articles
FAW, CASSON & CO., LLC
MEMBERS AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
November 5, 2003
To: Board Of Directors Ocean Pines Association Berlin, Maryland 21811
This letter is submitted in response to the Board's request for our comments or suggestions regarding the Ocean Pines Association's food and beverage operations noted during the study and evaluation of its internal controls. The information contained throughout this letter regarding industry standards, expected margins and standard practices was developed from multiple sources. The two primary sources of information were:
1. Analyses of ratios, trends and business practices of existing clients in similar businesses, and
2. Guide To Restaurants And Bars published by Practitioners Publishing Company.
We have relied on the accuracy and reliability of your historical financial statements. This letter is intended solely for your use ..
The food and beverage operations of Ocean Pines include The Beach Club, The Fairway Cafe, The Country Club and The Yacht Club, hereinafter referred to as "the Clubs." The industry itself is considered by many to be one of the most difficult, with a very high failure rate. Reasons why the industry is considered difficult include the following:
1. Sales consist of many small transactions as opposed to several large ones,
2. High number of cash transactions,
3. High turnover rate of employees,
4. Highly perishable inventory,
5. V ery narrow profit margins,
6. Lack of segregation of duties.
We cannot emphasize enough how difficult it is to be profitable in a low-volume food and beverage operation. The economies of scale are tremendously important and oftentimes are the only difference between success and failure. Unfortunately, all four of the Ocean Pines food and beverage operations are considered "low-volume." Each of the operations is unique in its own way, but they have been combined here for purposes of analysis so as to eliminate the potential impact of improper allocation among the departments.
There are many factors contributing to the inadequate profitability of the Clubs. Some of these factors are more controllable than others and some are not controllable at all. It's obvious the biggest reason the Clubs lose so much money is that the food, beverage and labor costs (known as prime costs) are far in excess of industry standards. The situation is aggravated by the fact that there are only monthly financial statements and those statements are not available until about the third week of the following month. By that time, the reasons why prime costs are so high are very difficult to pinpoint and almost always too late to change.
Typically, a profitable restaurant will operate with a prime cost of 63% to 68%. The Clubs of Ocean Pines have operated with a prime cost of 87%, 93%, 99% and 91 % over the last four years. A reduction of prime costs to 68% for the year ended April 30, 2003, would have resulted in cost savings of approximately $248,940.
Further analysis of each component for the same period is more difficult but is necessary to pinpoint how much the operations of the Pines vary from industry standards. Assuming industry standards where food cost = 35% of food sales, beverage costs = 25% of beverage sales and labor cost (including all labor related expenses) = 35.44% oftotal sales, the cost savings can be broken down as follows:
As one would expect, there can be numerous reasons why prime costs exceed industry standards at Ocean Pines. Each one of the cost components is listed below, followed by observations, comments and recommendations regarding the factors we believe have the greatest impact on these cost components at Ocean Pines.
• Purchasing
o Most food product is purchased through Sysco's "Preferred Buyers" program. This program is well recognized in the area and is used by the vast majority of food operators with which we are familiar. It guarantees very competitive prices - prices which decline as quantities ordered Increase.
• Inventory Control
o Control of the Clubs' food inventory improved greatly by putting the walkin on the second floor. The walk-in is locked overnight but, for practical reasons, is left unlocked during the day which is standard practice throughout the industry. While it is still possible for food to he improperly removed from the kitchen it would be difficult for the loss to have a significant impact on food cost.
o Inventory is counted once a month.
• Portion Control
o Portion Control is achieved by the use of standard recipes and scales along with close supervision by the chef during food preparation.
• Pricing
o The Director of Food and Beverages and the Chef price most of their menu items to sell with a food cost of anywhere from 25% to 38% (3- or 4- to 1, per the Director of Food and Beverages). A review of the Chefs pricing method appears proper in that it breaks down a unit cost for each item on the plate and includes the cost of a salad or side (if included with the meal) and adds a standard plate cost, which includes condiments and garnish. A waste factor is used in the calculation of cost and it varies, depending on the menu item. Of course, there are loss leaders offered at various times in an effort to promote business at slower periods.
Many restaurants encounter a problem achieving desired food cost percentages due to difficulty in determining how much consideration to give to coupons and discounts offered, which ultimately drive up their food cost. Whether or not these costs should be included as food costs or marketing costs is a separate philosophical argument not discussed here. The Director of Food and Beverages states he is charged with attempting to obtain a final food and beverage cost of35%. It's unusual for an operator with a 75/25 food beverage sales mix not to break down the desired margins between food and beverage sales.
Management of the Association's food and beverage operations claims their customers have a very high degree of pricing sensitivity. Nothing in our review of the operations would dispute this claim.
• Discounts
o There are certain Ocean Pines groups which are always given a 20% discount for their meetings. Employees are entitled to a 35% discount while they are working. In addition, the Clubs offer various other coupon and promotional programs. The Association's financial statements include all discounts as food cost instead of a separate line item as a marketing, promotional or other expense.
Discounts can have a positive or negative impact on a food and beverage business. They are very helpful in generating sales at non-peak times or introducing a new restaurant, but they can be detrimental because profit margins are so thin. They can also be harmful when they give away too much or become routine.
Currently, the Controller has some information breaking down the various types of discounts, but he admits the information does not appear accurate (especially where employee discounts are concerned).
• Portion Control
o Portion control of beverage sales is more difficult than food sales. The Pines uses a "metered pour," but this is only as good as the bartender pouring the drink (who is also serving the drink AND working for tips). The best control here is "management observation."
• Pricing
o Many of the comments regarding food pricing apply to bar pricing. The Director of Food and Beverages prices items at 3- or 4- to 1, resulting in a cost margin of anywhere from 25% to 33%:
• Happy Hour Discounts
o According to the Director of Food and Beverages, the majority of beverage sales occUf during "Happy Hour" when prices are deeply discounted. This coincides with what seems to be a trend throughout the industry in establishments that cater to age groups of 30 years and older.
• Bartender Theft
o Because bartenders do it all behind the bar (take orders, mix drinks, serve drinks, charge for and collect the bill), this area is especially susceptible to employee theft. In Ocean Pines, the bartender is required to ring up each drink as soon as it is served. Since it's unproductive to watch every single sale, the opportunities for theft are many. Management staff of the Ocean Pines food and beverage operations attempt to control this through close observation of bar activity.
• Kitchen, Servers, Bartenders, Bus persons
o Kitchen Labor is scheduled by the Chef. The remaining positions are scheduled by the Bar Manager. All schedules are based on anticipated Club events and the Clubs' routine needs, after considering projected activity based on current sales, prior year sales, the weather, the dates, etc.
The Director of Food and Beverages is very well aware that the Clubs' payroll cost figures exceed industry standards by alarmingly high amounts. Based on our discussions with him, this is attributed to:
1. Unusually high service needs demanded by the Association,
2. Operating four separate "low-volume" locations,
3. Mandatory discounts provided to Ocean Pines service groups, and
4. Operating out of an upstairs and downstairs kitchen at the Yacht Club.
An analysis of the Clubs' labor cost as a percent of sales for the period May 1, 2003, through September 30, 2003, would support the Director's comments that unusually high service demands are partially responsible. It is always easier to be more efficient when volume is high. For the above period, labor costs were 39.30% of sales. While this is still above industry standards, it is well below the previous four fiscal years when labor costs, as a percent of sales, were 48.28%,54.21 %,58.51 % and 51.28%.
We believe it's a safe assumption that by April 30, 2004, the Clubs' labor cost will be well in excess ofthe 39.3% it was as of September 30, 2003. This will occur because fixed salaries will not change and will represent a much higher percent of sales than they did the first five months of operations, if for no other reason than decreased sales volume in the "off" season. In addition, kitchen and service payroll can only be cut so much. It takes only slightly more scheduled help to handle $3,000 in sales than it does to handle $500 in sales.
o Management salaries are unusually high, based on total volume. This is most likely due to the fact that there are four separate locations and one of them is a full service restaurant and bar with a catering service.
o Like the Clubs' prime costs, General and Administrative expenses are also higher than industry standards. We believe a successful food and beverage operation will have G & A expenses of about 30% of gross sales. The Pines' G & A expenses measured 39.85%, 42.07%, 46.15% and 43.29% for the last four fiscal years.
The expenses included as G & A are difficult to control beyond a certain point, once a restaurant is open and a concept has been established. Maintaining these types of expenses at reasonable levels requires little more than general business skills and common sense. We attribute much of the excess of these expenses over industry standards to the fact that all four locations have a relatively low volume for their size, in addition to the age of the structures.
o Perhaps the single most important recommendation we can make is for the food and beverage operation of Ocean Pines to utilize financial data on a more frequent basis. It's obvious these operations are losing money because their food, beverage and labor costs are far above industry standards. What is not so obvious is how much of the loss is attributable to which prime cost component and when.
We recommend the Clubs maintain their own daily profit and loss data, to be compiled and analyzed on a weekly basis. The system must not be overly complex but must be accurate, especially where prime costs are concerned. Reviewing prime costs on a weekly basis will allow Management to pinpoint and quantify the reasons why these costs are so far in excess of industry standards (particularly payroll). Quantifying the reasons and passing it along to the Association's Management (the General Manager and the OP A Board) should allow them to make more info~ed decisions regarding concept, hours of operations, whether or not to remain open all year and, if so, which days of the week to be open. If profitability was the Association's only concern, we believe the Clubs would not be open year round.
This system should be especially useful in identifying reasons why payroll costs are so high compared to industry standards. To simplify the weekly report, we have suggested to the Director of Food and Beverages that he develop an average rate-per-hour for labor costs. This rate will be difficult to develop immediately but should become accurate over a short period of time.
Initially, we do not recommend a weekly physical inventory count. We do recommend attempting to achieve a par inventory level for food and beverage and accounting only for major changes to those levels (for example, the steaks that the Director of Food and Beverages has ordered in anticipation of future price increases).
It is imperative the weekly results be compared to montWy financial statements and any discrepancies be immediately reconciled so that future weekly data can be more accurate.
o Recommendations regarding pricing are extremely complex and depend on the goals and objectives of the Association, itself. We believe it is unlikely the food and beverage operations of Ocean Pines will ever break even, much less make a profit. Perhaps it's the location of its operations, the size of its structures or its policies of providing service needs at prices and times which are unprofitable.
In any event, the Board and the Association must first determine to what extent they intend to subsidize the Clubs and their patrons, and then set the menu prices and hours of operations accordingly. The Clubs' prices are currently below local restaurant averages. Most restaurants we are familiar with, that are comparable to the Clubs, set a target food cost of 33% to 35%. We believe food menu prices should be set to allow no more than a 36% to 40% food cost after accounting for all discounts, coupons, promotions, etc. Beyond these margins, you are destined to lose money in almost any operation that sells 75% food.
Bar prices are also currently below local bar averages. We recommend the Clubs' bar prices be set to achieve no more than a 25% beverage cost margin after all discounts.
While it's not our place or intention to determine whether or not the Association continues its discount policies, we think it's imperative the discounts be accounted for and separately tracked. Also, we recommend Management track customer counts at all times, but especially before, during and after any discount promotion. This information should be conveyed to Management and then evaluated based on the cost and benefit of each type of discount.
Discounts of 20% provided to Ocean Pines groups have a huge negative impact on profitability. For example, an $8.00 meal priced to have a 35% food cost will have a 43.75% cost if sold for $6.40. The cost gets even greater if the event is held at.a location away from the Yacht Club and has fewer than 60 to 75 paying attendees. These discounts, if mandated by Association policy, certainly should be separated from food costs and reported as a separate line item under General and Administrative expenses.
Please note, we do not necessarily advocate terminating any or all discounts. We simply suggest the Association do a better job quantifying and reporting the costs and benefits of them.
o While inventory control appears adequate, we recommend it be occasionally tested - especially for high-cost, easy-to-count (or steal) items. This can easily be done by performing an unannounced count of certain items first thing in the morning, before the restaurant opens, on two consecutive days. After adjusting for deliveries and sales (determined by reviewing the first days' POS report), the counts should be easily reconciled. Any discrepancies can be immediately investigated and dealt with at a time when all pertinent information is readily available. This can be done with food or beverage inventory but, because there is no POS report breaking down the types of liquor, beer or wine sold, it may require taking the bar inventory on two consecutive days.
o Also, as was discussed with the Board on July 30th, Management should pay very close attention to the amount of consumption of each bartenderis favorite beverage.
o As previously noted, the opportunities for bartender theft are many. This is a common problem in the industry. We do recommend very close supervision and observation of bartender activity, including the following:
1. Require each guest check be placed in front of a patron at the
bar so that it can be reviewed by a manager at any time,
2. Use professional "spotters" from time to time,
3. Require recording name and reason for "comps",
4. Be especially leery of collusion between friendly servers and bartenders,
5. Perform the "unannounced" counts referred to above.
o The Director of Food and Beverages' explanation for excessive labor costs has some merit. Unfortunately, it is impossible "after the fact" to determine how much. The Director admits to a certain degree of overscheduling and claims it is done as a "defensive" measure to avoid being caught short-handed. He feels this is just one of those unusually high service needs demanded by the Association. It appears to come down to a question of whether he must deal with complaints that his labor costs are too high, or that the Clubs provided poor service because they were understaffed.
This dilemma is faced by every restaurateur. It is much more difficult to deal with in a low-volume operation because over-scheduling has a much larger impact on the bottom line as a percent of sales than in a highvolume operation.
Recording the weekly profit and loss data should be especially helpful in determining why labor costs are so much higher than industry standards. Excessive payroll should be explained and quantified, and a summary list should be maintained totaling each individual reason.
o During one of our visits, we received exceptionally inadequate service.
The details were discussed with the Director of Food and Beverages shortly after the incident and we were assured it was an isolated case. We encountered no other problems in our other visits.
We recommend those involved in managing the food and beverage operations attend a seminar conducted by the authors of Practitioner's Publishing Company's Guide To Restaurants And Bars. This is not as a result of the above incident.
We recommend the Clubs' management meet with tipped employees to ensure they are familiar with all rules for tip reporting. Employer liability for under reporting has increased in recent years, so it's in the best interest of all concerned that these employees report all cash and credit card tips.
There appears to be some debate as to what policy the Clubs should maintain when customers request separate checks. We are not aware of a standard in the industry, but do know the vast majority of the operations with which we are familiar do allow them. This is not an issue with operations that have a POS system designed to handle the specific problem. But most operations that don't have such a system will allow them, if for no other reason than the fact they are in the "service" industry.
We recommend the Clubs allow separate checks when requested by customers. ill light of comments by the Director of Food and Beverages that he works very hard to meet the high service demands of his customers, this one seems a relatively inexpensive one to fulfill. Customers should be advised, in advance, that separate checks may lead to several unavoidable meal complications including:
1. Meals not coming out of the kitchen at the same time, and
2. A longer than usual check close-out process, depending on the number of checks and the method of payment (especially the number of credit cards used for payment).
The Clubs' POS system is about seven years old but appears to be adequate for its needs. We recommend meeting with a Micros salesperson, only to confirm this belief. We anticipate the benefits would not outweigh the costs, but cannot see any harm in going through the process.
Currently, The Country Club is treated as a separate profit center with beverage sales only. We do not see the benefit of reporting this way. However, including food sales in income of The Country Club would create bookkeeping difficulties in allocating payroll'and other costs. ill addition, it's our understanding the facility is often used for non-catered events. This, of course, explains some of the reason why G & A expenses are above industry standards.
We recommend the cost of the facility and its maintenance be allocated on a basis that will more accurately reflect its use in the food and beverage operations. While there is no net impact to the bottom line of The Ocean Pines Association, it will help in determining the true cost of the food and beverage operations.
Please feel free to contact us with any questions, comments or concerns you may have regarding the above. Many of these comments have been shared with the Director of Food and Beverages and he appears receptive to some of the recommendations. We would be happy to assist in the implementation of these suggestions in accordance with the terms and rates included in our proposal discussed with the Board on July 30, 2003.
Faw, Casson & Co., LLP
Uploaded: 9/5/2007
MEMBERS AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
November 5, 2003
To: Board Of Directors Ocean Pines Association Berlin, Maryland 21811
This letter is submitted in response to the Board's request for our comments or suggestions regarding the Ocean Pines Association's food and beverage operations noted during the study and evaluation of its internal controls. The information contained throughout this letter regarding industry standards, expected margins and standard practices was developed from multiple sources. The two primary sources of information were:
1. Analyses of ratios, trends and business practices of existing clients in similar businesses, and
2. Guide To Restaurants And Bars published by Practitioners Publishing Company.
We have relied on the accuracy and reliability of your historical financial statements. This letter is intended solely for your use ..
The food and beverage operations of Ocean Pines include The Beach Club, The Fairway Cafe, The Country Club and The Yacht Club, hereinafter referred to as "the Clubs." The industry itself is considered by many to be one of the most difficult, with a very high failure rate. Reasons why the industry is considered difficult include the following:
1. Sales consist of many small transactions as opposed to several large ones,
2. High number of cash transactions,
3. High turnover rate of employees,
4. Highly perishable inventory,
5. V ery narrow profit margins,
6. Lack of segregation of duties.
We cannot emphasize enough how difficult it is to be profitable in a low-volume food and beverage operation. The economies of scale are tremendously important and oftentimes are the only difference between success and failure. Unfortunately, all four of the Ocean Pines food and beverage operations are considered "low-volume." Each of the operations is unique in its own way, but they have been combined here for purposes of analysis so as to eliminate the potential impact of improper allocation among the departments.
There are many factors contributing to the inadequate profitability of the Clubs. Some of these factors are more controllable than others and some are not controllable at all. It's obvious the biggest reason the Clubs lose so much money is that the food, beverage and labor costs (known as prime costs) are far in excess of industry standards. The situation is aggravated by the fact that there are only monthly financial statements and those statements are not available until about the third week of the following month. By that time, the reasons why prime costs are so high are very difficult to pinpoint and almost always too late to change.
Typically, a profitable restaurant will operate with a prime cost of 63% to 68%. The Clubs of Ocean Pines have operated with a prime cost of 87%, 93%, 99% and 91 % over the last four years. A reduction of prime costs to 68% for the year ended April 30, 2003, would have resulted in cost savings of approximately $248,940.
Further analysis of each component for the same period is more difficult but is necessary to pinpoint how much the operations of the Pines vary from industry standards. Assuming industry standards where food cost = 35% of food sales, beverage costs = 25% of beverage sales and labor cost (including all labor related expenses) = 35.44% oftotal sales, the cost savings can be broken down as follows:
|
|
Actual |
Standard |
|
Standard |
Cost |
| |||
|
|
|
Cost % |
. |
Amount |
Savings |
| |||
|
|
|
|
|
|
|
| |||
|
Food Cost |
411,287 |
35.00% |
|
343,314 |
67,973 |
| |||
|
Beverage Cost |
93,276 |
25.00% |
|
78,684 |
14,592 |
| |||
|
Labor Cost |
625,774 |
35.44% |
|
459,399 |
166,375 |
| |||
|
Prime Costs |
1,130,337 |
68% |
|
881,397 |
248,940 |
| |||
|
|
Year Ended |
Year Ended |
Year Ended | ||||||
|
|
April 30, 2002 |
April 30, 2001 |
April 30, 2000 | ||||||
|
|
|
|
| ||||||
|
Food Cost |
48,593 |
55,651 |
52,427 | ||||||
|
Beverage Cost |
23,830 |
21,575 |
21,584 | ||||||
|
Labor Cost |
217,401 |
237,213 |
166,015 | ||||||
|
Prime Cost Savings |
289,824 |
314,439 |
240,026 | ||||||
As one would expect, there can be numerous reasons why prime costs exceed industry standards at Ocean Pines. Each one of the cost components is listed below, followed by observations, comments and recommendations regarding the factors we believe have the greatest impact on these cost components at Ocean Pines.
• Purchasing
o Most food product is purchased through Sysco's "Preferred Buyers" program. This program is well recognized in the area and is used by the vast majority of food operators with which we are familiar. It guarantees very competitive prices - prices which decline as quantities ordered Increase.
• Inventory Control
o Control of the Clubs' food inventory improved greatly by putting the walkin on the second floor. The walk-in is locked overnight but, for practical reasons, is left unlocked during the day which is standard practice throughout the industry. While it is still possible for food to he improperly removed from the kitchen it would be difficult for the loss to have a significant impact on food cost.
o Inventory is counted once a month.
• Portion Control
o Portion Control is achieved by the use of standard recipes and scales along with close supervision by the chef during food preparation.
• Pricing
o The Director of Food and Beverages and the Chef price most of their menu items to sell with a food cost of anywhere from 25% to 38% (3- or 4- to 1, per the Director of Food and Beverages). A review of the Chefs pricing method appears proper in that it breaks down a unit cost for each item on the plate and includes the cost of a salad or side (if included with the meal) and adds a standard plate cost, which includes condiments and garnish. A waste factor is used in the calculation of cost and it varies, depending on the menu item. Of course, there are loss leaders offered at various times in an effort to promote business at slower periods.
Many restaurants encounter a problem achieving desired food cost percentages due to difficulty in determining how much consideration to give to coupons and discounts offered, which ultimately drive up their food cost. Whether or not these costs should be included as food costs or marketing costs is a separate philosophical argument not discussed here. The Director of Food and Beverages states he is charged with attempting to obtain a final food and beverage cost of35%. It's unusual for an operator with a 75/25 food beverage sales mix not to break down the desired margins between food and beverage sales.
Management of the Association's food and beverage operations claims their customers have a very high degree of pricing sensitivity. Nothing in our review of the operations would dispute this claim.
• Discounts
o There are certain Ocean Pines groups which are always given a 20% discount for their meetings. Employees are entitled to a 35% discount while they are working. In addition, the Clubs offer various other coupon and promotional programs. The Association's financial statements include all discounts as food cost instead of a separate line item as a marketing, promotional or other expense.
Discounts can have a positive or negative impact on a food and beverage business. They are very helpful in generating sales at non-peak times or introducing a new restaurant, but they can be detrimental because profit margins are so thin. They can also be harmful when they give away too much or become routine.
Currently, the Controller has some information breaking down the various types of discounts, but he admits the information does not appear accurate (especially where employee discounts are concerned).
• Portion Control
o Portion control of beverage sales is more difficult than food sales. The Pines uses a "metered pour," but this is only as good as the bartender pouring the drink (who is also serving the drink AND working for tips). The best control here is "management observation."
• Pricing
o Many of the comments regarding food pricing apply to bar pricing. The Director of Food and Beverages prices items at 3- or 4- to 1, resulting in a cost margin of anywhere from 25% to 33%:
• Happy Hour Discounts
o According to the Director of Food and Beverages, the majority of beverage sales occUf during "Happy Hour" when prices are deeply discounted. This coincides with what seems to be a trend throughout the industry in establishments that cater to age groups of 30 years and older.
• Bartender Theft
o Because bartenders do it all behind the bar (take orders, mix drinks, serve drinks, charge for and collect the bill), this area is especially susceptible to employee theft. In Ocean Pines, the bartender is required to ring up each drink as soon as it is served. Since it's unproductive to watch every single sale, the opportunities for theft are many. Management staff of the Ocean Pines food and beverage operations attempt to control this through close observation of bar activity.
• Kitchen, Servers, Bartenders, Bus persons
o Kitchen Labor is scheduled by the Chef. The remaining positions are scheduled by the Bar Manager. All schedules are based on anticipated Club events and the Clubs' routine needs, after considering projected activity based on current sales, prior year sales, the weather, the dates, etc.
The Director of Food and Beverages is very well aware that the Clubs' payroll cost figures exceed industry standards by alarmingly high amounts. Based on our discussions with him, this is attributed to:
1. Unusually high service needs demanded by the Association,
2. Operating four separate "low-volume" locations,
3. Mandatory discounts provided to Ocean Pines service groups, and
4. Operating out of an upstairs and downstairs kitchen at the Yacht Club.
An analysis of the Clubs' labor cost as a percent of sales for the period May 1, 2003, through September 30, 2003, would support the Director's comments that unusually high service demands are partially responsible. It is always easier to be more efficient when volume is high. For the above period, labor costs were 39.30% of sales. While this is still above industry standards, it is well below the previous four fiscal years when labor costs, as a percent of sales, were 48.28%,54.21 %,58.51 % and 51.28%.
We believe it's a safe assumption that by April 30, 2004, the Clubs' labor cost will be well in excess ofthe 39.3% it was as of September 30, 2003. This will occur because fixed salaries will not change and will represent a much higher percent of sales than they did the first five months of operations, if for no other reason than decreased sales volume in the "off" season. In addition, kitchen and service payroll can only be cut so much. It takes only slightly more scheduled help to handle $3,000 in sales than it does to handle $500 in sales.
o Management salaries are unusually high, based on total volume. This is most likely due to the fact that there are four separate locations and one of them is a full service restaurant and bar with a catering service.
o Like the Clubs' prime costs, General and Administrative expenses are also higher than industry standards. We believe a successful food and beverage operation will have G & A expenses of about 30% of gross sales. The Pines' G & A expenses measured 39.85%, 42.07%, 46.15% and 43.29% for the last four fiscal years.
The expenses included as G & A are difficult to control beyond a certain point, once a restaurant is open and a concept has been established. Maintaining these types of expenses at reasonable levels requires little more than general business skills and common sense. We attribute much of the excess of these expenses over industry standards to the fact that all four locations have a relatively low volume for their size, in addition to the age of the structures.
o Perhaps the single most important recommendation we can make is for the food and beverage operation of Ocean Pines to utilize financial data on a more frequent basis. It's obvious these operations are losing money because their food, beverage and labor costs are far above industry standards. What is not so obvious is how much of the loss is attributable to which prime cost component and when.
We recommend the Clubs maintain their own daily profit and loss data, to be compiled and analyzed on a weekly basis. The system must not be overly complex but must be accurate, especially where prime costs are concerned. Reviewing prime costs on a weekly basis will allow Management to pinpoint and quantify the reasons why these costs are so far in excess of industry standards (particularly payroll). Quantifying the reasons and passing it along to the Association's Management (the General Manager and the OP A Board) should allow them to make more info~ed decisions regarding concept, hours of operations, whether or not to remain open all year and, if so, which days of the week to be open. If profitability was the Association's only concern, we believe the Clubs would not be open year round.
This system should be especially useful in identifying reasons why payroll costs are so high compared to industry standards. To simplify the weekly report, we have suggested to the Director of Food and Beverages that he develop an average rate-per-hour for labor costs. This rate will be difficult to develop immediately but should become accurate over a short period of time.
Initially, we do not recommend a weekly physical inventory count. We do recommend attempting to achieve a par inventory level for food and beverage and accounting only for major changes to those levels (for example, the steaks that the Director of Food and Beverages has ordered in anticipation of future price increases).
It is imperative the weekly results be compared to montWy financial statements and any discrepancies be immediately reconciled so that future weekly data can be more accurate.
o Recommendations regarding pricing are extremely complex and depend on the goals and objectives of the Association, itself. We believe it is unlikely the food and beverage operations of Ocean Pines will ever break even, much less make a profit. Perhaps it's the location of its operations, the size of its structures or its policies of providing service needs at prices and times which are unprofitable.
In any event, the Board and the Association must first determine to what extent they intend to subsidize the Clubs and their patrons, and then set the menu prices and hours of operations accordingly. The Clubs' prices are currently below local restaurant averages. Most restaurants we are familiar with, that are comparable to the Clubs, set a target food cost of 33% to 35%. We believe food menu prices should be set to allow no more than a 36% to 40% food cost after accounting for all discounts, coupons, promotions, etc. Beyond these margins, you are destined to lose money in almost any operation that sells 75% food.
Bar prices are also currently below local bar averages. We recommend the Clubs' bar prices be set to achieve no more than a 25% beverage cost margin after all discounts.
While it's not our place or intention to determine whether or not the Association continues its discount policies, we think it's imperative the discounts be accounted for and separately tracked. Also, we recommend Management track customer counts at all times, but especially before, during and after any discount promotion. This information should be conveyed to Management and then evaluated based on the cost and benefit of each type of discount.
Discounts of 20% provided to Ocean Pines groups have a huge negative impact on profitability. For example, an $8.00 meal priced to have a 35% food cost will have a 43.75% cost if sold for $6.40. The cost gets even greater if the event is held at.a location away from the Yacht Club and has fewer than 60 to 75 paying attendees. These discounts, if mandated by Association policy, certainly should be separated from food costs and reported as a separate line item under General and Administrative expenses.
Please note, we do not necessarily advocate terminating any or all discounts. We simply suggest the Association do a better job quantifying and reporting the costs and benefits of them.
o While inventory control appears adequate, we recommend it be occasionally tested - especially for high-cost, easy-to-count (or steal) items. This can easily be done by performing an unannounced count of certain items first thing in the morning, before the restaurant opens, on two consecutive days. After adjusting for deliveries and sales (determined by reviewing the first days' POS report), the counts should be easily reconciled. Any discrepancies can be immediately investigated and dealt with at a time when all pertinent information is readily available. This can be done with food or beverage inventory but, because there is no POS report breaking down the types of liquor, beer or wine sold, it may require taking the bar inventory on two consecutive days.
o Also, as was discussed with the Board on July 30th, Management should pay very close attention to the amount of consumption of each bartenderis favorite beverage.
o As previously noted, the opportunities for bartender theft are many. This is a common problem in the industry. We do recommend very close supervision and observation of bartender activity, including the following:
1. Require each guest check be placed in front of a patron at the
bar so that it can be reviewed by a manager at any time,
2. Use professional "spotters" from time to time,
3. Require recording name and reason for "comps",
4. Be especially leery of collusion between friendly servers and bartenders,
5. Perform the "unannounced" counts referred to above.
o The Director of Food and Beverages' explanation for excessive labor costs has some merit. Unfortunately, it is impossible "after the fact" to determine how much. The Director admits to a certain degree of overscheduling and claims it is done as a "defensive" measure to avoid being caught short-handed. He feels this is just one of those unusually high service needs demanded by the Association. It appears to come down to a question of whether he must deal with complaints that his labor costs are too high, or that the Clubs provided poor service because they were understaffed.
This dilemma is faced by every restaurateur. It is much more difficult to deal with in a low-volume operation because over-scheduling has a much larger impact on the bottom line as a percent of sales than in a highvolume operation.
Recording the weekly profit and loss data should be especially helpful in determining why labor costs are so much higher than industry standards. Excessive payroll should be explained and quantified, and a summary list should be maintained totaling each individual reason.
o During one of our visits, we received exceptionally inadequate service.
The details were discussed with the Director of Food and Beverages shortly after the incident and we were assured it was an isolated case. We encountered no other problems in our other visits.
We recommend those involved in managing the food and beverage operations attend a seminar conducted by the authors of Practitioner's Publishing Company's Guide To Restaurants And Bars. This is not as a result of the above incident.
We recommend the Clubs' management meet with tipped employees to ensure they are familiar with all rules for tip reporting. Employer liability for under reporting has increased in recent years, so it's in the best interest of all concerned that these employees report all cash and credit card tips.
There appears to be some debate as to what policy the Clubs should maintain when customers request separate checks. We are not aware of a standard in the industry, but do know the vast majority of the operations with which we are familiar do allow them. This is not an issue with operations that have a POS system designed to handle the specific problem. But most operations that don't have such a system will allow them, if for no other reason than the fact they are in the "service" industry.
We recommend the Clubs allow separate checks when requested by customers. ill light of comments by the Director of Food and Beverages that he works very hard to meet the high service demands of his customers, this one seems a relatively inexpensive one to fulfill. Customers should be advised, in advance, that separate checks may lead to several unavoidable meal complications including:
1. Meals not coming out of the kitchen at the same time, and
2. A longer than usual check close-out process, depending on the number of checks and the method of payment (especially the number of credit cards used for payment).
The Clubs' POS system is about seven years old but appears to be adequate for its needs. We recommend meeting with a Micros salesperson, only to confirm this belief. We anticipate the benefits would not outweigh the costs, but cannot see any harm in going through the process.
Currently, The Country Club is treated as a separate profit center with beverage sales only. We do not see the benefit of reporting this way. However, including food sales in income of The Country Club would create bookkeeping difficulties in allocating payroll'and other costs. ill addition, it's our understanding the facility is often used for non-catered events. This, of course, explains some of the reason why G & A expenses are above industry standards.
We recommend the cost of the facility and its maintenance be allocated on a basis that will more accurately reflect its use in the food and beverage operations. While there is no net impact to the bottom line of The Ocean Pines Association, it will help in determining the true cost of the food and beverage operations.
Please feel free to contact us with any questions, comments or concerns you may have regarding the above. Many of these comments have been shared with the Director of Food and Beverages and he appears receptive to some of the recommendations. We would be happy to assist in the implementation of these suggestions in accordance with the terms and rates included in our proposal discussed with the Board on July 30, 2003.
Faw, Casson & Co., LLP
Uploaded: 9/5/2007
