In February 2021, the world had begun recovering from the pandemic. However, a familiar challenge returned for nutrition managers and in greater force than ever: inflation. Between January 2021 and July 2024, food prices have increased by 33.2 per cent (in reality, inflation may have been greater than this due to Statistics Canada’s methodology). To put that in perspective, from 2016 through 2020, food prices increased only 9.2 per cent.Display footnote number:1 Food inflation seems to be coming under control; however, the reality is that food costs have increased significantly. In the post-pandemic period, the cost of labour has increased including in the food service industry.
The two greatest expenses in a food service operation; be it retail, patient feeding or catering; are cost of sales and labour. Over the past 3.5 years, savvy nutrition managers have increasingly focused on controlling these expenses. This article focuses on food cost control and the practices that should be in place at every food service operation.
PLANNING
Strong cost controls start with a plan. The plan should include, at a minimum, a menu and formal, scalable recipes that are accurately costed. An effective plan also includes a product specification guide to ensure recipe yields can be met, enable accurate ordering, and minimize waste.
PROCUREMENT
In my first year of hospitality school, a professor told us “a penny saved in purchasing goes straight to the bottom line of the income statement.” Make sure you tender your broadline distributor agreement annually. Join a group purchasing organization (GPO), which will provide savings on purchases and purchasing rebates, lowering your food cost. Shop high-cost products with other distributors (most GPO purchasing allows for 20 per cent of purchases to be made with other suppliers). Take the time to make sure you are not paying more than you have to for food. Forecast purchases and par levels based on projected demand.
Get in the practice of conducting an inventory prior to placing orders. If you have too much supply, it is more likely it will spoil.
RECEIVING
Receiving is an important aspect of food cost control. Make sure that all items delivered are checked to ensure the items on the packing slip are received, meet specifications, are not spoiled or past/near their best before dates, etc. Use scales to check items purchased by weight. Ensure credits are tracked until received or items replaced by your suppliers when appropriate.
Before processing invoices, check they reflect what was received and the price you agreed to pay. In my experience, invoice errors almost always favour the supplier.
INVENTORY
Once received, products should be properly stored. Stock should be rotated so the older product is used first (first in, first out, or “FIFO”). Any items that are not labelled should be dated prior to being stored. Products should be stored off the floor and stored in a way that prevents contamination. Temperatures of refrigerated and frozen storage should be checked each shift.
Key control is important. Only those who need access to the storage areas should have access to the keys. If the keys to the storage areas are “hidden” in the kitchen in a spot known to all employees past and present and/or the codes to the kitchen doors have not been changed every time an employee leaves, you do not have key control. Inventory must be secured, not just when the kitchen is closed for the day.
Inventory should be completed monthly. In many institutional food service operations, inventory is taken less often, if at all. Each month, the inventory should be cost extended and reviewed to ensure it is consistent with the budget.
The receiving door should be locked at all times and should not be used as an employee entrance and exit. Employees’ personal bags should not be allowed in production or storage areas.
PRODUCTION
Recipes should exist for all items and should be followed at all times. These recipes should be costed, and it is important that costed recipes are updated each month and reviewed by management. Allowing cooks to “be creative” is appropriate for only higher-end restaurants and can have severe consequences in health care settings. If the cost of a menu item increases, action is required (e.g., removal from the menu, rework the product).
Production planning is important. Production should be reconciled with usage (the number of portions prepared versus the number sold or used). This report should be reviewed by management who should understand when the forecasts used for production were wrong so forecasts and, by extension, production planning may be continuously improved.
The importance of portion control cannot be overstated. In health care settings, the correct portions are required to ensure the proper nutrients are received. From a cost control perspective, over portioning adversely impacts cost of sales. Pre-portion items before service. Make sure the proper tools are being used (e.g., if the portion is two ounces of sauce, use a two-ounce ladle as opposed to partially filling a four-ounce ladle). In some institutional facilities, uneaten food is tracked, primarily for nutritional purposes; however, if a menu item regularly is not finished by customers, perhaps the portion is too large and the recipe can be adjusted (work with an RPN to adjust recipes, as appropriate).
Waste sheets should be available in the receiving, production, and dining areas. All waste should be tracked with what was wasted (the product and how much), the reason, the date and the person responsible. Waste sheets should be cost extended every period and reviewed by management for opportunities to reduce waste. Some waste is to be expected; however, unnecessary waste should be avoided. One client I worked with donated unused product to the food bank. While they should be commended for helping those experiencing food insecurity, an unintended consequence was priority was not placed on limiting overproduction.
In retail food service settings where food is prepared to order, menu items should not be prepared until they have been entered into the POS. Often, the excuse for not doing so is “providing faster service,” however, this practice often results in missed items.
High-cost items should be reconciled each shift: beginning inventory, plus additional inventory, less sales should equal ending inventory. If it doesn’t reconcile, management should investigate and correct the problem.
Staff meals should be entered in the POS or otherwise recorded. It is important that staff meal utilization is reviewed regularly by management to ensure policies are being followed and to review food cost. One other note — discounted or complimentary staff meals are a taxable benefit, if they are not being treated as such in your facility, please reconsider. The CRA may one day audit your facility, which could also lead to tax problems for your staff.
ACCOUNTING
At the end of each month or period, food cost should be calculated. The formula is beginning inventory, plus purchases, less closing inventory. Food cost should be calculated by outlet. For example, a hospital should calculate food cost for each retail food service operation, patient feeding, and catering. To do so requires that raw or prepared product be issued to each outlet as well as products transferred between outlets (e.g., leftover patient meals being transferred, at cost, to the cafeteria). The food cost should be compared to budget and any differences investigated. Management should be accountable for any variances, which, unfortunately, is often not the case in institutional settings. If food costs are not transferred and separately tracked, it will be difficult to identify the source of a cost control issue.
In my experience, food service operations that compare actual to theoretical food costs each period have fewer cost control issues than those that do not.
Each month, theoretical food cost should also be calculated. The formula for this is calculated cost per portion multiplied by the number of portions sold or used.
Actual food cost should then be compared to theoretical food cost. Actual food cost should be one to 1.5 points greater than theoretical food cost. This represents normal shrinkage (the soup left on the side of the pot, variability in product yields, returned menu items, spoiled or dropped product, etc.). Any greater variance should be investigated by management and, once the reasons are discovered, corrective action taken.
In my experience, food service operations that compare actual to theoretical food costs each period have fewer cost control issues than those that do not. It is easy not to do this comparison as, to do so, you need to take inventory each month, update costed recipes each month, and do the work required to complete the analysis. Setting up a food service operation to compare actual to theoretical food cost takes a significant amount of work; however, once the initial work is completed, considerably fewer resources are required to maintain the control system. If you take anything from this article, the comparison of actual to theoretical food cost is the best action a manager can take to control food costs.
CONCLUSION
Given the significantly greater cost of food in recent years, food cost control has become increasingly important. It is imperative that nutrition managers implement food cost controls throughout their operations from recipe development, through procurement until menu items are sold or delivered to patients. Using controls allows you to identify when food costs are greater than they should be and provide the information required for management to take corrective action.
The practices discussed in this article are not rocket science. Most food service managers have been trained in cost controls; however, I find in practice they are not implemented. It can be difficult to do so as people resist change and long-term staff have often seen managers come and go and can resist the implementation of cost controls. If you are not implementing cost controls in your operations, you are definitely leaving money on the table, which means resources are being denied to other areas of the operation. I guarantee that, if you implement cost controls in your operations, you will see an immediate and sustained improvement in the bottom line. I am not advocating for minimizing the food used, just ensure that you are responsibly ordering the correct amount of food to service your clients’ needs and that all food purchased is used in the food service operation according to plan.
Jeff Dover is president of fsSTRATEGY, a consulting firm specializing in strategic advisory services for the hospitality industry, with an emphasis on food and beverage. Jeff is a certified management consultant, a member of the International Society of Hospitality Consultants and a member of the Foodservice Consultants Society International.
REFERENCE
1. Statistics Canada. Table 18-10-0004-03 Consumer Price Index, monthly, percentage change, not seasonally adjusted, Canada, provinces, Whitehorse and Yellowknife – Food.