Product Mix Relating to Inventory Costs
Not too long ago, I helped a user (Big Biscuit) with an inventory related question on the Foodservice Forums located at www.foodservicei.com
His questions (paraphrased) were:
- Let’s say that 15 restaurants have an average food cost of 27.50%
- If one of the fifteen restaurants has a 29.50% food cost, could the reason for the higher food cost be because of their product mix? Or, is the only option product theft or shrinkage?
- Put another way: Could a higher than average food cost at one store be because they sell more individual menu items that have higher food costs?
What an interesting question! This question isn’t specific to the hospitality / food-service industry, and could easily apply to a car dealership (average price of a vehicle), retail store, or plumbing repair shop. Without getting too deep into statistical analysis, the general answer to an anomaly in inventory is “it depends”, as the problem could be related to:
- Vendor changes (perhaps one store gets smaller cuts of beef, so they have to use more beef to get the same amount of stew).
- Personnel changes (a new cook may use more or less butter than her predecessor)
- Shrink or Shrinkage (fraud, theft or loss of a product, accounting errors, or perishable inventory)
- Different product mix (using or selling different quantities of inventory items)
To illustrate this particular problem, let’s assume we have two stores:
Store A and Store B sell the same “stuff” (menu items), and each store has sales of $1,000 per day.
Store A is located in a place where only “locals” would know about it, and most of the locals order burgers, which run $5 gross, but have a food cost of $1 (20%). The patrons also occasionally purchase steaks, at a gross of $20, but with a higher food cost of $10 (50%).
In this case, Store A has a product mix of 20 steaks ($400 gross, $200 in food cost), and 120 burgers ($600 gross, $120 in food cost). Total food cost is $320, or 32% ($320 / $1000) food cost, and each of the 140 clients spent an average of $7.14
Now, let’s say that Store B is located on the boardwalk, and sells more steaks than burgers. With 40 steaks ($800 in gross, and $400 in food cost), and 40 hamburgers ($200 gross, $40 in food cost), Store B’s product mix has an average food cost of 44% ($400 + $40 / $1000), and each of the 80 patrons at this store spent an average of $12.50
In this case, Store B has a 12% higher food cost than Store A. Interestingly enough, Store B only served 80 patrons, compared to the 140 clients that Store A was able to serve – another excellent indicator for tracking shrinkage. What is the average of the two stores? 38% food cost and $9.82 per person on an average check. Both stores are 6% away from the “average”.
As illustrated by the above example, varying product mix can certainly cause food costs to fluctuate, and one should be very careful when comparing averages against each other.
How do you compare product mix at your location?
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