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2018-11-20
Restaurant Food Costing - Profit vs Vanity


I am currently doing a food costing exercise for a local restaurant before the season starts. Many restaurants and food suppliers increase their prices over the festive season. The suppliers increasing their prices, coupled with the expected increase of meat prices in December leaves restaurant owners with little or no choice but to increase their prices. This is especially true in a country with high inflation like South Africa.

In the Western Cape the wages of most workers in the textile industry is increased annually on 1 September. So while some workers are earning more everything gets more expensive. Ad to this the fact that we had a 1% Vat increase this year in May then one has to carefully consider your price increases before the fesitive season.

In most restaurants the staff are motivated by tips and thereby have a vested interest in the price of the menu remaining as low as possible with regular specials to keep pulling in more customers. In the off season in the Western Cape many restaurants have winter warmers or specials for locals who keep the business going during the quite times. In most cases these specials dissappear when the season begins.

Perhaps more important than food costing is the accurate calculation of your restaurant's daily, weekly and monthly gross profit by using the right point of sale and accounting software. By keeping prices low, having regular specials and promotions you will be increasing your turnover BUT you will be achieving a lower profit margin. First your gross profit will decrease. The overall effect of lower prices and specials needs to be calculated. The higher turnover will increase net profit but the lower gross profit margins will decrease the net profit.

During recent years we have seen severe increases in the price of electricity and water, especially the Western Cape where the City of Cape Town has even started implementing penalties for over usage. These facts need to also be considered when doing food costing or when one is managing your restaurant's profitability. Being the local hotspot for locals will mean longer hours but not neccesarrily increase the bottom line as some fixed expenses have a variable component as mentioned. Wages, overtime and public holiday pay also need to be factored in.

Individual items on menus can not be viewed in isolation. In Kleinmond for example there are 4 or 5 restaurants at the Harbour. For years I have noticed that the most popular visisted place by locals and then holiday makers following suit is the restaurant selling it's Castle Draught Beer at the lowest price. The cheap Beer is the crowd puller. The real answer when managing the profitability of a restaurant is to have a Point of Sale system which gives you accurate information.

Important factors to consider when doing food costing also includes:

  • What is the targeted gross profit percentage? (You need to consider average turnover and your fixed monthly overheads.)
  • How price sensitive are your clientiele?
  • How much competition in the area?
  • How accurate are your calculation of food portion sizes?
  • What are the expected food price increases you will have to absorb during the festive season where supply and demand leads to higher food prices, especially meat?
  • What is your fixed - and semi variable monthly expenses? You need to understand all the costs of running your restaurant.
  • Current trends e.g. lower pork prices because of the listerioses scare
  • Having smaller portions available, which is reasonably priced could lead to customers increasing their spend per head overall by buying a starter as well as a main.
  • Are there suppliers that will venture with you to promote their brand by offering special prices which you can pass on to your clients to maintain an acceptable gross profit percentage?
  • Does your POS system / Accounting system give you accurate daily gross profit figures.

It should be mentioned that you can have the greatest food costing and accounting systems but if you do not implement internal controls like regular stock takes and do variance analysis and investigate differences you are wasting your time. Your staff is motivated by Tips and good reviews on TripAdvisor etc which is important but someone has to be the unpopular guy and manage the bottom line of the restaurant as well.

Obviously the situation needs to be managed. It makes a big difference if you as owner are present during the day to day running of the business or where you have appointed managers to do this on your behalf. Reporting the gross profit and not only turnover should be expressly included in the job description of management.

 

 

 



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