In quick serve restaurants (QSRs), operating costs average 91-94% of total revenue. These costs fall into three primary buckets: food costs, labor costs, and overhead costs. With such slim profit margins, cost reduction can be just as beneficial to the bottom line as an increase in sales. In this blog we discuss actionable tips for managing expenses in each of these three cost buckets.
With perishable ingredients and variance in sale volume, managing food costs is a great challenge to food service businesses. By one estimate, up to 10% of food purchased by restaurants is wasted before it even reaches the consumer. These tips intend to help restaurants reduce food cost percentage of revenue by reducing food inventory loss.
#1: Diligent Inventory Management: Restaurant inventory management is the process of monitoring the flow of ingredients in and out of a restaurant. Effective inventory management helps restaurants find the balance between having enough ingredients on hand to serve all menu items throughout the day, but not so much volume that ingredients expire before they are used. Historical sale data is a powerful tool in inventory decisions. This can reveal patterns in sale volume fluctuation and allow managers to make accurate predictions of ingredient demand. It is also important to account for discrepancies in theoretical vs. actual inventory use. While one menu item may call for a specific volume of each ingredient, employees may be inaccurate in replicating these guidelines consistently, leading to a situation where actual inventory use may be higher or lower than the predicted inventory use. These discrepancies should be considered when placing new inventory orders. Lastly, food safety technology such as remote temperature monitoring ensures refrigerators and freezers are functioning properly, alerting restaurant owners before inventory loss occurs. Effective inventory management promotes customer retention by building customer trust that ingredients for all menu items will be on hand and fresh.
#2: Calculate Food Cost for Recipes: Recipe costing estimates the food cost of an individual menu item to the penny. This information is beneficial in identifying the presence and scale of inventory loss. Tracking the alignment of each menu items’ intended recipe cost with actual food expenditure can help optimize food usage. The theoretical food cost can be derived from point of sale volume data and recipe cost estimates over a period of time. Actual food cost reflects the actual amount spent on ingredients over that period of time. The difference between these two numbers accounts for food waste, inaccurate portioning, or employee theft. Tracking this variance regularly can help managers spot discrepancies, and make necessary adjustments such as introducing targeted staff training in portioning. Recipe costing also informs profit margin on individual items. This data is useful for making pricing decisions, for example, a manager may choose to raise the price on a high volume, low margin menu item. Ultimately recipe costing informs decisions that lower the price of food inventory as a percentage of revenue.
Explore this recipe costing guide for additional details and tips!
Demand for higher wages in the food service industry has led restaurant labor costs to creep above 30% of revenue, which is generally considered the cutoff point for labor expenses. Many factors play into QSRs high labor costs including the industry’s notoriously high employee turnover rate, and the broader industry labor shortage. These tips aim to help QSR operators reduce labor costs by offsetting these industry characteristics.
#3: Strategic Employee Scheduling: Quick serve restaurants experienced a turnover rate of 144% in 2021. This is a threat to labor cost management because it is much more cost effective to retain current employees than to scout, onboard, and train new ones. One study estimates a restaurant’s training expense to be over $1,886 per employee annually. This investment becomes a sunk cost once the employee leaves. Unreasonable hours are a widely cited reason for leaving the food service industry. Employees value consistency and predictability in their scheduling. This way employees are able to develop a routine and healthy work-life balance. Employees who face irregular scheduling may experience greater work-family conflict and higher work stress, leading to increased burnout and turnover. When scheduling, staff peak times first, to ensure these critical shifts are fully staffed. Prioritize employee input on which shifts they would prefer to work, but also consider employee strengths and weaknesses. For example, during hectic peak hours it is beneficial to staff employees with excellent customer service instincts.
#4: Automate Restaurant Processes: Reduce labor costs by reducing the number of employees needed to operate the business. Automating tasks alleviates some of the employee workload, and allows employees to focus on tasks that cannot be automated, such as customer service. Restaurant’s have embraced this opportunity in recent years. Square reported that 36% of restaurants upgraded their technology in 2021, and predicted an even higher rate in 2022. At the front-of-house, restaurants like McDonald’s and Panera are opting for a contactless POS system, where customers can order and pay at a kiosk. At the back-of-house, restaurants are automating inventory management, food safety, quality control, and task compliance monitoring. By investing in automation, labor can be reduced by an estimated 21%. For example, a switch to Squadle digital food safety enables restaurants to shift from two employees needed for food safety tracking to one employee.
QSR overhead costs are not related to the cost of producing goods, but rather are baseline expenses such as advertising, utilities, and rent. Overhead costs can be difficult to offset since they are not related to the core function of the business – food production. However, there are steps that can be taken to reduce overhead costs as a percentage of revenue in the long run.
#5: Invest in Energy Efficiency: Restaurants are incredibly energy intensive. QSRs in particular may use up to 10 times more energy per square foot than other commercial buildings. However, there are many actionable steps to reducing energy consumption in QSRs. Try these three tips for immediate energy savings. First, consider investing in strip curtains for walk-in fridges & freezers. These help appliances retain their internal temperature by reducing outside air penetration by up to 75%. Second, enforce the habit of powering off appliances that are sitting idle. This accounts for more time than one might think! For example fryers are estimated to sit idle for 75% of a restaurant’s operating hours. Finally, embrace daylight as a substitute for internal lighting when possible. Known as daylighting, this may reduce lighting costs by 33%. For additional tips explore Squadle’s best practices guide for increasing energy efficiency in QSRs.
#6: Maximize the Utility of Your Restaurant Space: Rent is a quick serve restaurant’s largest fixed expense. The consensus among QSR operators is that annual rent should equal 8-10% of annual revenue. Unlike food, labor, and utility costs, little can be done to reduce this expense. Toast’s ‘On the Line’ recommends investing in a strong relationship with your landlord, and locking in a long-term lease agreement with expressly written protective rent increase provisions. However, in some cases rent increases are inevitable. Restaurants have gotten creative with ways to generate additional income from their space. Subleasing kitchen access has become a popular side hustle for QSRs. These spaces can serve as commissary kitchens before and after store operating hours. Clients such as food truck operators, independent chefs, and ghost kitchens may use the QSR kitchen for activities including food prep and overnight storage.
Price elasticity in the quick serve restaurant industry leaves restaurant operators with little room to raise their prices, without sacrificing business. For this reason, cost reduction is the most viable solution for increasing profitability. Although quick-serve food prices could eventually rise in response to rising inventory and labor prices, there is a delay between when restaurant operators begin experiencing these effects, and when some of the price burden is able to be transferred to customers. During this transitional period, a strong cost reduction strategy will allow QSRs to maintain their profit margins.