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Keeping Your Prime Costs in Check

With labor and food costs rising upward, many independent operators feel they have lost their grip on prime costs. As you likely know, prime costs are the sum of the operation's food, beverage and labor costs. For table service restaurants, prime costs should be no more than 65% of total sales. Casual concepts may get closer to 60%. Anything over 70% spells trouble.

A timely refresher on proven best practices to manage prime cost and learn how independent operators, from fine dining to fast-casual, are keeping their prime cost in check despite inflation, labor shortages, and supply chain interruptions.

At one time, Beaux Roby owned and operated 18 independent restaurant units. Now, he works for U.S. broadline distributor Ben E. Keith, where he applies his restaurant owner experiences to help independent operators run their restaurants better. Roby says independent operators often confuse food cost with purchasing cost. As a result, they focus on paying less for ingredient rather than looking at the cost of food holistically.

In his view, operators can't "out-shop" high prices. "You are going to spend a lot of effort to save pennies," says Roby. "You purchase from a vendor and those prices are high; but if you manage inventory correctly and price menu items correctly, you can arrive at an acceptable food cost," he explains. In short, Roby recommends operators think through all aspects of food storage, handling, preparation, and service, since these factors impact the true food cost.

And with food costs increasing, operators need to be as vigilant as ever about avoiding shrinkage, which occurs when you have less inventory than purchased. This includes theft, wastage, breakage and spoilage.

Roby reminds operators that food must be inspected upon receipt to assure it conforms to the amount ordered and acceptable quality. Then, it needs to be put away across dry storage, walk-in and freezer. Delays or improper storage can compromise food quality and encourage food waste. "These may seem like little things, but they can have a big impact," says Roby.

Avoiding shrinkage requires equal care in food preparation. Roby finds that independent operators don't always have standardized recipes. And that can reduce yield, which is how much of your inventory will be transformed into a finished or processed product.

Buying different ingredients or changing up the recipe – these are practices that can negatively impact the guest experience. They may save pennies here or there, but they'll cost you loyal customers, too.

You invite cost overruns when expensive ingredients, such as proteins, are used inconsistently. However, you also need to keep turning inventory to avoid spoilage. Proper ordering and usage are a delicate balance, but it can shave significant percentage points off the cost of goods sold. "There is a lot of waste that happens in the kitchen. Who is monitoring that waste?" Roby asks.

As important as recipe standardization is portion control. When portions are consistent, the difference between the actual and theoretical yield of an item – how many portions a batch yields versus how many portions the recipe is supposed to yield – should be negligible. And if operators implement recipe and plating standards and still find discrepancies in yield, it could indicate theft.

Menu consolidation and cross-utilization are frequently recommended prime cost management strategies. "Get a product mix report for 30 days that shows what you sell and see what you are selling," says Roby. By removing the bad sellers and consolidating the menu, operators can save money.

Roby encourages operators to take it one step further and really dig into the cost of top-selling items. He suggests taking the 10 best-selling items from the product mix report and cost them out by paper. "I want to see a plated recipe, cost it out and on top of that let's make sure the theoretical matches the actual," he says.

Once operators have looked at food, they should apply the same tactic for beverages. By going over those top sellers with a fine-toothed comb, operators can make sure things are done consistently across the board, no matter who is working that day.

One thing Roby warns operators not to do is lower standards. Buying different ingredients or changing up the recipe – these are practices that can negatively impact the guest experience. They may save pennies here or there, but they'll cost you loyal customers, too.

Labor is the third component of prime cost, after food and beverage. This is trickier for operators to control. Roby understands that operators have to pay to lure new workers, and even then, they often wind up with inexperienced employees who need more training.

It's very difficult to find management candidates, since many top-tier managers left the industry and have not returned. He says he's seen many independent operators push people into management roles without the proper training. This backfires by leading to a range of operational problems. "Then you start raising prices and the customer experience goes down because the standards have not been met," he sums up.

To streamline operations and get by with fewer workers, many operators have adopted a counter-service model. In Roby's view, this strategy costs the concept more money than it saves. From the restaurant's point of view, the service model is efficient and fast. However, a guest tends to see "uninterested counter help that only takes your order," as Roby puts it. Volume may be higher, but overall sales are down.

Counter service doesn't have to be this way. Roby says Chick-fil-A is "focused on quality and training and they do a great job training young people properly, with customer service etiquette. They're not sitting on a phone, they do their job, they suggestive sell, and they have busy restaurants." If a chain like Chick-fil-A can do it, so can independents.

Weekly Prime Costs Tracking

Keith Paul is chief executive officer of A Good Egg Dining Group in Oklahoma City, which owns and operates nine concepts. Paul says his concept reviews prime costs weekly at the group's table-service restaurants and every other week for quick-service concepts.

"Weekly tracking of prime costs is a necessity," says Paul. "We've always done it. That way, if something is really out of line, we know about it on day eight instead of having to wait 21 more days to figure out that issue."

Paul believes that regularly tracking prime costs and being willing to pivot has helped them keep costs in line through very challenging conditions. He says the group is also unafraid to raise prices, which he feels independent operators can sometimes be overly hesitant to do. "It's not what the product will cost as much as what the market will bear," Paul says. In other words, the market is the true determiner of the menu cost, not the purchase price of an item.

As inflation crept up, everything from beef to paper goods to gloves and to-go ware was affected. The group's steakhouse has suffered the most from price hikes. Crab cakes are a popular menu item there, and at one point crab was selling for three times the usual price. Prime beef has been hard hit, too. Paul estimates that supply-side challenges have pushed the average guest check at his steakhouse from $70 to $100 per person.

The group has several casual concepts, such as tacos and burgers. There, Paul estimates check averages have gone from $18 to $24. "I don't know how long we can keep that pace," he says.

Whereas normally the restaurant group might raise the prices twice in a year, Paul says they've had to raise prices four times this year as part of prime cost management. They are careful with how they raise prices at the casual concepts, since that market is more price-sensitive.

Raising prices helps offset higher prime costs, but it's not a silver bullet. "We've had to make changes to 10 to 12 things in the operations of the business to react to these higher costs," Paul says. "It's been a lot of work. Once you think you have it figured out, here comes another unexpected price increase and you're right back where you started."

When making changes, Paul says they look for areas where the guest experience will not be negatively impacted. Switching from a top-quality protein to a lesser-quality protein would obviously harm the guest experience, so that is not an area where they would look to cut costs.

One area where they were able to save substantially – $3,000 in a four-week period, Paul says – is takeout packag- ing. They've been doing more takeout since the pandemic, and paper goods have been hard-hit by inflation. The restaurant group was able to find a couple of products that have a comparable quality, maintain the desired guest experience, and saved a meaningful amount of money.

Weekly tracking of prime costs is a necessity … we've always done it. That way, if something is really out of line, we know on day eight instead of having to wait 21 more days to figure out that issue

While they only do it occasionally (such as around the holidays), Paul recommends contract pricing as another strategy to manage food costs. Contract pricing is when a restaurant negotiates a deal to purchase items from a sole or minimal number of suppliers in exchange for favorable pricing.

Paul says the group's restaurants started closing earlier in the pandemic and continue to keep reduced hours. He estimates that shorter hours save each unit anywhere from 30 to 60 minutes on a weekday to two hours on a weekend night. They also continue to pre-prepare desserts, rather than making them in-house, another practice begun during the pandemic. Altogether, Paul figures they removed around 10 percent of low-selling menu items and took off anything that was not cross-utilized.

While their guest count isn't quite back to where it was pre-pandemic, Paul says it's close. "Our per-person average is at an all-time high," Paul says. Strong revenue helps by creating a buffer to absorb some of the elevated costs.

Higher sales can help control prime cost. But they can also mean more work for operators who have to put time and effort into marketing. When asked about marketing strategies, Paul says they prefer to focus inside the four walls. A great guest experience creates word-of-mouth buzz. "If we focus on the four walls and having happy and collaborative employees within the stores, sales take care of themselves," he puts it. Their restaurants do social media and email marketing, both of which help maintain that top-of-mind awareness.

New Accountant, New Tools

Ronnie and Linda Nguyen co-own Roostar Vietnamese Grill, a quick-service Vietnamese restaurant in Houston with three units. Ronnie Nguyen says his concept's prime costs have actually decreased over the past year to a 54 percent average across the three units. As a reminder, anything under 60 percent is considered good for a fast-casual concept.

"During the pandemic, the objective was just to stay afloat and make sure the team was taken care of. We were okay with breaking even or getting by. Now we are focusing more on refining and tightening up the numbers," he says.

In June of this year, the Nguyens switched to a new accounting firm. Their new firm is detail-oriented and has made a visible difference in managing prime costs. Now, his accounting firm picks up invoices on a weekly basis. They categorize purchases. They've also helped him evaluate food cost based on usage instead of purchasing.

Nguyen mentions xtraCHEF automated restaurant management software as another tool that helped them control prime cost. His concept brought on XtraCHEF pre-pandemic and spent the last couple of years really understanding their costs. Nguyen says XtraCHEF is "difficult" because operators have to understand how to use the technology, manage inventory, and set up equations within the system. Despite the upfront investment of time, Nguyen strongly believes that XtraCHEF is worthwhile for the level of data it provides. Better technology, such as XtraCHEF, does represent an expense. But by streamlining data collection and providing high-level insight into prime costs, it saves money.

"Inflation does not matter if you don't know what your cost is for a particular item. You can do things to counter inflation, but you're not going to know where and when you can charge more if you don't have that data in front of you," Nguyen says.

One example that he mentions is garlic. It's used in many of the recipes. Nguyen prefers to get garlic peeled and prepped since this reduces his labor cost. However, prepped and shredded vegetables, including the peeled garlic, have increased in cost. XtraCHEF provides the data to understand how rising garlic prices affect all of the recipes that use garlic, which he finds far more valuable than simply comparing the item price over time.

Since garlic is essential to so many of Roostar's recipes, Nguyen can't do without it. Another item essential to his concept is Sriracha sauce. To absorb price hikes of necessary items like these, Nguyen turns to comparison shopping for better prices. He uses a mix of wholesale vendors and local supermarkets like Asian grocery store chain H Mart and Costco business delivery. "Keeping that option open is very important," he says. "It really helps us get things at a better price and hedges against the back orders some vendors may have."

As you might expect, Nguyen raised menu prices to offset his increased costs. His audience is accepting the higher prices, he says. He mentions how chains like Waffle House have raised prices of add-ons, like a sauce or side salad, rather than increase the price of the main item. The consumer is less likely to notice the higher price for the side than the main dish, so he feels the strategy is a good one for diners who are themselves confronting higher prices for groceries and consumer staples.

Culture Matters

So far, Nguyen has been spared the labor challenges faced by other operators. He attributes this to a few factors. First, he maintains a good workplace culture, so employees tend to stay put. Onboarding is strong, and the leadership program is good. "Everybody in the company has been with us for a long time and they are there because of the security we offer them. It may be in terms of a paid vacation, an increase in salary or hourly pay, flexibility in scheduling. It's not just the money part," he says.

When the Nguyens increased wages, they did so because they felt it was the right thing to do. They didn't raise pay to compete for a limited labor pool.

"A lot of operators want A players that are experienced and ready to go," Nguyen says. At Roostar, they take a different tack. Nguyen hires people with less experience and with "time, care and leadership" builds their skills to the level of an A or B player.

He believes this effort is rewarded with greater loyalty from staff. "Sometimes the inexperienced individuals who we train appreciate the training you provide, they're aware of the skills they've learned, and they stay with you for longer," he says.

At the end of the day, Nguyen tries to see the flip side of high labor costs. "If you have a lot of people working it can be a good thing because there is more time for learning. The labor cost is not going to waste, it is going into development." Restaurants need a lot of labor when they are busy, and that can mean increased revenue to offset the expense.

This labor crisis may have forced operators to really get behind a positive workplace culture. Operators have heard stories or seen firsthand how some restaurants have been spared employee churn. Sure, wages and benefits play a role. So too does hiring the right people, onboarding them well, and getting to know new hires as full individuals with wants, needs, and goals, and giving management the tools, training, and support to lead with kindness.

Are Your Food Costs in Line with Your Budget?

By Juliette Gust

You should always ask yourself if food costs are in line with what you budgeted. If you are finding significant overruns, that is not a good thing; however, if your food costs are below budget, that could be a red flag, as well.

Realize that even the best-run kitchens have cost control issues at times. Inventory overstate- ment is a common scheme that can be used to cover up a wide variety of problems, both mismanagement and fraud.

Did your manager discover that the meat cost was a little high due to poor purchasing? He or she might "add" a phantom case of sirloins to the inventory to bring the numbers in line. Does your budget require (and maybe your manager's bonus depends on) a 29% food cost (as a percentage of total sales), and your manager realizes that the restaurant is running at 30%? He or she can keep counting expired goods in inventory, even though they were thrown out before the last health department inspection.

You should be reviewing your profit-and-loss statement; however, without taking a good look at your general ledger as well, you might not be seeing the whole picture. Regardless of the sophistication of the inventory technology, you need to roll up your sleeves. There is no substitute for a periodic, in-person count check by someone independent of the function. Checks and balances are critical in every company, large or small.

Review the activity around deliveries. Sometimes cases of filet mignon really do fall off the truck, but not often. Do you know what is actually being loaded off trucks into inventory? An unethical manager can "pay" for items that never make it into your pantry. The money that comes out of your account might just wind up in his or her pockets.

Case in Point: A restaurant inventory list indicated there were 102 units of saffron on hand (among other false counts), and there were actually two.

Consolidate the Menu and Train Your Staff

Operators are realizing firsthand how reducing the number of menu items saves them money in multiple ways. Not only is there less inventory to manage and purchase, there's less food waste. Fewer things to prepare mean more efficient labor.

So says veteran hospitality consultant Chris Tripoli, co-host of the Corner Booth podcast, who is optimistic that independent restaurant operators are finally embracing the core concepts of cross-utilization and consolidation for prime cost management.

"It used to be hard for people to want to review their menu regularly and take things off," says Tripoli. "Now people are realizing their core menu items that really represent the concept need to stay, but other items really might need to go."

As far as the cost of labor, Tripoli notes, "Everyone is now concerned with training their staff and having a positive work environment because it leads to retention which leads to sales," Tripoli says.

For operators focused on that dollar per hour number, Tripoli recommends they stop think- ing about the extra cost per hour. Instead, think about the higher overtime wages you'll pay be- cause you are short staffed, or the extra training wages. "That's what you can't afford," he says, not the higher base wage.

Stop Procurement Ploys in Their Tracks

By Juliette Gust

Dealing with purchasing and vendor selection is an area that is rife with opportunities for fraud and corruption schemes. If you have delegated the purchase of any supplies or vendor relationship management, be sure to monitor the process and products closely, including:

• Review your vendor master list at least once per month to ensure that you recognize the names and inquire about those that don't look familiar. If your produce cost is increasing, for example, it could be there is a fake vendor that is receiving payments for goods not delivered.
• Periodically review your product list counts against what is in the storerooms. Is there a case of champagne that will never be sold? 24 bottles of a liqueur not included in any of your drink recipes? 12 bottles of very high-end scotch that won't likely be ordered by your guests? It could be a deal was made to purchase slow-moving product from the beverage vendor in exchange for a kickback or for product delivered to your manager's home.
• Another area to consider when reviewing your costs is the relationship between the prices you're paying and the quality of the goods received. Are you paying top-dollar for average goods? It could be the vendor is a relative or friend kicking back a percentage of purchase amounts to your manager. Or, it may be that your employee has created his or her own business on the side and has selected that business as one of your vendors. It's good practice to develop a simple conflict of interest policy that requires your employees to disclose any personal relationships they may have with prospective and existing vendors.

Procurement decisions and selection should be thoughtfully considered and consistent. A purchasing policy that outlines specific controls around product and supplier selection is a key control in deterring fraud and corruption. Some specific items to include are:

• A requirement that a certain list of vendors should be contacted for every purchasing need (I prefer three, but it could be more or less depending on the availability in your market and your personal judgment).
• Appropriate documentation on the selection process and outcome. The selection of a particular vendor, as well as notes on the losing vendors, should be documented and placed in the vendor file for periodic review. It may not be the best practice to always go with the cheap- est vendor as there may be other factors to consider such as quality and customer service, but at least it reduces the opportunity of playing favorites with the vendors that may not have your best interests in mind.
• Purchasing limits should also be clear, consistent and well documented. For example, a manager or chef may have flexibility with purchases up to $500, but anything beyond that amount requires review and approval by a second set of eyes.
• Vendor selection steps should also be outlined. Ensure that new vendors are vetted by someone other than the purchaser to confirm that the vendor is legitimate and that they adhere to your food safety and other operational standards.

Case in Point: a restaurant fish vendor was selected by a manager due to a close, personal relationship. The restaurant paid higher than market rates for seafood because of the glowing recommendation provided by the manager. After a slew of guest complaints, it was found that the vendor kept fish in an unrefrigerated, filthy warehouse, and transported it to customers in an unrefrigerated truck.

Another Case in Point: a meat vendor was paid every month for more than a year before the restaurant controller noticed unusual amounts of pork purchases. After investigating, it was found that the vendor didn't exist, nor did the pork. The vendor was a company created by the kitchen manager, who ordered the fictitious pork from the fictitious vendor and pocketed the vendor payments.

According to fraud experts and the National Restaurant Association, a typical organization loses up to 4-5% of annual revenues to fraud. Establishing clear guidelines and policies, ensuring they are enforced, and spending a few hours per month monitoring the numbers in your operation can often save you a significant amount of money.