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How to Manage Food Costs

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By Kevin Hardy October 2014 Finance

In May, the cost to customers dining in a full-service restaurant was 2.2 percent higher than a year earlier, according to the Bureau of Labor Statistics. The Bureau reported particularly steep increases in the costs of meats, fish, eggs, and produce; beef and veal prices in May, in particular, were 10.7 percent higher than in 2013.

David Scott Peters calls them locusts, those factors that constantly threaten food costs—disease, drought, inflation, and governmental instability.

“There are always locusts,” says Peters, founder of TheRestaurantExpert.com, which educates restaurant owners on how to create financially viable operations. “It’s all kinds of things completely out of an operator’s control. I tell operators they always have to prepare, because every quarter there’s something.”

And the industry has seen its fair share of locusts recently. This year, rising food prices have nabbed the headlines. With costs expected to hover at the same rate or even increase again in 2015, experts say it’s even more necessary for operators to examine how they manage food expenses for the coming year. Suggestions include implementing methods to track food waste, shopping suppliers, and creating a risk management system.

While a price hike is the first instinct to combat rising food costs, Robert Maynard, co-founder and CEO of Toast Café, an upscale breakfast and lunch eatery, says increasing menu prices should be a last resort. With four units in North Carolina and South Carolina, Toast Café orders a volume that allows it to negotiate with suppliers on food prices, Maynard says.

“If your food is going up 1 percent, you really should try to find that 1 percent somewhere else,” he says. “There are other ways to fight against the rising [food] prices.”

Maynard works diligently to manage all costs—wages, overtime, utilities, and paper supplies—along with the costs of food. That requires hands-on leadership.

For instance, Maynard suggests putting clear plastic bags in the kitchen trashcans to track food waste. “Go through it every day. Ask questions,” he advises. “If you find a decent piece of avocado, ask what happened.”

Aside from rising prices of produce, meats, and dairy, he says restaurants have a slew of other financial concerns moving forward. “You’ve got to worry about unionization and franchising. You’ve got to worry about the Affordable Care Act, [and] not just the cost of it, but the cost of explaining it to people. And wages. There’s more to it than food costs. You can never close your eyes on any of these issues.”

Supply Chain Scrutiny

Jeff Karrenbauer, president and a founding director of Insight Inc., a supply chain consulting firm, says restaurants should keep a closer watch on the mechanics of their supply chains. He recommends all operators complete a risk management assessment, tracing products and ingredients to their originating source.

“Do you have only one source for a critical material for which your restaurant is well-known?” Karrenbaeur asks. “Are you vulnerable because some ingredients are coming from unstable parts of the world?”

Of course, not every restaurateur has the same control over supply procurement and pricing. A chef who shops at the farmers’ market daily has little choice, and mom and pop operators are often at the mercy of their local suppliers. But even independent operators should investigate other local supply choices.

Chains, on the other hand, have much more leverage and buying power at their fingertips. But with so much volume, Karrenbauer says they also carry more risk. A domestic weather disaster, international conflict, or global crop shortfall could cripple their entire network of supplies.

“We’re in deep trouble from California’s [drought], and we get an awful lot of food out of the valleys in California,” he says. Restaurants that source produce from that state, he says, should consider secondary sources and whether international sourcing could alleviate concerns.

Part of the reason to look at international options is because domestic commodity and meat prices are creeping upward. Peters says prices of beef, pork, and cheese are particularly daunting.

“Today, that’s where I put my finger on the pulse,” he says. “If you’ve got those things on your menu, you’ve got to go through a list of solutions.”

That could mean increasing menu prices, but Peters says operators can also implement other changes like re-engineering the menu, tweaking menu items, reducing portion sizes, or swapping out certain products.

He also encourages independent operators to constantly shop suppliers, as some will offer reduced-price items acquired on behalf of chain restaurants. A chain’s proprietary chicken strips can’t be sold to other restaurants, for example, but the grilled chicken can—if operators know how to ask for it.

When operators truly understand their food costs, Peters says, they’re better prepared to adapt menu items with supply chain fluctuations and even have the power to raise prices on top-selling items or implement portion-control systems down the line.