Steven Brown: Making your food and beverage operation more profitable

Seamus Rotherick
By Seamus Rotherick October 12, 2011 16:32

If you get turned on by key figures and industry norms then you will just love this!

In this feature we are going to focus upon the use of facts and data that are available to you to use as control mechanisms in your food and beverage operation leading to greater efficiency and profitability.

We are going to look in depth at:

• Gross margins

• Wage analysis

• Yield

• Pipe cleaning and other waste (all allowances)

• Product mix variances

• Days sales.

Why, I hear you cry, do I need to know this level of detail? If you are involved in a management capacity or are ultimately responsible for the viability, profitability or even break-even point of food and drink, then you have to understand the ways in which our industry allows you to measure your own effectiveness.

All of the measures (where given) are standard within the industry but are naturally subject to regional, or perhaps a set of special, circumstances relating to different types of outlet.

How do most businesses measure their financial success? By turnover, gross profit, control of cash margins, cost of sales and expenses or net profits.

Not all of the above can be measured by our industry as a national norm.

For instance not every golf club will generate 250k sales for their food and beverage, some will only generate 100k. But by following some accepted, tried and tested guidelines, the 100k outlet can be just as profitable if not more so, them the 250k outlet.

In order for your business to achieve the financial targets you set yourself we have to understand one thing: turnover should not be your God! Turnover is vanity, profit is sanity. What matters to you is that your net profit from your food and beverage operation provides the level of contribution to your outlet that your investment in time and energy deserve.

One thing therefore is for certain. If you do not begin right you reduce the opportunity to end up right.

Gross profit and the accompanying gross margins are key to your business success. We cannot bank margins, only profits! That is certainly true but I can assure you that you will be banking less profit if you ignore the industry guidelines on gross profit margins (or percentages).

So what are the industry norms for bars and catering?

The table on this page shows a list of typical figures. Review them, compare them to your latest stock results and then be prepared to answer some questions.

Firstly, don’t panic. I bet some of your latest figures don’t match up to these by 10, 15 or even 25 per cent! Why? Well do your stock results reflect for either of the following:

1. 10 per cent or 20 per cent discount to members;

2.  Discounts we received from the suppliers?

If your stock results do reflect either of these figures then your margins will be low. No need to panic, that would be expected. The question is if you add back into the results those figures, does it bring you back to the industry norm?

Secondly you may have deliberately decided (the committee, you or the members) to keep retail prices low in order to generate greater volume sales and in so doing attract higher discounts from your supplier and then either pass them onto your customers or not as you see fit.

Either course of action is acceptable so long as you know what you are doing and how those decisions will affect your gross profits and therefore your gross margins.

Overall gross margin figures for golf clubs will vary from 40 per cent (non proprietary) to 55 or 60 per cent for owner operators. But seek guidance from your account before slitting your wrists!

Wages are the bain of every business and will probably account for your biggest single cost.

Are you controlling your wage percentage within industry norms or do you allow this cost to spiral upwards and eat into your profits?

Firstly, we must separate, if we can, the cost of staff used in the bar from those staff employed to work in the food section.

Why? Because it costs an awful lot more to employ food staff (dry) then bar staff (wet) and if we simply add the two together we wont know where any inefficiency in wage costs is occurring.

If you are trying, as we always are, to identify which part of your business is self-sufficient – the wet, dry, both or neither, then you must, wherever possible, allocate appropriate costs to each section as this will affect the bottom line (net profit) of each but also allow you to see which part of your business is dragging you down and needs therefore to be addressed, perhaps by a better control of your biggest outgoing – wages.

If you reduce this outgoing without affecting the level of service then you improve the bottom line big time. Always think this way! How many fewer staff could I do with to generate the same level of sales without  affecting our service levels.  Every penny saved on staff costs makes a greater contribution to your profits?

So what are the guidelines on staff vs turnover?

Let’s split the operation in two.

If you have dedicated staff who work in the bar then typically your wage percentage should be 10 to 12 per cent of VAT-exclusive bar turnover. This wage percentage will not include your club’s bar’s manager or stewards’ salary.

If, however, you expect your bar staff to take food orders, collect them from the kitchen, deliver food to the table and clean up afterwards, then expect that percentage to rise as more staff may be needed to cover staff involved in these duties. The wage cost could rise to 15 per cent.

With regard to staff costs dedicated to catering then the width of the parameters is totally governed by the style of catering you provide. The table on this page shows the standard industry guidelines.

This would assume that one person makes the sandwiches and possibly serves. We assume two people are involved in preparing food and cooking in the hot snacks provision. Sunday lunch will need a cook and assistants in prep and production whilst cordon bleu needs a chef, comi chef and so on. Remember this though: while the staff cost rises so does the level of gross profitability for each food style, ranging from 50 per cent (sandwiches) to 75 per cent (cordon bleu) but then the wastage element for all foods has to be accounted for as well.

The industry fully understands the need to control this massive cost.

The guidelines is this: if you increased your turnover you can increase the number of people you employ and the spend but not your wage percentage. Failure to control this simply means that any additional profitable turnover is eaten up by over-blown staff costs.

Let’s focus now on the all important results obtained from your last stock result.

How much detail did you record regarding ullage or product loss in the last stock period? Or did you simply write down a lump sum and give it to the stock taker to record on the results as waste beer?

You need to be aware of how products are lost or wasted in specific detail because in this way you can identify inefficient practices and even who the main culprit is.

1. Pipe cleaning. The industry guideline is one to 3.5 per cent and will be affected by the following factors:

• Length of lines

• Number of lines

• Diameter of pipe

• Regularity of clean

• Keg or cask

• Method of cleaning.

The one to 3.5 per cent is the amount of draught product loss as a percentage of the estimated total draught product sold in the period. The good news is that once established and unless any of the above factors alter, it should be the same every month! So it should be a good standard to set for yourself to check every month.

2. Product mix will identify precisely where your sales activity takes place in your chosen period. Typically a beer lead outlet will generate draught sales of 45 to 50 per cent. If food is a good seller in your outlet then expect wine sales to be 15 to 20 per cent and minerals 10 to 15 per cent. Keep an eye on your product mix monthly to make sure you are aware of changing trends either to more profitable lines or, worryingly, to less profitable lines.

3. Drip tray waste is a constant worry for bar operators. Staff need to be fully trained in how to pour and to report fobbing problems immediately. A high incidence of ullage in this area will be identified by the next important measure.

4. Yield is a measure of your ability to be able to take a purchased product and turn into a profitable sale. Your stock result should illustrate your yield – if it doesn’t, get your stock taker to calculate it for you.

You should be expecting a yield of no less than 98.5 per cent! Your results may show a lot less (a recent result I saw showed an 82.5 per cent yield) which could be caused by a mixture of inefficiency, fraudulent activity or the committee having tea and coffee and not paying for it! (I apologise unreservedly to the hard working committee members I have just offended!) Ask your stocktaker, no demand from your stocktaker, how your percentage yield can be improved. If they have no suggestions I suggest you look for a new stocktaker!

5. Days stock is a great indicator of how much dead stock you have tied up in the cellar and stores. I regularly encounter figures of 25 to 40 days when industry standards tell us that an outlet can run efficiently on 10 to 12 days stock (excepting emergencies seasonal variations and functions).

This figure tells you by product line how much stock you still have left to sell at the end of the period. A low figure is great so long as you don’t run out. A high figure is not acceptable unless you have a great cash flow situation and are aware of an imminent cost price rise. Remember not to buy lots of discounted goods unless you can sell them. The best discount in the world is worthless if the stock remains unsold!

So what next? Why not review your business in lines with the industry norms listed. If you are operating within the guidelines then maintain these results. If you are outside of the norms then you need an action plan to combat inefficiency and bad practices.

Much of our time spent on site with our clients during our business wealth checks will be spent identifying current working practices and looking at how they can be improved to bring them into line with the industry norms that regulate our working lives in food and beverage.

Take a professional’s advice and adopt tried and tested industry norms that are used for one reason, and one reason only: they work.

Seamus Rotherick
By Seamus Rotherick October 12, 2011 16:32
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