I like your site, excellent information.
I am looking for a resource that explains why operators would use ‘mark-ups’ of factors over FC%.
I teach food costing to our chef students and always use FC% to get a selling price, but now I have to explain the other options but can’t seem to find good definitions of why you would use the other options of obtaining selling price.
Could you offer any advice?
Thanks for the question Mark.
During my corporate years, we never used food cost % since our billing method was per man per day. To get more current, it helps to use a destination resort for an illustration. Many resorts located in the mountains offer a complete package including room based on double occupancy, all meals and snacks, and optional activities.
We were big fans of these hotels and inns when we lived in Quebec. You can get a fantastic price for mid-week visits. Any operator who wants to offer a competitive all-inclusive price needs to know their costs to the penny.
Caterers should not use food cost percentage to control their costs if they offer packages. In my July 2008 post Profitable Special Events , there is a chart designed to show the impact of raising $200,000 of additional revenue. I included the % analysis to be complete but the focus was on the cost per guest for each cost component (including profit).
Many caterers and hotels negotiate a final price in a competitive environment. If the sales team does not have a hard deck figure, you may find yourself working very hard for free.
Why do percentages fail in these operations?
One of my early catering clients was barely breaking even. He was an attorney with a major investment in a catering hall. When we met the first time, he was shocked he couldn't break even although his 25% food cost number was well below the 32 or 33% figures mentioned in the book he used to put together his business plan.
I asked him what he used for the divisor.
He was dividing his net food purchases by total sales. Many of the events were cocktail receptions held in the evening hours. Guests were treated to a full bar with several stations and hors d'oeuvres served by wait staff. I asked him what his bar cost % was for the same period of time. Due to his belief in serving top shelf liquor and premium beers and wines, his bar cost percentage was 14% of total sales.
The combined cost of goods sold was almost 40%. I explained what he needed to do to cover his costs and produce a reasonable profit. He had 2 options: raise prices or reduce costs (or a combination).
Food cost percentage analysis is also mediocre for buffet management. Any all-you-can-eat buffet operation would get a better view by tracking layouts and components. There are strategies for controlling high cost proteins and promoting low cost desserts. A simple food cost % tells you very little about this type of meal service.