It's not talked about much, but retail grocery has a perpetual food-cost advantage over the QSR restaurant industry.
Food Cost Inequity
The disparity is called "Buy-by-the-Pound and Sell-by-the-Pound" (Retail) vs. "Buy-by-the-Pound and Sell-by-the-Piece (QSR)." Since I have worked mainly for chicken QSR chains, we dealt with this inequity continually with bone-in chicken parts, boneless wings, regular wings, Popcorn Chicken, etc. And since pork, seafood and beef products can be impacted, protein products — due to their higher food costs — are particularly problematic to a QSR food-cost Proforma statement.
But the inequity issue is pervasive within the QSR industry. For example, produce products are particularly vulnerable, as are side portions and desserts that are spooned out of the frontline counters. Since I previously worked for Boston Market, they represent this case perfectly. In addition to the QSR chains that sell a lot of chicken, the pizza QSR chains face portion control requirements needed to control against this cost in equity — particularly topping control.
The questions to ask the retail convenience and grocery industries is, "Do you take advantage of this inequity, or ignore it?" I suspect that most retailers go about their daily business without paying much attention to it. That would be unfortunate if they didn't leverage the advantage. So when retailers complain about thin margins and talk about QSR profit margins, I shed few tears for them.
What may seem as a clear retail advantage is a blessing in disguise. QSR executives already understand some of the protein cost inequities, but it is prevalent throughout their menu. So how can QSR executives turn a disadvantage into an advantage?
- Build awareness throughout the company employees (top to bottom) that food-cost control is the top priority, second only to customer satisfaction. This is the CEO's responsibility.
- Make sure that Product Specifications are tightly based on rigid "Process Capability Studies." In other words, are the specs as tight as possible – and does the supplier deliver against them? It is always going to be the natural inclination of suppliers to agree to wider, rather than narrower specifications. But remember who the customer is in the customer-supplier relationship. This is the joint responsibility of Purchasing and QA departments.
- Ensure that store procedures are strictly written to control food costs; waste is documented carefully at the end of the day, and substandard quality products are returned to the supplier. This is the responsibility of the Training Department.
- And lastly, determine to engage your suppliers in a "Process Cost Analysis Methodology (PROCAM)" to determine your true food costs at the supplier level – and do give in when they resist. And remember NOT to trust "Cost Plus Contracts" because they almost always benefit the supplier most. I have helped develop this methodology while working at KFC, and have helped numerous companies save millions of dollars over the past few years. Remember, the savings are actually profit transfers from inefficient suppliers to your QSR bottom line.
For more information on "Process Cost Analysis Methodology (PROCAM), Activity Based Costing (ABC), or Cost Engineering, please contact me at firstname.lastname@example.org or 303-471-1443.
Darrel Suderman, Ph.D., is president of Food Technical Consulting and founder of Food Innovation Institute. He has held senior R&D/QA leadership positions at KFC, Boston Market, Church's Chicken and Quiznos and led KFCs development team of Popcorn Chicken, now a $1B international product invented by Gene Gagliardi.