food costs

What to do when your food costs are rising

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By Hugh Johnston

With food inflation at a troubling 3.9 per cent year-over-year in the third quarter of 2015, operators have more reason than ever to be concerned about rising food costs. Leading the way were beef (up 12 per cent), fresh vegetables (up 11.5 per cent) and pasta (up 10.5 per cent). If you make some smart moves this year to deal with food cost pressures, you can put some space between you and your competitors.

The fall of the Canadian dollar has not helped on the food cost side, putting pressure on anything you buy from the U.S. and on any foods that are from U.S.-dollar-based categories. The upside is the cheaper Canadian dollar is driving growth in tourism as Canada becomes a more affordable destination again. Lower gasoline prices, which have kept inflation down overall, are also putting more discretionary income in the wallets of our guests.

Playing to win — Table stakes

Getting a handle on managing your food costs begins with getting the table stakes right. How much can good food cost controls matter? Time and again I see restaurants improve by three to five per cent of total food and beverage cost across multiple restaurants, just by doing the basics right — inventory control, portion, shrink, loss prevention, and buying well from trustworthy suppliers. If you don’t have these basics right your margins will suffer.

Playing to win — Volume not price

If you want to win you will need to do more than get the basics right. Once you have the right tools working for you, you will still have to “deal with” your food costs going up.

Resist the temptation to raise prices and to “manage your food costs down” to the percentages they used to be. If you do these two things you will surely lose guests and see your other costs rise as your food cost percentages come back in line. If you are not careful you can control your food costs so well that you end up making less money.

One great way to deal with cost inflation is to find ways to move more product through your restaurant. More volume will allow you to buy better, have fresher foods and reduce shrink. But where you will really see the benefits of growing volume is when you drive more guest counts against your fixed costs. Done right, increasing volume will generate more margin dollars to more than cover your increasing food costs.

Playing to win – The value game

One way to get more volume in your restaurant is to “play the value game.” The value game is when you engineer your menu and service to give your guests 1) more value for the same price or 2) the same value at a lower price. However, the value game is at its best when you 3) give your guests more and at the same time give it to them for less.

Focus on creating more “workhorse” menu offerings in your restaurant. Workhorse menu items are the ones that are most popular with your guests and also have lower margins. Yes, you heard right — beat food cost inflation by focusing on selling more lower margin food.

Your value-oriented items, whether they are at the bottom end of your menu, the middle or the top should be your best sellers. Your guests tell you these are the menu items they value the most by the number of times they order them. Play the value game by selling more of what your guests already love or by creating more “best sellers.”

Promotions that guests respond to, compelling offers and menu engineering that gets results will drive up your sales and your guest counts. Your food cost percentage of sales will go up, but your labour cost percentage will come down. In fact, you can even end up with higher overall margins after both food and labour by taking advantage of serving many more guests than you did before.

Three ways to put the “value game” into action:

  1. Invest your higher food costs and price promotions into the shoulders: dayparts, days of the week and seasons where you are not on a lineup
  2. Find “value food buys” that you can pass on to your guests. Innovative chefs create great value by focusing their buy on overstock, in-season and less-popular cuts
  3. Fearlessly promote food and beverage items that “guests really want,” knowing that you will attract guests who would normally never come to your restaurant while at the same time locking in the loyalty of those who already love you

Playing the value game can be nerve-wracking for operators who are used to managing to a food-cost percentage. Knowing where your food costs are supposed to be, based on your food theoreticals and your sales mix, will help take the fear out of seeing food cost percentages move off their historic levels.

In the end you have to watch your total margins after all costs (not just food) to make the best of a changing food cost world. After all, you don’t bank percentages, you bank dollars. Why not use the opportunity provided by food cost inflation to put some real distance between you and your competitors.


About the author:

Hugh Johnston, CPA CA, CMC, works with business leaders to create strategic and financial solutions to make more money in their people driven organizations. Hugh provides his clients with strategic and financial advice to help these business leaders deliver dramatic results. Hugh has written extensively for CRFN. For more information, visit www.hughjohnston.com.

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