Cutting Supply Chain Costs
The number one way to increase profitability in your LRS, bar, or pub is to reduce costs. Every dollar saved is a dollar that goes straight to your bottom line, whether it comes from reduced waste, labour, or other operating expenses.
However, the greatest impact on your profitability will be lowering your food and beverage costs. Best of all, by saving here you can increase profits without impacting sales through price increases.
Calculating Cost Ratios
The first step in any cost reduction program is to understand your current costs for food and beverage by doing a cost analysis.
The more items a purchased product is used in, the higher the efficiency of your purchasing will be.
The formula should be familiar and simple: divide the cost of product purchased by the revenue from the product sold and multiply that by 100. Get this for any period by adding beginning inventory and new inventory purchased, subtracting ending inventory, dividing by sales revenues, and multiplying by 100. For food cost you should get a number between 25 and 40. Traditionally a higher number means you’ll have less to spend on labour, so a 30-35% cost ratio is the accepted standard. Don’t forget to include things like paper supplies, condiments, fryer oil, etc.—anything that contributes to the cost of goods sold.
For beverage costs you should see around 30%, depending on whether it’s liquor, beer or wine, but combined it shouldn’t be much higher.
Getting these numbers is the first step, but it only provides a snapshot of your costs. To get a big picture you need to track your costs on an ongoing basis, comparing them from month to month. You’ll also need a variance analysis to figure out exactly what happened when your costs show any significant change.
Finally, you’ll need to break out individual drinks and dishes to determine which ones are driving the bottom line, and which ones need to be streamlined, repriced to be more in line with the rest of your offerings, or eliminated altogether.
Streamlining costs consists of looking at the number of different items you order from your suppliers, and cross-referencing that with how many different menu items they appear in. While your goal isn’t to pare your menu down until its unvarying monotony, the more items a purchased product is used in, the higher the efficiency of your purchasing will be.
Once you have your numbers and have taken the basic steps to chart variances, streamline your menu, and eliminate waste, it might seem like you’ve reached the end of your ability to reduce cost. Your sales reps can help you with suggestions, purchasing programs, and incentives to push you to certain deals or buying cycles to save money, but their focus will always be on increasing sales, not reducing your costs.
There are also manufacturer savings over and above regular programs, but trying to find all of them, much less keep track of every incentive available, is time consuming.
A great way to make sure you’re getting all the savings possible is to join ABLE BC’s Foodbuy program. It’s a transparent and seamless way to maximize your revenues. All your existing agreements with GFS or Sysco remain in place, along with vendors and current rebates, but Foodbuy makes sure you get every possible rebate on each product. All you have to do is sign up and you’ll start receiving an itemized rebate cheque and custom reports to track how well you’re doing. Best of all, there are no costs to you and you’re not locked in to a specific term. If you’re not on this program, you may be leaving money on the table.
Savings on LDB Purchases
Chain stores with aggregated purchases and large inventory capacity are often able to negotiate better pricing from suppliers, and get discounts passed through the LDB, and they’re also able to buy exclusive products that small stores can’t. This kind of clout gives them a strong competitive advantage.
That’s where a group purchasing organization (GPO) comes in. A GPO pools the buying power of its individual members to get the best prices and selection on products—think Costco, or a Co-op, but specialized for your needs. Group purchasing gives you the leverage to get desirable goods while keeping costs as low as possible.
Here ABLE BC steps into the scene again, with their BuyABLE program. It’s a web portal that brings together the private retailers in BC with vendors in the LDB’s system.
A GPO pools the buying power of its individual members to get the best prices and selection on products.
Just like larger chains, the collective purchasing power of BuyABLE can not only bring down the cost per case/unit from a vendor, it can also aggregate enough orders to make it worthwhile for a vendor to import specialty products that would otherwise be unavailable.
This program is as seamless as the FoodBuy program: sign up with ABLE BC, log in to the web portal, navigate by product type, make your selection, input your goal profit margin, click buy, and that’s it. Your order gets processed though the LDB’s system, charged and delivered exactly as it is every other time you order. For direct delivery products, buyABLE generates the Doc 60 and sends it through the system as you normally would.
This is a huge advantage for a small retailer: you can have the selection and pricing of a large chain with only the commitment to your regular inventory levels and order cycle, keeping product costs low. And there is no cost for the program, as it’s free for all ABLE BC members.
The diligence and effort that evaluating and comparing prices, vendors, and services takes is overwhelming for most small bars, pubs or LRSs, and takes away from the most important focus for your business: customer experience and satisfaction. By teaming up with a GPO and coordinating your rebates, you’ll not only increase your bottom line, you’ll free yourself up to work on your business instead of working in it.