"Where's the beef?" Why clubs lose big money in F&B.

Every year, the more than 10,000 private clubs in the United States that receive this magazine will lose approximately $700 million to food and beverage (F&B) overuse. On a per-club basis, that equates to more than $45,000 per $1 million in F&B revenues. Since the average F&B revenue for the 10,000 clubs in the U.S. is approximately $1.5 million, the typical loss per club is nearly $70,000 per year!

This staggering loss can be largely avoided without any need to get better pricing from vendors, changing the menu, raising prices, or making any other changes members would notice. In fact, recapturing this loss is simply a matter of using different tools and mindsets to manage how F&B is used in the club. The key word is "usage." By controlling usage, clubs can minimize losses. The old Wendy's commercial helps illustrate the point. The question "Where's the beef?" needs to be answered to truly run the best possible F&B costs.

But do clubs really care about F&B costs? In many cases, F&B is the ugly stepchild--that is, a necessary evil. In fact, current studies indicate that of the $58 billion in club revenues annually, $19 billion (34%) is in dues, and $15 billion (26%) is in F&B. Given the relative equality of these two factors, it seems strange that more emphasis and resources would not be devoted to F&B. Few clubs would consider operating without membership accounting software, but most clubs operate without F&B control software. Given this mentality, more than 25% of the club's total business operates with inadequate control.

Hitting the Budget Might be a Bad Thing!

What about the club accounting system? Doesn't it handle F&B control as well? Club managers and boards have always focused on profit and loss statements (P&Ls) for controlling F&B costs. Boards typically set budgets for F&B costs as a percentage of sales, and ask club managers to meet or exceed the budget. Clubs that come in at or below budget are thought to be well-operated, while those that don't usually face angry boards and, in some cases, have their managers terminated.

The fact is, F&B costs are the result of F&B usage, and usage is dependent on sales, recipes, and yields. If nothing is sold or distributed, the food cost should be zero. However, sales, recipes, and yields constantly vary. While it is certainly possible to set budget numbers based on forecasts and historical data, these budget numbers may have very little to do with reality, and are even less helpful for purposes of determining whether the operation is well-controlled.

To show how the budget may not necessarily be a good indicator of control, consider the following example. Club A runs a 45% food cost, and Club B runs a 50% food cost. Assume the budget for both is 45%. Which club is better controlled? Using the budget as a guide, it is likely that Club A's board would be happy with the performance, while Club B's board would not (see table 1).

On the other hand, if we have information from a F&B control system (based on each club's sales, recipes, and yields) that Club A should ideally have run a 40% food cost, and Club B should ideally have run a 48% food cost, the picture changes. In this example, Club A ran 5% higher costs than it should have, while Club B was only 2% higher. Obviously Club B was better controlled, even though the food cost percentage was higher and exceeded the budget. Consider how differently the boards would react if this type of information was available (see table 2).

With only budgets and other accounting data to use as a guide, Club A's board would be rewarding management, while Club B's board might decide to search for new management. However, with information provided by the control system, Club A's board might be looking for new management, while Club B's board would be happy with management's ability to control the department, and instead start looking for ways to either reduce food costs by making changes to menus and process, or to simply increase the budget if no changes are desired. The difference in approach based on useful data is dramatically different.

According to Phil Kiester, general manager of the Farmington Country Club in Charlottesville, VA, "Budget numbers are like mileposts along the highway when you don't have a watch. You don't know how efficiently you got there, even though you ended up where you wanted to be." Kiester's extensive F&B background helped him realize early in his career that budgeting is not controlling. In order to manage F&B usage, other data is needed.

Kiester points to previous situations where, when asked to explain F&B cost overruns, managers would pose a list of hypothetical reasons, without any facts to support their arguments. "I want to know exactly what we used, not approximately what we used. I'm really not interested in managing based on impressions. We need facts to make good decisions. One of the things that helped us most has been understanding the impact of sales mix on cost of goods," he said.

His point should resonate strongly with club managers and board members who sit at meetings and listen to people explain why the numbers aren't lining up with the budget. Without accurate actual and ideal usage data (typically not provided by the accounting department), the answers to these types of questions amount to little more than guesses or excuses. And even with the facts, it may become clear that the budget was unrealistic in the first place.

New Accounting Standards Require Control Documentation

Another reason to consider implementing a control system as opposed to using traditional methods is the newly introduced auditing standards. These new standards, issued in March 2006 (AICPA's Risk Assessment Suite), now require auditors to evaluate all the control systems and procedures associated with F&B and determine thoroughness and the degree to which they were implemented. For most private clubs, these new audit standards could mean much higher audit costs, and in many cases could result in negative comments on audited statements. Utilizing the typical accounting-based approaches will no longer suffice in demonstrating sufficient internal control.

Philip G. Newman, CPA and Florida-based director of club assurance for McGladrey & Pullen, LLP, helps to clarify the problem. "The new audit standards will likely see much more time spent by auditors in gaining an understanding of the scope of the control processes in the department. Auditors will also have to evaluate whether the controls have been implemented," Newman explained. "For example, we rarely see a purchase order system implemented in F&B. Ultimately the club relies heavily on performance to budget. This begs the question of how strong the budget really is as a control."

Newman's example of a purchase order as a control tool points out the difference between accounting and control systems. Accounting systems do not require purchase orders. Invoices are the critical document for the accounting system, since they affect the general ledger and thereby the P&L statements. While many clubs take steps to break down purchases on invoices to multiple cost of goods accounts, no actual control has taken place.

F&B control systems, on the other hand, rely on purchase orders as a control device. In most cases these systems are used to forecast purchase requirements, taking current inventory levels, par levels, pending events, and sales history into account. Using the forecast information and vendor bids, if available, the system automatically generates purchase orders that staff can modify prior to delivery to the vendor. The purchase orders are used to receive the goods, and are then converted automatically into invoices by the system, eliminating the need for invoice entry. The F&B system also distributes items on the invoice to their proper general ledger (G/L) accounts, and transfers invoice data directly to the accounts payable system for posting. Stated differently, these systems can actually reduce the time it takes to provide the accounting information while significantly enhancing the ability to control inventory at the same time.

Focus On Usage, Not Dollars

With accounting information, almost everything comes down to dollars. Food cost, inventory value, purchase costs, and transfer costs are the numbers required for financial statements. With control information, on the other hand, the concept of cost is irrelevant. Inventory is purchased and used in non-monetary units such as pounds, cases, sleeves, gallons, fluid ounces, and other descriptive units. While it may be necessary for the accounting department to focus on dollars, the F&B people are better off simply trying to use the right amount of everything, and not worrying too much about the dollars.

The reality is that F&B managers cannot control food and beverage cost--the vendor sets the prices, and no club can corner the market on commodities and therefore dictate its prices. While it's true that large clubs can gain advantages by contract or volume purchasing, daily "dickering" with prices will have little or no effect on overall F&B costs. On the other hand, F&B managers can and should control F&B usage. The fact is they will run their best possible cost if they use only what they need to satisfy member orders.

An example of cost-oriented thinking as opposed to usage-oriented thinking is the habit of purchasing only in case lots, since the cost of a split case could be higher. A basic principle of good inventory control is to keep as little inventory on hand as possible. Lower inventory levels lead to less spoilage, less theft, improved cash flow, and less waste. People are more careful when they realize there is only enough inventory to get them to the next delivery.

Tom Elliott, CCM, general manager of the Westborough Country Club in St. Louis, MO, tries to get this message across. "The challenge is getting the chef to understand why it might be better to buy a can than a case if all we need is a can," he said. "Chefs are focused on better pricing and don't like to pay a premium for split cases, even though we intuitively believe it would be better to keep inventory levels to a minimum."

That challenge may pale in comparison to this one: Having a chef take the time each day to negotiate with the vendors over price may in fact cost more than it saves! Vendors are masters of the price game, and while they may give a better price on one item, they will usually make it up on another. Consider the chef's salary on an hourly basis, and the cost of the phone call alone could be more than the price reductions achieved. Also, while the chef is on the phone, who is making sure nobody's wasting food, stealing food, cooking things improperly, or otherwise causing overuse in the kitchen? Finally, unless the chef communicates the special prices to the receiving clerk, or gets it onto a purchase order, what stops the vendor from charging a different price anyway? Invoice pricing "errors" of this type are commonplace, and--surprise!--typically in favor of the vendor.

Defining Usage Variances--Key to Control

The ability to quantify specific F&B overuse in a timely manner, combined with the understanding of the causes of overuse, leads to an ability to specifically manage usage and thereby minimize F&B cost overruns. This type of information is not available from P&L statements. Even if the P&L is broken down into smaller cost of goods categories, no specific information is available on individual item usage. In addition, the P&L is generated typically on a monthly basis, and comes out in some cases weeks after the month ends. Managing overuse requires immediate notification and rapid response times. In order to get this type of information, other data must be collected and analyzed.

Clubs with the capability to isolate central storage can use F&B inventory systems to easily run real-time perpetual inventories on the central storage goods. On-hand amounts are incremented with purchases and decremented with transfers. Since no sales are involved, recipes, yields, and sales mix information are not necessary. By simply checking the actual amount of stock on hand against the perpetual inventory system's estimated amount on hand, variances are instantly apparent. Some F&B systems provide the ability to use mobile scanners for these instant spot-checks. Estimated on-hand amounts are displayed on the screen, and physical inventory quantity can be entered on the spot to update the level. Variances in this area are instantly noted, and would most typically be caused by purveyor or employee theft, since no cooking or preparation takes place in this area.

The ability to control central storage this way leaves only the F&B outlets and kitchens exposed to overuse problems. Assuming most inventory can be retained in central storage, with as little as possible issued to the outlets at any given time, exposure to loss is already minimized without the need for further controls in the more difficult areas. Calculating ideal usage in production areas can be time-consuming, and may not be worthwhile in many cases. However, key items such as meats and seafood or other expensive or highly-used items can be tracked without much additional effort.

As shown in the inventory control example, it is possible to calculate usage variance for a single day without a significant amount of data. In this example (on page 68), ground beef is the key item, and it is used in two products on the menu. Actual usage is calculated by counting on hand amounts at the beginning and end of the day, and keeping track of purchases or transfers into the outlet. Ideal use is calculated from the recipes, yield, and sales mix information. Subtracting ideal usage from actual usage shows a variance (overuse) of 22 pounds. Once the variance is identified, the next question becomes ...

So, Where's the Beef?

An even better question would be, "What happened to the 22 pounds of ground beef we overused last night?" Overuse is caused by a limited list of problems:

* Employee Theft;

* Purveyor Theft;

* Waste;

* Spoilage;

* Over-Portioning;

* Under-Portioning; and

* Bad Yield.

While other possible causes exist, these constitute the lion's share of losses in the operation. Notice that none of them have anything to do with selling prices, purchase prices, or recipe costs. All are the result of operational problems associated with proper use of F&B inventory. Given quick access to variance information for key items, it is typically possible to determine the most likely cause from this list and take appropriate action.

Automated F&B Systems Provide Critical Control Information--Desert Mountain Case Study

Bob Jones, CCM is the senior vice president of operations for the Desert Mountain Club in Scottsdale, AZ. His club is one of the nation's largest private clubs, comprised of six 18-hole golf courses and as many clubhouses. Larger clubs are always among the first to require automated systems over manual or spreadsheet-based approaches since they can be easily justified. With huge F&B revenues, even a 1% variance could translate to hundreds of thousands of dollars. Jones came from a hospitality industry background where inventory control systems were widely used, so locating a similar system for Desert Mountain was high on his 'to do' list.

"Five years ago, software choices were almost non-existent for clubs," Jones indicated. "Comprehensive F&B inventory systems for clubs were few and far between. Desert Mountain was operating three clubhouses at the time, and had no centralized accounting, inventory, or point-of-sale (POS) systems. We could not continue to operate under those conditions, so we worked hard to locate and implement all three. The difference was staggering. We went from a $2 million F&B loss to breakeven as a result of implementing these systems."

Providing an example of the ability to react quickly, Jones explained, "We implemented a central storage concept, where we issue only what the outlets need on a daily basis, keeping our inventory levels to a minimum. Using perpetual inventory reports, we know within hours if there are any variances. Reduced inventory levels and instant access to variance information not only reduced spoilage and employee theft, but it virtually eliminated purveyor theft." Desert Mountain is also investigating the use of mobile scanners for taking inventory and receiving goods, anticipating significant time savings for inventory taking and the ability to get real-time perpetual inventory as goods arrive on the dock. The lag time between collecting data and posting it to the inventory and accounting systems would virtually disappear through the use of these devices.

Not a fan of lag time, Jones was insistent that information be available on a daily basis, and created what he calls the "Eagle" report. "Our Eagle report is a daily snapshot of club activity. We get sales information from our POS system, labor information from our labor system, and cost of goods information from our inventory system to produce a daily report to help us manage the club. The daily information is rolled up into weekly reports, and the weekly reports become monthly reports. It's almost the exact opposite of the traditional accounting model where we would wait until a week or two after the month ends to find out what happened during the month." Jones said. "We never have to make excuses to the board, because we fix problems sometimes before they happen. No manager wants to see problems on the daily report, so they act proactively to avoid them."

Justifying Automated F&B System for Smaller Clubs

Obviously, Desert Mountain is not typical of most of the 10,000 private clubs in the U.S. With costs for acquisition and implementation of these systems running between $40,000 and $80,000 (1/3 software license fees and 2/3 professional services fees), smaller clubs are slower to pull the trigger. In fact, most of the clubs that have implemented systems of this type are of the larger, more prominent variety. But average-sized clubs, running approximate F&B revenues of $1.5 million or more, are starting to recognize the benefits and have implemented or begun the exploration and budgeting processes to acquire these systems. Considering the average variance in F&B for most clubs ranges between 3% and 6% of total F&B revenue, clubs of this size can generally pay back the investment in the first or second year.

The move to automated systems is as inevitable as the move from columnar pads to spreadsheets was slightly more than a decade ago, or more recently, the move from manual tickets to POS systems less than five to six years ago--not to mention the move from mailed newsletters to webpages less than two to three years ago. These types of technological leaps have made clubs far easier to manage, and have improved their ability to reach and satisfy members while keeping costs to a minimum.

Virtually every club manager has experienced what CMAA National Director Allan S.U. Lum, CCM, general manager of Waialae Country Club in Honolulu, HI describes. "We had been doing everything manually for years," he said. "Although we approach $4 million in sales, we still did not feel that it warranted a conversion. We then ran into a period of unexplained F&B highs and lows. We report monthly to a finance committee, and it became increasingly uncomfortable going into those meetings without any explanation for the unfavorable variations. What was worse was that although I had my suspicions as to what was happening, I could not prove it. It was about this time that we started looking at various systems that could do a better job of tracking what was going on with our purchasing, receiving, requisitions, and inventories."

Waialae's F&B revenue is much lower than Desert Mountain's, although it's still somewhat higher than the average private club. But Lum's experience with fluctuating F&B costs is not unique. His next challenge was to justify the investment to his board. "With the foregoing still fresh in everyone's mind, we explained to the board that with a better system of tracking we would be able to pinpoint what the problems were and correct them. Part of the presentation was also a month by month reconciliation of what the unfavorable percent variation would have been if converted to dollars. Once they heard how much money was involved, it was a slam dunk."

In the end, decisions of this type require a clear understanding of the benefits. And while saving money is certainly at the top of the list, other less tangible, but equally important, benefits can also be realized. According to Lum, "Like anything else new, it was not an easy change to go from something you were used to for eons to something brand new. It was a giant leap. Errors were made, and we're still making errors. But I can definitely tell you that there is better control--and having control is the number one underlying issue."

Jones from Desert Mountain takes it a step further. "Instead of responding to the board with guesses, impressions, or action steps dealing with getting the chef or other managers involved, I can tell them exactly why the numbers are like they are, and what we intend to do about them," he said. "Not only is the board more comfortable, but the members and the staff also feel the club is better managed as a result of our control systems. In the end, all I can say is embrace technology and everyone's job gets easier."

Editor's Note: This is the first in a series of articles by Bill Schwartz to examine the various issues related to F&B control in private clubs.

Bill Schwartz is president of System Concepts, Inc. (SCI), and has been a F&B management consultant since 1980. Based in Scottsdale, AZ, SCI is the developer of the FOOD-TRAK Food and Beverage Management System, which is widely used in private clubs around the country. Bill is a noted author and lecturer and a member of CMAA's Speaker Bureau, providing seminars and workshops on a variety of F&B management topics. He can be reached at [e-mail].

Table 1

           Food    Budget    Variance
           Cost    F.C.

Club A     45%      45%         0%
Club B     50%      45%         5%

Table 2

           Food    Ideal     Variance
           Cost    F.C.

Club A     45%      40%         5%
Club B     50%      48%         2%

Inventory Control Sample

Actual Usage:
Beginning Inventory:                               200 lbs ground beef
Purchase/Transfer:                               + 250 lbs
Ending Inventory:                                - 150 lbs

Total Actual Usage                               = 300 lbs ground beef

Ideal Usage:
Jack's Better Burger (4 oz x 750 units sold):      3000 oz
Bonus Better Burger (8 oz x 100 units sold):     + 800 oz

Total Ideal Usage:                               = 4000 oz

Yield:
Assuming 90% yield: 16 oz per pound x 90% = 14.4 oz usable per lb
of raw ground beef
4000 oz sold/14.4 oz yield per lb = 277.78 lbs

Variance:
Actual use:                                        300 lbs
Ideal use:                                       - 277.78 lbs

Overuse:                                         = 22.22 lbs