Controlling food costs comes down to one simple rule

Few things drive restaurant managers nuts more than controlling food costs.

But it really comes down to one simple rule that Chow Talks host Dave Miesse learned 38 years ago as a wet-behind-the-ears distributor sales rep.  This is part 2 of how to set menu prices that remain profitable week in and week out.  Listen to Part 1, featuring The Restaurant Boss Ryan Gromfin.

Here’s rule #1:  Stop playing the “invoice plus percentage” game that some local suppliers like to push.  Especially on more volatile categories like proteins and produce.

Controlling food costs: The game to avoid

The deal goes something like this.  “We’ll agree to only charge you 10 percent over our invoice price for chicken.  So, if chicken is $2 per pound this week, we’ll charge you $2.20.  Next week, if it goes down to $1.80, we’ll only charge you $1.98 ($1.80 + the 10% mark-up of $0.18 = $1.98).  That’s fair, right?

Wrong.

While most distributors won’t blatantly lie, many won’t explain exactly how they determine their “invoice price.”  A lot of creative adjustments you’ll never see can go into that number.  Everything from off-the-invoice discounts and credits to merchandising fees and local market adjustments.  Heck, is the invoice based on the day the chicken was actually ordered, paid for, delivered to the distributor warehouse or delivered to your dock?

The best way to cut through the financial hi-jinks is to negotiate set target prices for your most costly items with your distributor.  In other words, take the “market” out of the equation.

First, figure what your price needs to be for your menu items to be profitable.  So, if $2.10 per pound is reasonable for chicken to make a profit each week, who cares if the “market price” is $1.90 one week and $2.25 the next week.  Your price is set and you won’t drive yourself crazy figuring profit.

Listen in how Dave learned this hard lesson from a simple exchange with one of his best restaurant customers.  Or read the transcript below.

Video transcript

Listen in how Dave learned this hard lesson from a simple exchange with one of his best restaurant customers.  Or read the transcript below.

My third year of being a sales rep in 1983, we were just renegotiated the deal for the next year and it was a handshake. But we’ve done business for a year and a half. And so we were the prime vendor and we get lunchtime and we’re up in their corporate office and they like four stores by then. So we had done it 10 percent over on the proteins, 12 percent over on the paper, 15 percent on the non-foods items and all that.

And everybody is like “okay is that the current deal because we’re making pretty good money.” The operator saying this and I saw the owner just sitting there.  And he really wasn’t in the restaurant business even though he owned them he was a Clairol hair wig business big time.  And so we go out to get in the van to go to lunch.

The owner says, “hey Dave, get my car and ride down with me and the rest of the ride down in the company van.  You get in my car I get to ask you a couple of questions.”

I’m going… “Oh, no… this guy is my biggest account.”

We start riding down the hill in Pittsburgh in his fat Mercedes.  And he goes “Hey, let me ask you question… would you rather have 10 percent of $2 or 10 percent of $1.80?”

And I said “What do you mean?”

He said…”Just answer the question.   Would you rather have 10 percent $2 or 10 percent of $1.80?.”

I said $2.

He said “Why would you guys sell me chicken breast for $1.80 if the deal’s 10 percent of the cost.  That’s how that target price came up that day.

I said “Oh, they wouldn’t do that.”

Where’s the incentive for “invoice plus percentage?”

He said “They’re in business… what do you mean they wouldn’t do that?  Why would the be encouraged to sell at 1.80 with 10 percent markup.  They would want to sell at $3, not $1.80.”

So I’m just sitting there going oh my gosh.  So on the way home riding back to Columbus Ohio from Pittsburgh. I told them what the owner said in there.

The owner asked me that day it I could find some chicken company to guarantee the $2.22 price he needed. He figured with his accounting people, based on the menu price and profit he needed to make, that they needed the chicken to cost $2.22.  He asked if I could find somebody to guarantee that price for a month at a time instead of a change every week.

He said he couldn’t control anything because profits were all over the board. So anyway I found one and then we ended up doing it for a year at a time.  And that’s where the top 20 came from… the top 20 most costly items.  Wejust went down the list and started picking them off for target price programs.

So maybe for some of your operators if you encourage that on some of your shows… don’t think that the distributor or the sales rep would even know something like this and unless that happened I would have never learned that. But because he said that we did it and then we started doing that and started going down that list. Here’s the price I need.  And start going down that most-costly list of top 20 or whatever you come up with the target price needed to be.

And then and how much it is per ounce… then portion control and portion sizes.  I’ll tell you some of the most profitable restaurant people that I know — I’ve been doing this 38 years — have the most profitable sales rep at their company the one with the highest margin prices. Like you said earlier that’s pricing is not where it’s at.  How do they do it. Because they work on all those things like what the price needs to be.