things you can do in this business.
A good rule of thumb: Buy just what you need and make the most of it.
Myth 4: An Ongoing Competitive Bidding Program Will Get You the Lowest Prices
Growing up in the restaurant business, I recall several times being told by people “who knew” that to get the best prices and keep suppliers honest it was imperative that you bid out your food, beverage and supply products on a regular, ongoing basis. If you neglected to do this, your suppliers would take advantage of your inattention and ratchet up your prices.
Now there may be some truth to this but I’ve found that some of the most successful independent operators don’t engage in ongoing competitive bidding on the majority of their products. Instead they purchase most of their food and supplies from one, prime supplier or vendor.
Their reasoning is that by consolidating the bulk of their purchases with one supplier they can get lower “overall’ prices for a lot less time and effort. They get lower prices because the supplier is willing to lower the “margin” they charge to get a larger share of their business and have the opportunity make more gross profit dollars on their account.
Also, there are some economies of scale, particularly in terms of delivery costs. Drop costs for a supplier are primarily fixed. So it costs about the same to deliver five cases to a restaurant as it does 50 or 100 cases. That savings along with other supply chain efficiencies and the chance to secure more sales is a strong motivation for suppliers to lower their margins to become a restaurant’s prime vendor.
Prime vendor arrangements are often structured like this: The supplier will agree to provide certain products at their cost plus a fixed markup or margin, which is expressed as a percent of cost or a fixed dollar amount per box or case. The operator generally has the right to audit invoices of the supplier to verify the supplier’s cost. The prime vendor agreement, which spells out the markups and other conditions, often runs for a period of one year.
While prime vendor arrangements are not an end all be all fix, many independent operators cite numerous advantages over ongoing competitive bidding. Lower “overall” prices, less time spent in purchasing activities, few supplier and sales people to deal with, and better service and more attention from their prime vendor are a few pluses that are commonly heard.
Myth 5: Paying Higher Wages Increases Labor Costs
Early in my restaurant consulting career I was involved with a restaurant group that owned a popular steak-and-seafood restaurant. On our busiest nights, typically Wednesday, Thursday, Friday and Saturday, it was customary to schedule three line cooks for much of or the entire shift.
When one of the line cooks gave notice that he was leaving, the remaining two came to us and asked if they could be given a chance to handle the line themselves, just the two of them even on our busy nights. If they could do it, they wanted to be paid a little more because they’d be saving the restaurant that third position.
Management was intrigued and gave them a week to prove it and prove it they did. Shortly thereafter, those two employees became the highest-paid line cooks in the city. They were thrilled to be making that kind of money and remained loyal employees for the restaurant long after I had finished my consulting contract.
The truth is, every restaurant has its superstars. These are the employees who, for whatever reason, are more capable and have a greater capacity to get things done than your average workers. Why not identify your superstars, pay them more but also expect them to do more work.
Paying your superstars more, if done right, can result in having fewer, more productive employees who stay with you longer because they’re making more money at your restaurant than they can anywhere else. It can also reduce your overall labor cost.
Myth 6: Paying Overtime is a Sign of Bad Management or Poor Scheduling
Not necessarily. Overtime may also be a sign that a well-conceived, tight schedule was prepared and the restaurant was busier than expected. The absence of any overtime can be indicative of padded schedules and having more employees than needed.
Many restaurants have a policy that either prohibits or discourages management from scheduling any hourly employees more than 40 hours per week. The goal, of course, is to keep from paying the 50 percent premium on overtime wages.
While this may appear to be a good business move, it can be shortsighted after considering what can happen when a few hours of overtime are regularly scheduled for certain, key employees.
The key employees are usually kitchen workers who don’t have the opportunity to earn tips and have been known to switch employers to make 25 cents more per hour.
Scheduling a few hours of overtime for certain back-of-the-house employees may keep you from hiring additional people and give them a reason to stay at your restaurant. In a time when good workers are hard to find and expensive to replace, anything you can do to reduce turnover and improve employee retention is worth considering.
Myth 7: The Trash Can is Our Friend
Kitchen trash cans have been referred to as “black holes of profitability” and for good reason. Any restaurant, including yours, is at risk for losing good, usable food products to the kitchen trash cans. If there’s a training gap or people are careless when slicing, dicing or prepping anything in your kitchen, good, usable (and expensive) products can end up in the dumpster.
Say someone is preparing a piece of fish or meat and inadvertently makes a slice in the wrong place. Might they be tempted to hide their mistake in the trash? You bet! It could be happening all the time unless you’re doing something to control it.
I have removed all the trash cans in their kitchens and replaced them with clear buckets. At the end of each shift, a manager briefly inspects the contents of each employee’s bucket. If good, usable product is discovered, it’s immediately brought to the employee’s attention and, if necessary, they receive some on-the-spot training.
As I always say, “Inspect what you expect.”
Ditching your kitchen garbage cans for plastic food boxes, even for a just week or two, will give you the perfect opportunity to find out exactly what’s leaving your kitchen and ending up in the dumpster.
Always Be Learning
Just because we’ve always done something a certain way doesn’t make it right or best. One thing I’ve learned about the restaurant business is whenever you think you’ve got it figured out someone will show you something new or different that tests your conventional thinking. Maybe that’s why some of us should be in this business. It keeps us humble and open to new ideas.