Bringing this article back around. It’s a good read.

Here is a an article I wrote dealing with gross profit pricing for new restaurants. You should give it a read.
http://blog.bodellconsulting.com/2009/06/04/how-can-i-use-gross-profit-pricing-for-a-new-restaurant/

I would suggest finding your specialty. Don’t try to be all things to all people, as you will often get approached for projects you are not qualified for. It’s important to realize your limitations and not try to be an expert on something you’re less experienced with.

I see all of your points, and they are valid. Unfortunately, I am in a corporate chain so have little control over how the bonus is determined, how often we increase menu prices (although we regularly increase) etc.

But, this is great information should I get the opportunity to coach operators in the future.

Do you ever offer advice on how one might break into the field of consulting?

As you point out, bonusing on increases leaves the managers nowwhere to cut that doesn’t affect quality. There are many factors affecting sales, etc that are out of the control of the managers. A good example would be the present day economy. If managers are getting bonused based on profit comparisons instead of flat profit, and sales are flat or lower due to something out of their control, their only avenue for creating more profit is through cutting needed expenses, and as you point out, this can hurt long term profitability.

When the focus of the bonusing is completely on profit, without being affected by comparisons to other periods, and staff is properly educated as to how profit is made, their only incentive is to make more money for the restaurant not just in the short term, but in the long term. Afterall, they are getting the next quarter’s bonus based on profit too, just it doesn’t do any good to rob Peter to pay Paul.

When viewing food costs, it’s important to look at everything from menu item costs to ingredient costs. A properly set up inventory and recipe spreadsheet system allows owners and chefs to see how the cost of individual ingredients flows through the entire system. I link together spreadsheets so individual inventory item price increases are carried through every other spreadsheet. Owners and chefs can see how price increases affect their gross profit on individual items, overall profit, cost percentages, etc. It doesn’t do much good to concentrate on only one aspect of cost control.

Another major consideration in menu profitability is the frequency of menu price increases. Many, if not most, operations wait 1 year or longer to raise prices. They then use larger increases that are more noticed by their customers instead of doing smaller, more frequent price increases. A quick example of the financial advantage of frequent price increases is on the front page of my blog http://blog.bodellconsulting.com/2008/10/30/quick-tips-update-your-menu-often/.

The disadvantages I see to bonusing based simply on cost accuracy between theoretic and real food costs is that it ignores the rest of the financial picture. It removes the incentive to control the other 70% of the financial picture. Some restaurant that use this model also use sales bonuses for FOH staff, and effectively create a rift between their back of house and front of house, because they have set separate goals. In the food business, it is tough enough to get BOH and FOH staff working together without creating a bonus system that makes them work against each other.

I, personally, like the bonus structure I’m in. Bonus on food cost gap, or the difference between actual and theoretical, and certain sections of guest surveys. We do have a merit increase for profit, but here is why I think that’s dangerous:

In the beginning, we bonused on sales increase and flow through over the previous year. In a slowing market, sales increase is a lofty goal, but trimming T.C.I. isn’t. For managers that aren’t as invested, this simply means trim labor to substandard levels, don’t purchase the items needed for crew to effectively do their job, don’t pay for extra cleaning, and duct tape maintenance issues, all of which hurt long term profitability. I feel bonusing on profit alone is dangerous as it encourages management to cut costs where they may be needed.

One of the reasons I’m loving this blog and commenting, however, is education. I would like to venture into the world of consulting focusing primarily on controlling food cost, so I would welcome any rebuttals that may help me view things differently.

FYI, I am having my current management team, who know how to do what I tell them but understand very little of the food cost intricacies, browse through this blog as there are several times, in reading your posts, I have found myself saying, “Yes, yes! That’s exactly what I’ve been trying to say!”

Thank you, keep up the good work!

Ps. Basing bonus on hitting a budgeted food cost is just silly and leads to frustration as the person eligible rarely receives the bonus because there is no way to track where they should be.

Also, in your spreadsheets and analysis, do you look at things on a menu item basis, or ingredient basis? I dramatically improved food cost gap in my unit by analyzing each individual items food cost gap and going after the highest dollar losses…from about a 4% gap to a 1.5% currently…a savings of about $500 a week.

This focus on costs is hurting many concepts in the long run. Successful contract food and beverage management companies like Compass Group set up bonus programs for their general managers based only on profit, then they give their managers the education to understand what it takes to profit.

I have my own bonus structure I modeled after their philosophy, that I share with restaurant owners. It is based strictly on the bottom line. In any business, every attempt at controlling cost or driving revenue is an effort to earn a larger profit. That needs to be the end goal of any manager, not cost percentages or sales figures that by themselves don’t mean much.

Some independent restaurant owners I know have created bonus models for their chefs based on hitting theoretic food costs instead of budgeted food costs. While I still advise bonusing based on profit exclusively, and using theoretic and actual food cost comparisons as a tool to manage profit, bonus structures based on theoretic to actual cost accuracy are a great improvement over bonusing based on budgeted costs.