Finance | August 2016 | By Jessie Szalay

How to Get the Right Balance with Operating Costs

As the wage debate rages on and food prices rise, operators are re-examining their operating costs.
Franchisee Steve Foltz (second from left) invests in employees by offering perks like business training classes, which in turn ensure a more cost-efficient operation. jamba Juice/Maria Sheehan

Not long after opening in 2013, the owners of Detroit-based fast casual Moo Cluck Moo decided to pay all workers $15 per hour. Cofounder Brian Parker and his partners were growing the concept, marketing aggressively, and developing manuals and educational videos for employees and consumers alike.

Somehow, through it all, Parker says, the company’s labor cost percentage in relation to overall operating costs remained between the upper 20s and lower 30s.

Achieving those numbers was a juggling process, one that other operators are also handling. While it may seem like cost percentages are going up across the board, some quick serves have kept their cost breakdowns consistent and manageable.

Operators have traditionally aimed to keep labor costs around 35 percent of their budget, but Ed Heskett, a loss prevention consultant with restaurant-analytics firm Delaget, says that number is too high. For the last few years, most organizations have kept their labor costs around 30 percent, including benefits and workers’ compensation insurance, which can make up as much as 5 percent.

“If you’re in a quick-service environment and averaging between $1.2 and $1.5 million in sales each year, labor costs should be around 30 percent,” Heskett says.

Food, including paper for serving, should be in the 27–28 percent range, Heskett says. Purchases like uniforms, office supplies, and sometimes services like trash removal and window cleaning should be about 6.5–8 percent of the budget; other paper products and supplies like gloves and hairnets should be 1 percent; and beverages should be between 3.5 and 4 percent.

Managing labor and food costs can go hand in hand. Steve Foltz—cofounder of Cinnamon Bums, which operates three Cinnabon locations and 20 Jamba Juice units throughout Oregon, as well as the new co-owner of 72 more Jamba Juice locations in California—uses food costs to offset rising labor costs. Each year, the price of labor goes up in Oregon, and Foltz uses small price increases to absorb about 40 percent of the loss.

“If we raise smoothie costs by 4 cents, it lowers our food costs by half a point,” Foltz says.

For nearly three years, Foltz’s Oregon stores have paid workers $10 and up, which is higher than the state’s minimum wage. In the advent of the Affordable Care Act, Foltz and his team decided not to limit hours, and therefore pay for insurance for employees who qualify. Additionally, Oregon mandates sick leave. These factors have caused Foltz’s labor costs to rise from 28 percent to 31 percent. Price increases, better food costs, better productivity, and lower turnover are all tactics Foltz uses to manage costs.

Increasing efficiency is one of the best tactics to keep costs in check. Moo Cluck Moo deconstructed back-of-house processes to maximize productivity. At Toppers Pizza, workers not only make pizza, but they also pound the pavement handing out fliers and running other local, on-the-ground advertising efforts, which result in more revenue.

“It’s very effective, and it’s our culture. We recognize people every year for their topline sales efforts,” says Adam Oldenburg, corporate operations director for the Wisconsin-based quick serve, which also increased worker wages ahead of new minimum wage requirements. “All problems are solvable with sales.”

Toppers also focuses on efficient scheduling that maximizes worker productivity. The brand reports a low 20.5 percent in labor costs, which Oldenburg expects to rise 1 or 2 percent.

At Foltz’s Jamba Juice and Cinnabon stores, workers receive business training, which imbues a sense of ownership. He says that’s key to increasing productivity, as well as morale. Additionally, by allowing employees to work more than 30 hours a week, Foltz’s stores can employ fewer people—often workers who see their jobs more like full-time careers.

Developing relationships with suppliers can also make an impact on food and supply costs. Foltz cites the good prices on food as a primary reason to be a franchisee. His stores average 24–25 percent in food costs, including paper.

Toppers, however, has not yet seen an economy of scale when it comes to food, Oldenburg says, though costs are a reasonable 27.5 percent. The biggest food savings lately have come from good harvests and strong production in cheese manufacturing.

Moo Cluck Moo has only two stores, but more are in the works, and Parker hopes growth will reduce food costs. The price of the brand’s all-natural and often locally sourced food runs high, at more than 35 percent. Parker anticipates that good relationships with suppliers—many of whom are small companies themselves—will reduce costs down the line. The brand also promotes its suppliers on social media.

Changes in the cost of doing business seem inevitable regardless of whether they arise from consumer demand, crop yields, or government mandates. Operators need to change their mentalities to keep up, Foltz says.

But if customers and workers are satisfied, sales will go up and employees will stay. “Then,” Oldenburg says, “we’ll be in the right place.”

This article first appeared in QSR's August 2016 issue with the title "The Cost Equation." 

Comments

Here in Texas, we have 29% food costs, 29% labor costs, 3% paper, 7% rent, plus insurance, taxes, R&M, general supplies, laundry, cleaning chemicals.

You have got to keep your costs under control no matter what to succeed in business.

Phuket condo

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