The Costs of Success

Small operations adjustments can keep food and labor overhead at bay

By Margaret Sheridan, Senior Editor -- Restaurants & Institutions, 7/1/2004

Finding ways to keep food and labor costs down weighs as heavily on chain executives as does identifying strategies to increase customer visits.

Sales are improving for many chains, but the gains are eroded by cost increases. In June, the Monthly Restaurant Industry Survey (a collaborative effort of the Smith Barney unit of Citigroup and Reed Research Group), found restaurant executives (at large and small chains and independents) to be optimistic about the sales outlook for the next six months but apprehensive about the impact of rising operating costs. More than half (52%) the respondents rated the sales outlook for 2004’s second half as “excellent” or “very good,” up from 48% in the May survey.

Changes in insurance plans and increased safety training have saved El Pollo Loco millions of dollars.

But cost-control confidence moved in the opposite direction in June: 39% said they expect costs of doing business to be “up meaningfully,” a dramatic jump from 22% in May.

In the June survey report, Smith Barney analyst Mark Kalinowski points to the year’s sharp increase in dairy and cheese prices as being especially worrisome for restaurant operators, but beef and poultry prices also have gone up. Rising energy costs—led by gasoline—compound the problem.

Fighting Back on Food
Top 400 Chain operators utilize a variety of tactics to dampen food-cost increases’ impact. Ferndale, Mich.-based BD’s Mongolian Barbeque joined a Tennessee-based co-op of produce vendors. The 23-unit chain’s purchasing department receives a price sheet each Friday for the coming week; it is sent electronically to each unit.

“We get the best price, and it allows us to order daily, if necessary, for next-day delivery,’’ says Todd Pahl, chief financial officer. In three months, he cut food costs by a half percentage point, which in a multi-unit chain translates to sizable savings.

In Dallas, Dickey’s Barbecue Pit has streamlined inventory to control costs. “We’re down to 50 products per unit, including 16 vegetables and eight types of meats. The minute you buy extra oils or spices, that clutter leads to disorganization and waste,’’ says Roland Dickey, Jr., vice president.

Prices on commodities are watched and menus adjusted accordingly. “When chicken prices went through the roof recently, we used photos to promote more beef ribs, pork and turkey items,’’ says Dickey.

Penny-pinching helps, too. Penn Station East Coast Subs bases the number of ketchup packets on the size of the French fries order. “When the staff makes a concerted effort to count packets, systemwide, it increases awareness of portion control,’’ says Craig Dunaway, president of the 138-unit, Cincinnati-based chain. Savings per store is $3 to $10 per day.

Labor Lost
To manage worker’s compensation costs, Irvine, Calif.-based El Pollo Loco implemented a loss-control program in 2002. It uses enhanced safety-training programs, accident prevention procedures, and post-accident cost-control techniques to attack workers’ compensation claims before and after they occur, according to Julie Weeks, director of communications.

The transition from a guaranteed-cost insurance plan to a loss-sensitive program enables the company to better manage costs. Under the previous plan, premiums would have cost the company over $6 million in 2003, says Weeks. For 2004, the premiums for its plan are less than $1 million. Accident frequency and severity are at the lowest point in recent history.

Chicago-based Big Apple Bagels units plan labor schedules on a quarter-hour basis instead of hourly. The 15-minute modules help cover peak times and use labor more efficiently. “When you factor labor in as a percentage of sales, every minute counts. This way, you have more control,’’ says Rosanne Angell, director of franchise relations, adding that the flexibility appeals to part-time workers.

Following a similar course, Kings Family Restaurants in McKeesport, Pa., added time-management software at seven of its 36 units in March 2004. Labor costs dropped 2%. It catches culprits who clock in early, explains Chris Wahlen, controller, and resulted in changing scheduling from hourly to 15-minute increments for greater efficiency. Once the program is installed systemwide, he estimates it will save the chain $300,000 annually.