Restaurant Growth Magazine Cover on Controlling Costs

Few basic concepts of restaurant operations are more universally accepted as crucial to success as good control of food costs. At the same time, few concepts are as commonly, at least partially, misunderstood.

The fundamental idea of “buy low – sell high” is an easy one to wrap your head around. But the details of how you arrive at the information that you will use to make important decisions is very important. If the methods are faulty, or your interpretation of the figures misinformed, you can end up doing your operation more harm than good. The subject of controlling food costs touches many parts of your business. Your menu, how well you execute your basic concept, all aspects of purchasing, how your kitchen is managed, menu pricing and more, all play a role in how well you and your staff will control this important, and fairly complicated, expense. If you and your key staff are on the same page about how to determine your “food cost,” how to interpret that figure, and what needs to be done to accomplish your goal, the whole process of working together on this issue can be a positive, team-building experience. If there isn’t a genuine, well thought-out consensus about how to handle this matter, it can easily become more of a source of contention than a useful and necessary tool to improve profit and overall operations. Let’s take a close look at this key subject.

To begin with, let’s define what we mean when we say, “food cost.” Simply put, food cost is the cost of goods sold – in this case food – expressed as a percentage of what it’s sold for.

On a small scale, we can determine what this percent is for each individual item on our menu. First, using current prices from our vendors, kitchen yields and our established portions, we figure out just what the food on a particular plate should cost us. Let’s say we’ve decided that the food on a certain plate costs us $5.00, and we sell it for $20.00. Divide the cost of the food by the selling price, 5/20. The answer is .25, or 25%. This means that we have a “food cost” of 25% for that plate. While this is a worthwhile exercise and gives us useful information that can help us make good decisions about menu writing and pricing, it’s not the final, most valuable answer about our food costs. Vendor’s prices change, our portions aren’t always perfect, kitchen habits result in various waste, and theft is sometimes an issue. These factors aren’t typically taken into consideration in the costing of a particular plate of food. This kind of analysis tells us what our “food cost” would be in a perfect world, which probably doesn’t describe many operations.

A more valuable figure is one that reflects our actual, overall food costs.

To arrive at this figure for a particular month:

  • take an “opening” inventory of all the food, and its value, that you have in house. Do this at the end of the last day of the month preceding the first month you plan to track.
  • At the end of the first month you’re tracking, add the value of the opening inventory to the cost of any food purchased during that month. (Exclude any non-food items on your invoices, like cleaning supplies.)
  • Do a “closing” inventory at the end of the last day of the next month and subtract its value from the sum of the opening inventory and purchases.
  • This will tell you your cost for the products that were actually used that month, not what was purchased. There’s a difference.
  • Divide the cost of the food that was used by your total food sales for that month. That percentage is your overall food cost for that month.
  • Continue to take an inventory on the last day of every month and perform the same calculations.

This method has several important advantages. Because it takes into consideration prep waste, spoilage, kitchen yields, actual portions served, food used (not just purchased), theft and current prices, it lets you see your actual “cost of goods sold.” This will open a window on what you should be doing to improve many aspects of your operation. Another big benefit is that just the act of your staff doing an accurate inventory every month will encourage them to keep a more organized and clean kitchen, and really get to know and keep track of everything they have on hand. This in and of itself is an important step in improving control of your food costs.

If you have any doubts about whether it’s worth doing inventories to see what food is used in a month, and not what food is purchased, consider this one example. Let’s say your chef decides to take advantage of a great deal on frozen shrimp and buys three months’ worth. If you didn’t do an inventory and just went by what you paid in invoices that month, it would look like your food cost percent went through the roof that month, instead of reflecting an actual savings. Not only would you have an incorrect idea of your real costs, but you wouldn’t be helping your chef’s morale, either. It would be a similar situation if you happened to get a big delivery on the last day of a month.

Now that we’ve seen how to determine your food costs, before we discuss how to control them, I’d like to bring up two very important points that restaurateurs sometimes miss.

The first point is contained in this general definition of cost control: the elimination of any expenses that won’t diminish the quality of goods or services as perceived by the customer. If, in an effort to reduce your food costs to a predetermined, arbitrary point, you lose customers either because your quality or portions become unacceptable, you lose. Keeping a higher percentage (of profit) of a lower number (of sales) may be OK, but probably not. You have to be careful to control your costs in ways that won’t cost you customers.

Another concept to watch out for can be summed up in the old adage, “You can’t spend percents, you can only spend dollars.” Here’s an example of what that means. Let’s say one of your chicken entrées costs you $4.00 and you sell it for $16.00. That would mean its food cost was 25% (4/16 = .25). Let’s say your rack of lamb entrée costs you $12.00 and you sell it for $32.00. The lamb dish would then have a food cost of 37.5% (12/32 = .375). If you only looked at the food cost percent, you’d think you would be better off selling the chicken. After all, 25% food cost is better than 37.5%, right? But consider how much money you make with each dish. With the chicken, you’re taking in $12 (16 – 4 = 12), but with the lamb, you’re taking in $20 (32 – 12 = 20). The lesson here is, while food cost percents are very important, don’t forget to always see the bigger picture. Higher menu-cost items will frequently have a lower markup (higher food cost percent) than lower cost items, but still might be more profitable. It’s very common to see this same situation on wine lists.

Intelligent Menu Writing

Intelligent menu writing is the first step in controlling your food costs. Obviously, your menu has to offer a wide enough variety of choices, of the appropriate style, at the right price for your restaurant. The menu items should highlight the strengths of your kitchen staff and avoid their weaknesses, while always being practical in terms of your equipment and layout. Not as obvious, but very important to food costs: the ingredients required to produce the menu items should work together to insure maximum usage and no waste. If one dish contains finely julienned red peppers, consider having a red pepper coulis made from the ribs, tops and bottoms of the peppers somewhere else on the menu. Scraps from onion rings can go into the stockpot, along with a lot of other things that will do your food more good than if they go into the garbage. (There are exceptions, such members of the cabbage family or anything whose freshness is questionable – don’t go overboard.) If you cure your own salmon, make a mousse or spread out of the scraps. If you have enough scraps to put a salmon mousse appetizer on your menu, great. If you don’t produce enough for that, you can always give away salmon mousse bruschetta when your guests first sit down, starting their meal off on the right foot at no real cost, or maybe put the bruschetta on another plate as a garnish. Trimmings from cuts of beef can go into a Bolognese sauce. Even if it takes a week to accumulate enough scraps to run a special for one day, do it. At the very least, if you can’t figure out how to get a by-product from one menu item somewhere else on the menu in another form, serve it for family meal and save some money and create goodwill at the same time. For this concept to work, your kitchen has to be organized enough to make sure that scraps from one station are saved and gotten into the hands of another station that will change them from useless waste into mise en place. Cooperation and organization, of course, are always good habits to develop and encourage in any kitchen. This is one good place to start.

Effective Purchasing

After writing a good menu, the next step on the way to controlling your food cost is effective purchasing. The goal of purchasing is to get the right amount of everything you need, when you need it, with the correct specifications, at the best price available with an acceptable level of service. All purchases should be menu driven. The purchasing agent should work closely with the chef and manager, assuming they’re not all the same person, to determine what, when and how much of everything to order. This should be informed by your menu, inventory, schedule and anticipated guest count. A frequently updated list of all necessary food items, including pertinent specifications, preferred vendors, vendor info and price history should be readily accessible. Spreadsheets are handy for this. Pertinent information should include brand names, grades, specific cuts of meat (use the NAMP Meat Buyers Guide), type and size of container, the unit (pounds, each, gallon) every price is quoted for and any other information that’s important to your situation. This list will also come in handy when you’re figuring out food costs for individual dishes or getting new quotes from different vendors. Par stocks should be determined and a physical inventory, even if it’s a quick one, should be done before any order is placed. Ordering something you don’t need is as sloppy and expensive as not ordering what you do need. It’s usually a good idea to have more than one vendor for each type of product (meat, dairy, dry goods, seafood…) to keep them interested and competitive. However, especially if you’re a small operation, it might be better to give most of your business to fewer purveyors so that you can be a more significant account to them. This is, of course, only for as long as they treat you as if you’re significant. Watch prices like a hawk and always be aware of how timely and accurate deliveries are. Don’t forget that your vendors are running a business too, and that placing organized, accurate orders and paying your bills on time go a long way in getting the best service out of any vendor. And good service can often be as important as quality or price.

Receiving

After purchasing comes receiving. The simple goal of receiving is to be sure that you’re getting the items you’ve ordered, in the correct amounts, for the price you were quoted. Always weigh in at least some, if not all, of any meat, seafood or produce order. This practice will catch the inevitable honest mistake, and also encourages your vendors to be scrupulous – at least with you. Train whoever checks in the orders to carefully count and verify the dry goods, inspect the produce and smell all seafood for freshness. Implement a system to

see that vendors are delivering what you have ordered. It’s no good if the invoice the driver shows you indicates 50 pounds of potatoes, he delivers 50 pounds of potatoes, but you ordered 500 pounds of potatoes. Remember, the best time to catch any problem with what’s delivered is at the time of the delivery. Easy returns and refunds for unacceptable product and quick delivery of shorted items are two of the most important criteria for a vendor. Also keep your ears open for any specials they may be offering.

After the food has been received, it must be stored so that you experience minimum loss through spoilage and theft. The importance of proper storage should not be overlooked. Wasting money at this point in your operation will adversely effect your food costs as much as overly generous portioning, sloppy prep or overpaying for product. Dry storage areas should be well ventilated and pest-free with sufficient space and light to make it easy to rotate and inventory stock. Refrigerators and freezers should be checked frequently for correct temperatures and cleanliness. All storage areas should be organized, rotated and straightened on a regular basis to make it as easy as possible for the people doing the ordering and inventory to see at a glance what’s there. Storage areas should also be sufficiently monitored, especially if they’re conveniently located near back doors. Alcohol should be locked-up.

Portion Control

Portion control is obviously an important factor both in terms of your costs and your guests’ satisfaction. The two places where portion control takes place are during prep and at service. When fish and meats are butchered, special attention needs to be paid both to waste and portion size. Any usable trim should be properly stored to be used in a timely fashion, and portions should be very accurate. Your kitchen should have both ounce and pound scales for different jobs, and management should check them periodically for accuracy, and that they are being used. The butchering process is where the Edible Portion cost, as opposed to the As Purchased cost is figured out. When breaking down a whole snapper, for instance, weigh the whole fish and figure out what you paid for it (the AP cost), then, after cleaning it, weigh the two fillets. Your actual cost of the two fillets is what you paid for the whole fish. Per pound, this is the EP cost. This is the cost you should be using when figuring out menu pricing and food cost per serving. If you don’t have the space or trained staff to butcher on site, consider buying pre-portioned items. The money you save in production and waste will help defray the higher costs of the product. Also give some thought to which cuts you should have in your kitchen to serve your needs for the best price. For a chicken entrée, buying 6oz. breasts might be worth the money, but for chicken salad, random breasts will work just as well for less.

Some items lend themselves to pre-portioning during prep, others don’t. For sauces and soups, make sure the appropriate size ladle is handy, and that the people plating know to use one ladle-full only. Vegetables and rice might work better with a scoop or kitchen spoon. A spoon might result in a better-looking presentation, but make sure that the cooks are given direction about how full a spoon to use. Spot checking by a sous-chef or manager is never a bad idea. A little mistake here and there may be no big deal, but consistent, repetitive mistakes add up fast.

Well-written Recipes

Although recipes obviously help with consistency, they are also a great tool to help with cost control. Well-written recipes with accurate yields will not only help you figure out your costs for a particular dish, but they will also be a big help to the chef in terms of his ordering and prep. Update recipes as needed. And realize that even the most accurate, up-to-date recipes won’t help if they are not used.

The process of food cost control ends where it began, with the menu. But at this point, instead of considering the menu items, we’re concerned with menu pricing. Since we arrive at our “food cost” by dividing our cost for the food by what it’s sold for, the menu prices are literally half of the equation. In other words, the best, most efficient cost control habits used from menu writing to service will still result in a dismal food cost percent if the menu prices are too low. If they’re too high, you’ve also got problems. With no customers, you’ve got no business but, on the other hand, if you’re losing money on every plate of food sold, you can’t make it up in volume. Balance counts. Cost control is a big, crucial part in running a successful operation, but there are others, and menu pricing is one of them.

Menu pricing is a major topic in and of itself, with many books, theories and methods to explore. One point to consider is that some people try to make the second half of the food cost equation (pricing) as arithmetic and linear as the first (cost control.) Because the public is involved with one and not the other, I’m not sure that approach always works.

But there is no doubt that having a system in place that effectively keeps food costs in line, coupled with intelligent menu pricing, will do wonders for a restaurant’s success.