How to efficiently calculate food costs
Food costs play a major role among the cast of characters that make up the overall profitability of a retail bakery. From setting price points to possibly eliminating a product altogether, food costs and how and when you calculate them, impact your day to day business profoundly. Food costs encompass a range of things that need to be looked at regularly. Not only does the actual cost of ingredients factor in, but also labor and waste.
“Food cost is just as important as picking your menu and your customers,” says Butch Rouwhorst, owner of Ryke’s Bakery in Muskegon, MI. “What’s going to sell in my world and how much are they willing to pay for it?”
Like most operational decisions, making decisions on how often to calculate food costs depends on your individual situation. Figure out what works best at your bakery and go with it, but always re-evaluate on a schedule and be willing to adjust when necessary. “We calculate food cost on a weekly basis,” Rouwhorst says. “As we enter our delivered product into our inventory, our computer program will make adjustments to our pricing and also send up flags if the profit margins are compromised.”
In addition to weekly food cost, Ryke’s keeps track of its overall pricing as well, although it’s not necessary to do this as often. Special and more occasional items also need to be considered. “We also look at our standard menu pricing on a yearly basis as other costs may affect profitability,” Rouwhorst says. “Prior to a holiday or for seasonal menu items, we calculate that price in time for our marketing calendar.”
Obviously in today’s world of technology, specialized computer software provides the best and most efficient way to calculate and follow food costs. Prepare yourself to spend some time and money fine tuning your system. There are many systems available for the retail food service industry, and many of those systems cost a fair amount of money. Shop around and do your research to make sure any new system you decide to go with serves you in the best way needed for your bakery.
Rouwhorst cites BakeSmart, Mixing Bench and Caterease as just a few of the options available. “It can be quite time consuming, also continuous data entry is required,” Rouwhorst says. “These systems are only as good and consistent as the data given.”
Food costs fluctuate. Once you’ve completed your calculations initially, it then becomes a matter of continuous management. When food costs increase, prices need to be raised to maintain profitability, but be careful. “First, determine why your food cost is going up,” Rouwhorst says. Ryke’s tries to approach any price increases on a yearly basis. “Too many changes in a year and your customer will question your tactics and ethics,” he adds.
When ingredient costs do rise, and they will, it might necessitate a hard look at the profitability of products you offer that contain that ingredient. When ingredients get too expensive, too fast, it might be best to eliminate that product altogether. This follows along with the customer trust issue.
“A few years back, a 30 lb box of pecans went from $80 to $220. Our choice was to eliminate some of the items that included pecans rather than increasing the price by 250%,” Rouwhorst says. “Customers would not understand such a large price increase.”
Bakeries and cafes can handle food cost fluctuations and increases by keeping staff, especially those in sales and customer service, trained and knowledgeable on the ever changing prices of ingredients. “We equip our staff with pricing information as they are on the front line and are handling the questions from the client,” Rouwhorst says. Convey to customers how the costs of ingredients are on the rise as well, he adds.
Relative to price
When setting prices, remember that food costs are only a piece of the overall cost to produce goods. According to Rouwhorst, labor and production costs, overhead such as rent and utilities, etc., what you want your profit margins to be, and estimations of waste and unsold products, all factor in to the equation. When figuring food costs relative to your retail mark-up, there is a lot of flexibility.
“Labor is more the driving factor when you are pricing out finished products,” Rouwhorst says. It might look something like this; flour, fat, water, salt and sugar are 10% to 15% of unit sales price, with labor being 15% to 48% of unit sales price. Asking the right questions get you going down the path to solid pricing relative to food cost, as well as all the other costs involved.
“Is your ingredient 10% and your skilled labor 40% or is your ingredient a lobster and your labor boiling water?” Rouwhorst asks. “Pay attention to the product cost, the labor to produce it and the dumpster,” he adds. “After that part of the pie is paid for, can you still pay your mortgage and overhead? How much did you make? Who is the happiest, the customer, you, your employees, or the rat in the dumpster?”
This list is just a sample of what’s available. Be sure and research all options and decide what works best for your bakery before purchasing.