Restaurant Operators, Franchisors and Franchisees – Benefits of an Inventory and Theoretical Program

Today’s post is written by recognized restaurant operations expert Fred Kirvan. I’ve had the privilege of working with Fred (almost 20 years) on various projects building scores of franchised Fast Casual restaurants. Today Fred discusses the importance of creating an accurate, detailed and evolving inventory and theoretical Cost of Goods program. Franchised as well and independent restaurant operations should take the time to learn how to build an use such a program. It will not only help you save money but more importantly will create a better system for overall results with or without your daily participation in the operation.
– Gary Occhiogrosso
Founder and Manager – Franchise Growth Solutions, LLC. #howtofranchise
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Performing regular inventories will serve to organize your stores as attempting to perform an inventory in a disorganized store will take twice the amount of time. As part of the integration of this program, we will teach managers and franchisees how to perform accurate and effective inventories.

Benefits of an Inventory and Theoretical Program

By Fred J. Kirvan
Founder FK Consulting
Cooperative Member – Franchise Growth Solutions, LLC

I deal with numerous franchisors and restaurant operators and still can’t understand why so many do not employ a good inventory system. In fact, the sad truth is some don’t even conduct a weekly or monthly inventory…Instead, they use purchases to somehow (and inaccurately) calculate their Cost of Goods (COG’s).
Today I will attempt to explain why it is critical for professional restaurant management that you have a detailed Inventory and Theoretical COG’s Program. A 3%-5% saving in COG’s can add up to tens of thousands of dollars. Remember, this saving goes directly to your bottom line, not to mention the increase in accountability of your operation whether you participate in the day to day operation or not.

Here are just a few benefits of using such a program

1. Provides the ability to conduct a monthly audit on your purchases when the program’s Master Inventory Sheet is updated each month by you or someone in your organization. These audits should be updated internally.

2. The process of developing this program serves to streamline your order guide by having to determine which products you will use moving forward as they are now tied to menu and recipes within the program. What that means is your order guide gets cleaned up by removing duplicate or unnecessary items.

3. In addition to a Theoretical Food Costing Program, it will also include Inventory Sheets for performing accurate physical inventories.

a. Performing regular inventories will serve to organize your stores as attempting to perform an inventory in a disorganized store will take twice the amount of time. As part of the integration of this program, we will teach managers and franchisees how to perform accurate and effective inventories.

b. By having theoretical and physical inventory in one program we can immediately identify down to the penny, the difference which should be accounted for discounts, employee meals, and waste. The unaccounted-for amount is then either over portioning, shrinkage or theft. Without this information your operating blind.

4. This process will streamline your Recipes, portioning must be solidified to achieve costing which serves to assist with the consistency of menu offering as well.

5. This process will streamline your Plate Builds, portioning must be solidified to achieve costing which serves to assist with the consistency of menu offering as well.

6. Once the program is completed:

a. You’ll immediately be able to identify higher and lower costed menu items.

*** i. With that information, you may elect to change the portioning and/or pricing to remedy the issue having an immediate impact on your costs.

*** ii. Additionally, repositioning lower cost items on the menu will also serve to immediately lower costs as well.

b. You’ll be able to see the immediate impact on your overall food cost as a percentage and dollar amount by changing costs from your distributor.

c. You’ll be able to see the immediate impact on your overall food cost as a percentage and dollar amount by changing portions on menu items.

d. You’ll be able to see the immediate impact on your overall food cost as a percentage and overall dollar amount by changing prices on your menu items.

Quite simply, no professionally managed restaurant group can or should operate without this level of information – certainly not having this level of detail on your menu offering will heavily impact your ability to recruit multi-unit franchisees in the future.

For more information on building and using an Inventory and Theoretical Program and for a FREE Consultation please contact [email protected] or call (917) 991-2465
Visit www.frangrow.com
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About the Author:
FRED KIRVAN
Founder FK Consulting

Fred started in the franchise business in 1991. Working with the founder of Desert Moon Fresh Mexican Grille he developed the operating systems and grew the company from a single unit into a multi state, 30 unit franchised brand. In 2008 he became President of Desert Moon remaining in that role until 2013

Mr. Kirvan was then recruited as the Chief Operating Officer for TRUFOODS, LLC. a 100 unit, multi brand franchise company that included Pudgie’s, Wall Street Deli, Ritter’s Frozen Custard and Arthur Treacher’s Fish and Chips.

Upon leaving TRUFOODS he became VP of Operations for Energy Kitchen; a NYC based fast casual chain which pioneered the “healthy alternative” space before leaving to launch an early learning & play center business “Moozie’s Play Cafe” with his wife.

Working in a variety of capacities in food and non food business’ Mr. Kirvan’s experience in systems development, writing manuals, brand connectivity, purchasing and construction project management have proven invaluable assets to start up & emerging brands.

Currently FK Consulting works to develop a full suite of Confidential Franchise Manuals which include Operations, Managing the Business, C&D and other critical Job Aids and Training Tools necessary to grow and enhance the process of devloping successful franchisees.

RETAIL ECONOMICS – ITS ABOUT COMPS, COST OF GOODS, & LABOR

Article contributed by www.rogerlipton.com – Roger’s (unfiltered) Restaurant and Retail Review – While this discussion reflects upon trends for publicly held restaurant companies, it should be useful for franchisees and potential franchisees to consider.

RETAIL ECONOMICS – ITS ABOUT COMPS, COST OF GOODS, & LABOR
By Roger Lipton

2017 SUMMARY BELOW – 19 RESTAURANT COMPANIES
There are four major components of profits for restaurants (and retailers):

Revenues (made up by same store sales, price and menu mix, and traffic)

Cost of Goods (food and paper)

Labor Cost (Store level managers and crew expense, including benefits)

Occupancy expense, consisting of minimum rents adjusted for volume overages, and common area management charges (CAM) when appropriate, normally also including utilities, real estate insurance and real estate taxes. Occupancy expense is important, usually at 6-8% of sales (if you’re lucky), but nowhere near the 30 points, give or take a few points, that make up both Cost of Goods and Labor. For this piece, suffice to say that occupancy expenses are trending higher, clearly not helping store level margins.

This discussion, however, is primarily meant to summarize restaurant executives’ expectation for revenues, cost of goods, and labor expense in 2017, which represent larger variables than occupancy expense. In that effort, we have excerpted the numbers presented below from the most recent corporate reports (including conference calls) from each of the companies shown below.

For context, over the last couple of years, while labor costs have marched consistently upward, commodity costs have reliably been a “partial offset”. At the same time, store level traffic has been challenged, which obviously puts store level margins at risk if one or both of these major line items increase as a percentage of sales. Very few restaurant companies have shown increases in traffic during 2016. Typically, it goes like this: Same store sales were up 2-3%, price and menu mix increases were 2-4%, so traffic was up (maybe 1%) or down (probably 1-3%). The labor percentage was up anywhere from 50-150 basis points, partially offset by commodity deflation of 25-100 basis points. The table above shows the commentary from nineteen publicly traded restaurant companies. You can see that the “good times” in the form of lower commodity costs seem to be behind us. Almost all the companies are looking for cost of goods to be flat or UP, rather than down.

You can also see that the labor percentage is often expected to be up by 3,4 or 5 percentage points, which would translate to 90-150 basis points of margin if the labor percentage is 30%. Suffice to say we are moving to the top of the previous range rather than the bottom.
Lastly, the table shows that comp sales expectations are (perhaps conservatively, perhaps not) estimated at 1-2% (higher at PNRA and TAST), and that implies continued traffic challenges since menu prices will generally be a couple of points higher.

Putting it all together, traffic and sales will be challenged, labor % will be up, probably by more than in ’16, commodity % will be “flattish”, less of an “offset” than in ’16. Occupancy expense, FWIW, won’t help either. For good measure, it will be difficult to raise prices at the store level, when grocery prices seem well controlled, which has no doubt helped to contribute to the sluggish store traffic we have been recently experiencing.

About the Author:
Roger Lipton is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and an MBA from Harvard, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken.
For more information please contact: WWW.ROGERLIPTON.COM ORWWW.LIPTONFINANCIALSERVICES.COM

If you have any questions relative to the above information, don’t hesitate to contact us.
Roger Lipton