Tag Archives: pricing by gross profit

Restaurant Review – Waxy O’Sheas in Shawnee, KS

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I’ve decided to start a new category of posts for the O’Dell Restaurant Consulting blog that I think will be very beneficial to restaurant owners everywhere. I am going to review restaurants that I have been to. These are not reviews from strictly a patron’s standpoint, but from the standpoint of an experienced food service professional and consultant. I will attempt to identify strengths and weaknesses in the operations of a restaurant and make suggestions on how the particular restaurant could maximize these strengths or overcome the weaknesses. Please read the following disclaimer:

Disclaimer: This review should not be read as an endorsement or warning for or against patronizing the described restaurant. It is intended strictly as a study of the restaurant’s operation, perceived weaknesses and strengths, and suggestions on how to improve the operation. As this review is not sanctioned or paid for by the owner, it is not meant to be a comprehensive review such as one O’Dell Restaurant Consulting provides to it’s clients. It is strictly superficial. There has been no discussion with the restaurant owner about these observations and no back of house or office visit has taken place to gain perspective as to the cause of the problems. My assumptions are based on my experience and may not necessarily reflect the actual cause or source of an issue.

Now that the disclaimer is out of the way, let’s get to my review. I will break this review down into three sections that describe different key parts of the operation; reception, service and food. Future reviews may contain other parts of the operation I have also been exposed to, such as marketing.

Waxy O’Shea’s Irish Pub – Mother’s Day 2010

Reception

Mother’s Day or Easter are traditionally the busiest days of the year in a restaurant. Many restaurant, like Waxy O’Shea’s, offer a brunch buffet. The intent of offering a buffet is to serve as many patrons as possible in as short a time as possible. On a day like Mother’s Day, it is especially important for a restaurant to process customers quickly. There are many customers to be served and the more customers served, the more sales dollars to be made.

Quick service for a buffet starts with the reservation (or no reservation) of tables and seating of customers. In order to process the most customers possible, a restaurant must have a good system in place to get customers from the door to the floor. Our first observation about Waxy O’Shea’s came when calling to make a reservation. Waxy O’Shea’s does not take reservations on regular business days and did not take them for Mother’s Day. Not taking reservations normally serves two purposes for a restaurant:

  1. No reservations means no empty tables being held open while the restaurant is waiting on the reservation to arrive. When there is a steady stream of customers, not having tables sitting empty for reservations means the restaurant can serve the maximum amount of customers their staff can handle during their rush. This normally means maximized sales.
  2. No reservations also eliminates the work of processing phone calls, tracking reservations and setting up a dining room to accommodate those reservations.

Not taking reservations sounds like a good idea, doesn’t it? In theory, it is, and it works for many operations. However, on the busiest days of the year, not taking reservations eliminates some advantages that can be gained through better planning.

  1. Taking reservations means being able to adjust hostess, bar and service staff to make sure your customers are best served.
  2. Taking reservations means being able to adjust food production to reduce waste, or more importantly, to make sure there is enough food to serve everyone.
  3. Taking reservations allows you to plan ahead for large tables and reservations that require you to separate or put together tables in your dining room.
  4. Taking reservations means having some control over the flow of customers in and out of your restaurant, allowing you more direct effect on their dining experience.

Whether or not taking reservations is a good idea for your restaurant depends on your ability to handle lines of people, clean and reset tables and give proper service.

Here is my observation on how Waxy O’Shea’s did in receiving and seating their customers.

First, I believe Waxy O’Shea’s would have benefited greatly by having a reception area for customers. The restaurant has a small wind break foyer, then a small receiving area inside the front door. The left side of the restaurant is the bar and the right side is restaurant seating. The small receiving area inside from the foyer has a floor standing specials board with a couple plants behind it. There is also a floor standing specials board in the foyer. In my opinion, the second one inside the door is redundant and the space would be much better used as a reception with benches for patrons who are waiting. Instead of a hostess stand, there is a shelf in the hall to the dining room where the menus are set, with a stool beside it where the floor plan with sections on it is kept. The look is very unprofessional and I believe this area would be best utilized for additional seating for reception. In all, I believe there is room to create seating for 12 or more patrons at the front of the restaurant. I’m sure the owners of the restaurant would question where to set up the menus and floor plan. I believe there is also plenty of room for a free standing podium with shelves inside, though I would rather see a built in hostess stand with a telephone line ran directly to it.

Another observation about the seating process of Waxy O’Shea’s was their lack of hostess staff. One person, who may have been an owner, had a note pad to take names for a seating list. While she did a good job with keeping everyone straight who was waiting for her to add them to the list, she was also trying to help clear and set tables for seating which took her from the front. While we were already on the list and waiting for a table, four groups of customers came in and waited to be put on the list. They were all added to the list in the right order of their arrival, but what the hostess/owner did not see was the 3 groups that came in the door, were not greeted and left to go eat somewhere else. The lack of a good setup and system cost the restaurant at least $200 in sales just in the 20 minutes I was waiting for a table.

On the positive side, we were able to come in the front door of the restaurant, put our name on a list, and get seated in 20-25 minutes. That was pretty good for Mother’s Day. However, I was very disappointed to see that after waiting for 20 minutes, and counting around 20 people waiting behind us, there were 13 tables in the dining room that were no longer full. Lack of a good system and slow processing caused all those people to wait while the restaurant could have been serving them and earning dollars, in addition to serving the others that decided not to wait. To someone walking in the door, the restaurant was full and the wait looked to be an hour. In reality, half the tables in the dining room were empty and the hostess was on the floor instead of greeting them and explaining the situation.

In addition to changing the reception setup, I believe Waxy O’Shea’s would have greatly benefitted from being adequately staffed for reception. In a restaurant that seats likely 200 people, a day like Mother’s Day where the tables could have been turned 4 or more times would require at least 3 hostesses. There could have been a constant flow of patrons being lead to tables while another hostess helps put together or separate tables to set them to the right size, while the hostess/owner/manager was supervising the process and managing the waiting list.

Service

Upon being seated, our table was greeted by one of the waitstaff very quickly. I believe it is important that guests be at least greeted within the first 30 seconds of being seated. Mission accomplished. That server was taking care of another section, but the greeting acknowledged us and let us know someone would be with us shortly. Our server took 2 or 3 minutes to make it to our table, but on a very busy day that is acceptable, though not preferable. The server took our drink orders which included water and a couple bloody marys. She put our drink order into the POS to send to the bar, then went after the waters. The waters took longer than needed to get to the table, but not unacceptably long. However, the bloody marys didn’t come back on the first trip with the waters. It took more than 5 minutes to receive the bloody marys.

During the meal, the server returned to the table twice to clear plates and ask about needs and another time to refill beverages. A manager also cleared plates one time. This many trips to our table did provide the necessary visits to provide good service, however the server neglected to refill the coffee for one of the guests. Though this level of service wasn’t “bad”, it wasn’t impressive. My wife perceived this as the server not considering to refill her coffee. While the server did ask if we needed anything on a prior visit, a better trained server would ask specifically if the coffee needed refilled, or better yet would have just made rounds with a coffee pot and topped off every coffee cup in the section or even the whole dining room. EVEN better yet, the restaurant could have staffed bus persons to refill coffee, tea and water, in addition to clearing and resetting tables to allow for faster seating. There seemed to be enough servers staffed in the dining room, but no bus persons at all.

Here are some changes I would suggest to Waxy O’Shea’s to improve their service for future Mother’s Days and other busy days. I suggest having two bus persons in addition to the two additional hostesses. Between the bus staff clearing and resetting tables and the hostess staff seating customers quicker, Waxy O’Shea’s could have processed dozens more customers. Using bus staff to also refill teas, coffees and waters would not only increase the level of service and improve customer’s perceptions of service, but it would also allow servers more time to suggest, sell and replenish cocktails. Cocktail service could have been started at the reception area. If the bar is properly staffed and set up for speedy service, the cocktail sales on the day could have likely doubled. Another suggestion would be to set up smaller service stations through the dining room where water and tea pitchers could be kept for quick access. They could also keep a coffee burner on those stations for quick access to coffee. With just a tray jack, tray stand and a table cloth, you can create a very effective service station. One more step I would take would be to prefill glasses with water and ice and have them at the ready to set down as soon as the hostess knows how many patrons will be at a table. When the table is being cleared, a hostess can convey to the bus person that the table needs to be set up for “x” number of guests. When the guests arrive, their waters are waiting and the server can concentrate on selling them add-on beverages like tea, coffee and cocktails.

In all, I think the service at Waxy O’Shea’s was acceptable for a busy day, but “acceptable” should never be good enough. If you want to earn a great reputation, you need exceptional, not acceptable service.

Food

As far as quality goes, everyone at our table was pleased with the food offered at Waxy O’Shea’s Mother’s Day brunch buffet. Most their food, if not all, is made from scratch and well seasoned. The biscuits were light and fluffy and the prime rib was tender.

What I would have improved upon from a food perspective at Waxy O’Shea’s was the presentation of the buffet. The buffet was simply chafers lined up on a table. The salads were in several different types of bowls crammed together on a 4-top. The omelet station was an absolute mess by 11:00 am. I can only imagine what it looked like by the time brunch was over. The prime rib carving station was just as messy. The rib was being carved on a cutting board set inside a sheet pan, with tin foil covering the exposed rib to keep it from getting cold. Visually, the buffet was a disaster.

The first thing I would have done to improve the perception of the food would be to garnish the pans and bowls of food. Creative use of herbs, lettuces, colorful vegetables and fruits can do a lot to enhance the appearance of a pan of food with very little cost.

The next thing to do would be to have their carving and omelet stations moved to a different location. It’s hard to describe a restaurant layout on a blog, but the important thing to convey about the buffet layout is that the carving station and omelet stations were positioned beside the reception area on the opposite side of the area from the dining room. This drove much of the traffic to the stations through the guests waiting at the front of the restaurant. While I didn’t see any major occurrences from our table or while we were at the reception waiting for a table, there was a lot of cross traffic that could have resulted in a spilled and/or broken plate, stains on customers or even a slip and fall accident. Any of these things can pull needed staff and attention from the dining room and affect service and the customer’s experiences. The main part of the buffet was set along a wall inside the bar. A better place for the carving and omelet stations would have been anywhere inside the same room. Tables and seats could have been moved and recovered in the area where the stations were. The flow of the buffet would have been much improved and a lot of risk of potential accidents could have been avoided.

Along with moving the buffet, the overall aesthetic appearance of the buffet could have used a “woman’s touch”, or at least the touch of a create man. Chafers can be elevated slightly to give the appearance of levels. A nice centerpiece can be placed on the table with some flowers in in. Other decorations such as colored beads, fresh flowers, lemon leaf, leather leaf, ribbons or different colored linens can be used to fill space between chafers and liven up the appearance. The salad presentation could be spruced up with some attractive bowls and creative garnishing, different levels and the same decorations. I would also suggest to delegate the constant cleaning of the buffet to one kitchen staff member. This person should have a wet rag at all times to wipe off the excess food being spilled onto the table cloth. Messy spills can then be covered with clean napkins of the same color.

The appearance of a buffet can have a dramatic affect on the perception of the food by the customers. Great food on a nasty buffet suddenly becomes mediocre food. Mediocre food on a beautiful buffet becomes great food. Imagine what kind of impression great food on a beautiful buffet can make.

Summary

The lesson to be learned by this review is not to leave money on the table. With better staffing, a more guest friendly reception, quicker seating, faster bar service and wait staff more focused on selling “extras”, Waxy O’Shea’s could likely have increased their Mother’s Day sales by $2000.

If they take the extra step and improve the look of their buffet, they could move their price from the bargain $14.99 we were charged, up to $25 per person which is still less than other “nice” buffets they are competing against for customers. If they can pump through 400 customers on Mother’s Day with efficient systems, that extra $10 per customer could gross them an additional $4000 in revenue.

Done my way, their brunch could have easily yielded $6,000 more in sales while pleasing more people and earning more repeat business than how it was done. Take what I have observed at Waxy O’Shea’s and apply it to your big brunch days. Don’t forget that days of “guaranteed” traffic like Mother’s Day are a prime opportunity to build your customer database with names you could turn into regulars.

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
(888) 571-9068

How can I use gross profit pricing for a new restaurant?

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When opening a new restaurant, you are going to have to make assumptions about all your expenses and your head counts regardless of whether or not you price by gross profit. Since you will already have those assumptions, it only makes sense that you set prices so that you will collect enough markup (gross profit) from each of those assumed customers to cover all the expenses you are assuming.

 

Since you won’t have “real numbers” to work with in your startup, it will be important that you create your budgets conservatively. Set realistic expectations for traffic and for expenses, based on your/your advisor’s experience and averages in your area. You’ll need to be doing all this regardless of whether or not you price by gross profit. Pricing by gross profit simply guarantees that if you bring in the customers you assumed, and you keep your expenses down to where you assumed, that you will at least make the profit you budgeted for.

 

Without pricing by gross profit, you are simply guessing at whether or not there will be enough markup to cover your expenses. Pricing by a budgeted cost percentage doesn’t take into account the other expenses of the restaurant.

 

In short, budget conservatively and use your assumptions on customer counts and expenses, along with accurate recipe costs to price by gross profit in a startup.

 

Brandon O’Dell

O’Dell Restaurant Consulting

web:  www.bodellconsulting.com

blog:  http://blog.bodellconsulting.com

email:  brandon@bodellconsulting.com

office:  (888) 571-9068

What's the difference between retail and restaurants?

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Many new owners think that running a restaurant will be easy if they’ve worked in the retail world. While all their retail skills do help, there are major differences between owning and operating a retail shop, and operating a restaurant.

These include:

In the food biz, you are also the warehouse and manufacturer of the product you are selling, which together both make up more work and require much more managing than a business that just sells the product. This is the major difference.

In the food biz, your product is perishable. After it is manufactured, it has to make it to the customer within a few short minutes in order to be satisfactory. A retail stores product isn’t worthless 5 minutes after it goes on the shelf.

In the food biz, you are also managing a distribution system. Whether it’s only coming from the kitchen to a tray on the counter, or all the way to a table, or even all the way to their home, you have to have a system for getting a highly volatile product to your customers before it’s ruined. They aren’t just plucking something off the shelf and bringing it to your register to pay.

There are a LOT more expenses involved in a restaurant compared to retail. The line items of things you must manage in a restaurant dwarf that of a retail shop.

Inventory procedures and control are much more complicated for a restaurant than a retail shop. While both types of businesses require you to track your cost of goods sold, the process in a restaurant is MUCH more complicated, as you will likely have more items on your inventory in more various stages of prep that all have to be counted, tracked, and ordered more often. These items are also much easier to waste and steal than in most retail settings.

Managing a food business and managing a retail business just aren’t the same thing. Not even close. While managing a food business requires all the skills used in managing a retail business, those skills are only a fraction of the skills you need.

The most difficult transition isn’t going from retail to food, not if you have worked production in the food business, it’s going from employee to owner. Managing in a business and owning a business are not the same thing. Not to say that people don’t successfully make that transition because some do. Most need experience running a business with someone else’s money first though, in a structure with support and mentors to teach you what you don’t know.

I would suggest reading a couple books to give you some insight on being an owner that you may not have considered. Any book on opening and operating a restaurant will help. One that I think is good is “The Everything Guide to Starting and Running a Restaurant” by Ronald Lee, a guy who owns and operates restaurants. I would also suggest “The E-Myth Revisited” by Michel Gerber, and any and all books by Al & Laura Ries or Dan Kennedy. They are real world marketing gurus.

While you can’t realize it until you open your business, the toughest part of the restaurant business isn’t making and serving great food. Doing that is relatively easy. The toughest part is creating a concept that speaks to people, and creating a system of marketing to get people into your business.

The biggest mistake new restaurant owners makes is thinking that all they have to do is “build it and they will come”. They believe their food is so good, or their idea so revolutionary that people will flock to them. They talk about building their business by “word of mouth” instead of having a real marketing plan, and more often than not, they fall flat on their faces. Don’t make these mistakes. If you do nothing else, study restaurant marketing. I think everyone who owns a restaurant will tell you they greatly underestimated how important marketing is. Remember, word of mouth marketing can’t work if no one knows who you are.

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
Office: (888) 571-9068

Pricing food – Why you’re doing it wrong and how to fix it

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One thing I’ll never forgive formal culinary schools for, is teaching new impressionable would-be chefs to use a budgeted cost percentage to price food menus. Chain restaurants share an equal responsibility for perpetuating this bad practice by focusing their managers on food cost percentages without letting them in on the secret that the cost percentage is a management tool, not a pricing tool.

Though most culinary programs teach many different methods for pricing food, every culinary student seems to emerge from the Culinary Institute of America or Le Cordon Bleu believing in the world of restaurants, all they have to do to be profitable is serve great food and deliver a 33% food cost, or is it 25%, or 35% or 30% or 19%? The truth is, hitting a budgeted food cost does nothing to guarantee there will be enough money left over from the sale to pay for things like labor, rent, insurance, linens, smallwares, uniforms, utilities, taxes, etc, etc, etc. Hitting that cost percentage really means nothing. Further, not hitting it only means, “I should give things a closer look.” It doesn’t mean there is a problem. On the contrary, a high food cost could mean you’ve been selling a lot of high cost items that contribute more gross profit per sale. Are you going to make more money selling 50 hamburgers priced at $6 that cost $1.50, or 50 lobsters priced at $30 that cost $15? As long as there isn’t a significant increase in the overhead of serving the lobster, gross profit dollars win every time. You don’t want to sell the item with the 25% cost and $4.50 gross profit, you want to sell the item with the 50% cost and the $15 gross profit. Rather than comparing the food costs, you should be comparing the gross profits from each item. Obviously, if you have $15 left over from the sale after paying for food (gross profit) compared to $4.50, you’re going to have a lot more money to pay your overhead and turn a profit.

If you want to create prices in your restaurant that guarantee you’ll have enough dollars left over after paying for food, you’ll need to make three important considerations:

  1. Market price point – What does your market consider a fair price for the food you are preparing, served in the atmosphere you offer?
  2. Menu item cost – I know I said you shouldn’t use cost percentages. That doesn’t mean you don’t include the cost of the food into the price. You need to keep up-to-date recipe dollar costs for every item on your menu, and use those costs to figure into your pricing.
  3. Needed gross profit – What does every person who walks through your door cost you to serve? You have a lot more costs to cover than just food. That’s just a fraction of the picture. You must consider every expense of running your business when pricing menu items, including the profit you need to make.

I guess now the question is, “How do I price by gross profit?”.

I’m glad you asked.

Market Price Point

You can’t throw prices out there, whether based on cost percentages or gross profit, without considering what your market is already paying for those products elsewhere. Just like your potential customers, you must consider what other operations are charging for the same type of food, or even the same dishes, that you are offering. If you are going to charge more for the same dish than your competitor down the street, you have to be able to justify your price with added value. Added value could be larger portions, more exotic ingredients, better atmosphere, better location, live entertainment or something else. It could also be the promise and delivery of a unique selling point that your competition doesn’t have.

Whatever your prices, they must offer value to your customers. If your customers don’t feel your food is worth what you’re charging, you won’t have enough of them to make money no matter your pricing method.

Menu Item Cost

How much does each menu item cost you to make? Ingredient costs go up all the time. When is the last time you updated your menu item costs? Without knowing exactly what a menu item costs you to make, and how many dollars you need to add on to the price to pay for the ingredients, you can’t possibly come up with prices you KNOW are going to make you money.

The easiest way to track recipe costs (menu item costs) in my opinion is with Microsoft Excel spreadsheets. While there are many commercial food costing and inventory programs out there that will help you cost out your items, many use costing formulas based on valuation methods I don’t endorse, or require too much input to keep prices up-to-date. Some do have the capability of linking directly to broadline vendor’s invoicing systems to update prices automatically, but most smaller vendors don’t have this capabibility and you’re still left doing a lot of extra manual input. For my money, there is nothing simpler, less time consuming and easier to use than Excel spreadsheets. That doesn’t mean you shouldn’t use other inventory and costing tools. Any effort you make toward calculating recipe costs and inventory is going to pay off. Even the more expensive softwares will make you money in the end.

Don’t make the mistake of getting lazy with your recipe cost tracking. Many operators only price out menu items when they’re making a menu change (which are normally too few are far between). Between changes, they don’t see how the cost of ingredients is impacting certain menu items, and without that information they don’t have the urgency to make the necessary pricing changes needed when they are needed.

Needed Gross Profit

This is the most important consideration in setting menu prices. You must know what your guests cost you to serve. Without knowing what they cost you to serve, you can’t know how much money you need from each of them to pay all your bills and make a profit.

Look at your financial picture this way. Your food costs make up anywhere from 20-35% of your financial picture in most restaurants. Depending on your labor costs, your food cost could be the largest expense of running your business, and it needs consideration when forming menu prices. BUT…… What about the other 65-80% of your financial picture? It’s not all profit. Most of that picture is expenses other than food cost, and if you’re lucky a little profit left over. Doesn’t it go to reason that you have to include those costs in your pricing? Of course it does. Without knowing those costs are covered, you can’t know you’ll make money.

Before you can know how to add gross profit into a menu price, you have to know how to calculate it. Here are some explanations to try and illustrate how to calculate a needed gross profit per person. The needed gross profit per person is what you add to your recipe cost to arrive at a menu price. Unlike the menu price, the needed gross profit per person is a fluid number. Since it is important to keep menu items within the price point of your market, you will likely have to increase the gross profit you add to some items, while decreasing it on other items. It’s only important that the end result gives you an average gross profit per person that delivers enough gross profit to pay the bills.

You can start to calculate your needed gross profit by looking at your financials and customer count records. It’s best to use financials from months where you achieved as many of your financial goals as possible to establish your needed gross profit numbers. You can use an average of all months by using a year-end profit and loss statement. From your P&L, you need to find how much all your operating expenses for the year were without including product costs. This is your overhead. To this, you’ll add the ideal profit you should have made during that time period.

Total expenses for year – product costs + ideal profit = Total needed gross profit

Once you know how much gross profit you would have needed to collect during the last year to make the profit you should have made, you have the beginnings of your pricing method. Before we go any further, you need to take into consideration any inflation or cost increases you can assume for the following year. Operating costs will always go up, and you need to price for those cost increases. If you’re smart, you’ll re-price your menu every 3-4 months to make sure those costs are covered, but that is another article. To be on the safe side, I add a 5% cost increase into the total needed gross profit to come up with a target for the next year. With the ever increasing cost of gas, you could either add in a higher buffer, or do what I suggest and evaluate your pricing every 3 to 4 months. It’s much better to do regular, small increases to some menu items than annual large increases to all of them.

Total needed gross profit x cost plus increase (105%) = Total needed gross profit (adjusted for next year)

Now that you have your new needed gross profit, it is very easy to figure out how much of it you’ll need to collect from each person to cover all your expenses. That is, assuming you track how many people come into your restaurant. If you don’t, you need to start doing it now, and you’ll need to estimate how many covers you did for the previous year. Estimate low to be on the safe side.

To find out how much you need to collect from each person, simply divide your total neeeded gross profit for the upcoming year by your total customer count for the last year.

Total needed gross profit ÷ previous year customer count = Needed gross profit per customer

This number is simply the amount of gross profit you would have had to collect from each of last year’s customers to achieve your financial goals for the upcoming year. What this gives you, is a target gross profit to collect from every person this year to achieve profit. That profit will be achieved if you can meet or exceed your customer counts from the year before, or you can exceed the gross profit average per customer.

Gross profit per customer  x customers per year = Actual gross profit

If you can exceed your total needed gross profit per year with your actual gross profit, and you do a good job of controlling your expenses, you will exceed the profit you budgeted for.

Remember in all this that your budgeted food cost percentage hasn’t entered into the equation once. You are adding the actual cost of your menu items to the needed gross profit per customer to come up with a selling price. That’s all it takes.

There are a few other things to consider though. Your needed gross profit per customer is collected from a few different sources. You don’t have to mark up every menu item by your needed gross profit. Your needed gross profit per customer is collected by combining gross profits from everything a customer buys. The markup on entrees, appetizers, desserts, soft beverages, alcohol and merchandise all contribute to gross profit. If you need $7 in markup from 30,000 customers per year to make your total needed gross profit, you have many different avenues to get it from and don’t have to mark up every menu item by $7.

Another factor that majorly affects these averages is your customer count.

If you’ve determined that you need $7 gross profit from each of 30,000 customers that walks through your door to reach your total needed gross profit, then you can also reach that number ($210,000) by serving more customers at a lower gross profit markup. If you could double your covers to 60,000, you could theoretically collect $3.50 in markup from each to collect the same total gross profit. Whenever considering cover changes however, you must also consider how serving more people will change your overhead. If you serve twice as many people, some of your expenses will also increase. They WILL NOT however, increase exponentially. Additional customers are always cheaper to serve than your primary customers, as they are the ones you are covering your fixed costs with. Add your additional expenses to your year end numbers and start over calculating your needed gross profit.

I hope I’ve laid out this method in a way that you can understand it. While it isn’t complicated, it does go against the principles being taught in classrooms, chains and kitchens all over the country. If you have followed along well though, you can see how this pricing method takes into consideration every cost of doing business, and leaves no guessing as to what you need to do to make money. This method of more effective planning could do a world of good for your profitability. Try it out. If you need some help, give me a call.

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
Office: (888) 571-9068

How do I figure my food cost?

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Calculating how much the food you sell costs you to sell is a very important practice in running a profitable restaurant. Knowledge is power, and knowing your food cost compared to your sales and your ideal food cost is very empowering information. By figuring your food cost percentage, you have an early warning system to alert you to potential theft and waste.

Before we get into the process for calculating food cost, it’s good to talk about how often this should be done. I suggest calculating your food costs at the end of every week. If you happen to have a cost control issue, it’s best to know as close to the time the occurence happened as possible. The farther you get away from an occurence that caused a cost problem, the harder it is to determine what that occurence was.

You are going to need to track a few pieces of information to calculate your food costs. You will need to know:

  • How much is my starting inventory for the period I am evaluating?
  • How much is my ending inventory for the period I am evaluating?
  • How much food did I purchase during that period?

This is all the information necessary to calculate actual food costs for any given period. How long that period is depends on you. As I said, I suggest evaluating food costs every week.

In addition to knowing your actual food costs, you’ll need a couple other pieces of information to compare the actual food cost to:

  • What is your ideal food cost for the period being evaluated? (we’ll discuss how to calculate ideal food cost also)
  • What are your total sales for the period being evaluated? (you’ll also need to track your sales by item to calculate your ideal food cost)

Now let’s go one step at a time to get these powerful pieces of information.

Calculating actual food costs

Calculating your actual food cost starts by taking an inventory of all your food items at the same time every week. Choose one time as the starting and ending time for all your reporting for that week. I suggest ending your reporting after the end of business on Sunday, but before the beginning of business on Monday. Inventory levels are usually at their lowest on Sunday, so inventory takes less time to count and calculate.

The inventory that you take every week will serve as the starting inventory for the week to follow, but also the ending inventory for the week that is concluding. It will be used in both capacities to calculate food costs depending on whether the calculations are for the past week or the coming week. By counting your inventory, and using a spreadsheet to multiply out the value of all your items on hand, you will come up with a dollar amount that shows you how many dollars in inventory you have on hand.

This starting inventory is the beginning to the food cost equation. The equation looks like this:

starting inventory + purchases – ending inventory = cost of food for period

By taking a physical count of all your food on hand, you’ll have the starting inventory and the ending inventory parts to this equation. From there, you simply have to track your purchases within that time period. For this number, you’ll use dollar amounts from invoices received in the period being evaluated. It does not matter to the equation when that food is actually paid for.

Start with an inventory you took on the Sunday before a week started. Add all the dollar amounts for food received during that week. Subtract the amount of your inventory counted on the following Sunday. The resulting number is the cost of goods sold, or food cost, for the week.

Calculating ideal food costs

Ideal food costs are the amount of money the food you sold during a given period should have cost you. Compare your ideal food cost to your actual food cost to help you identify when there is a breakdown in your system. If your actual food cost goes up for a period, your ideal food cost should go up too. If it doesn’t, then you’ve just identified a problem, possibly theft or waste. If your ideal food cost does rise with your actual food cost, then you know your food cost is high not because your staff did something wrong, but because of the sales mix of your menu items for the period. This is important to know, because most high food cost menu items also contribute more gross profit dollars to your bottom line, so a high food cost for that period is not be a bad thing. The only way to know whether it is bad or good, is to compare it to your ideal food cost.

Here are the equations to figure your ideal food cost:

recipe cost for menu item × number of item sold = ideal cost for item

ideal cost for all items added together = ideal food cost

In a perfect world, your ideal food cost should match your actual food cost exactly. Since it’s impossible to perfectly measure every piece or food, or track every piece of waste, you will see some variance between your actual and ideal food costs. You have to decide how large a variance is acceptible. I believe you should expect to keep your actual and ideal costs within .5% of each other. Variances larger than this tend to point to problems in your system. These problems could include theft, waste, under-portioning, over-portioning, poor prep procedures, bad food receiving procedures, or other problems.

What we haven’t covered yet is the “percentage” part of food costs. I’m sure you’ve noticed that other restaurateurs express their food costs in a percentage. I also suggested your ideal and actual food costs stay within .5% of each other.

Food cost percentages

A food cost percentage is an expression of what your food cost you to serve compared to the sales you made during the period you’re evaluating.

The simple formula for figuring this percentage is:

actual food cost ÷ total food sales = actual food cost percentage

 

ideal food cost ÷ total food sales = ideal food cost percentage

 

The resulting percentage is the percent of your sales that go to pay for the food you sold, whether it’s actual or ideal. These percentage make it easy for you to compare your actual and ideal costs to each other, but also make it easy to compare food costs from different weeks, months, quarters or years to each other.

I hope this explanation helped you learn how to calculate your food costs. Calculate them every week, along with your ideal costs, and you’ll find that the extra attention you are paying to your costs will open your eyes to many opportunities to save money in your restaurant or food service. If you need some tools to help you calculate your actual or ideal food costs, please visit the webstore on our website.

Marketing tips for restaurants – vol. 1

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Marketing is maybe the most important function of running a restaurant. It is also the function that most restaurateurs have the least skill at. That’s why I consider having “no marketing skill” one of the biggest mistakes restaurants make. You can read about the others here: The biggest mistakes restaurants make, and why they have a high failure rate .

In the spirit of helping restaurant and food services owners and managers build their business, I’m going to start a series of posts with marketing tips for restaurants.

My first marketing tip, trick, gimmick, offer, or whatever else you want to call it, involves bounce back offers to new customers. As you may have read in my other posts, collecting customer contact information is the single most important marketing practice you can undertake. Marketing to people who have already been to your restaurant gives you a better return per marketing dollar than any other practice. I bring this up because the marketing tip I’m going to share requires you to collect and store contact information for your existing customers to work.

New customers represent a huge opportunity for growth for your restaurant. These customers now know what your food is like, what type of value you offer, and where you are located. They have demonstrated that getting to your restaurant is not such a huge hassle that they won’t bother coming, and hopefully you’ve done a good job giving them good food and service at a price they feel comfortable with.

By collecting these new customer’s contact information, you are presented with the opportunity to turn them into regular customers, the back bone of every good food concept. Gaining one new regular customer could mean a $1000 per year or more sales increase for you, depending on your concept. If it’s a couple, or they have children or friends they dine with on a regular basis, it’s exponentially more. Since these are all new sales, turning this new customer into a regular customer means growth for you.

The marketing tip I’m about to share with you explains one way to try and get these new customers back into your restaurant, with friends. Here’s a couple reasons why this tactic helps turn these new customers into regulars.

  • Bringing someone back as soon as possible increases your chances of making a permanent impression. They are more likely to remember the server that helped them, how great the food was, and how good a value you offer.
  • Getting them to bring friends makes them feel more at ease and comfortable. People are more likely to make a restaurant their “hangout” if their friends are there too. By encouraging these new customers to bring guests, you help build the environment necessary to make them comfortable.

 Here’s the tip:

Send out direct mail “bounce back” offers to new customers. Give them a reason to come back as soon as possible, with friends. An offer I recommend is to give away a free appetizer, dessert or speciality beverage to each guest they bring with them. Use the mail piece as an opportunity to say “thank you”, and to entice them back with as many people as you can get them to bring.

Don’t offer just any old appetizer or dessert. Offer a particular one so you can use it’s name or description to make the offer sound more enticing. A “free Chocolate Avalance dessert” sounds a lot better than a “free dessert from our menu”. Use this opportunity to promote your signature items. If you don’t have signature items, get some. People need a reason to come to you instead of your competition. A signature item should be something in a particular category, dessert for example, that you make in-house, that is better than the other items in that category. This item should cost more, and contribute more gross profit dollars than your other items, while still being priced low for the incredible quality of the product. This is easily achieved, as your competition probably overcharges for their expensive items because they are worried about “cost percentages” instead of “gross profit dollars”. This presents a great opportunity for you to be the best value on the highest quality product. By using this product in your offer, it not only seems like a more impressive offer, but you are also promoting your highest gross profit menu item in that category. You’re killing two birds with one stone!

Use this type of a product, and the following verbage to create an attractive bounce back offer for your new customers:

Thank you for visiting our restaurant! We’re so happy to have made some new friends and patrons!

We’d love to be introduced to your other friends too! If you come back with this card before May 31st, we’ll buy you and your friends our delicious Chocolate Avalanche dessert, just for introducing them!

The reflex of the average restaurateur is to start asking, “How should I limit the offer?”, “Should there be a maximum number of desserts I give away?”, or “Shouldn’t I have a minimum purchase?”.
The answer to all those questions is “NO”! The only limitation you should have on a promotional offer is the expiration date, because it is there to build urgency and make people ‘act now’ (unless that particular offer is specifically designed to build non-peak time sales). If you have a good offer that allows you to make money and the customer to experience a good value, then you should want as many people as possible to take advantage of it. If you’re just giving stuff away and not making money, it’s not a good offer. The more people your new customers bring with them, the more new customers you have to try and turn into regular customers. Even if they bring existing customers with them, they’re likely getting those people into your restaurant more than they would have come in on their own, and the more friends that come to the restaurant, the more likely they will become regulars.

The only caveate I would throw in, would be to warn against using discounts as your promotional offer. There is nothing special about a discount. The only thing a discount serves to do, is to skew your customers perception of your value. It’s easy for them to see what type of value they would have gotten if they paid the same and didn’t receive the free dessert or appetizer, but allowing them to pay less with a percentage or dollar discount gives them bad information to make a value judgment on. This type of promotion also tends to attract “coupon clippers”, people that only go out to eat where they have a coupon. This type of diner isn’t likely to come back to your restaurant until the next coupon comes out. You can’t build your business on couponing unless you are pricing a “20%” discount into every menu item, like pizza chains do.

Armed with this marketing tip, I think you’ll find not only that your ability to turn new customers into regular customers increases, but that you’ll gain more new customers without having to do the searching yourself. Let your customers be your best sales people. Offer them something for bringing in their friends. Promote items that make you more money. Get more customers, and make more profit from each of them!

My name is Brandon O’Dell and I’m an independent food service consultant. I own O’Dell Restaurant Consulting and offer email, telephone and on-site consultations for $75 per hour. To receive 30 minutes of free consulting time with me, Brandon O’Dell, email or telephone me at my contacts found on my “About Us” page.

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A lesson in listening

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Listen to learn, not to defend!

by Andy Swingley
Regional Manager
Thomas & King
Applebees Restaurants
http://www.fohboh.com/profile/AndySwingley

 

 One of the skills we should all take time to be better at everyday is listening. Many opportunities pass us by each day when we don’t engage in “active” listening. There is a positive benefit to be gained from everyone you interact with on a daily business especially in your career or business. In the competitive world of business, people occasionally view listening, learning, and changing as a vulnerable or weak value. Some would say, well if I don’t stand up for my position or prove my point, I will get walked on or miss the next big chance. Every person you engage with achieved the level of their current position with an attribute or skill that is worthy of understanding!

So slow down, look the person in the face and listen. Close your mouth and open your ears. Slow your mind down and really try to understand the message that is being given to you. Set aside proving the idea that is coming out of the other person’s mind is wrong or needs corrective coaching from you. When engaged in active listening, practice these mental behaviors:

What is the outcome of this conversation? Are you here to learn something, be sympathetic to a plight, or help solve a problem – ask the person talking to you which one it is – this will give you a better foundation to listen from

What is the topic?

Why does the subject mean this much to the person delivering it?

How can I better listen to understand what this person means?

Validate points back in the conversation – what I hear you saying is….. Then the person talking to you can determine if you are getting it and agree or reframe the discussion to present it better for you

Ask for specifics when the discussion gets off course or “tangents” away from the outcome you discussed at the beginning

And, if you just can’t keep your mouth shut…..take pen in hand, scratch pad and take notes about what the person is saying. This will force you to hear and capture the message.

So………listen to learn and not to defend

When you become a truly great listener, you develop a “mentor” quality that attracts people to you.

When you become a truly great listener your relationships, both personal and professional, become deeper and more satisfying.

When you become a truly great listener, your quality of life improves.

When you become a truly great listener, you learn from others, and this is where the best ideas come from!

The difference between a “reason” and an “excuse”

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As a consultant, and someone who talks to business owners on a daily basis, some who are clients and many more who are not, I’ve heard an incredible number of reasons why restaurant owner’s businesses are struggling or failing. 99 out of 100 times, that “reason” really isn’t a reason at all, it’s an “excuse”. There’s a big difference, and I’ll tell you what it is.

A “reason” is an explanation for why something is the way it is, with everyone involved taking accountability for their part in a situation. An excuse is an explanation for why something is the way it is, that always involves the blame being put on someone or something that isn’t involved in the conversation, and not able to share their side of the story. What’s the difference? The accountability.

Let me give you some examples. Common excuses for why restaurants, or other businesses, fail include:

  • Our employees were stealing from us
  • Our purveyors were cheating us
  • Our concept was too progressive for the market
  • The market didn’t appreciate good food 
  • Our landlord was unreasonable

The list is endless. There are as many excuses for failure as there are failed businesses. If a person were to take accountability for their decisions and their actions, those excuses could be seen as the real reasons for failure, and they would look more like this:

  • We didn’t have a reliable system for evaluating good help, and we didn’t supervise our employees as effectively as we could have, so we lost a lot of money from theft
  • We didn’t know anything about negotiating purchasing, and ended up paying prices we couldn’t afford to pay
  • We didn’t research our market well enough to find out what the market wanted, so we ended up giving them what OUR idea of good food was, not theirs
  • We failed to communicate what made us special compared to the competion, and the market didn’t respond  – or – We didn’t realize that our market doesn’t have the same ability to notice quality that we have, and we were really banking on them realizing our food was better
  • We didn’t negotiate a good lease

 You probably notice a trend here. For every excuse that an owner can give for a business failing, there is a real reason that points back to something THEY did or didn’t do.

 I’m sharing this information not to make anyone feel bad about their struggles or failure, but to help owners and managers realize that they are the only person that controls the destiny of their business. For every mistake someone else makes that affects your business, there is a procedure or a system you could have had in place to increase your chances of avoiding it.

Accountability. Until you learn to take it, you’ll be doomed to repeat the same mistakes over and over. Don’t be afraid to make mistakes, everyone does, but only those that admit their responsibility in the mistake learn from it. Those are the people that can keep trying and eventually taste success. Those that only want to blame someone else for their failures are dooming themselves to a life full of them.

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Brandon O’Dell
O’Dell Restaurant Consulting
web: www.bodellconsulting.com
blog: blog.bodellconsulting.com
email: brandon@bodellconsulting.com
office: (888) 571-9068

Do’s and don’ts for startup restaurants – vol. 3

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Do:
Make vendors compete for your business. If you chose a vendor without making them outbid other vendors, you didn’t get their best price. Competition is the most effective tool you have to keep your purchase costs down. When choosing a vendor, make a list of the top 20-50 items that make up the bulk of your dollar purchases. Send a list of these items to all the vendors in your area that deliver those items, along with a cover letter informing them that you are taking bids from all local vendors that provide these items. The cover letter should also let them know approximately how much dollar sales volume you do, and any issues pertaining to the supply of those products that you have. This bidding process needs to happen every year so whoever you choose to go with has to continue to compete on price to get your business. You should also require them to verify their prices on your inventory every 3-4 months.

Don’t:
Depreciate all build out costs at 30 years. Some capital purchases in your buildout, like wiring, finishes and equipment can be amoratized to depreciate at 5, 7 or 10 years. A faster depreciation schedule means better cash flow for your business.

Do:
Investigate buying groups. Through group purchasing organizations (GPO’s), a smaller chain or individual restaurant may be able to receive discounts on purchases of all types, such as food, paper goods, chemicals, linen, uniforms, equipment, maintenance supplies and more. Two of the larger buying groups out there are Avendra, Marriott’s buying group, and Foodbuy, the buying group for Compass. While a well negotiated individual purchasing contract can yield just as good, or better, prices than a buying group, many operators don’t have the experience to successfully negotiate such a contract.

Don’t:
Blame a particular advertising medium for the failure of an ad campaign. In most cases, advertising mediums don’t fail restaurants, restaurants fail their ad campaign. I’ll explain. The success of an ad campaign doesn’t depend on a particular marketing medium. Saying that “Radio/TV/billboards/direct mail/internet doesn’t work for us” is a cop out. Marketing mediums don’t fail. Marketing messages fail. While radio, for example, isn’t the ideal medium for every ad campaign, it does work for certain promotions if the message is formed right. All the advertising dollars in the world aren’t going to make a bad message effective on any medium. You can’t just pay to have your business’ name plastered on a TV ad every 10 minutes and expect it to bring people in. That’s not how advertising works.

Do:
Take a physical inventory weekly. Knowing your cost of goods sold on a weekly basis allows you to catch major problems sooner. It doesn’t do you any good to find out you had a cost control problem 4 weeks earlier. By then, there’s nothing you can do about it. The steps to figuring your cost of goods sold include; (1) create an inventory spreadsheet with all your current purchase prices for your inventory items, (2) count all your inventory items after the end of business on Sunday, and before the beginning of business on Monday, (3) enter your counts into your inventory spreadsheet to calculate how many dollars of each inventory item you have on hand, (4) add your purchases for the week in review to the beginning inventory for that week, which is the count you took the prior week, (5) subtract your ending inventory, which is the count you took this week, from this amount. The remaining number is your cost of goods sold.

Don’t:
Operate under the assumption that fired employees qualify for unemployment benefits. This is a common misnomer in every industry of business, perpetuated by uninformed employees and managers. If you keep accurate records of disciplinary actions taken against an employee, give that employee an opportunity to correct that action, then accurately record their failure to do so, you have enough evidence to avoid having your unemployment insurance being charged for that employee’s unemployment benefits. In most states, a terminated employee will not qualify for unemployment benefits, but the business has to show accurate records for this to happen.

Do:
Find some way to reward employees. Playing games with staff, and making them compete against each other is not only fun for the employees, but also profitable for your business. Have selling competitions with service staff. Have speed competitions with kitchen staff. Any issue your restaurant or food service is experience can be improved through the implementation of some sort of game or competition to improve that situation. 

Don’t:
Underestimate the impact of a clean bathroom. Your bathroom in your business is a reflection of the overall cleanliness of your business. A clean bathroom will make your guests confident that your kitchen, and the rest of your restaurant, is also clean and sanitary.