The opportunities and challenges you face to develop and evolve the Food & Beverage (F&B) services offered at your venue are not unique. Whether delivered by a third-party catering company or an in-house team, your catering team is balancing quality and breadth of service with commercial pressures. Understanding these commercial pressure points enables you to work with your catering team more effectively.
Your catering team must have a demonstrable passion for F&B and providing your visitors with a quality experience. Whether serving a cup of tea in a self-service café or table service dining, this principle is the north star guiding all decisions. Visitor perception of the F&B experience is intertwined with value – the balance of experience and price – and the question of value brings us to the economics of catering.
Understanding the economic drivers behind the catering business empowers you to understand the business in more depth and make better decisions when planning and managing. The economics are straightforward. The catering business buys raw materials (food and drink), manufactures and / or serves the product with skilled labour. Along the way it has business expenses, pays rent and hopefully makes a profit.
Let’s start with the raw materials. As a rule of thumb, the food and drink cost the caterer between 25% and 40% of the sale price of the product. We call this the cost of goods. The gross profit margin is the difference between the cost price and the selling price.
Let’s say you sell a brownie in your table service café for £2.40. At 20% VAT rate the income to your caterer is £2.00. If the brownie costs your caterer 75p (cash cost of goods), the percentage cost of goods is 75/200 = 37.5%. The cash gross profit margin is £2.00 – 75p = £1.25 or 62.5%.
If your catering team produce the brownie in-house it is likely that their gross profit margin will be higher / cost of sale lower. Buying in ready made products is more expensive and deliver a lower profit margin. And this is because of labour cost. The raw materials that make up the brownie recipe are relatively inexpensive, the labour to make the brownie isn’t.
Buying in pre-made / ready to sell products outsources the labour to the manufacturer. It also outsources the requirement to own, house and service any specialist equipment required in the manufacturing process. Additionally, you don’t require the space for a skilled worker to make the brownie. Sounds good right?
The issue with buying in pre-made products is about point of difference and value. If all the F&B products you have on offer in your café are bought in, what makes the café special? And if your F&B offer isn’t special, your guests value perception of the experience will be driven by one thing only: price. Buying in a cheap brownie is easy, it just doesn’t taste very nice.
The food service industry is highly skilled at producing finished, or part finished goods to help your caterer reduce the skilled labour required to produce them. Think of croissants. Now I’m a decent cook. I spent years working in kitchens in my early 20’s and have the scars on my hands to show for it. But I’ve never made a croissant in my life for two good reasons. Firstly, I’m not inclined to follow recipes: just as well I stopped cooking professionally. Secondly, making a decent croissant is hard, really hard.
Luckily, the food manufacturing industry produces a huge range of frozen croissants that your catering team can buy and bake. These can be basic or of high quality, all of which is reflected in the final product. It isn’t bags of flour that is being delivered to bakery cafés like Le Pain Quotidian or Paul. What is being delivered is quality frozen breads and pastries ready to be baked by staff who are not bakers.
So, we now understand the product side of the business. Next comes labour, and controlling labour costs is what really keeps your catering partner awake at night. The trouble with labour is that it is not, in my view, a commodity (Mike Ashleys of the world would not agree). Unlike a commodity, you can’t turn the tap on and off with ease in line with customer demand. If you want to create a café that is distinct, you will require a well-trained, passionate team to bring it to life. And whilst that team will likely flex their working hours within reason, this is and will always be the biggest issue for the business.
In my experience, the single biggest influencing factor is the quality of the manager. A good manager can increase income and control expenditure simultaneously. Only last month I worked with a client to replace a restaurant manager in an upmarket shopping destination in Germany. Within two weeks, the new manager had overhauled the team and working practices and last week, the restaurant performed 20% above budget, enjoying its best week’s trading ever. If you’re going to spend a little extra money, spend it on the manager first.
Labour cost will range from 25% – 40% of income, depending on the F&B outlet style. As a rule of thumb, basic cafés serving bought in product will have lower wage percentage costs, but as noted above, will also have lower gross profits. Table service restaurants will have higher wage costs due to the skilled labour requirements; they will also enjoy higher gross profits.
The hardest operation to manage is when demand fluctuates significantly, something which is typical for cultural venues. There must be strategies put in place to manage peaks and here are a few that might be worth considering.
- Flex the menu – have a smaller menu on busy days
- Have kiosk points that can offer bought-in items for peak days, relieving pressure from your café or restaurant
- Consider the mix of items bought in. There is nothing wrong with supplementing your offer on peak days by buying in some selected goods.
The above gives you an introduction to the two key levers affecting the finances of your catering operation. The combined cost of goods and payroll costs amount to ~ 65% of the outgoings from your catering business. Understanding these in isolation is straightforward. Understanding how the food and labour costs are intertwined is more nuanced and hopefully gives you a better understanding of your catering operation.