How to Track Your Foodservice Financials

A smooth-running, profitable foodservice operation is like a lava lamp — smooth, freely flowing and often changing in shape, form and color. Like a lava lamp, certain colors (or, in a foodservice context, certain items and flavors) will dominate before smoothly and swiftly changing, perpetually melding into another form.

With so many moveable parts, proper management of the financial substructure of your foodservice operation — including food costs, shrinkage, spoilage and, of course, labor — can mean the difference between profit and loss; success and failure.

For starters, convenience store retailers must understand that when you are in the business of serving food, there will be waste. It simply comes with the turf, according to our Convenience Store News How To Crew panel of foodservice experts.

“Food and beverage items have exceedingly short shelf lives relative to retail items, and throwing them out is seen as a waste of money,” said How To Crew member Mathew Mandeltort, vice president of foodservice strategy for convenience distributor Eby-Brown Co. “On the other hand, leaving food and beverages out past their prime will result in lost sales. You need to determine what levels are acceptable, and these levels will vary depending on the product and category.”

Tracking why you throw out an item is as important as tracking what you throw out, Mandeltort added. Some factors to keep your eye on are:

• Did someone over-order?
• Was the product damaged?
• Was it improperly prepared?
• Was the product improperly stored?
• Was it stolen or pilfered?
• Did someone not follow par level recommendations?

Another important consideration is all is not lost just because a product has gone past its “best if used by” date. Reengineering or repurposing food can minimize waste and help recapture what would otherwise be lost revenue. Over-ripe bananas can be converted to banana muffins/bread. Rotisserie chicken meat can be pulled from the bone and repackaged as ready-to-use boneless chicken. Cookies can be used to make ice cream sandwiches.

Keeping an ongoing inventory of all items is an integral component in the process. How To Crew expert Larry Miller, president and founder of Sanford, Fla.-based Miller Management & Consulting Services, poses several important questions. How does your store track and account for all the items that go into a prepared food item? How often are you, as an operator, taking inventory of all the foodservice items you stock in order to make certain your margins are the same as what was projected?

“For someone with my background — heavy traditional c-store operations, and almost as much time in foodservice — I am well aware of the challenges of accounting for prepared food sales and profit margin,” Miller remarked.

Some operators mistakenly “pull a number out of the air for a budget number,” acknowledged fellow How To Crew panelist Dean Dirks, CEO of Gig Harbor, Wash.-based Dirks & Associates, a foodservice consultancy serving the greater Seattle area. Instead, he offers a hybrid of a Taco Bell/Subway spreadsheet the company created to show actual food cost vs. what the food cost should be based on item sales. (See worksheet example on page 52.)

“Ours changes week to week based on the items purchased. For instance, a store that sells more cold cut trios, our best food cost item, will have a lower expected food cost than a store that sells more chicken sandwiches, our highest food cost item,” Dirks said.

SETTING THE BAR

So, how does a c-store operator know if a program is hitting its goal, and how should the retailer go about setting that mark in the first place, and modifying it if necessary?

The first step is to establish metrics for each area: sales, shrink, margin, labor, etc., advised How To Crew retailer Chad Prast, senior category manager of fresh foods and dispensed beverages for El Dorado, Ark.-based Murphy USA Inc. Once these metrics are in place, Prast suggests comparing each store against them to gauge how that location is performing.

“To establish the metrics, try and use industry standards and then tweak them for your business model,” continued Prast. “For example, industry standards for coffee cups per day may be 100. But depending on what part of the nation you are in, that metric can vary greatly.”

At York, Pa.-based Rutter’s Farm Stores, Director of Foodservice and How To Crew member Ryan Krebs employs several criteria to establish and confirm foodservice goals. These include margin, overall sales, spoilage and labor costs.

“These areas are constantly reviewed to assess budget vs. actual,” said Krebs. “The obvious goal is to exceed expectations in all categories, with the exception of margin, which is controllable.”

When introducing new items, one might want to test different retails to see what hits the best profit-tosales ratio, according to Prast. It is also important to keep a careful eye on any cannibalization a new product may have on your current offerings.

“If you introduce an item that sells 20 units per day, but other items drop by 10 a day, then it may not be as profitable as first thought,” he explained.

Beyond the numbers, it’s also helpful to gather customer feedback. “There are lots of items that customers say they want, but when you bring them in, they don’t sell,” Prast said. “Usually, sales and profits dictate the success of an item.”

The tendency for many c-store operators is to rely on anecdotal evidence from their frequent foodservice customers. These customers, of course, will usually provide positive feedback and that will provide unreliable results.

“If they have the resources, they should consider engaging a customer research partner to help them gain a complete understanding of all their customers; not just foodservice program enthusiasts,” Eby-Brown’s Mandeltort said, pointing out it’s more difficult to capture insights from infrequent customers without third-party assistance. “For every positive review, there may be five negative ones, but you’re never going to hear that [with anecdotal evidence].”

IDENTIFYING KEY METRICS

To ensure the maximum financial efficiency of a foodservice operation, it is imperative to identify the most important financial metrics to track the overall program. Here, there is some divergence in opinion among our How To Crew panelists.

“Sales, margin and spoilage are the main three,” said Prast, succinctly.

For Krebs, though, it’s all about sales. “It’s really that simple,” he said. “Are customers purchasing what you are providing? If product is spoiling or excess inventory accumulates due to slow-moving items, decisions must be made to find what the customer is actually looking for. Case purchases vs. actual sales is a tell-all of success. As long as products are aligned within margin profits and labor models, successful items will drive consistent and ongoing profits to the bottom line. Essentially, meeting sales/budgetary goals will be the catalyst for growth, added labor, remodels or whatever direction an organization plans to move in.”

Another How To Crew member David Bishop, managing partner of Barrington, Ill.-based sales and marketing firm Balvor LLC, says at the most basic level, unit sales and gross profit dollars indicate how a program is performing. A program that’s growing unit sales is either resonating with a larger customer base or becoming a greater draw for specific customers. “Either way, the consumer value proposition is working,” he stated.

From an internal perspective, a program that generates more gross profit dollars — taking into account product waste and shrink — depends on either fewer price discounts or more effective management of operational costs to drive volume.

“Retailers who focus on one measure [internal or external], but not the other, may be getting a false sense of whether their programs are truly successful,” Bishop cautioned. “Units sold is the No. 1 metric to monitor. This variable drives the others and represents where customer demand is high or low for a program.”

Next in importance, Bishop believes, is cost per unit, which typically excludes waste. “Monitoring this metric impacts how you price, promote and produce an item,” he said.

In some areas such as hot dispensed beverages, the result should reflect a weighted average based on usage or purchases. “This is because you have different items, coffee blends, that go into selling a single item — a cup of coffee,” said Bishop, who noted retailers can manage waste by adjusting production schedules or par levels based on sales patterns by time of day, day of week, etc.

The process of managing waste often produces a classic retail conundrum: How do you lower the rate of spoilage without limiting variety and choice for the consumers? This is particularly important in the foodservice arena.

“It just comes down to tracking and analyzing sales patterns and being disciplined about par levels, etc.,” said Mandeltort. “Being willing to adapt offerings by region is also beneficial. What sells well in one market may not sell well in another.”

Of course, being creative with potential waste is always helpful. “I used to say that if I had pizza, quiche and/or soup on the menu, I ran zero-percent food waste,” said Mandeltort. “Yesterday’s leftovers became tomorrow’s special of the day. Of course, it helps to have a kitchen.”

The advice of Murphy USA’s Prast: Allocate more space to higher volume items and don’t cut back on variety. Cut back on the space allocated for lower-volume items.

Savvy retailers understand how and where they can expand variety with minimal risk to increasing product waste. “For instance, if you have a made-to-order program, you can add menu items by finding ways to cross-utilize existing ingredients,” explained Bishop. “Or, if you’re expanding your hot coffee lineup, you can adjust brew size for new blends initially to reduce the potential waste.”

And yet, as important as sales are to the bottom line, there may be even one more undervalued and underappreciated metric: customer satisfaction — the single most important factor in building customer loyalty for your convenience store.

“Many retailers simply don’t take the time to gauge customer satisfaction levels with their foodservice programs,” Mandeltort said.