Counting the costs

270114_3985There was a time when you could safely assume two plus two equalled four. But when it comes to menu costing, the answer is no longer that simple. Sharon Aris reports on the secret to effectively monitoring costs and achieving your gross profits.

It used to be simple. Costing a menu traditionally consisted of tallying up the raw produce costs per item, working out what proportion of the overall price this should be—generally around a third—then adding the balance to each accordingly. But increasingly restaurateurs are asking whether this basic formula can really reflect the true costs of producing a plate. For a start, as a service business, shouldn’t labour costs be factored in directly?

Figures from the Australian Bureau of Statistics suggest it should be considered. While purchases at 39 per cent were the single largest expenditure item in 2003-4, labour costs followed hotly on its heels at 36 per cent. With the average operating profit for cafes and restaurants hovering at just 4 per cent during that year, things don’t seem to be adding up. Certainly, the last 10 years have been tough. While some sheet this home to the GST—with many restaurateurs initially absorbing the extra 10 per cent and never catching up—additional staffing costs like superannuation and work cover have also come in, which weren’t a factor in the past. Profits aren’t what they should be. But does that mean the menu formula is wrong?

David Pugh is the celebrated chef and co-owner of the much-awarded Restaurant Two in Brisbane. But while food is his passion, his business brain means he also follows the money. So his rule of thumb is 33 per cent for labour costs and 33 per cent for food costs, which, he concedes, “sometimes works, sometimes not.” But, he adds, “You need to charge a reasonable amount, otherwise there’s not much point in being in business.”

And getting the price right, points out Pugh, has never been more important now produce prices have escalated so dramatically. “The price of seafood has gone up five to 10 per cent this year. Lamb now matches if not surpasses beef in costs, and with organic chicken breasts costing $21.50 a kilo, it’s now the case that seafood isn’t always the most expensive produce on your menu. Chicken can be.”

Then there are the veggies, up around 35 per cent, which has led to one form of cost cutting he’s not so sure about. “I never thought I’d see the day chefs would buy portion cuts or freshly prepped veggies,” he says of the trend that started in hotels. “But doing so means you’re not carrying an extra staff member.” He adds the long-term cost is trade skills are being lost.

Instead, says Pugh, there are better ways to ease expenditure. “Chefs are a funny breed. They don’t think of price, like with using out-of-season produce. When something’s in season we’ll put it on in three or four different ways. That’s where we’ll make the money.” He points out this is something that could well be learned from Europe. “I’ve been to a three star Michelin restaurant, and they had raspberries on two entrees, two mains and two deserts when they were at their best and cheapest.”

Then there’s buying from several different suppliers. Restaurant Two has 20 more suppliers on their books now than three or four years ago. It’s about quality as much as price—“these products aren’t cheap, but the potatoes were dug yesterday”—but he adds consumers do wear the increased cost, so long as they can see they’re getting the best. “If you put beans on the plate they need to be hand picked and the best in Queensland. We’re looking for that edge, and you have to have one to maintain your advantage.”

Alla Wolf-Tasker, executive chef and owner of the celebrated Lake House in Daylesford, Victoria, also thinks costing in labour matters. “It’s not just the ingredients on the plate. It’s the work put in the kitchen and being served by someone with experience. It’s the value of the dining experience,” she says, adding it’s fundamentally about the value customers put on the experience itself. “If you’re willing to just be fed, you get food from a buffet.”

For her money, part of that valuing includes directly costing the labour: “Human beings are your most expensive item. With that, too, come the extra elements of knowledge and skill in your employees. Do you want to be looked after by a 16 year old or do you want to be looked after by someone who treats the job as a career? I often think as restaurateurs we often sell ourselves short. I think there is a public willing to pay more.” She points out that those at the very top end can and do charge handsomely for degustation dining—with all the costs that involves—and find a ready audience prepared to pay for the experience.

Wolf-Tasker sees the failure to truly cost dishes as a symptom of a wider malaise, which is the failure to truly operate as a business. “A lot of restaurateurs are not great business people. They have an innate sense of style and hospitality, and can create a great experience, but it’s often at the expense of the bottom line. It would be a shame to lose the most creative ones. If only people were prepared to stick their neck out and put prices up.”

She adds the cure can be simple. “Probably the best thing we ever did, a long time after we opened, was to get a really fantastic accountant. A lot of people still operate on single column accounting: ‘I have money’ or ‘I don’t have money’ without setting aside money for fridge repairs or holidays. Then it becomes a temptation to dip into GST.”

Harry Ferrante, owner of Simons Seafood Restaurant in Perth and president of the Restaurant and Catering Association of Western Australia, agrees this is part of a bigger problem: too many restaurateurs simply don’t bring in good business skills. Ferrante is scathing of the trend to compete on menu price—often by new owners who don’t understand the sums. The resulting price war to the bottom means everyone loses when the newbies eventually go belly up: other restaurateurs have to drop their prices to compete initially, clientele get used to paying a lesser amount that doesn’t reflect the true cost of preparing a dish and the suppliers who don’t get paid when someone defaults have to recover their losses with price hikes for everyone else.

“Today to operate a restaurant successfully you need a gross profit of 71 to 72 per cent after you have paid for all the goods,” he states. Though, he adds, because of the competitive nature of some dishes, the profits on some may have to be sacrificed. Just make sure you make them up on others.

“Include on the menu a signature dish to make up the loss of other items that aren’t so profitable,” he advises. “But you must always give value to the client, too. They have to see they have received value. So if you’re forced to price a dish a dollar or two more, give it extra attention to justify the extra charge.”

For Tony Eldred, managing director of hospitality consultants Eldred Hospitality, getting the price right—as part of an overall management control system—is exactly his business. So it may seem surprisingly that he plumps for the old formula for costing a menu. But for Eldred there is a bigger picture. For a start, while he agrees there may be better ways to do this, they’re also a lot more complex and require more administrative time. With a chef doing admin costing you around $75 an hour, there are better ways to spend your money. So he says, stick with the simple system. Take your raw costs and apply a multiple. If you’re a fine dining restaurant that multiple is three, and if you’re mid level it’s four.

But, cautions Eldred, this has to be part of a bigger system; there’s prep work and plenty of follow up to make proper menu pricing really work. For a start, you need to decide what your price structure is going to be and stick with it: if you decide mains will be $25 – $35 and an item costs more, it doesn’t make the menu.

Then you need to make sure you’re managing your real costs. Menu prices should be based on real cost. With food prices being wildly volatile you need to know how the prices change from week to week. “The chef should be keeping a close eye on that,” he says.

With meat prices increasing 35 per cent in the last year, that eye not being on the ball will cost you dearly. And he adds costing should also be done to the worst-case scenario. “Some businesses use average costing and say they’ll make it up on the swings and roundabouts,” he says. “But they mostly don’t.”

Eldred also prescribes a stocktake at least monthly. “A lot of restaurants simply use purchase as the basis of calculating out food costs. But that doesn’t take into account what’s being lost in the system.” And there’s the monitoring of portion size. With an expensive item like crayfish, overgenerous carving by an inexperienced apprentice adds up fast. It may seem a long list, but for Eldred, the art of a profitable restaurant is the sum of many parts. “For restaurants to succeed you have to pay attention to the minutiae.”

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