Big profits for food cost fanatics

Dec. 8, 2005

When the till is off by several dollars at the close of a shift, every operator starts hunting it down.

Yet when the food cost is out of line by the same amount, do those same operators ferret out the problem with the same vigor?

Probably not. And that amazes Jason Shifflett.

"If your cash register was short $10, you'd notice that, wouldn't you?" said Shifflett, a seven-store Domino's Pizza franchisee in Olive Branch, Miss. "So how is food cost any different? It's not to us, so we look at it daily."

Viewing food as edible cash is a concept many operators don't consider, according to Dave Ostrander, a former pizza operator turned consultant. You do all you can to see that food isn't wasted or stolen, but when a little is lost or dropped here and there, that's just pennies, right?

"It is until you add them up," said Ostrander. "It's what you don't know that hurts you, and so many operators don't really know. Guys tell me all the time, 'I didn't know I was losing my butt on wings. I didn't know salads were costing me that much.' But when you see in black and white what your food cost really is and see where the money's going, you can't ignore it any longer."

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SpeedLine Solutions

That is unless you never track food cost or inventory, and Ostrander suspects many operators ignore both. "Ninety percent of operators I speak to have a food cost percentage they can quote from top of their heads, and 90 percent of the numbers they give me are not real. ... And before I got serious about it, I did the same thing they did. Whatever number my accountant shot back to me as my cost of goods sold, that was my food cost."

It wasn't as accurate as it could be, however, and he knew it. That number didn't show how his food was used once delivered to the store — whether it was wasted through over-portioning or spoilage, or simply stolen — and it didn't reflect an actual cost based on his menu prices. Somewhere in that murky mathematical void in which he needed do some basic figuring lay several percentage points of lost profit. Armed with a pencil, an adding machine and an accountant's ledger, Ostrander set out to calculate both an ideal and actual food costs.

"I thought I was doing well until I found out I was way off," he said. Nearly worse was the realization that all those tedious calculations were obsolete when the new accounting period rolled around. Invoice prices had changed, new items and specials were on the menu, poor sellers were gone. "I knew I didn't have the time to keep doing that by hand, and that's where most operators think they are."

The computer age

The number-crunching knowledge needed to operate a pizza business hasn't changed throughout the industry's history, but the tools available to simplify and speed up those calculations are cutting-edge wonders. Ever-improving software — either standalone programs or components of point-of-sale system software — tracks food cost precisely to the penny. No more pencils, adding machines or calculators.

And yet, few operators to take advantage of it, said Joe Erickson, a former restaurant operator and now vice president of, a subscriber-based restaurant education resource on the Web. Since food cost tools are purely data driven, Erickson said he's not surprised time-pressed operators avoid entering all the necessary information to make them run properly.

"It's one thing to put every menu item into the system, but I think the biggest hassle is taking your purchase orders and entering those into the system," he said. "That's an ongoing process that some people don't want to do over and over."

Matt Tuck doesn't like the data-entry process any more than the next guy, but as regional director for Hungry Howie's Properties, a 40-unit franchisee of Hungry Howie's Pizza, he said it's vital to the company's profits and his managers' bonuses.

"We don't put it off, we enter in our truck orders every time they come in," said Tuck. "When they're doing their ending inventory, it gives them a real food cost by comparing actual to ideal. It generates a report that the managers can look at before they turn it into me. It enables them to identify their problems, to say, 'I'm high here and low there,' and it gives us a really good look at our usage."

Jennifer Wiebe, marketing manager for POS maker Speedline Solutions, estimates less than 10 percent of its customers use the inventory and food cost modules that are part of Speedline's system.

"A lot have purchased it deliberately, but they're not using it," she said. "If they start to use it, they've got to get them to maintain it — and that's even if they track inventory at all. Some people just don't even do it."

Shifflett and Tuck both said their managers do nightly inventories of core items such as dough balls, meats, cheeses, pizza boxes and drinks, and then enter that data into their POS systems. At week's end, less-used items, such as banana peppers and anchovies get counted in order to calculate a weekly food cost.

"All your inventory has to be done correctly in order to have a true idea of usage," Shifflett began. "If there are variances, we and translate them into dollars and look at them from a financial standpoint. That tells us how many dollars we've saved or wasted."

Within those variances lie profit dollars many operators either don't know exist or don't view worth pursuing. No question, Shifflett said, the commitment to entering the data to rule out all the variances is enormous.

"It probably took about 80 man hours to do it, and every time we have a new product, I have to go back and rebuild it," he said.

The result of his efforts, however, is a near-bullet-proof system for accounting every food item that passes through his stores. The recipe for all Domino's menu items are entered into the system, and on Shifflett's POS keyboards are PLUs for every topping, sauce, cheese or side-item variance imaginable, he said. If a customer orders a three-topping pizza, the system calculates how much of each topping goes on that pizza, no more, no less.

"We've got it down to every slice of pepperoni, down to how much sauce goes on an extra sauce, because in my opinion, nothing should be able to slip out of your store," he said. Not only is exact portion control vital to profits, Shifflett said it's equally important to customer service. "It could be an issue of you not giving the customer the best pizza, a consistent pizza, if your inventory is high on sausage every week. You know you're not giving them what you should be."

Erickson said that if an operator is going to use his POS to provide real food cost information, doing it like Shifflett and Tuck is the only way.

"It's hard to do it halfway, because you need to keep your recipes updated all the time or your costs aren't right," he said. Erickson also said he's not surprised that chain operators focus more on data input than independents. "If you have someone

Inventory Tips

Make inventory sheets that reflect the "walking order" of your coolers storage areas.

Do a daily inventory of eight to 10 key products.

Where possible, keep no more than five days of food on hand.

Do a thorough weekly physical inventory.

Calculate food cost at least weekly based on sales and weekly inventory. It allows you to pinpoint problems as they occur.

Use employee incentives, such as tying raises to food cost goals.

Use a POS system to compare sales against inventory.

in house who understands that kind of a system, it happens a lot more. Sometimes it comes down to resources."

Ostrander eventually computerized his pencil-and-paper food cost effort with a Microsoft Excel spreadsheet, but his limited knowledge of the program made it cumbersome. He sought help from a programmer in Oscoda, Mich., where he lives, and was amazed at the results he brought back. The two men have since refined the program, dubbed it FoodCost Pro and now sell it to pizzeria operators worldwide.

"There were similar programs out there, but they were not built for pizzerias," said Ostrander, who sells the program during half-day seminars where he teaches how to use it. "There are a whole lot of little ingredients that these other programs weren't good at managing, and I knew that was the key to making it work in pizza." FoodCost Pro works on any Windows-based machine, including a POS, he said.

Speedline's Wiebe said her company is seeing an unexpected spike in sales of its food cost module. Be it operator response to rising raw food costs or a growing awareness that such programs save operators money, she's not sure what's driving the increase. Of course she's glad it's happening, but she said she'll be happier if those customers follow through and use it.

"It takes a commitment to do it right, and if you don't maintain it on a daily basis, your database becomes useless," she said. "The people who use it understand that any savings in inventory drops straight to the profit line. Operators try a lot of different things to increase their profits, but this is a sure way to make more money."

Topics: Financial Management , Operations Management , POS

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