PERCEIVED VALUE DEFINED BY PERCENTAGES!
The consumer has a built-in perceived value system that we, in management, can interpret in percentages. That is part of the reason for the 65% food, beverage and labor cost figure being called the "magic number." The other part of the reason is that the average restaurant overhead factor is 25-30%, which leaves 5-10% for profit.
There are some small variances on this theme, however, depending on the type of restaurant, sales volume, and the owner's concept of a reasonable return on the investment. For instance, a restaurant doing under $500,000 per year in sales may try to reach for the 10% profit factor; and a restaurant doing over $1,000,000 per year might settle for the 5% profit factor.
But, the problem with this thinking is that if the lower volume restaurant is trying to achieve profit of 10%, by lowering the food, beverage and labor cost to say, 60% (because of high fixed overhead), the public will then stay away because it is no longer getting it's perceived value.
The following is a fair rule-of-thumb schedule:
65% food, beverage and labor plus 25% overhead = 90% costs = 10% profit.
Since management is primarily held responsible for the high variable costs, i.e. food, beverage and labor, we will deal first with some of the variances that invariably arise in those areas.
1. In a fast food environment, "food" cost generally includes the "paper" supplies and the two are targeted at about 40%. With labor targeted at 25% and overhead at 25%, the total is 90% costs.
2. In a coffee shop, the "food" cost is generally targeted at 33% without paper and the labor is targeted at 32% with overhead at 25%, the total is 90% costs.
3. In a dinner house, "food" cost is weighted with "beverage" cost, referred to as "product" and is generally targeted at 35%. With labor targeted at 30% and overhead at 25%, the total is 90% costs.
4. In haute cuisine, the product cost is generally targeted at 25%. With labor targeted at 40% and overhead at 25%, the total is 90%.
As you will note, overhead did not change in any of the above illustrations. The normal rent factor within the overhead factor is 5-6%. If the restaurant is fully equipped, then the rent factor is 10-12% "fixed" costs, leaving 15% for semi-variable costs.
There are any number of food and beverage concepts today that don't quite fit the mold all of the way and yours may be one of them. Some of the variances in this theoretical discussion may be:
1. Labor does not include the employer's contributions. Those are considered a part of overhead (semi-variable). The reason is that the "manager" has only a very minor role in controlling them.
2. The same logic applies to other forms of "semi-variable" overhead such as repairs and maintenance.
3. Entertainment and advertising are usually placed by management in "overhead," but here I take exception and like to place them both in the "controllable" section along with food, beverage and labor, because of the high degree with which they integrate into sales and service.
4. If you want to split hairs -- where does the manager's salary belong? Is he/she a replacement for an absentee owner? If so, then the salary, bonus, etc. should be placed in the "profit" section. On the other hand, if he/she replaces the chef or bartender shouldn't they be considered as a part of the "magic number" of 65%? Sometimes it's best to split the management cost between variable and profit.
5. Sales may be lower than expected due primarily to "location". The expected profit and overhead combination of 35% may not be achievable. If the restaurant is to remain open it is important the 65% factor remain intact in order to keep whatever customer base you have.
6. In no case, should any single category of cost be considered unto itself; i.e. food by itself -- where beverages are a significant part of sales. Or labor all by itself, when it is essential to the manufacturing, sales, and delivery of the product. Even rent is relative in this analogy.
My experience says that whenever management tries to sell the public a 50-55% product and labor combination, it will eventually erode the customer base to oblivion.
Good luck!
John R. Bryan
655 W. Baker, Ste. K111
Costa Mesa, CA 92626
http://virtuallyfree.com/
1996-2002©
