Managing the Big Three

Success or failure is almost always related to an operator’s ability to manage the big three cost centers:  labor cost, beverage cost and food cost. Corporate operators have systems and procedures down pat to monitor these costs in real time, and these systems are extremely helpful in providing up-to-the-moment information. But even with the high-tech systems and the data they generate, management must manage.

Many independent operators still struggle with containing labor, food and beverage costs, and because many do not have these systems, their struggle is a bit harder than that of the multi-unit operator. Here are some simple steps and tactics to help you get these critical costs in line.

Labor is Easy!
Labor expense is typically the highest cost of any operation. Therefore, containing or reducing your labor cost by a few percentage points can mean big bucks in profitability. The good news is that it’s really the easiest cost center to manage. 

Labor cost is tracked and managed as a percentage of your total sales. A typical restaurant will run at a labor cost of approximately 30 percent of total revenue. Comparably, a bar or nightclub can operate at a considerably lower percentage — about 18 – 24 percent of revenue, based upon the type of operation.

Unlike food cost, which is affected by waste, ordering and other elements, or beverage cost, which is impacted by over-pouring, theft and related issues, labor costs are absolute. For example, if you knew your sales were going to be $1,000 tomorrow, you could cap your labor spending easily: By forecasting your revenue each week by the day before you do your schedules, you will know exactly how much you can spend on labor. Once you are good at forecasting sales, your labor cost should hit its target every time. In the previous example where sales are projected at $1,000 a day, the total costs of the scheduled labor cannot exceed $250 a day.

Each type of operation can spend its total labor budget differently between kitchen, bartenders, servers, security and other employees. Typically in a restaurant, approximately 60 percent of the total labor budget is allocated for the back of the house and 35 – 40 percent for the front of the house (servers and other revenue-generating employees). But, this split may vary in your operation.

The trick to consistent labor cost management is in the forecasting. If you forecast too low, your operation will be short-staffed for higher-than-expected sales. On the other hand, if you over-forecast you will have allocated too many employee hours and will be over budget as a result. You don’t need a computer to tell you the obvious: You missed your sales forecast, so your labor cost is high, plain and simple. When this happens, it’s time for management to manage more effectively.

In addition to forecasting, management must stay close to this cost and monitor results daily; they’ll know right away when they are running over labor budget. As soon as management knows, it’s time to begin reducing employee hours for the rest of the week and/or month by sending employees home early, adjusting schedules to reduce hours or eliminating employee shifts. These adjustments can get you back in line in a few days.

This simple forecasting system becomes very easy after only a couple of weeks of using it. So as long as you forecast, monitor and adjust daily, your operation will hit your labor cost goals almost every time. Unfortunately, managing your food and beverage product cost is not as easy.

Product Costs
While operators often talk about “food and beverage costs,” they do need to be considered individually. Beverage cost is really five combined costs:

  • Liquor: Typical cost is 17 percent.
  • Bottled Beer: Typical cost is 23 – 25 percent.
  • Draft Beer: Typical cost is 21 – 22 percent.
  • Wine: Typical cost is 30 percent.
  • Soft Drinks: Typical cost is 6 – 8 percent. 

When it all washes out, based upon differing sales mixes, prices and costs, a typical (combined) beverage cost is 21 percent. When your beverage cost goes above 21 percent of your beverage sales, something is very wrong.
Food cost is considerably higher than beverage cost. In a traditional casual dining environment, food cost runs 29 – 32 percent, depending on the menu and pricing.

While the cost percentages may differ, the skills and practices required for managing food and beverage costs are exactly the same across five common critical areas:

Recipes & Specifications. If there is no recipe for a Martini, there is no manageable cost. A bartender can pour any brand or amount he or she chooses and do so without breaking any rules. The same applies for a food recipe because your cook can pile on French fries, ham or another product, thus raising your cost. So, any food or beverage cost containment program always begins with recipes. Each recipe must have a known cost and a price to make certain it achieves its proper cost percentage. 

Once your recipes are complete — with specified brands, quantities, ingredients and costs — you can set your prices to achieve your targeted cost percentage.Then you’re well on your way toward manageable costs.

Production Accuracy. All food or beverage recipes must be strictly followed, or your budgeted costs have no chance of succeeding. This requires training and management follow-up to be certain all bartenders pour accurately, use proper glassware and adhere to specifications without exception, just as your cooks must stick to recipes, quantities and specifications. Adhering to your recipes and specifications is an absolute. To make it happen, management must manage and employees must be observed and held accountable.

Waste/breakage. This can increase your costs considerably. For example, draft beer will have huge waste if your system pours too much foam — it can increase your cost by 20 percent! Your bartenders and kitchen staff must be taught and trained to have respect for products, recipes and efficiencies. In the kitchen, this is even more important. Food that is mishandled can spoil, and improperly cooked food or food prepared in too large a quantity is wasted. There is no substitute for quality training in your kitchen and bar to minimize the mistakes that cause product waste.

Again, management must manage. Check garbage pails for wasted food often, watch draft beer systems, find bartender mistakes and other costly waste, and you’ll be surprised at how quickly you can lower your costs.

Theft. Theft is still a major issue in our industry. There are many ways a bartender can steal. A simple example: A bartender delivers four drinks to a guest and says, “That will be $20.” The guest gives the bartender $20. The bartender rings up $5 and puts the $20 in the cash register. The bartender remembers that the drawer “owes” him/her $15. The bartender does this five times during the evening, which adds up to $75. Later, the bartender makes change from the tip cup, placing five singles in the cash drawer and putting four $20 dollar bills into the tip cup. The $75 dollars is now in the possession of the bartender. From a distance it all looks just fine.

This is why a bartender should never make a transaction between a tip cup and the cash register; management must enforce this rule and be observant. Bartender theft is a whole subject in itself, but the solution is always that management must manage.

Kitchen theft is not much different. Food is moved outside for pickup later, dishes are prepared without tickets, steaks are sneaked home, etc. To really protect your food and beverage cost requires what I call “Management Engagement.” Management must stay close to product movement throughout the day or night so unusual movement or changes are immediately noticeable. If it’s not easily observable to management, it won’t be long before your employees take advantage.

Purchasing. Watch your vendor prices. If your recipes are priced for a particular cost percentage and then your product prices go up, so do your costs. Work your suppliers and never let them think your business is assured. Cross-bid all of your food products and common beverage products every month, and whoever has the best prices should get your business. The others will work harder to get your business next time. This valuable process will keep them all aggressive in their pricing and supportive of your business.

There’s a lot of money in controlling costs! These simple programs, procedures and systems can double your profits with surprisingly little effort.

But even with great up-to-the-minute information, effective cost management is only achieved when management is fully engaged. NCB