Managing the Impact of Restaurant Commodity Price Swings

Produce prices are in constant fluctuation. This is no big deal for a restaurant if the shift is small, but can make a massive difference if the price jumps significantly—especially if the commodity is one of your most used items. You can’t control the changing costs of commodities. You can, however, employ some strategies to help manage the impact of those changes. Here are a few techniques to help ameliorate the impact of commodity price swings in the best way possible.

Have a Clear Picture of Which Commodity Items Are Driving Your Highest Costs

In most restaurants, it’s usually about 20% of the commodities that are driving 80% of the costs. When it comes to managing commodity prices, these items are the most critical to focus your cost saving efforts on. Don’t get side-tracked pinching pennies on items that have a negligible impact on your overall costs. Focus on the big guys, and then take the time to shop around, compare prices between produce suppliers and find opportunities to negotiate better deals.

Want to Know When the Next Restaurant Commodity is Going to Soar? Keep an Eye On the News

Commodities prices are affected by what is happening globally, and no one can predict when the next fluctuation will come. That said, keeping an eye on the news can at least provide some indication of the next big price increase and can help you be prepared to handle it. Whether it’s a drought in the Bread Belt, frost in Florida or civil war in Columbia, commodity prices are going to be affected. Knowing where your main commodities are coming from and monitoring the news from those areas will go a long way toward giving you a head start in dealing with the forthcoming price increase that occurs when disaster strikes.

Consider Restaurant Purchasing Contracts Instead of Managing Produce Orders In-House

Another way to manage commodity costs is by partnering with a purchasing company. There are a number of benefits to doing so—not the least of which is negotiated rates, as well as buying and consulting support. Restaurants who have purchasing contracts are protected from being at the whim of dramatic shifts in commodity costs throughout the course of the year. When deciding to enter into a purchasing contract, shop around and get a number of proposals as a tool to negotiate the best deal. Know your specifications to ensure that you’re getting comparable price quotes from suppliers and distributors. Look for fixed contracts to best manage commodity prices over time.

The downside of purchasing contracts is that you’re not free to shop around for a better deal until the contract is done. If you know that the price of a produce item is likely to go down, look for shorter-term contracts. When your contract is up, be sure to take a fresh review of available alternative options before signing the contract for another round.

No one can guess what will cause one item to spike while another stays static, but we all know how much those fluctuations can effect our bottom line—especially when they are unexpected. Taking the time to be aware of which commodity items could cause the most risk in your restaurant business if prices fluctuated, monitoring the news from areas where those commodities come and considering purchasing contracts to lock in better prices are all great strategies to help manage the impact of commodity cost fluctuations.

How the New IRS Rules Regarding Group Gratuities Could Impact Restaurants

For years it has been common practice for restaurants to add a fixed gratuity to parties of five or more. As of the beginning of this year, however, how restaurants handle tips for large parties is going to have to change. The IRS came out with a new ruling this year that draws a more distinct division between what are considered tips and what are considered service charges. From here on out, it will no longer be legal to require a tip and still call it a tip. If it’s a mandatory fee, it is now called a service charge, which changes how restaurants can handle payouts for bonuses.

It used to be that cash tips generally went unreported, though both tips and wages are technically taxable. Those days are mostly gone now, what with credit cards and more stringent reporting and tracking requirements. This change in what constitutes service charges vs. tips comes on the heels of a larger effort by the IRS to crack down on tip reporting in general, though many feel that this added ruling isn’t going to turn up much in terms of unreported income.

What Restaurants Can Call Tips Versus What Can Be Called Service Charges 

In order for something to be considered a tip, it must be voluntary. The customer has to decide who gets the money. It must also be for an amount entirely set by the customer, not dictated by a company policy. If it is a mandatory fee such as a fixed gratuity, it is considered a service charge, not a tip, and therefore must be processed through payroll rather than being paid out to the server that day.

The Biggest Effects of the New IRS Ruling on Restaurant Operations

The biggest effect of the new IRS ruling is that it will complicate payroll accounting. Larger restaurants may already have the infrastructure to deal with the additional accounting, but smaller establishments may not. Employees who are used to cashing out their tips each day will also be affected, since they will now have to wait until payday to get their bonuses for the larger tables they served.

Some restaurants will deal with the additional accounting and maintain their fixed gratuity policy. Others will do away with a fixed gratuity entirely in favor of a gentle reminder encouraging patrons to tip by putting a “suggested amount” for the tip on the receipt instead.

How Restaurant Operators Should Handle the Policy Change

The best thing you can do to handle this new IRS ruling is to simply talk to your employees. Let them know about the details of the new rule and that it’s coming from the government, not you. Ask for their feedback about what might be the best way to handle gratuities for large parties, now that fixed gratuities are no longer allowed to be considered tips. The choices are to either keep letting servers take home large party tips that same night (but let them risk getting under-tipped), or to keep the fixed gratuity as a service charge that then doesn’t allow employees to take home the bonuses until their next paychecks. Talk over the options with your staff and see how they feel about both choices before making a decision.

Potential Challenges to Restaurant Operators in 2014

Each year brings a new set of challenges to restaurant operators. While it’s impossible to predict every challenge a business might face, there are some that we can predict with a fair amount of certainty. Here’s the list of potential road bumps for 2014.

Health Care, Hourly Wages, and Garnering Valuable Knowledge Effect Restaurants

The Patient Protection and Affordable Health Care Act, popularly known as “Obamacare,” is set to take full effect in January, 2014. Most analysts are predicting that the act will create a two to four percent increase in costs to businesses with more than 50 employees. If your margin is more than 30 percent, this won’t have much effect, but since the foodservice industry’s average pretax profit is less than five percent, this could cause challenges and a focus on improving your profit margins is going to be critical to success.

The living wage debate flared up strongly in 2013, and is unlikely to go away any time soon. The odds that strikes, demonstrations, and discussions around increasing minimum wage will continue into 2014, is pretty good.

We have a ton of information at our disposal, but sorting what is valuable from what is not can be a major challenge. Vendors who can supply “Big Data” overviews and insights will surpass those who cannot garner such comprehensive information in 2014 and beyond. 

Restaurants must Deal with Increased Commodity Prices and New Consumer Trends

No one can predict how weather and climate change will affect growing conditions in 2014. Commodity prices are always an unpredictable, uncontrollable cost to restaurant operators. You can bet that the prices won’t be dropping though, so the best you can do is make certain that your controllable costs are optimized to give you the best leverage possible in the face of these uncertainties.

How diners are choosing and using foodservice is vastly different than it was even five years ago. There is a new set of expectations involving everything from what consumers want to see on the menu to which devices they can use to interact with your restaurant. Restaurant operators who wish to succeed in 2014 and beyond must keep a keen ear to these new trends and expectations and make regular judgment calls about whether or not to follow suit.

Building Leaders Rather than Employees for the New Age in Restaurants

You can’t predict your company’s future, but you can give it the best chance for success possible by hiring and developing people to be leaders rather than just employees. Picking people based on competencies that were valued ten years ago isn’t going to do much for you now or in the future. To best succeed in 2014, ask yourself what competencies are going to be needed now and in the future and start focusing on hiring and developing your employees into the leaders that they will need to be in this day and age.

Your company will have a better chance for success if you plan for contingencies and educate yourself to make the best choices for your business as possible. Being average is easy, but being awesome takes some work – so make a plan for how you are going to address upcoming challenges and get started now!