Foodservice 101: The Basics

Sitting down and drafting a strategic plan for foodservice is the important step most often skipped by operators new to foodservice. Skipping strategy development is akin to shooting your foodservice program in the foot before you even begin. Take the time to develop your plan, know your market and customers, and build a menu that reflects their needs and identifies gaps in the market that you can fill.

THE ROLE OF FOODSERVICE

As you drill down in the menu development process, you should define the role of the foodservice categories (food and beverages) and the subcategories (coffee, cold dispensed beverages, sandwiches, pizza, etc.) For instance, will your breakfast sandwiches be traffic generators, margin enhancers or business maintainers? What role will your coffee and fountain beverages play? Understanding the role of your menu categories based on competitive and market dynamics will determine your company's price and margin tolerance levels for each category and subcategory.

A strategy is important because it provides a roadmap for your program, and will help you avoid chasing competitor strategies in lieu of your own, according to our How To Crew experts. From the beginning, understand who you are developing the food for and why. Identify the market gaps, define the roles of categories, engineer and test menu items, itemize food costs and develop packaging, marketing and training. Once you have all the pertinent information in place, then you can address pricing and promotions, one expert said.

COMPETITIVE ANALYSIS

It's important to know what competitors in your marketing area are doing, so spend time in your competitors' stores to do price, quality and menu checks. At this early stage of development, primary competitors will be area convenience stores, but understand the impact other competitors can have on your programs, including quick-service restaurants (QSRs), drugstores, grocery stores, restaurants, etc. The importance of studying the competition is to help you find a unique place to compete — a creative offer that can set you apart from the competition.

It's important not to match your competitors every step of the way, especially if they are deeply cutting prices and they are much larger than you.

"I will caution all levels of operators that using rock-bottom pricing as a way to grow volume and customer awareness is a risky road and can become a slippery slope," said foodservice consultant Larry Miller of Miller Management & Consulting Services, a member of the How To Crew. "I have witnessed a lot of retailers that have started a food program using high-quality ingredients, but to keep up with competition they switched to inferior products to try to maintain some level of profitability. Once you lessen quality to make margin, you will lose customers."

Experts recommend offering promotions not at your competitors' disposal. Perhaps a loyalty program that gives cents off per gallon of fuel based on dollar value of foodservice purchases. Of course, some of the biggest differences to capitalize on include the overall convenience of the store, the ability for customers to buy multiple products (foods, drinks, lottery, gas, etc.) in one stop. Find ways to highlight the differences instead of copying and matching competitors, which will likely just erode your margins and strategy.

PRICING STRATEGY

Once the strategy and the menu are established, itemized food costs and pricing guidelines must be established for each category and subcategory of products. But there are no hard and fast rules about how to do this, as our experts have widely varying opinions.

One expert is a firm believer in establishing everyday retails based on the need to attain a certain level of profitability, meaning you build the pricing around a desired gross margin, taking cost of goods, labor and spoilage into consideration. The following are some other methods for determining foodservice pricing:

Reverse engineering. By determining the ingredients and weight of the product, and based on the opportunity gaps discovered in your competitive analysis, you back into the cost of goods. "You will also know from your competitive analysis where the optimum retail price should be based on the opportunity gaps," one expert noted.

Breakeven analysis. Determine what your gross margin needs to be on a percent basis to cover expenses, and build up from there. Once you know the food costs, a general rule of thumb is to multiply times three and round down to arrive at the price.

Another expert cautioned to be sure to measure against "comparable competitors" on quality and price. In other words, don't compare your pricing on a custom-made sandwich with a competitor's grab-and-go sandwich.

"Your product is better and should cost more and customers know that," the expert said. "Determine your actual cost. Through testing and trial, determine what an acceptable spoilage percent should be; finally, look at any investment you need to make in store improvements and labor requirements to execute, and determine the margin you need to justify all that. The rest is math. At the beginning, pricing will be on the low end against competitors as you develop your food image."

Another way to look at it: "You should really determine retails based on labor and food costs and hit 30 percent net margin," one expert recommended.

MARGIN STRATEGY

So, if one approach is to build pricing to reach a certain gross margin, the next question is likely, "What should my margin expectations be?" Unfortunately, the answer to that question varies widely as well, but depends on your geographic region, the competition and your cost of goods.

Again, the role of the menu categories comes into play. If the menu item is a traffic builder, the margin will be less; if it is a margin enhancer, the margin will be higher; and if it is a business maintainer, it will be a middle-average margin.

Several experts recommend looking at the Convenience Store News Industry Report gross margin averages for various food and beverage types and make sure you are within those averages. Other experts were bolder, saying that food gross margins should be between 50 percent and 65 percent, and hot and cold dispensed beverage margins should be between 65 percent to 75 percent.

It's imperative to set up controls at the beginning stages of food-service in order to prevent caving into pricing and margin pressure as competition heats up. Stay on top of inventory costs, labor costs and spoilage, in particular, and be very disciplined about measuring them and incorporating those costs into pricing to get a true picture of profitability.

HOT TIPS

• Your foodservice strategy should drive pricing and margin strategy, not vice versa.
• A strategy is important because it will help operators avoid chasing competitor strategies in lieu of their own.
• Establish and understand the role of your menu categories, which will determine your company's price and margin tolerance levels.
• Build on your uniqueness and what sets you apart from the competition.
• Stay on top of inventory, labor and spoilage costs, and incorporate them into pricing to get a true picture of profitability.

The Biggest Pricing Pitfalls

The following are some of the biggest pricing pitfalls operators should avoid, according to our How To Crew experts.

• Picking a price and trying to engineer to it. What you do in this case is cut size and or quality with disregard to what the consumer wants.
• Don't try to be the cheapest guy out there if you can't satisfy the customer. "Selling coffee at 49 cents a cup but only having room on the coffee bar for four glass pots is just going to tick off the ones that have to wait," one expert said.
• The biggest pitfall is charging too little.
• Not using trial to determine what the market will bear for what you are offering.
• Unrealistic goals and expectations. Keep a realistic approach to pricing and always ask yourself if customers can afford what you are asking them to spend. "Keep your program and your pricing centered around your customers and their demographic," another expert recommended.