Seven Steps to Food Cost Control

by Mihran Kalaydjian, CHA

The Chair of the department was Peter Dukas who taught  a class  on food & beverage management which used a text book he had authored called,  “How To Operate A Restaurant”.   Long ago,  I loaned the book out and never got it back so don’t quote me as saying this is his list when I refer to it. Over the years I have  referred back to that mental checklist and adapted from it.  It has been useful to me and I’ll list it here as I remember it, right or wrong. 

1.  ORDERING  –  The  first  step  is to  order  right.  Having detailed  recipes,  designing purchasing   specifications,   doing  comparative  shopping  based  on those  specifications,   and comparing  quality,  price  and  service,  etc.   Oh  yes,  don’t  order too  early  in  order  to  avoid spoilage, wasted storage space and lost interest on your money.  Don’t order too late, so premium costs and delivery charges accrue.  I remember being told standing orders were a bad habit. 

2.  RECEIVING – The fundamentals are obvious: count; weigh;  inspect for condition and quality;  verify  against  the purchase order;  keep the receiving area clean and  uncluttered;  limit access  to  the  receiving area;  train the person receiving and make him or  her responsible.   Get credit memos from the delivery driver. 

3. STORING – Is the method and place of storage for the various items appropriate for the item?  Is  it  secure  from  pilferage?   Are  the shelves strong enough for  the  product,  allow  air circulation and easy to clean?   Are all items stored at a temperature appropriate for that product? Are  items  dated  (with year,  in some cases) and priced?   Is the storage area orderly  and  clean? Should shelves be labeled and maybe even stocking quantities noted? 

4. ISSUING – What is issuing based on?  Who has access and or authority to issue or take things  from  the  secured  store  rooms  and  walk-ins?    Are  issues being  made  in  appropriate quantities   and at appropriate times?   Is there a relationship to volume or reasonable par  stocks?  Are  issues being accounted for?   Is a perpetual inventory or sign out sheet designed  specifically for your operation or a particular store room in use? 

5.  PREPARATION  – I’m not so clear about the details here any more because it has been a  long  time  since  I  worked in a kitchen regularly.   Phrases that come  to  mind  include:  trim properly;  use  trimmings for stock pots and other recipes.  Proper tools, sharp knives,  clean and neat  working area,  enforcing a policy of following recipes,  and having photos of finished  products  available and used regularly are also critical.   Enough said,  as I suspect my readers know a lot more than I do about this! 

6.  COOKING – Various considerations here, again my readers know more than I.  Proper temperatures,  proper  cooking times,  following recipes carefully,  using photographs of finished products, correct size, material, and type of utensils and cookware, clean work area. 

7.  SERVING  – Serving is not only about portion control,  it is also about decisions made regarding  portion  size and presentation.   With a buffet,  it is obvious. Proper  serving  utensils, proper holding/serving equipment, right presentation order, plate sizes, etc.  In a bar its easy, too.  Jiggers  or  other  measuring  and control devices and very strict discipline.   I  take  it  back,  the discipline  isn’t  easy  especially  in tight labor markets.   Dining room service should  be  easy  to control  using good kitchen supervisors,  trained cooks,  photographs for both cooks and  servers, etc.    Watch  what  comes  back  from  bused  tables  to  see  if portions  are  proper.   Marketing decisions  may  drive  large  portions  but if the patrons are not eating it  or  taking  it  home,  the portion size or the recipe should be reconsidered.   Proper china for each item served is important for both presentation and portion control. 

Work   hard   on  your  cost  controls  and  be  consistent  about them.   One   element   of controlling  food  cost covers all seven categories:  thorough training. Give your staff the  ability and knowledge and confidence to do their jobs properly and to your specifications. Inconsistency and  failure  to enforce procedures will drive costs skyward.  Failure here is like throwing  money away. 


Do Your Share, Join Your Resort or Hotel & Lodging Association

by Mihran Kalaydjian, CHA

I get sad and angry when I think about the number of hotels, motels, inns and resorts (all of which I’ll refer to as hotels in this article), regardless of size, which are not members of the industry’s associations. Let’s not be confused either, it’s not hotels that join and get active its people!

I am sad because I know that as a result of not joining, a lot of people, owners, management and staff are not receiving all the advantages of membership. I am angry both because I feed taken advantage of and I know how much more could be accomplished if the membership was larger and more active. I feel taken advantage of in the sense that non-members are getting some of the benefits of my fellow members’ and my time and money.

In my mind there are three primary reasons for joining the industry’s associations:

  1. A. At the state level, to join voices with the owners and employees associated with the tens of thousands of hotel rooms represented to affect legislation that impacts our industry financially. B. As a member of the Minnesota Hotel and Lodging Association, a hotel is also a member of the A.H.& M.A. which also has a very aggressive lobbying program that effectively looks after the industry’s interests at the national level.
  2. The industry associations, through their committees, educational and certification programs, have a tremendous impact on the hotel industry. There are committees which address such bread and butter issues as development, increasing travel in the United States and quality assurance. The educational programs at the state and national level are so extensive that a person could take courses, watch training videos and attend seminars full time for years before completing them! Combined, these are things that impact levels of employment, staff quality and profitability.
  3. Finally, there is members helping members. There are numerous formal programs ranging from the Minnesota Resort Association’s members volunteering their expertise in 20 categories to the A.H.& M.A.’s Information Center and Referral Service. Equally, if not more, important are the relationships one develops and the resources associated with them.

At the state level the associations’ lobbyist, Tom Newcome, with the active support of a grass roots effort by many members, has been able to impact a number of important legislative issues to the benefit of hotels in Minnesota. For instance, we helped draft and lobbied in support of the recent HealthRight Health Care bill which will benefit so many uninsured. Significantly, the bill does not ask business to directly shoulder the burden. 

In conjunction with other businesses we were able to make in roads in Workers’ Compensation reform which will result in a 16% cut in employers’ costs. We were a member of a coalition that defeated a proposal to move school opening to a date prior to Labor Day. This would have seriously impacted summer vacation travel by cutting at least one week and a long weekend out of the summer. Another bill which could have impacted us all would have been one requiring us to rent rooms to anyone over 18 years old! Thankfully, it never got a hearing.

Nationally, the Governmental Affairs Department saved each of us many thousands of dollars. Here is the short list: 

  • removed a provision from a federal bill which would have required hoteliers to install costly telephone equipment to promote equal access, saving an estimated $15,000 per property; 
  • removed a harmful anti-billboard provisions from the new federal highway program, preserving the industry’s ability to attract guests via outdoor advertising; 
  • secured an exemption for properties with three or fewer stories from costly sprinkler systems retrofitting, resulting in a conservative per room savings of $1,500; 
  • and finally, helped secure a phenomenal 25% increase in funding for the U.S. Travel & Tourism Administration (USTTA) during a time when most agencies have had their budgets reduced.

If a hotel isn’t a member, they have benefited financially from these legislative efforts at no cost. The benefits were not exclusive to the members that paid dues and contributed time and/or money to the legislative committees. Why should I pay for the non-members’ free ride? It isn’t fair, but I guess I’ll keep doing it so I’ll keep benefiting!

The associations’ committees are groups of individuals volunteering their valuable time to work towards many common goals. One of the most exciting committee accomplishments at the national level was one that resulted in getting President Bush to do a wonderful television advertisement with scenes from all over the U.S. inviting people to visit us from abroad. This advertisement was funded by contributions from member companies and is playing on television in Europe. The same coalition raised $8 million to promote travel for a six week national campaign during the Gulf War to ease fears and get travelers back on the road. In Minnesota, the associations work actively with the Department of Tourism to publish over 100,000 copies of the Explore Minnesota Travel Guides. The national equivalent is the OAG Lodging Travel Planner & Red Book which is published quarterly.

The associations’ executives, committees and staff coordinate a number of other activities:

  • A free annual review of laws and regulations affecting the industry.
  • Negotiating volume discounts with credit card issuers which benefit smaller properties.
  • Training seminars and educational programs which are done both locally and nationally. The Educational Institute in East Lansing, MI is also an integral part of the A.H.& M.A. and it produces excellent correspondence courses, videos and other programs which are available at a 25% discount to mem bers.
  • In Minnesota, the associations sponsor the Upper Midwest Restaurant and Lodging Show which is free to members.
  • Nationally, in addition to two excellent national meetings, there are several specialized meetings such as the Quality Assurance Conference, and the National Marketing Conference. A myriad of committee meetings occur in conjunction with the national meetings addressing more specific issues affecting the industry, its members and employees.
  • One of the state’s committees goes out to high schools and promotes the industry as a career alternative and addresses other issues regarding the scarcity of labor.

One of the important things to me is the issue of members helping members and the relationships that have come to me over the years. On several occasions I have picked up the phone and called Dr. Tony Marshall, the dean of Florida International University’s hotel school who is a noted columnist and legal expert in the hotel industry, to ask questions. As the president of a more modest size management company, I have called the president of the biggest management company, MHM, to get advice on running my business. Based on contacts I have developed, my company gets referrals from a large number of sources and the hotels we manage are among the first to get overflow referrals from competitors. Many of these contacts have evolved into close friendships. 

While I obviously feel the benefits of membership in the Minnesota Hotel and Lodging Association are innumerable, there are costs. The first and most obvious is financial. Depending on the size and level of service of the property it can be as little as $119 a year to a maximum of $7.05 per room for a full service hotel with more than 76 rooms. That amount includes membership at both the state and national level. Many hoteliers don’t take the time to understand the bottom line value of participating and the utilization of the many resources of the associations more than pay for their dues investment in the first month or so of membership. The direct economic benefits easily outweigh the direct financial cost. It’s a good deal!

The way to maximize the benefits of membership is to be active in those areas of interest to people at a member property. Have a problem with the Health Department? Work on the Joint Health and Safety Committee which includes Restaurant Association members and also tell your new acquaintances on the Joint Legislative Committee what you think of the law and administrative regulations. Have a problem with employee turnover and performance? Get involved with the Joint Human Resources Committee, use the educational programs that are available for you and your staff.

The hospitality industry is probably the world’s second oldest profession and is one of the most diverse. It includes everyone from the all-important room attendant to the inconsequential Leona Helmsley at the human level and the smallest Mom and Pop independent motel to the Waldorf Astoria at the property level. All of us are in the same boat and generally have the same goals. We have a better chance of achieving them if we work together to improve the industry and the people that work in it. 

I invite you to join with your peers in the industry and support it with your membership dues and time. We’ll get more done with your help and I won’t feel ripped off. If you mention this article when you join I’ll take you as my guest to the Minnesota Hotel and Lodging Association’s Annual Meeting and Christmas party. 


Economy Lodging – Always in Transition

by Mihran Kalaydjian, CHA Economy Lodging – Always in Transition

Since its inception, the economy segment of the lodging industry has undergone a continual process of transition. Although most owners, operators and lenders take a “stick to the basics” approach to economy lodging, a problem arises when one attempts to define just what “the basics” are.

There are essentially two schools of thought when it comes to defining the basics. In the first, they revolve around price/value, guest satisfaction and market position; in the second, they focus on minimum amenities, minimum services and Spartan physical facilities. Although profitability is the goal of both approaches and both tend to focus on occupancy, the former group additionally recognizes that average daily rate (ADR) plays a role in the room-revenue formula.

These two approaches create a dynamic tension in the economy segment. This tension contributes to the excellent price/value that economy-hotel guests enjoy. The entry barriers to the economy segment are relatively low: Less than $2 million, with minimal equity requirements, will develop a very nice 40- to 50-room economy property.

Don’t scoff at that size, by the way: In many markets, it’s just about right. Yes, the hotel will be fairly Spartan and yes, the owner will likely be a neophyte to the hotel industry (though not necessarily to the development game). But that neophyte will learn in a few years what the old-time hotelier already knows: The mouse trap must be improved regularly if it’s going to continue to work well.

Enhancing guests’ perception of value vs. cost

As amenities and services are added, room rates must rise—but not beyond perceived value nor out of balance with the competitive market. Here is where the tension tightens: As soon as a new developer perceives an opening in the market and can obtain a secondary or tertiary site in a decent location, a new budget hotel appears on the scene. In response, management of the moderately priced hotel nearby moves to reposition it as an economy property by lowering rates. These two events create a market situation that’s viewed as either highly competitive or overbuilt.

New amenities and services added to economy/limited-service properties to make them more competitive usually are inspired by their full-service big brothers. The constraints to adding new amenities are cost, staff and available land (or its marginal cost). As a result, pools, hot tubs, and well-equipped exercise rooms have become almost commonplace in economy properties. Complimentary continental breakfasts, rather than just coffee and a doughnut, were adopted years ago from the all-suite model. Executive centers have appeared, complete with Internet access, fax machines, and copiers. Lobbies featuring couches, coffee tables and side chairs have replaced utilitarian entryways. When economy-hotel guests enter their room today, they expect to find Internet access, hair dryers, easy chairs, desks with large work surfaces, and remote-control cable TV with free movie channels. Even pay-per-view-movie firms, once reluctant to market their expensive installations to economy hotels, have discovered big profits in the segment’s guestrooms.

More profitability from investors’ perspective

Clearly, a significant number of investors believe that economy/limited-service hotels are more profitable than their full-service counterparts. All the statistics I’ve seen over the years support this premise as it relates to profit before income taxes as a percentage of sales. This is because the rooms department of any hotel, which is its very reason for existing, has the highest profit margin. Not only do the other revenue departments in full-service hotels have lower margins, but they also add undistributed expenses disproportional to their departmental margins. The question then becomes one of whether they add significantly to occupancy and ADR (which is, after all, the reason extra facilities and amenities are included in a full-service hotel). It stands to reason, then, that operational profits as measured in cash flow are higher in full-service hotels, while the percentages are higher in economy/limited-service lodging properties.

However, this leads to another question: Is return on investment (ROI), another measure of profitability, greater in economy/limited-service hotels than in full-service hotels? In researching this question, I was unable to find any objective comparisons of return on assets or equity. Comparing ROI, by any definition, between the average full-service hotel and the average economy/limited-service hotel is difficult because of the criteria one would have to establish. However, I feel safe in saying that some investors are likely to accept lower returns on economy/limited-service lodging investments compared with full-service hotels because the risk is significantly lower. The primary reason for this is that the capital required to build one medium-size, mid-price, full-service hotel could build three or four economy/limited-service properties in various locations: Thus, the risk is spread over more markets. The higher profit margins on sales would seem to imply that the economy/limited-service lodging hotel would have a higher degree of resiliency in down markets and quicker recovery as demand returns. The minimum staffing levels and other semi-fixed expenses necessary to maintain these hotels’ service levels clearly set a very low floor on how much expense-cutting an operator can achieve once the variable expenses and value-added amenities have been cut in a depressed market. Because of the limited cash circulating through these properties, managers tend to be very conservative in their decisions regarding discretionary expense items, particularly in marketing and employee benefits.

Speaking of employees, labor costs in economy/limited-service lodging properties appear, on the surface, to be very low. I believe the opposite is true and that the actual cost is obscured by the high number of hours the manager and others work. With few exceptions, employee turnover is very high and is always blamed on local market conditions. The fact is that the typical manager has not been trained to check references, interview properly and effectively orient and train new employees. Often, the environment is such that the manager hires a “warm body” in hopes that the new employee will work out and the manager’s own work load be reduced. The cycle, however, goes on as the new employee often becomes disenchanted and leaves. The hidden costs in poor efficiency and quality of work resulting from this system are obvious to all but the most unsophisticated — and could be corrected by more emphasis being placed on proper recruiting, interviewing, hiring and training procedures.

As for marketing, economy/limited-service hotels tend to focus on room rate and location. Due to the low payroll budgets, sales representatives are virtually unheard of in the segment — managers are expected to shoulder the burden of the direct-sales effort. Unfortunately, the typical economy-hotel manager defines “management” as getting reports done, hosting, and holding payroll to a minimum by working at the front desk for an inordinate amount of time. Competent training of staff, inspecting, civic involvement and quality sales calls are not commonly found in these properties.

A major factor counteracting this tendency is the substantial support offered to operators by most franchisors in the economy segment. The top franchisors are getting more and more sophisticated in their marketing efforts. TV ads are becoming increasingly more effective, target marketing is implemented in very sophisticated ways, and any chain worth its salt has developed sophisticated Internet marketing and sales programs.

Keeping the ‘Big Picture’ in sight

In my opinion, the key factor in being a successful developer or operator of an economy hotel is simply this: Pay careful attention to every detail of development and day-to-day management without losing sight of the big picture. But just what is “the big picture”? I see it as a continuing, evolving collage that includes ever-changing guest preferences, shifts in the local competitive environment, and the dynamics of the local area’s economy and how it impacts demand for hotel rooms. This last piece of the big picture is probably where the least amount of support is available to the manager from either the owner or the franchisor. As a result, the economy/limited-service lodging operator typically reacts to, rather than plans for, change.

But perhaps the most important piece of the economy-segment big picture is this: It will always be a people business, whether the people are guests or employees. And whatever your definition of “sticking to the basics” might be, in the economy segment it should always start with taking care of people.