Food Cost: You Don’t Take Percentages to the Bank
Restaurants have razor thin margins. I hate that saying. It’s a saying similar to one of those “tips” and “tricks” that catch fire after an influencer on social media rattles it off and goes viral. It is not a universal truth in food service. Restaurants could be money making machines. The following approach applies to catering as well.
Restaurant margins could range from 0 to 15% on average. Reference any blog from a Restaurant Point-of-Sales service company for validity of the data. What, I ask, makes the restaurant any different from a top performing Fortune 500 company? Statista.com logs Tesla’s margins over the last 5 years to range from -35% to 21% and Finbox.com pegs Paypal’s margins at 15.5%. These are some of the best performing companies on the S&P and Nasdaq.
If the average money a restaurant can take to profit maxes out at 15% then, if properly run, a restaurant can perform just as well as some of the best performing companies in other market sectors. I am certainly excluding a “Software as a Service” company that aims for 80% margins, which is bound for a judgment day some time soon. The largest restaurant focused companies like Darden Brands tend to take around 20% margins quarterly and Bloomin’ Brands will hover over 40%. The restaurant or catering business could be extremely lucrative but it must be run properly.
So what can be said of food cost? As a manager, owner or chef, one metric that the office folk typically like to call KPI (key performance indicator) is your food cost percent. This is typically the glaring mark on your ability as a food service manager to perform to the standards set before you. 30% or lower is the typical deal. The food on the plate cost 30% of the selling price of the dish. If by the end of the month your physical inventory of food in-house plus the purchases made over the month, divided by total food sales comes out to anything over 30% you are considered a failure.
Unless you work for a highly standardized and controlled environment then there is reasonable consideration to be made for variance in food cost especially if the following are true:
- Your menu changes frequently
- Your product is of high quality in volatile pricing markets, consists of highly perishable product
- You are working for (or are) a small business owner.
Many factors in these above situations can account for variance in theoretical or desired food cost KPIs. It is vitally important for you to know what is accounting for the variance whether it be over portioning, waist or theft. But what you need to consider more than anything is a complete change in perspective when looking at numbers.
“You can make numbers look like anything” an insightful production manager once said to me in casual conversation. “I would rather sell 10 filets than 10 salads any day.” I didn’t really understand what that meant. As he was stabbing a screwdriver into a used Flatten-O-Matic chicken breast machine he just bought, he explained, “If I sell a filet, I will make $10 off of the dish. If I sell a salad I will make $2. Yea… the filet is 45% food cost, but you don’t take percentages to the bank”.
You don’t take percentages to the bank.
I am writing this piece for the chef, the small catering company, business owner or venue operator. You, as a leader (or future potential leader) in your small company have more give when it comes to how you interpret numbers. I only realized this myself at around 12:30 am on a Sunday morning when I was sitting at my shared desk in the basement of the restaurant where I had run the back-of-house operations. I had just finished transcribing my hand written food inventory into a spreadsheet on the computer. To give you perspective, food inventory was around $30,000. My food cost was a few percentage points higher than the “theoretical” or the “budgeted” food cost I was expected to meet. In fact, it had been for the past few months and if I didn’t make this number fit the budget then I was sure to get a reprimand from the higher ups.
Consider this scenario: A chef rubs the sides of their head with their soar, Saturday night rush fingers as they stress over the future of their career. They realize their job is at stake over a couple of “points” over on food cost percent. What do you think that chef would do? Is it unthinkable to believe that maybe they would also count the cost of the frier oil being used in the machines? Or to all of a sudden find a few extra pounds of aged ribeye and miraculously meet food cost percent? There are countless others who have been in this position and it is not comfortable.
I was in this position myself. I was weighing my integrity, deciding whether to bump the count on a couple of cases of this or that in order to meet the food cost KPI’s. Just as I gave up on my integrity, my boss, and also my mentor validated the perspective of the production manager I spoke to previously.
“What’s the matter with you?” he said as it was obvious I was expelling stress from every gland.
“Food cost is three points over.”
He huffed a disconcerted breath out of his nostril and rolled a chair up next to me.
“Billy,” he began, “you don’t take percentages to the bank. You take money to the bank.”
My eyes widened as it felt like deja vu hearing the saying again.
He continued, “Have the floor manager print you out a product mix for the month and see how many steaks you sold versus everything else. Good luck kid.” He finished as he rose, patting my shoulder before leaving for the rest of the night… or morning, whatever it was.
It was true that the higher food cost menu items did dominate the sales for the month and were a major component to the discrepancy in budgeted food cost. But, as the production manager friend of mine said in the past, “You can make numbers look like anything.” This was true, considering I could have just added a case or two if this and that to the inventory to make my percentage numbers look good. As a small business owner, manager or caterer it is important to consider the real, actual, cold hard cash you are taking into the bank from the sale. Your actual margin, not your margin percent. Because you are a smaller operator with more control over pricing and KPI’s then you are positioned to deliver more value to your guests than a larger hospitality conglomerate would be.
Cost your menus and your catering gigs based on the cash you want to take to the bank versus the industry standard KPIs. The individual operator can decide how they wish to view pricing based on a true cash-in-hand figure rather than robotic KPI’s. That, among other things, is the reason people choose to work for smaller businesses or start small companies. You have the flexibility to be creative, tend to your guests’ needs and succeed without being beholden to performance standards dictated by those elsewhere. Think of the money you are taking to the bank rather than percentages and you will find fruitful strategies to expand on.