We all know that food costs are high right now. Inflation is happening right before our eyes. But could you also be losing money behind your back? If you aren’t using the right restaurant cost management and inventory management strategies, the answer is probably yes.
Obviously, you can’t control rising food prices, but you can control things like waste reduction, labor optimization, and menu presentation. In other words, even as food prices rise, there are restaurant profitability strategies you can use to improve your profit margins.
We wanted to learn more, so we caught up with Fifteen Group and Navi Cost Control President David Hopkins.
“Restaurants know food costs are one of their biggest challenges, but many don’t have visibility into where money is being lost,” David explains. “We help operators take control of inventory, monitor food costs, and make smarter decisions to protect profitability.”
Is Restaurant Cost Management a Missing Ingredient for Independents?
Navi is actually the technology spinoff of the Fifteen Group, which is the largest hospitality consulting company in Canada, and which also has a significant presence in the United States. As David explained, “When I started the Fifteen Group, we would go into all these restaurants that were busy but didn't actually know how to turn that into profit.
“So,” recalls David, “we were originally founded on the basic question ‘How do restaurants perform better and make more money?’”
It was while doing this kind of consulting work that David realized something was missing from the marketplace. In the early days, recipe costing and menu presentation were done by spreadsheet. It was slow, clunky, and prone to error. Today, there is a crowded marketplace full of advanced platforms and comprehensive software systems that can do all of these things for you.
Technology has obviously come a long way since the days of spreadsheets. But so too has the cost and complexity of restaurant management software, David says.
Filling a Gap in the Marketplace
David points out that many of the all-in-one restaurant management systems are both prohibitively expensive and difficult to use for independent restaurants and small multi-unit operations.
“We got really frustrated because we found all of these products are way too complicated and way too expensive for the average restaurant, and even for the smaller multi-unit group,” David told us.
“We felt there needed to be a tool that services that gap, because proper menu engineering and product cost control are the biggest opportunities for restaurants next to driving revenue,” David explains. “Revenue is number one all day long, but product cost control and inventory control are the biggest opportunities.”
Seizing the Biggest Opportunities
Fifteen Group launched Navi Cost Control for restaurants that needed something in the middle, a set of tools that is more advanced than the old spreadsheet method but also less costly and complicated than those massive all-in-one platforms.
The result is a platform built to help independent restaurants identify and fix those silent profit killers.
Subscribe to the Operation Station Newsletter
Run tighter operations with practical POS and operational tools, delivered monthly.
Profit Killer: Poor Cost Control
Unfortunately, a shocking number of restaurants — 70%, according to David — are basically guessing when it comes to pricing out their menu items.
“Believe it or not, most restaurants do not price their menus properly. The majority of restaurants still price their menu on a cost-basis approach,” David explained. So for instance, a restaurant looking to run a 25% food cost may have a plate cost of $10 with a menu price of $40. The assumption is that if you do that with every menu item, you’ll have a 25% food cost on your financial statements.”
“That,” David explains, “is the completely wrong way to price your menu. The right way is by taking a margin-based approach — looking at the relationship between how profitable your items are in different categories and how popular they are.”
The Solution: Menu Engineering
Navi was created with this margin-based approach in mind. With Navi, you can plot your menu items based on the quantity sold and your margins. Once you have access to these insights, you can do what David calls “menu engineering.” He explains, “There are lots of little things you can do to make your menu a better value proposition for the guest and still drive more profitability through proper menu engineering.”
Understanding the connection between profitability and popularity per menu item can help you make data-driven decisions about which items to promote and spotlight, and which items to scratch from your menu. In fact, says David, simply cutting the biggest margin losers from your menu presents a big opportunity to make your restaurant more profitable.
How big is this opportunity?
“If your restaurant is taking the percent-cost approach to menu pricing and they switch to the margin-based approach, that'll generally add about 3% of sales to their bottom line profit,” David explains. “So for a restaurant that does $2 million in business a year, that's $60,000 of profit just by doing a bit of work, costing your menu and pricing it properly.”
Profit Killer: Invisible Inventory Loss
The other area where independents are losing money is through poor restaurant inventory management. Certainly, we’re accustomed to hearing about food waste due to inefficiencies like spoilage and overstocking. But David says misportioning and employee theft are much bigger issues.
“Most restaurants don't realize that portion control and staff theft are massive profit killers,” David notes. “If a $2 million a year restaurant overportions everything by just 10%, they are losing about $60,000 in profit a year.”
Few independent restaurants realize just how much money misportioning and employee theft are costing them. They don’t use the same all-in-one inventory systems that the big chains use, so they don’t have the same visibility into their inventory management.
They also don’t have the time to master complicated inventory software. As David explains, even with one of these advanced systems, “The entire inventory control process would take a full-time employee 20 to 40 hours a week.”
The Solution: Simplifying Inventory Control
Putting aside the cost of this software, it simply isn’t worth the investment of time for the business independent restaurant owner. With Navi, the focus is on simplifying this process while still providing visibility into these potential areas of inventory loss. David uses the way Navi evaluates your liquor inventory as an example.
“Most restaurants don't realize this, but you don't need to cost out the 300 items you have in your point of sale,” David points out. “You can cost out just the 25 items that account for about 80% of your liquor sales, and get a theoretical target cost.”
David argues that for most independent restaurants, that’s really all you need to know in order to discover inventory loss. After that, it’s up to you to find the source of that loss and act on it.
As David notes, “If I know I'm missing the little pieces, I'm going to make sure the new bartender knows the recipes and make sure people are using the portion control tools. If it's a big enough variance, I can check the cameras for theft. I'm going to make sure our receiving procedures are proper.”
The key is that Navi is designed for simplicity, accessibility, and affordability — all priorities for the busy independent restaurant.
Cut Your Costs by Investing in the Right Tech
Navi provides tools that simplify restaurant food cost control and inventory management for smaller operations. Before you choose the right tech for your independent restaurant, think about what you really need and what you don’t need. Because when you get one of those big all-in-one systems, you’ll be paying for those advanced features, whether you use them or not.
Navi gets rid of the features you don’t need, and provides the features you do need at a cost of about $2,000 per year, says David. And, David notes, “For the typical restaurant that we encounter, Navi adds between $50,000 and $100,000 of annual profit. So it's a no-brainer.”
“A lot of times, when people are switching systems, they just want to cut costs, cut costs, cut costs. But proper menu engineering and product cost control are by far the biggest opportunities to gain profitability, add to your bottom line, and thrive instead of barely surviving.”
For other tips on how to thrive even as food costs continue to rise, sign up for our monthly Operation Station Newsletter and stay up to date on all the latest industry trends and developments.
