Instructors know culinary students understand foodservice economics when the class shakes their heads in disbelief at the profit earned for $100 in sales. Students must understand the bottom line.
By Adam Weiner, JD, CFSE
Note: Before COVID it was important your students understand basic restaurant economics. It is now time, particularly with the strain that COVID restrictions and closures are placing on the food service industry, for you to make sure your students AT ALL LEVELS understand the basics of what is needed to keep a food service establishment afloat.
Your culinary students have grown up watching “Iron Chef,” “Chopped,” and “Master Chef,” where expensive ingredients like truffles and caviar are tossed around like water. They have watched “Hell’s Kitchen,” where allegedly experienced chefs mishandle and mis-cook scallops, lobster and lamb, yet still remain eligible for the grand prize of running a restaurant.
The bottom line (if you pardon the double entendre) is that if your students don’t understand foodservice economics, you are dooming them and the places they will work to failure. You don’t need to teach the intricacies of cost accounting. In fact, there are plenty of foodservice software products that manage those issues. However, you need to make sure students understand the basic fact that for every $100 in sales, the foodservice business earns $4 to $7 in pre-tax income. Here is a 10-step approach to teaching this subject.
[Note: The percentages given below were the approximate industry standards from several years back. As you know, different parts of the country have different percentages, and these percentages change over time. I have not read any material on how the percentages have changed post-COVID. However, clearly the percentages must have been altered with changes in food costs, rent, and most importantly decreased sales.]
- Start with a surprising question. Ask your students, “Why does someone open a restaurant or start a food truck?” Start calling on people. You will get answers such as, “To sell food,” “Make people happy with the food I make,” “Because they make really good grilled cheese sandwiches,” or “To have jobs for themselves and their families,” etc. Keep this up as long as you have the time. Then, walk up to your white board (or whatever digital screen you are using) and write one word as large as you can: PROFIT. Explain to your class the reason someone goes into business is to make money and the only way to make money is to bring in more income than you spend.
- Make the students think. Ask the following question, “Suppose you burn a premium hamburger, steal a nice sandwich at your break, or give away a pizza to your friends without putting it on the register. How much does the restaurant have to sell to recover the expense?” I get some numbers from the students, and then write these on the corner of the whiteboard. I put a big question mark next to the numbers and circle them. (Note: You don’t give them the answer yet.)
- Hit them with your best shot. I then ask the students, “If a well-run restaurant sells $100 in food, what is its profit before paying taxes?” I write their answers on the board. You will be shocked how many students guess more than $50. I put a line through each wrong number immediately after I write it. It takes quite a while, but eventually the students start guessing less than $10. When that happens, I stop them and write $4 to $7 on the board.
- Explain the facts of life. To be honest, at this junction, the students will think you are crazy and/or lying. Write on the board:
Food costs: approx. 32 percent
Labor costs: approx. 32 percent
Overhead: approx. 32 percent
Total costs: approx. 96 percent
Profit: four percent or $4 per every $100 in sales.
[Note: You need to point out these numbers have been rounded and approximated for the purpose of teaching basic profitability and each institution will have slightly different numbers in each category. However, you can’t let your students think the variations are great. You must stress that $4 to $7 in profit for $100 in sales covers well over 95 percent of foodservice establishments in this country. Stress these numbers cover everything from fast food, which has lower food costs but higher overhead because of advertising and rent for large buildings and parking lots to high end restaurants with lower rent but higher labor and food costs.
- Food costs. When I started in the foodservice business, food costs were almost universally budgeted at 33 percent. Pre-COVID many places budgeted 28 percent. (Teaching food costs is an article in itself which I will cover later.)
- Labor costs. The most important thing to explain is that cost of labor costs the business far more than labor is being paid. Remind students employers make matching Social Security contributions, pay for workers’ compensation insurance, set aside reserves for sick leave, etc. Many areas require health insurance and/or vacation pay. The numbers vary, but all of these add up anywhere from 33 percent to 50 percent or more. Show your students how being paid $10 per hour actually could cost the employer $15 per hour. Then point out that $5,000 in payroll could actually cost the owner $7,500. (If your students aren’t shaking their heads in shock and disbelief then you haven’t gotten the point across.)
- Overhead. I used to teach overhead by pointing at one student and having her state an overhead cost such as insurance. That student points to another student who repeats the process. I write the items on the board while this is going on. Your students should be able to come up with at least one overhead item per person and often more. Here is just a partial list: rent, insurance, health permits, local taxes and permits, water, gas, cleaning chemicals, to-go containers, food-packaging materials, pots/pans/and other kitchen items that need frequent replacing, phone bills, gas for delivery vehicles, Internet-connection fees, Internet advertising fees, newspaper advertising fees, electrical bills, towels, uniforms and PPE’s (Personal Protective Equipment), POS rentals, bank fees, accountant costs, legal fees, etc.
Normally, I would have not given the definitions and differences of fixed and variable costs. However, COVID is greatly affecting the industry and I think there is now no choice. You need to explain certain costs do not change with the sales amount even if nothing is sold. These fixed costs include such things as rent, insurance, permits, internet provider fees, etc. You then explain the costs whose amount is based on how much is sold. The biggest example of this is food costs. There is also a third category of semi-variable costs. The biggest of this is labor costs. If a restaurant is open, it needs a minimum staff even if there are only a few dollars in sales because there has to be at least one server, one cook, one dishwasher, even if there are only a few customers. When there are many customers there will be more staff and food product, and thus more variable costs.
- You deposit money in the bank, not percentages. When I first started my own food service business, I diligently kept track of percentages. It was a catering company and I was proud that I knew the percentages for all the overall categories and for each individual event. I was talking over a cup of coffee with a friend who was in a similar business. I was bragging about how great my percentages were. He told me that his percentages were nearly double mine. I expressed shock since he was doing so much better financially then I was. “Adam,” he said, “Percentages are great as a monitor, but remember at the end of the day you deposit dollars into the bank. You don’t deposit percentages.” I must have looked confused because he continued, “I would rather deposit two percent of $100,000 in the bank rather than 10 percent of $15,000.”
- Closing the deal. Now go back to the original question about the burger, sandwich and pizza. How much in sales does it take for the restaurant to recover from the loss of just one of those items? Tell the students the food costs for each plate was around $4. In other words, the business needs to make $4 in profit to recover the loss. Your students should quickly now see that $100 in sales is needed to recover that $4 loss. They will groan with shock and surprise but explain to them this is the real food world and they have to learn to live in it.
- End with reality. I repeatedly taught, “What do you call a chef who doesn’t watch his costs?” When I would call this out, my students would yell back, “Unemployed.” One time a student said, “Well, what if the chef owns the restaurant?” I looked back and said, “Unemployed and bankrupt.” That sums up the industry pre-COVID, during COVID and post- COVID.
The bottom line is students need to be aware everything they do in a dining establishment has an impact on the bottom line. More importantly, they should understand their employers have to juggle many factors—many of them beyond their control—just to try to break even.
Adam Weiner, JD, CFSE, has been a culinary instructor in the San Francisco Bay Area for more than 16 years.