Episode Transcript
[00:00:00] Cogs, otherwise known as cost of goods sold, make a profound impact on the profitability of any given restaurant. It's one of the three main moving targets we have in running a profitable restaurant. Right. That's the hard part about running a restaurant, is that we got revenue. We don't know how many people are going to come in and how much each of those people are going to spend. So we have to sort of guess. Because of that, we have to guess about how much we order. That's cost of goods sold, making sure we have enough food so we don't run out, but not too much. So we've got waste. And. And then, of course, the third piece is labor. We're going to talk about labor at a later point. But of the three moving targets, cogs is the one that I think most of you have been impacted by at least through 2023. And that's because the rising cost, you know, inflation and all of that. So today we're going to talk about it, because cogs, a cogs problem is one of my favorite problems to have because there are five things we can do, five levers we can pull to get cost of goods into line. I'm going to talk about all that and more on today's episode of Restaurant Strategy.
[00:01:01] There's an old saying that goes something like this. You'll only find three kinds of people in the world. Those who see, those who will never see, and those who can see when shown. This is Restaurant Strategy, a podcast with answers for anyone who's looking.
[00:01:33] Thanks for tuning in. My name is Chip Close, and this is Restaurant Strategy, a podcast dedicated solely to helping you build a more profitable restaurant. Each week, I leverage my 25 years in the industry to help you build that more profitable and sustainable business. I also work directly with owners and operators from all over the world through my P3 mastermind program. The three Ps stand for profit, process and Progress. I'm giving you a process to make a more profitable restaurant, and we measure our progress every single week. If you got a busy restaurant driving a lot of revenue, people love your food, but you're struggling to generate consistent, predictable 20% returns, then please get in touch. Set up a free call with me or someone from my team. We'll learn more about you, you'll learn more about the program, ask some questions about the program, and we'll see if you're a good fit. You do that by visiting our website, restaurantstrategypodcast.com/schedule. Grab some time on the calendar. We look forward to talking with you. As always. That link is in the show notes now. So one additional favor to ask you. I'm always talking about how we need to create evangelists for our brand. I need you to go evangelize for me. Two things I need you to do today.
[00:02:44] Number one, if you get anything out of this show, if you've, if you've been impacted, if you get value from this show, please press pause right now and go to Apple Podcasts. Leave us a five star rating and review. Simply let other people know what you've gotten out of the show that will help me incredibly. The next thing I need you to do is to pause again and go find your favorite episode from, let's say, the last three months and forward that on to someone else who you think will get a lot out of that. So another restaurant owner, another manager, another chef, any episode at all, something that resonated with you and send that on. That's how we grow this. Let people know what you're getting out of it. You do that by leaving us a rating and review you and then spread the word. Evangelize for me. That's how this community grows. I will remind you that 86% of the listeners of this show just discovered the show in the last 12 months. When I read that statistic this past year, it absolutely blew my mind. It's incredible. A testament to this community, to all of you. Thank you so much. Those are the two things you can do to help me continue to grow this podcast. Please do that right right now.
[00:03:53] Okay, you're back. Hopefully you've done each of those two things and I thank you for doing that. Today we're going to talk about cost of goods sold. So when we talk about profitability of a restaurant, right? Profit is revenue minus expenses. And unfortunately, what happens is we get a P and L and we've got 132 lines of expenses. And it's difficult to compartmentalize them. It's difficult to sort of wrap our heads around it. When I talk to my clients, the members of the P3 mastermind, I say we think about our, all of our expenses as going into one of three buckets. Cogs, labor, and what I lovingly call everything else. Because if it doesn't go into cogs and labor, it goes into everything else. Everything else literally is everything else. So your rent, your utilities, your insurance, your credit card fees, on and on and on. Everything else goes into that bucket.
[00:04:45] It's called everything else because we really can't control a lot of that. Most of those are fixed expenses. And if we start cutting those things, we start degrading the quality of the. Of the product, right? We say, well, maybe we'll get rid of linen. Maybe we'll get rid of the nice hand towels in the bathrooms. Maybe we'll. And that we're just. We're just degrading the experience.
[00:05:05] So really what we do is we focus on revenue because we can always drive more revenue.
[00:05:11] We focus on managing cogs, right? The product we serve, how much we charge for that product, how much we serve on the dish, and then labor, who we hire, how much we pay them, how much we schedule them. Those three things are our biggest controllables. Revenue, cogs, and labor. And when somebody has a cogs problem, they come to me. We look at their P and L. It's the first step we do with any new member of the program, right? We look at their P and L, and we see right there in black and white, because the numbers don't lie. We see in black and white what's going on with the business.
[00:05:43] And if it's a cogs problem, right? If it's anywhere above, say, 33 or 34%, that's a problem. Because really it should be 30 or below if it's in a problematic place. I always say, this is such a good problem to have. We know how to fix this. So I said here, the title, right? The first five ways you can fix a cogs problem. The best part is, and no, no, we don't start with changing the price. Now, that's a lazy. That's a lazy way of doing it, of fixing it. Now, sometimes it's the only solution, but it is the. Our last solution. In fact, there are five things we can do, five levers we can pull to help to help fix our cogs problem. Meaning if our food cost is out of whack, our beverage cost is out of whack, what are those five things? Here we go. We write them down. Number one, we can renegotiate the price that we pay with our vendor. Number two, we can find another vendor. Number three, we can source a different ingredient to replace the ingredient we're using.
[00:06:45] Number four, we can adjust the portion. And then number five, we can adjust the price, right? So again, let's go through those. You can renegotiate the price with your vendor, you can shop around for another vendor, you can source a different ingredient, you can play with the portion size. Or finally, you can increase the price. There are five things at our disposal, five ways that we can get a cogs problem under control.
[00:07:13] The first thing we need to do, though, if we've got a cogs problem, is we need to identify where the problem is. Because if we're looking at cost of goods sold, if we're looking at fixing food cost, there's theoretical food cost and there's actual food cost. So there are all kinds of incredible programs out there. I'm partial to margin edge. They're a sponsor of this show, and I love what they do. But there's software out there that will help you stay on top of your costs, that will help you handle your ordering right, and manage your inventory and see the real time plate costs for your dishes. Because sometimes the price of eggs skyrocket, sometimes wings go up, sometimes chicken breasts go up. All of that will infect the will affect the profitability of a given dish on a day to day or week to week basis. So it behooves you to keep tabs on that when we talk about cost of goods sold. Right. Again, there's a theoretical and then there's the actual theoretical means on paper, when we look at our recipe cards. And a recipe card simply says, here are all the ingredients, here's the cost of each individual ingredient.
[00:08:20] That adds up to a total plate cost.
[00:08:24] And then we divide that by the price that gives us our food cost, for example, on that given item. And then we can measure gross profit. We can take the price of the item minus what it costs us to plate that item. That gives us our gross profit. So not taking into account any other overhead or labor, just gross profit minus. Right. We take the price of the goods, what a customer pays us, minus the plate costs, what it costs us to put all that food on a plate and send it out. That gives us our gross profit for the most part. Here's a simple rule of thumb that I was told right. Beverage should be about 20%. Food should be at about 30%. There are nuances, of course, but it's a good rule of thumb.
[00:09:08] Maybe Those numbers are 22 and 32. Now maybe it's 19 and 31, depending on your market. I don't care.
[00:09:15] There's a rough pocket. I was always taught 20 and 30. It balances out. Most places sell more food than beverage. Or most places will have a slightly elevated food cost. So it averages out between, let's say, 25 and 28. That's really the sweet spot. We want a blended COGS percentage of 25 to 28%.
[00:09:38] Because if we're doing 30% labor, 30 plus let's say 25. That's 55% prime. I'll remind you, prime cost is just cogs plus labor. It's a good benchmark for the profitability of the restaurant. If we're at 55% prime, you are golden. You never want to be any higher than 60%. If it's higher than 60%, it is almost impossible to make money.
[00:10:02] So when we look at the problem at a cogs problem, again, we've got five levers to pull. It's a good, good problem to have because we've got a lot of agency here, a lot of things we can do to fix the problem.
[00:10:13] But we got to figure out then if it's a theoretical problem or an actual problem. Theoretical means, on paper, that we look at our recipe cards, we price out, we cost out our entire dishes, and we make sure that everything is coming in at 22%, 26%, 29%, 21%, that everything is in the green zone. Anything 30 or above is in the red zone. That's a problem.
[00:10:36] We always want it to be below, right? That's the first piece. Now, let's say you go through all of that and you say, yeah, on paper, it looks good.
[00:10:45] Well, then we got an actual problem. We're going to talk about that in just a second after a word from a sponsor. But these are separate. The problem is, though, unless you have recipe cards built and you can show me in real time what they are today, we don't know if it's a theoretical or an actual.
[00:11:03] So the first step you need to do is figure out on paper if you should be making money, if you should be making money right, or if those are off, I'll say, then we go to our five levers that we pull, right, the five things.
[00:11:18] We renegotiate the price, we find a new vendor source, a different ingredient, play with the portion size or then increase the price. That's a way to fix theoretical food costs. And if you are out of whack on paper, then great, that's what to do.
[00:11:33] Now, the stickier problem is actual, and I'm going to share with you the other things that we can do, because there are five more things on that end. The other things we can do to try to increase the profitability of our menu items on the other side. But again, all of that in just a second. After a word from another one of our sponsors, today's episode of Restaurant Strategy is brought to you by. Seven Shifts. Seven Shifts is a team management platform built specifically for restaurants. Great restaurants are built by great teams and seven shifts is your secret weapon to better understand your restaurant, hit labor targets and keep your entire team connected with drag and drop scheduling in app communication, task management, tip management, and more. It makes restaurant work a lot easier from back of house to front of house managers, franchise owners and larger corporate teams. Seven shifts has benefits at every single level. Plus it integrates with the other systems your restaurant already uses, like your POS system and your payroll. Turn your team into your competitive advantage. Restaurant Strategy podcast listeners get 3 months absolutely free get started at 7shifts.com RestaurantStrategy that's the number 7s h I f t s.com RestaurantStrategy to get 3 months free and join over 30,000 restaurants using 7shifts today. As always, you will find that link in the show Notes now, like I said, when we're dealing with theoretical food cost, right, Trying to get our cost of goods in line, on the theoretical side, we've got five levers we can pull. It's ultimately a good problem to have because there's a lot that we can do to fix it. But when we get to the actual stuff, actual food costs, right? Cost of goods, if it's all good on paper, well then we equally have a lot of different things that we can fix on that side, right?
[00:13:25] A lot of different ways that money goes out the window when it comes to a cost of goods problem on the actual side.
[00:13:34] Number one, the number one culprit is portion control.
[00:13:38] Number two, problem is spoilage.
[00:13:42] Number three is waste.
[00:13:46] And number four and five are theft and theft. Both intentional and unintentional theft. And I'll explain what I mean by that in just a minute.
[00:13:54] So all of those can be culprits. And the number one, the reason I say this is portioning. You need a really good system for how you portion out specifically your proteins, right?
[00:14:08] Specifically how the cooks in the heat of the moment on a busy Friday Saturday night, you know, does it. Does a pinch become a palm full? Does a handful become a heaping handful that we need really good ladles or scoops or we have to weigh everything. You know, French fries are an easy problem to have here. Or when you're, you know, breaking down, you know, if you're molding burgers, if they're not pre portioned, it's an easy thing to do where you just grab a thing of meat and you sort of roll it in your hands and you just throw it on the griddle.
[00:14:37] And I mean, I get it right? In the heat of the moment that stuff happens, you can help yourself quite a bit by pre portioning as much as possible.
[00:14:48] So controlling who breaks down salmon, who breaks down, you know, a rib of, you know, side of beef, a rib eye, who breaks down these things, who portions out the tuna tartare, who portions out each individual burger, all of that, and then the scoops, the ladles, things like that at each cook's station so that they know there's a specific number, right? We use a specific amount of oil or butter on a given dish. It's not just willy nilly I go in and grab a spoonful.
[00:15:20] We gotta keep this as specific as possible.
[00:15:24] Again, the other problems we were talking about was spoilage and waste. Spoilage is back in the walk in food that doesn't get used, it goes bad before it gets used.
[00:15:34] This really has to do with having really tight pars and keeping really good inventory and ordering procedures.
[00:15:43] You need much less on hand, I've found, than you, than you think, than you realize. The amount of backup food simply because we don't want to run out of stuff is crazy. This goes pretty much across the board. Most restaurants operate with sitting on much heavier inventory than they probably should. So keeping really tight pars and keeping really tight ordering and inventory, that becomes really important so that we don't have an entire box of lettuce that wilts and goes bad. We don't have an entire, you know, you know, 20, you know, 20 gallons of milk that are sitting behind something else, and we didn't realize they were there, and they go bad. This happens every single day, and I'm sure you guys know it.
[00:16:25] Spoilage is really big waste. Two main culprits of waste on the server side and the cook side of the line.
[00:16:33] So either on the server side, they rang in medium well, but the guest ordered medium rare.
[00:16:39] It comes out medium well, it gets returned. You say, oh, I'm so sorry. I meant to order it medium rare. And that's got to be thrown in the garbage and then refired. You have to make sure you're tracking all of your waste when it comes to this. Same thing on the cook side, right? There are cooks who will overcook a steak, will overcook a salmon.
[00:16:58] That ends up. That ends up costing us, and we need to be able to track that as well. On average, how much waste is there a night or in a week?
[00:17:08] Even? If you're just gonna track this via a simple clipboard, you should do it. And then the managers log it in later. At the end of the night.
[00:17:16] It's perfectly acceptable to do that, but you have to be able to track that. So portioning is a culprit, Spoilage, waste on the server side and on the cook side.
[00:17:28] And then finally, what I call theft. And two main culprits here, both intentional and unintentional. Intentional theft, I think, is really easy for us to understand. It's when somebody walks out with four stakes in their backpack, right?
[00:17:41] Obviously, that honestly doesn't happen that much, but obviously, if that's a problem, you need safeguards in place to make sure you're checking bags before people walk out, et cetera, right? This happens. Somebody walks out with four stakes. Somebody walks out with, you know, with a bottle of wine in their bag, et cetera.
[00:17:59] The unintentional side of things happens way more than we realize here.
[00:18:04] The. The totally, like, give the benefit of the doubt, right, Is that the bar is slammed, it's three deep, and you're just trying to get things and you're making drinks, and you forget to ring a couple in, right? And a couple every single night over the course of the week, right? Three turns into 20 or 30 over the course of the week, 30 times 52 weeks a year. That ends up being a meaningful, meaningful number. Right? Just like somebody returns the burger. Hey, I'm sorry. They ran. I was supposed to bring in a medium rare. I can't believe I hit medium well. Can we just refire it really quick? Right? And I've worked with chefs who said, I don't start cooking until I see that coming through.
[00:18:40] Right? But sometimes the cook will say, okay, and they'll just start working on it. And then the server has to go put out some fires or go back to, you know, their section, and they forget to ring it in.
[00:18:51] That is unintentional theft. We are unintentionally stealing from the restaurant, serving them food that is not being rung up or charged. Right?
[00:19:00] So there are all kinds of ways, all kinds of things that affect cost of goods sold. But cogs is one of our big three buckets. Again, think of it like all of your expenses, everything you spend money on over the course of the month, everything goes into one of three buckets, cogs, labor, and everything else.
[00:19:19] Today I just wanted to focus on cogs. It's a huge part of what we do. It's a huge part of the expense that we have. But there are so many things at our disposal on both the theoretical side and the actual side. So many things we can do to get those numbers in line that we should never, never have a cogs problem again. When a client comes to me with a cogs problem, I love it because there's so much that we can do. In any event, that's today. That's what I wanted to talk about today. Hopefully this opened your eyes to the problem. Hopefully. If you're overwhelmed by this, this put you at ease because you know that there's a lot to do. I want to remind you the two things I want you to do for me. Number one, if you get any sort of value from this show, please take a minute, go to Apple podcast, leave us a five star rating and review. Just let others know what you've learned, what you get out of this show. The second thing you can do to me is go back to your favorite episode from the last three months, find it, copy the link and send it to at least one person. Someone you know would love this show. Someone you know that would benefit from the things that we talk about on this show. If you can do those two things more than just about anything else, you would help me immensely. I appreciate you being here, spending your time with me every single week.
[00:20:36] Thank you very much and I will see you next time.
