Reduce Costs via Food & Beverage Cost Analysis
Updated: Feb 12
During these challenging times it is more important than ever that restaurant operators engage in food and beverage cost analysis to help reduce their cost of goods sold (“COGS”), ideally, by 3 to 5 percent.
The primary contributors to these reductions will be: 1) better menu management, and 2) inventory usage variance control.
The first phase of menu management in COGS-Well consists of building the recipes for your prepared items and menu items. Once the recipe ingredients and portions are entered, a cost will be calculated for each recipe.
While recipe costing can be done using a spreadsheet, this approach is very difficult to maintain. Ingredient costs are constantly changing and recipes are often adjusted over time. It is much easier to use a system designed for recipe costing, like COGS-Well, working together with an AP Automation Solution, like Plate IQ, that automatically updates ingredient costs.
COGS-Well allows you to enter a target cost percentage for a menu item and it will then suggest what the price should be to achieve your target. For example, if the recipe cost for a cheeseburger is $2.00 and your target food cost is 33%, then COGS-Well will suggest to price the hamburger at $6.00. Without this practice, It will be difficult to achieve financial success if you don’t begin with pricing that is targeted for that success.
With COGS-Well you can also monitor how ingredient cost changes are impacting your target menu item prices and profitability. If a menu item cost becomes too high, you can model changes that bring the cost back down. These changes could be to price, portion sizes, or the type or source of an ingredient.
COGS-Well's second phase of Menu Management consists of adding an interface to your Point of Sale ("POS") to capture the menu item sales mix. A POS interface extends the benefits of building recipes and does not require any more time or effort on your part.
By adding the sales mix to recipes, COGS-Well enables you to evaluate the performance of your full menu, If the profit on a cheeseburger is $6.00 and it was sold 100 times, then the cheeseburger is contributing $600 to your profits. You can also compare the cheeseburger to other sandwiches, to identify which sandwiches are most profitable. COGS-Well provides this information via a “Theoretical Profit from Sales” report.
COGS-Well also provides “Menu Engineering”. Menu Engineering combines the profitability of a Menu Item with its popularity within its category, to rank its performance. For example, a menu item that is high in popularity and high in profitability is ranked in COGS-Well as a “Star” - you may want to do additional promotions for this item. An item low in profit and low in popularity is ranked as a “Dog” – you may want to consider dropping this item from your menu.
As a restaurant operator, how do you know if you are performing as well as you could or should be? The answer is inventory usage variance control. Once recipes are created for each menu item and the sales mix is imported from your POS, COGS-Well will determine how much inventory you should have used and then compare it to the quantity actually used to identify variances.
COGS-Well calculates how much inventory should have been used (theoretical usage) for each inventory item by looking at the recipes the item is used in, the portion size, and the number of times the recipe is sold. For example, if a cheeseburger has a 6-ounce portion of ground beef, and it is sold 100 times, then the COGS-Well calculates a theoretical usage of 600 ounces of ground beef (37.5 pounds).
COGS-Well calculates actual usage for each inventory item by using the accounting standard of beginning inventory count plus quantity received, minus ending count, equals actual usage. Using the cheeseburger example, if you started with 10 pounds of ground beef, and received 40 pounds, and you ended the period with 8 pounds, then your actual usage of ground beef is 42 pounds.
By comparing the 37.5 pounds theoretical usage for ground beef to the actual usage of 42 pounds, an inventory control system will calculate a usage variance of 4.5 pounds. Based on your recipes and sales mix, the system can only explain 37.5 pounds of usage. The difference could be spoilage, over-portioning, waste, theft, etc., but now you know if your restaurant is experiencing inventory challenges and if so, where to go to fix them.
The combination of menu management and inventory variance control is commonly referred to as performing “Food and Beverage Cost analysis”. Food and beverage cost analysis can be done most efficiently by using an inventory control and menu management system like COGS-Well that is designed to deliver these features.
While food and beverage cost analysis does require taking the time to set up and maintain recipes, the effort is primarily a one-time effort and the return can be significant both financially and operationally.