This episode is sponsored by Cenex®
In this episode of “At Your Convenience,” CSP Editor Chuck Ulie talks with Liza Salaria, merchandising and foodservice practice lead at Chicago-based W. Capra, from CSP’s C-Store Foodservice Forum in Schaumburg, Illinois, in June.
Salaria discusses correcting foodservice margin leakage, touching on gross margins, open rings, known loss, unknown loss, supplies and more.
“At Your Convenience” brings industry experts and analysts together with CSP editors to discuss the latest in c-store news and trends. From mergers and acquisitions to foodservice and technology, the podcast delivers the story straight to listeners in short-format episodes, perfect for the morning commute or a quick break at the office.
Listen to their conversation above, or read the transcript here, which has been edited for length and clarity:
Chuck Ulie: Earlier today, Liza, you told me that c-store retailers will come to you and they’ll ask: Why are my margins so much lower than traditional QSRs? What do you tell them?
Liza Salaria: I tell them they have to get under the hood. You know we run very different food models than traditional QSRs. We tend to batch food. We tend to have to rely on really good forecasting, and that in general tends to drive up costs and other leakage opportunities like high waste.
Ulie: I know in your presentation for tomorrow, you have four big areas of margin leakage. Can we talk a little bit about these? The first one is gross margin leakage.
Salaria: So if you think about gross margin, you just think about it in the most basic terms. And that is what is my retail minus my cost divided by my retail, right? That’s your gross margin. And there’s two big factors here. One is sometimes we think our retail is what we have on our menu board: $3.99. But when we get down and we look at our sales divided by our units, we find that we have a very diluted retail. And that is because we have discounts, we have employee incentives, we might have open rings going out. So there’s all sorts of things that may dilute your retail, and you don’t even realize it, because it’s not being mapped back to that line item.
Ulie: And what did you mention? Open rings?
Salaria: Yeah, that’s an interesting one. What can happen is if you’re selling bulk product, let’s say like a doughnut out of a case or maybe a roller girl item where when it is tendered out, it is not captured at a UPC level, you may be relying on a team member to ring that up correctly and there can be some risk there. So it never gets accounted for, or it gets accounted for at potentially the wrong price or retail. The other big component I’ll just touch on is cost. Like what are you paying for product? And that gets into how are you sourcing product that gets into the level of quality. But when you just think about gross margin, it really comes to how are we sourcing product? How much quantity, the level of quality and how does that relate to our top line retail?
Ulie: Another area of margin leakage is known loss.
Salaria: I call it known loss because there’s a couple pieces to known loss. And this is probably the biggest leakage bucket. The first one is waste, and waste is simply we made too much product and we had to throw it out. So I made 10 breakfast sandwiches, I sold eight and I had to throw away two. That is waste. The other component is spoilage, and that gets into how well are we prepping our raw ingredients. So, if we have hot steak or scrambled eggs on our hot hold and at the end of four hours we have to throw it away, that’s considered spoilage. And it’s very important to capture that so we understand how to go solve it. And by capturing that means we have to record it daily. We have to account and then figure out what went wrong and how to be more efficient and how to have better forecasting, how to replenish more quickly, maybe use smaller batches. There’s all sorts of ways to solve against it.
Ulie: And what about another area of margin leakage: unknown loss?
Salaria: Unknown loss. I call this one chasing ghosts. These are your food shortages when you do a food count or a food audit. And when you do a food count, whether you do weekly or maybe you do a monthly, the best way to do it is to be on item level recipe management. And what that means is the accounting structure that you run is every time you sell an item, like a breakfast sandwich, you decrement that sausage, that biscuit, that egg from your inventory. Decrement, meaning you pull it out. So you buy product, you sell product, and every time you sell it, you pull it out of your inventory. So you note that I’ve now one less slice of cheese, I’m one less sausage patty. So what that gives you is the best visibility because when you take a food count at the end of the week, now I know am I missing a half of pound of cheese? Am I missing some sausage? If I’m missing that product, then I can go solve against how do you do an audit investigation. You figure out where all this stuff went.
Recently I’ve done a few projects, and this is an interesting one. I have found that we’re losing a lot of product in this yield prep. So let me give you an example. You heat some cheese sauce and you’re gonna put it on your make line, and when you heat it, you have to transfer it from a bag to a container. Think about how you have to squeeze that product out and get it into the container. It was solid and now it’s a liquid, but in the transfer process you lose product because there’s stuff—you’re not gonna get it all. Some is sticking to the liner. I did some measurements from the time the product came in to when they prepped it, moved it to the container until the end of life and I found a 15% loss. So that tells you if I buy a four pound bag of cheese, I’m probably not gonna get 64 ounces out of it, and that’s gonna raise your average cost, or at least you have to account for it in your recipes, so you’re decrementing appropriately in your inventories.
Ulie: The fourth big area of margin leakage is supplies. Can touch a little bit on that?
Salaria: So what I see there’s two big things in supply. So, one, keep in mind we are in a grab-and-go environment. So our packaging cost is much higher than a traditional QSR. So think about a breakfast sandwich that you might see that is wrapped in a nice little cardboard box, or you go into a convenience store and there’s a sub in the grab-and-go case and it’s in a nice acrylic container. Think about when you buy a sub at a Subway. You’d get it in a wax wrap. Automatically our supply costs out of the gate are much higher because of how we offer the product for sale. The other one is we’re in the free-for-all condiment world. When you think about when McDonald’s or Chick-fil-A or Chipotle, whenever you order product, the measurement of those ingredients is standardized, right? They have certain scoops, certain measurement tools. When we have a condiment bar, whether it be for our coffee or for our roller grill or a sandwich topping bar, that’s a free for all. And nobody’s policing it and you can put as much on it as you want, and that dries up our total supply costs if that’s where you’re coating those products.
How do we make product and match the demand of the customer? It’s complicated. And I think the biggest challenge for our industry, and I always say this, is it’s actually uncovering these buckets and seeing them so you can solve against them. And that’s the biggest challenge is in our world, we run a foodservice environment within the context of a retail architecture. And makes it difficult to often get the visibility into these different areas.
Ulie: Is there anything else before we wrap it up?
Salaria: I would just say to solve margin leakage, you have to know where it’s coming from. So get under the hood. Make sure you understand with your accounting department where you’re mapping certain components. Solve what you can solve. Work with operations, scan out your waste, scan out your spoilage, take accurate inventory counts. If you can, move to item-level recipe management so you get the visibility. Item level recipe management is decrementing everything.
Ulie: Don’t just say we lost a breakfast sandwich. Say we lost a bagel, a slice of cheese and a sausage patty and anything else.
Salaria: Absolutely. That’ll give you much more visibility.
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