I don’t need to tell you that running a restaurant has always been full of challenges. You’re living it. Right now you’re dealing with costs increasing at a record pace and a real labor shortage. You already know you can’t keep doing what you’ve always been doing. Something must change. In this episode of The Restaurant Prosperity Formula podcast, I’m asking you one question: are you really willing to make those changes? The idea of change is one thing. To actually take action to make changes, especially when they’re difficult, is a whole other level. I’m on calls every single day with restaurants just like you, whether it’s on a discovery call or a group coaching call, or one on one call. One thing I can tell you for sure is that if you didn’t react to the rising costs in first quarter 2022, odds are you lost 2 to 3 percentage points from your bottom line in food cost alone. Forget about labor. If this is something you would like to prevent going forward, and if you are willing to make changes, I invite you to listen to this podcast episode.
In this episode, you’re going to learn:
- The one number you must know to have any chance to make any money, prime cost, and why it is critical to this discussion. Prime cost is the total cost of goods sold plus total labor costs, including taxes, benefits, and insurance.
- Why it’s important to use gross sales versus net sales when calculating your prime cost. Gross sales is a ring at the register before discounts, not including sales tax.
- The target prime cost for your restaurant if you do $850,000 a year more in sales, and the target if you do less.
- The tool that will help you manage fluctuations from week to week and month to month so that you maintain your prime cost average.
- Solutions some of my members have tried to bring their costs down without sacrificing the quality of the experience for their customers.
In listening to this podcast episode, I’m challenging you with ideas of changes you might have to make to your menu to lower your costs, increase your sales and better manage your labor costs.
If you know you aren’t willing to change anything in your restaurant, if you’re not willing to consider a menu overhaul, if you don’t want to dig into the numbers, you need to stop searching for answers. Stop listening to the podcast, watching videos, reading books. If you’re not willing to take action, stop. If you’re not willing to take action, and you’re not willing to change what you’re doing, even when and especially when it’s hard, then why even bother?
Remember the definition of insanity? Albert Einstein is doing the same thing over and over again but expecting a different result. If you’re doing the same thing over and over and expecting a different result, how is that working for you? If you always do what you always did, you always get what you always got. It is time to change.
The last two and a half years has been the smack in the head that a lot of restaurant owners have needed to make change. What are you waiting for?
When you’re willing to change. When you have a willingness to change, a willingness to learn, a willingness to take action, those are the keys to your success in these challenging times. If you want to be successful in the restaurant business, you must be willing to change. Are you?
Click the podcast player above to listen in, or you can watch the video on YouTube, click here to download the latest episode.
Read the full transcript.
Hey there restaurant pros, it’s David Scott Peters and welcome to episode 44 of the Restaurant Prosperity Formula. I’ve been coaching restaurant owners since 2003 and the Restaurant Prosperity Formula is based on what the most successful restaurant owners I’ve worked with do on a daily basis to achieve their success. The basic premise of the formula centers around achieving prosperity, freedom from your restaurant and the financial freedom you deserve. To achieve prosperity, you have to follow a very specific formula made-up of leadership, systems, training, accountability, and taking action. Today’s topic focuses on the restaurant challenges we’ve faced over the last two plus years.
From COVID business restrictions and rising operational costs to food and labor costs skyrocketing out of control and ultimately the changes you need to make in your business to continue to be successful. I’m going to ask you one simple question during this podcast. Are you willing to make the changes necessary? Let’s get started. Look, I don’t need to tell you that running a restaurant has always been full of challenges. I also don’t necessarily need to rehash the challenges you faced in 2020, 2021, and now in 2022. You get it. Costs have risen at a record pace. The labor shortage is real. You already know you can’t keep doing what you’ve always been doing. Something has got to change.
My question to you is, are you really willing to make those changes? Right? The idea of change is one thing to actually take action to make changes, especially when they’re difficult. Are you willing? Why do I ask this? Because I’m on calls every single day. every single day with restaurant owners just like you, whether it’s on a discovery call or a group coaching call or one-on-one call. And there are challenges that we’ve been facing and working through, my members, the people I’ve been talking with on a routine basis recently, and it all has to do with the rising costs that we have out there.
The fact that food cost is astronomical and the fact that if you looked at the first quarter of 2022 and if you didn’t react to those rising costs, odds are you lost two to three points to your bottom line in food cost alone. Forget about labor. So before I go into anything further of making change in your business, I want to talk about a concept that you’ve heard me talk about multiple times, whether here on my podcast or on my YouTube channel. or seen me speak across the country or been on one-on-one call with me or seen me do a webinar. What is that? We’re going to talk about the one number you must know to have any chance to make any money and that’s called prime cost.
And this is critical to this discussion because prime cost is the total cost of goods sold plus total labor costs including taxes, benefits, insurance. So whatever your cost good, bottled beer, draft beer, wine, liquor, food combined, Labor from salaried to hourly, management included, including taxes, benefits, insurance, that’s your number. Now I’m not going to go into great detail into prime costs, but you get the idea. It’s cost of goods sold and labor cost. I also want to make sure we understand we’re measuring it off the right number, and that’s gross sales versus net sales. Gross sales are the ring at the register before discounts, not including sales tax.
So if you ring up a $10 burger and comp $5, gross sales is $10. Net sales is after the discount. That would be $5. And this is important because we’re going to measure off of gross sales because that’s the right target. If we ask chef to put out a burger for $10 and use $3 in product, that’s a use divided by sales, 30% food cost. If we comp $5 and use that as our number, our net sales number of $5, we’ve doubled our cost of goods sold. And that’s not really a fair measurement of the kitchen. That’s a fair measurement of your bottom line. But not did my chef or kitchen manager do a good job in managing my restaurant, my kitchen, training, product, right portion control, you name it.
So we’re going to use gross sales. Now in the old days, when I first started back in 2003, experts said prime cost target for a full service restaurant was 65% for a quick serve 60%. And over the years, over the past 20 years, things have changed quite a bit for the restaurant industry. Forget about 20 years, how about the last 2 1/2? Right? Our food cost is astronomical. Our labor cost is astronomical. There’s real challenges because of COVID and the after effects of it. I’m here to tell you that you can’t run off a 65% prime cost target anymore. Your new prime cost target is 55%. If you do $850,000 a year more in sales, your prime cost target is 55% or lower.
Now if you do under $850,000 a year, your target is 60%. Now, keep this in mind that is going to fluctuate depending on what you’re doing. You could run a higher food cost, lower labor cost. You can grow a higher labor cost, lower food cost. You get the picture. You get to choose based on where you’re located, style of service, quality of product, your core values. There’s so much that goes into it that we can’t use a national average. We’ve got to make sure we’ve got a budget for you. And that budget primarily is going to give us that prime cost targets, those numbers you need to hit to make the money you deserve.
So now let’s back into the conversations because we’re going to talk about food costs and we’re talking about labor costs when it comes to challenges that are you willing to change. So let’s talk about food costs running high. So I have a new member that has a BBQ restaurant that is currently running a 49% food cost. That’s easy to do when brisket alone went up 300% last year, let alone I haven’t kept up pace of what’s happened this year. And if that’s one of your top sellers, that’s going to be driving things up to a point where at what point in time can I not continue to raise my prices where my guest is, holy crap.
Now I will tell you we’ve not talked about this yet with this member, but we’re going to do a menu analysis to make sure we can re-engineer his menu. And a part of it may be with brisket, things like that. We’re going to take a page out of the seafood restaurant and go to basically market price. Now it becomes a little bit of a tracking nightmare, but the fact of the matter is, hey, if you really want the brisket, it’s the market price and you understand that. Now in order to bring those food costs down, we’re certainly going to look at portion controls. That’s critical when you’re dealing with high cost proteins.
We’re definitely got recipe costing cards and what we’ve already set up out of the gate, brand new member, we’re going right into menu engineering because we can move the needle usually three to seven points the first time through. But because the food cost is so high, it is critical we make the changes necessary. And a part of those changes, what’s beautiful is he has a second location that actually is a different style of product. Actually, it’s Cajun food that goes with it.
And so in this initial location, we’re talking about bringing that food over because those rice, the beans, things like that, high quality and so on, we are low cost, high perceived value, we can charge for it, changing our mix along with portion controls and changing our menu with what the BBQ portion is, we drive the food costs down. But the question is, as an operator, if you were presented with a 49% food cost and BBQ is what you know and do, are you willing to make the changes? Are you willing to potentially go to market price on brisket or not sell ribs anymore because you can’t charge enough for them? Are you willing to make that change?
Are you willing to re-engineer your menu and position pulled pork as your number one item that you want people to buy, driving your food costs down because it’s a lower cost product. Are you willing to make those changes? Are you willing to raise your prices? See, you may also look at it and say, are you willing to reduce the amount of prep you have and whatever it may be to change the menu to make it easier to make money? Are you willing? Are you willing to, in this case, maybe instead of buying from multiple vendors, go to a prime vendor agreement to reduce your cost of goods sold by promising 90% of your purchases to 1 broadline distributor to make more money? Are you willing?
See, each one of those questions is you’ve got to answer yes, you’ve got to answer yes, you’ve got to answer yes, or you’re going to be stagnant. Nothing will change. I’ve got an another new member who came in as a seafood restaurant running a 38% food cost. Now that is not unusual. 34 to 38% is typically where many of my restaurant operators, owners come to me because they haven’t made the changes necessary. Now this is a group that already had recipe costing cards, which means out of the gate we’re going to do a menu engineering call. But in our discussions I said, are you willing to stop selling items so you don’t make money on? Are you willing to again drop those items?
Are you willing to raise prices on items that you’ve maybe falsely kept low because you’re afraid people weren’t going to buy them? Where I might say if they aren’t willing to pay the money for it, maybe you shouldn’t be selling them. Are you willing to add and drop items to drop your cost? Now I will tell you, I will never have you buy ****** product, right? Reduce your quality. I will never have you, know, cheap up your restaurant. It has to stay true to your core values, but you’ve got to be willing to make changes. And again, in this situation, are you willing to get a prime vendor agreement, especially if you’re a seafood restaurant and you like to buy from local vendors?
Does that go against your concept? And we’ve got to find other ways. I’m going to give you one more example. A burger restaurant, a member I’ve been working with for two years. And they’re running a 30% food cost because why? They’re primarily beef. And what has beef done in the last two years? Just keep going up and up and up and up. Now I will tell you this member is a rock star. I’ve done a podcast with him, Steve Eller. He’s I mean, he’s one of The sharpest people I know drills down numbers like there’s no tomorrow. He has made major changes over the last two years that have truly not only made his business survive COVID but thrive today. They are set up for success.
But his numbers are rising. Now this is somebody who knows his ideal food cost on a weekly basis to a point where he’s got spreadsheets that know which products have increased in price that have increased his prime cost and by how much. His food cost, I should say. He already has a prime vendor agreement. He already has a budget, knows his food cost target is 26%. He understands that a rockstar kitchen is going to run two points above. But ARD takes weekly inventories and much more controlling portions and waste sheets and key item trackers like systems oriented guy like dead on. But his food cost was rising too.
Budgeted 26 and because of the rising food costs, even after raising prices and making some menu changes six months ago, three months ago or so, his food costs went up. He’s going through another round where he’s attacking portions. He’s attacking waste and preventing theft. he’s going through and he is dropping even top selling menu items because they’re too prep intensive, they slow down the line and the food cost is too high. He’s taking his menu and shrinking it down to focus even more on what his customers want and understands that after this next round of changes he may have to get more aggressive.
because ultimately that’s what it’s going to take to bring his prime cost down, in this case the food cost portion of it, because he runs higher labor, paying higher than most. So you’ve got to be like Steve and be willing to make those changes, always looking at your numbers and leading your team. Now what about running with higher labor costs? This is really a challenge that is affecting all of us today. I have a member who is a Mexican food restaurant in California that after doing her budget, we reduced her labor costs in her kitchen alone by 50%. And after doing so, she runs more efficiently, better ticket times. All the employees are happy because they have hours.
Everything’s running even better with less people. How did we get there? We did a dollars per labor hour worked analysis where you take the number of man hours in that position divided into the food sales for the kitchen. Now if we do that for servers, it’s their total hours divided by total sales, whatever position and what they sell. Well, I have another member who is a pizza restaurant and we looked and was doing his budget and he had a 16% back house labor. I’m like, it’s way too high, way too high. And he’s not in a $15 minimum wage state. We were able to look at it and say, you’ve got to get your labor costs down in the back house. 5%.
We want you 10 to 12% in general, maybe a little bit higher if you’re in a $15 an hour state. 5 is what he decided he was willing to do after we did a dollars per labor hour worked analysis. And we discovered that I think it was their people were doing about 6 entrees an hour. If I had somebody stand in there, they’d do 6 entrees. That was the dollar equivalent. Well, in our conversation, what was beautiful, I’ve never done this before and now I do it routinely, is I said, hey, let’s go onto your cameras. And we watched the busiest hour on the busiest day and realized, you know what?
he knew as an operator being in the weeds himself, trying to do all of it himself, when he stepped backwards and looked at his team, he realized, You know what? The numbers didn’t lie. So he made the changes and things are going extremely well. He cut the fat and people are happy, more efficient and doing better. Are you willing to make those kinds of changes? Remember that burger restaurant, Steve Eller? Well, guess what? The dollars per labor hour worked. When we were talking about his budget, when we were talking most recently about, hey, what about his labor? I said, your labor still looks a little high in the back of house and I’ll tell you why.
because he had already, again, went through my systems and already created in his budgeting system his dollars per labor hour calculation. We did the calculation and I said, hey, look, that’s about 6 entrees an hour. So what it means is our menu may be too complex. There may be too many steps and you’ve got to be willing to re-engineer your menu again, possibly changing what you are selling in not in wholesale, but in some and reducing the prep, the complexity of the menu. And again, with all of this, you have to be willing to make those changes. So remember when I went over prime cost?
This is critical because you, can choose where you need to make changes to hit your desired target prime cost. You have to have a budget, right? This means you need a budget. We’ll talk more about budgeting in a future podcast, but right now you can go over to my YouTube channel, David Scott Peters, And you’ll find several videos on the topic of budgeting, prime cost and more. But the real question is, are you willing to make the changes necessary to change your business? If the answer is no, you need to stop searching for answers. Stop listening to podcasts, watching videos, reading books. If you’re not willing to take action, stop.
If you’re not willing to take action and you’re not willing to change what you’re doing, even when and especially when it’s hard, hard to make those changes, then why even bother? Remember the definition of insanity, Albert Einstein is doing the same thing over and over again but expecting a different result? Well, I have one more thing to it. How’s it working for you? If you always do what you always did, you always get what you always got. It is time to change. Do you need a smack in the head with a 2×4? The last 2 1/2 years has been the smack in the head. And if you have failed to change, what are you waiting for?
But here’s the deal, if you are willing to change, willing to fundamentally change what your menu looks like, how you schedule, how you train your team, then you’ll be a restaurant owner who leads your restaurant to success. When you’re willing to change, when you have a willingness to change, a willingness to learn, a willingness to take action, those are the keys to your success. In these challenging times, if you want to be successful in the restaurant business, you must be willing to change. Are you? Hey, that was an awesome episode. I want to thank you for taking the time to take action on building a better, more prosperous restaurant.
Before you go, I want to give you these three thoughts. One, by combining leadership and taking action with systems and training, being checked by accountability, you are on your way to creating prosperity for you and your restaurant. Two, I have something I need from you. Please leave a review on Apple Podcasts, Spotify, or wherever you happen to listen to podcasts. By leaving us a review, other restaurant pros seeking out this information are able to find it. I read the reviews and hearing how this information has benefited you does wonders for me. And 3, if you find any of the discussions helpful, share them.
The more restaurant pros who have access to them, the better we become as an industry. com. Be passionate about what you’re doing. Be persistent, but more importantly, become better and help everyone around you become better. And your restaurant is going to kick some ***.