How to balance restaurant costs and quality

In its recent State of the Industry report, the National Restaurant Association notes that rising food costs are negatively impacting restaurant operations. In addition, restaurateurs are adapting to what’s available. Nearly all operators report food and beverage supply shortages. These factors can adversely affect quality and the customer experience. Controlling costs and managing shortages without sacrificing quality is a delicate balance that requires careful planning and strategic management.

In this blog post, I’ll discuss three strategies that can help you tip the balance in your favor: menu engineering, vendor negotiations and tighter financial management.

Menu Engineering

One of the strategies in play for restaurant managers and owners is menu engineering. This allows analysis of the profitability of each menu item to optimize the most profitable dishes while considering ingredient substitutions or portion adjustments for less profitable items. With this, you can classify menu items into four categories:  high-profitability, high-popularity “stars,” low-profitability, high-popularity “draft horses,” high-profitability, low-popularity “puzzles,” and low-profitability, low-popularity “dogs.” Knowing which menu item is which can help solve some dilemmas. To do this, you’ll need the following data:

• Menu item sales data: This information includes the number of units sold, selling price and revenue generated for an individual menu item over a specific period, generally no less than a month up to a quarter.  Be sure to include any promotional items or limited-time offers as metrics from these can offer further insights.
• Ingredient cost: The cost of each ingredient used in each menu item must be tracked. This includes all direct costs, such as raw materials, spices, sauces and garnishes.
• Menu item contribution margin: Calculate the contribution margin for each menu item by subtracting the ingredient cost from the selling price. The contribution margin shows the profit generated by each item before considering other overhead costs.
• Menu item cost percentage: Calculate the cost percentage for each menu item by dividing the ingredient cost by the selling price and multiplying by 100. The cost percentage shows the proportion of the selling price that goes towards covering the ingredient cost.
• Seasonal ingredient costs: Consider any seasonal variations in ingredient costs as this can affect the profitability of certain menu items during specific times of the year.
• Menu item cost history: Review historical ingredient cost data to find any significant fluctuations that may have affected profitability in the past.

You should be able to find the information needed by using data from the point-of-sale, inventory and accounting systems. By collecting and analyzing this information, you can find which menu items contribute the most to your profits and which ones may need adjustments to improve profitability. This data-driven approach allows you to make informed decisions about pricing, promotions, and menu design to control costs effectively while keeping the overall quality of the menu offerings.

Vendor Negotiations

Vendor negotiations are another strategy that restaurant managers and owners can use to drive down costs while ensuring quality.

As a first step, you should review the terms and conditions of your current contracts and agreements. Look at pricing, payment terms and termination clauses. For example, if the payment terms call for a net 30, might the vendors be willing to discount invoices for early pay? Understanding your current agreements helps you to find areas for potential improvement. As well, analyze the historical data of your purchases from your vendors, including the volume of items bought over a specific period. Vendors may be more willing to negotiate better pricing for larger volume orders.

Along with examining your relationships with your current vendors, you should investigate what other vendors have to offer. Research their prices for similar products or services. This provides leverage during negotiations and ensures you are getting a competitive deal. If other vendors offer services such as training, technical support, or marketing aid and you’re not getting these from your current vendors, consider how these added services could add value to your restaurant. It helps if you are informed about market trends and fluctuations in pricing for the products or services you are seeking. This knowledge helps you negotiate with a realistic understanding of the current market conditions.

When it’s time to negotiate, find specific points that you wish to address during the negotiation. These could include price reductions, bulk-order discounts, payment-term adjustments or extended credit lines. By gathering and understanding this information, you can enter vendor negotiations with confidence, bargain more effectively, and secure deals that align with your budget and quality requirements. Building strong relationships with vendors through successful negotiations can lead to long-term cost savings and a more efficient supply chain.

Tighter Financial Management

It might not seem obvious at first, but using the right accounting platform can help you cut costs while maintaining quality. These platforms allow restaurant owners to track and categorize expenses accurately. With a clear breakdown of costs, you can find areas where spending is high and take measures to reduce these. Regularly analyzing reports can highlight potential inefficiencies and cost-saving opportunities.

Here are some of the areas where a sophisticated, multi-dimensional accounting platform can provide insights:

• Inventory management: An accounting platform can help track inventory levels, analyze usage patterns, and set par levels to avoid overstocking or waste. This, in turn, reduces food and beverage costs.
• Cost of goods sold (COGS) analysis: By closely watching COGS through the accounting platform, you can identify trends, seasonal fluctuations and discrepancies. This information enables you to negotiate better prices with suppliers and make smarter purchasing decisions.
• Budgeting and forecasting: With a multi-dimensional accounting platform in place, you can create budgets and financial forecasts. These projections help in setting realistic financial goals and targets, allowing you to plan better and make informed decisions to avoid overspending.
• Automated invoicing and billing: The accounting platform can automate invoicing and billing processes, reducing the time spent on administrative tasks and minimizing the chance of errors or missed payments.
• Payroll management: Payroll expenses are a significant part of a restaurant’s overall costs. An accounting system can streamline payroll processes, ensuring correct and prompt payments to employees, minimizing errors and avoiding unnecessary labor expenses.
• Cash flow management: The accounting platform can provide insights into cash flow patterns, enabling owners to manage working capital efficiently and avoid unnecessary borrowing costs.

Your accounting platform should adhere to the National Restaurant Association’s Uniform System of Accounts for Restaurants. With real-time financial data available through an accounting platform, restaurant owners can make data-driven decisions to optimize their operations, reduce waste and find opportunities for cost savings.

By using these tips for menu engineering and vendor negotiations, and using your accounting platform, you can find ways to cut costs while maintaining or enhancing quality for on- and off-premises dining.