Prime Costs, the Secret to Success in the Restaurant World
by Will Lawrence-Grant
In the 34 years I’ve been involved in restaurants and pizzerias nothing has been so important as Prime costs. You can make the best food in the world and have the best location in your city, but if you don’t know your prime costs, you’ve already lost any chance of being a viable, sustainable business. Without knowing your prime costs, you can’t make a relevant schedule or produce a menu without losing money and in turn without alienating customers who are the real bosses in the restaurant world. Prime costs are separated into two categories Labor and Food.
Labor Cost is your gross sales divided by what you pay any staff; it includes scheduling, hiring and training. I was taught the old school method of keeping labor cost below 25%. Somehow I always kept us scheduled at 25%, but it kept us at 20%. The problem was I was always exhausted and training new employees on Friday nights. It was a nightmare! A $1,500 night would have 12 mistakes, and I’d literally be crying from all the customers yelling at me! Our profits were good, but we couldn’t grow. By having that low of labor cost my staff was constantly overwhelmed, I couldn’t leave the kitchen and we had a low-quality service/product. It was physically impossible for us to keep up.
So I decided to make a change, I went crazy and jumped us up to 30% labor. Wow, what a difference! It gave me a chance to work on systems for training and hiring, make my shop more efficient and start marketing. Our business grew, it was amazing! We had better-trained employees, more staff on busy nights, our customer service was spot on, and complaints were almost non-existent. I was so excited I said to myself “let’s bump it to 35%!”
In its own way 35% was just as bad as 25%! Instead of focusing on work everyone was focused on chatting with each other! I had stepped out to a more marketing role, and none of the staff knew who I was and they decided they knew how to do things better than me! Employees got lazy, cleaning tasks never got done, and heaven forbid we got slightly busy with a half staff, they didn’t know what to do! And profits? They shot out the door!
I’ve since decided that 30% is my sweet spot. We can handle a 5,000 dollar day with no mistakes, no angry customers and with a general feeling of it being slow! 30% gives my staff all the support they need to be successful while I work on projects like Perfecting Pizza in my office!
Food Costs is your gross sales divided by all food purchases. Due to theft, we learned early on always to watch our food costs. The first thirteen years of being opened we were barely making ends meet and struggling to stay open.
Then one day it happened. Another business owner came in for a pizza and noticed our manager didn’t ring in the cash but put it in our till. This meant our manager was taking orders, taking cash for the orders but not ringing it into our system. At the end of the day he would take all the extra cash and put it in his pocket. Not only that but he was doing all our delivery drivers paperwork and stealing from them as well. We were devastated. This manager was practically a member of our family. He met his wife working for us and had stayed with us in our home during a severe snow storm for a week.
He didn’t even spend any of the money on his wife or four kids; he spent it all gambling at the casino. We ended up catching him stealing over $25,000 from us in 5 years. He had worked for us for 13 years so who knows how much money he really stole from us. And do you think we got paid back? Not even close. It still makes me angry to this day, 21 years later!
So, you better believe we started doing monthly inventories. You can always cross check how much food you have sold by how much product you have on hand combined with all the invoices for the month. Spoilage sheets are important as well. It helps you to find out if you are over ordering or if your distributors are selling you lousy product, which believe me does happen a lot! Plus always check in your orders. People make mistakes all the time! It could be your manager making the order, the salesman not inputting the order correctly, it could be a miss-pick at the warehouse, or it could be spoiled product or damaged on delivery. If you’re not checking in your orders, you’ll never know if you’re having any of these very costly mistakes.
Without a good grasp on your food costs you can’t price your menu correctly. Too high and you’ll alienate your customers. More importantly too low and you won’t make any profit. I had a restaurant concept that I wanted to be affordable to bring in families, so I priced myself on the lower end. People loved my restaurant, but it couldn’t sustain itself in the slow winters. It was sad because people really loved the concept but because I didn’t charge enough. It became a burden. Luckily I sold that location before times got too rough.
Food cost averages are also decided by how much food you make on sight. The more you make and produce the lower your costs are. We make our dough, shred our cheese, cut our produce, make our own sauces and dressings and have a food cost that always hovers between 18-20 percent. This is a drastically lower food cost then places who don’t (which can be upwards of 30-40%.) Plus, house-made product is always 100 times better than anything you can buy. You can’t buy passion, but you can make it! To be fair, I spend a decent amount of labor making all that product, so our little higher labor cost is offset by our extremely low food cost.
Restaurants are a number and people game. If you don’t keep your prime costs in check, you’ll never be able to really stay open and take care of the people.