By Fran Duskiewicz
The column I wrote a couple months back, about how inept foodservice accounting practices and the lack of industry foodservice metrics and standards could result in untold shrink figures, resulted in the most comments and questions I’ve received.
The advent of complete price books, full item scanning and automatic inventory adjustments was a godsend for our industry, not just for the rich lode of data it provided, but because it exposed the true level of inventory shrink we were experiencing and not necessarily seeing.
The automation of invoice entry and inventory adjustments took away managers’ opportunities to hide shrink by lowering retail purchases and underreporting markups. The result was a jump in unadjusted gross margin percentages and a jump in retail inventory losses as well.
What we thought was 1% inventory shrink was more like 2.5%, perhaps 3%. Scary, but at least we knew the truth and we understood the task at hand.
CLOSING THE LOOP
The data loop was closed and that was a good thing. Then we opened a hole in that loop that a truck could drive through when we expanded foodservice offerings and tried our hand at cost accounting.
Industry accounting software providers have worked diligently to upgrade foodservice cost accounting, and I would wager some retail companies that have been at foodservice for a long time have created systems of their own to create some level of accountability. Our executive vice president of food services, Jack Cushman, as well as his chefs and I, did our best to do that at Nice N Easy. Jack’s background at Domino’s helped significantly with those efforts.
Even so, let’s say you do a professional job of cost accounting, how do you know what your expected metric of success is? Your earned foodservice margin is accurately calculated to be 50% and you pat each other on the back because you think 50% gross margin is great. But what if you should have achieved 57.5% and you simply didn’t know that?
If your food sales for the month were $40,000, you’re missing $3,000—at cost. That could be $7,000 in sales not rung in. What would happen at a store with a $7,000 retail inventory shortage? Every loss prevention procedure known to man would kick in until someone was led out of the store in handcuffs.
But a 50% food gross profit margin versus 57.5%? Heck, if the retail inventory results are good, the thief might even get a bonus. That used to keep me awake at night. Thieves in our stores understood the situation, too.
Each store might have a different anticipated food gross-margin ratio based on its sales profile. A store that sells many pizza slices and few whole pies could project out to a 60% pizza margin, while a rural store that cranks out whole pies for dinner, but sells few slices for lunch, might not make 50%.
Again, unless you can project the anticipated gross-margin percentage based on sales, you don’t know. And if you don’t know, odds are you are getting ripped off.
During my stint on the NACS Research Committee, the paucity of good, detailed foodservice information was alarming and extremely disappointing. We knew we needed to capture more actionable data, but we could not collect what retailers could not provide.
Who owns this problem? Accounting? No, their job is to provide the proper accounting procedures and to report results. Analytics? It is to a certain degree because a store should know its anticipated foodservice gross-margin percentage based on its sales profile. Foodservice? Somewhat because all other possibilities for lost margin must be examined and ruled out. Operations? Yes, because most employee theft takes place at the register, but can be complex to decipher if retail inventories are good and there’s no reason to believe food margins are not where they should be. Loss Prevention? Supervisors can’t address it if they don’t know.
Someone in every company must understand and be ready to make a call. Store accounting and analytics are a necessity in savvy companies, and not just a luxury if we are to maximize full potential income.
Until then, who knows just how far short of the mark we’re falling in foodservice performance and in controlling internal theft.