Business Economic Notes 18
Catering - Fast Foods, Cafes and Snack Bars
These notes are issued to Inspectors of Taxes to assist them in examining accounts. They are intended to provide a general background to the trade, with some explanation of its most important features. Business Economic Notes are not intended to provide an exhaustive or definitive picture of any particular trade or profession.
Contents
1. General
2. Fast Foods
- The Franchise System
- Financial Aspects
- Location
- Competition
- Volume
- Food Costs
- Rental Costs
- Wages/Costs
- Interest
- Location
- Costings
- Food Costing Examples
3. Home Delivery
4. Cafes and Snack Bars
- Cafeterias
- Sandwich Bars
- Coffee Shops
1. General |
The snack food sector is dominated by the comparatively new fast food outlets. Their popularity, as witnessed by the remarkable growth since the mid-1970's, has to a large extent been responsible for the substantial demise of the traditional snack bar and café type establishments.
The fast food sector is now valued at some £3 billion and employs around 300,000 people. Whilst there are a fair number of independent operators, the market is mainly dominated by the large fast food franchises and multiple chains.
2. Fast foods |
The phrase fast foods covers any form of food that can be quickly prepared and usually eaten without cutlery. The concept ideally suits a take-away operation catering for a fast throughput of customers. Fast food covers a wide range of foods such as
- Baked potatoes
- · Hot dogs
- Burgers
- Pizzas
- Fried chicken
- Kebabs
- Indian snacks - samosas and bhajis
- Spare ribs
- Tandoori chicken and pork
- Tapas and tortilla dishes
The emphasis of any fast food outlet is on high turnover, fast turn-around, low labour costs and minimal wastage. The essential features are easy to prepare or ready prepared foods, fixed and limited menus, multiple service points and disposable serving dishes.
Fried chicken, burgers, hot dogs and pizzas dominate the market and, of course, chips or french fries. Other products commonly retailed by fast food outlets are pastries, doughnuts, bread rolls, sandwiches, ice cream, milk shakes and hot and cold beverages.
There is now also a trend towards extended menus by the larger chains and items such as chicken burgers, chicken nuggets, spare ribs and vegetable burgers are finding their way on to the menu.
Pizza outlets are continually extending their range of toppings and new products such as pizza pie and priazza, which is a mini pizza, are popular sale items.
High turnover is achieved by having a fast throughput aided by a significantly high take-away trade and also length of opening time. Top league units open seven days a week for 12 hours per day. The average spend on fast food outlets was around £2.70 in 1988, and it is not difficult to see how a small outlet with say, an average of 80 covers per day, can achieve a turnover in excess of £70,000 per annum.
The franchise system
Franchising is basically the selling of a licence to provide a selling medium or market, product or service, where the originator of the idea provides a package or product support in exchange for a fee or royalty.
The Wimpy franchise was the first in the United Kingdom and is amongst the leaders in the fast food market. Since then a number of franchise establishments have emerged, each one with differing franchise formats, but with similar basic concepts, in that
- all franchises normally require an initial franchise fee to cover
purchase of licence and setting up costs
- fittings and style of service comply to the franchiser's specifications
- an annual fee is charge by either
- a royalty on gross sales
- a smaller, fixed fee plus a contract to buy stock from the franchiser
or
The franchise agreement forms the basis of the legal relationship between franchiser and franchisee and it lays out the main aspects and terms of the relationship. The actual working details of the franchise are usually set out in a manual and explains the franchisee's obligations and how the franchise should be operated.
Briefly the agreement will cover the following specific points
- Parties to the agreement
- Territory - setting out any conditions of exclusivity
- Payment clauses - setting out the basis on which any service fee or
royalty is to be calculated
- Terms of agreement - sets out the obligations on the franchisee to
ensure the standards and quality identified with the product and the
controls the franchiser intends to impose to ensure conformity
- Exclusive supply - sets out any conditions regarding exclusive supply
of raw materials
- Assignment - the agreement may give the right to franchisees to sell
their business subject to certain conditions. It will also indicate
whether the franchiser has the right to pre-emption and contain details
of fees the franchiser may impose in addition to the expenses of assignment.
It is increasingly common for the franchiser to charge an 'Estate Agents'
fee, where he finds a purchaser for the business
- Termination - this is an important clause in the agreement concerning
the right to terminate the agreement of the franchisee if in breach
of any substantial term of the contract
- Post termination clauses - these set out restrictions on the franchisee
following termination, concerning use of trademark and competition within
a specified territory for a stated period
- Accounts - it is self evident that where the franchiser depends for his income upon the payment of a percentage of gross turnover, that he will have a very considerable interest in ensuring that the franchisee keeps proper records and that he is permitted to examine such records from time to time and also has sight of annual accounts
Financial aspects
Fast food outlets continue to grow in popularity and new sites seem to be opening at an ever increasing rate in cities and high density conurbations. The potential financial rewards are enormous and there is money to be made in fast foods.
Typically a fast food profit model may look something like this
|
£ |
as % of sales |
|
|
Annual turnover (including VAT) |
700,000 |
100.0% |
|
Food cost (including packaging) |
262,000 |
37.5% |
|
Gross profit |
438,000 |
62.5% |
|
Wages |
140,000 |
20.0% |
|
Rent |
60,000 |
8.5% |
|
Overheads (rates, light and heat) |
56,000 |
8.0% |
|
Advertising |
28,000 |
4.0% |
|
Trading (pre-tax) profit |
154,000 |
22% margin |
The cost structure of different types of fast food operations varies according to the level of counter services, seating area, and so on, but the model assumes an average fast food burger outlet in a London suburb. The unit would probably cost a minimum of £300,000 to fit out, with an area of 3,000 square feet and a rental of £20 per square foot.
Direct taxation in the form of VAT will of course substantially reduce the operating profit and bearing in mind that the food purchases would be tax free, the VAT bill could be in the region of £70,000 - £75,000, reducing the trading profit to about £80,000 and an effective 11.4 percent margin on sales.
Quite apart from the VAT factor, it is not hard to see how units, particularly those established with a high level of borrowed capital could find themselves in a loss situation, whilst having a healthy turnover and an excellent gross profit margin.
A good fast food outlet relies on a high volume throughput, so the following factors have to be considered in deciding whether a site will be successful or otherwise.
Location
It is said that success in fast foods is all about site, site and site. To be successful, units need to be sited in prime positions, right in the centre of all day activity with above average pedestrian flow and good visibility.
Fast food outlets need to be open 12 hours a day and a good site is one which has a steady flow of potential customers throughout opening hours without any sudden tail off, say when shops close at 5.00 p.m. and so on.
Competition
Generally speaking fast food operations do not have much to fear from traditional forms of catering. Apart from perhaps the West End of London, there is still plenty of scope for new units in the London suburbs and the provinces. Different types of fast food outlets appear to be able to survive within close proximity of one another and indeed the general trend is for prime sites to be shared by a number of fast food outlets.
Volume
Annual sales of £200,000 (£4,000 a week) would certainly not be asking a lot of a prime West End site, but generally speaking, for high investment units, the £10,000 a week barrier is quite a formidable one for many units, especially during the critical start-up period.
If sales however only reach the £10,000 a week level and do not improve then the profit position becomes fairly marginal.
Some of the costs, of course, are turnover related rather than fixed, but even so £500,000 a year, based on the model, the trading profit could be as low as £35,000, taking into account reduced overheads (a 7% pre-interest and taxation profit margin).
Conversely, if sales were say £20,000 a week, and this is not impossible on a prime well-established site, then the gearing works the other way, with possible trading profits of around £270,000, taking into account increased overheads, giving a 37% pre-interest taxation profit margin.
Food costs
Portion control is an integral part of the modern fast food system, but food costs ratios may in the first 12 months run above normal because of the need to establish quality standards and initial high wastage. High wastage can be caused by a combination of lack of familiarity with equipment and having a higher level of pre-cooking.
There always has to be an element of pre-cooking, to cope with sudden rushes. Unless the quantity of pre-cooking can be judged accurately then wastage will occur. Foods such as burgers for instance cannot be stacked up for more than 10 minutes before becoming cold and soggy. A food cost margin of around 41% can therefore easily result from wastage and shrinkage. Such a shift would substantially reduce the gross profit margin. In the model this would be reduced by about £27,000.
Rental costs
Average rental costs are around £50,000 for a 3,000 square foot site. They would probably be higher in the West End of London and lower in the provinces. The normal rule of thumb applied is to calculate anticipated sales as being 10 times the rental value, as a minimum.
Wages/costs
The critical task of matching staff levels to sales activity is an extremely difficult one. Initially operators tend to over-estimate staffing levels, partly intentionally, in order to create customer goodwill.
A good fast food outlet needs a fairly large number of staff to achieve and cope with the heavy throughput. To obtain the level of turnover as indicated in the model an average of 12 crew per 8 hours shift with two shifts per day would be required. Wages costs of around £140,000, including NIC, staff benefits and manager's salary, would not be unreasonable.
Interest
The level of interest paid depends on the level of capital borrowings and this in turn depends on the level of capital costs in setting up a unit.
An average spend of £100 a square foot, taking into account the sophisticated kitchen equipment, air conditioning, lighting and fixtures, is not untypical. In the model, it is estimated that the cost of fitting out the 3,000 square foot unit is £300,000. If the proprietor had borrowed all the necessary capital, at interest rates of, say 18 percent there would be an annual interest charge of £54,000. Moreover if the capital costs were to be written-off over a ten year period, this would virtually eliminate the operating profit.
The foregoing only goes to demonstrate that whilst fast foods offer enormous profit potential, success is by no means guaranteed and the business is not without its risks and failures. It also becomes clearer to see why a burger and bun, which most people know can cost only, at the most, around 17 to 20p, wells for almost £1. When the container cost is added together with rental and other overheads, it is not difficult to see that the operators net share of what appears to be a substantial profit margin, is drastically reduced.
Costings
Running a franchise outlet is very much an 'accountancy' dominated function and depending on the particular franchise, the operation is geared to reaching specific targets of sales volume and gross profit margins.
As far as food costings is concerned, the franchisee will be working on precise costing requirements laid down by the franchiser. Franchisers produce detailed product costings, calculating the gross profit margin on each menu item and these costings are usually updated annually and/or amended, following any change in cost or sale price.
Food costing examples
ChickenChicken in its various forms - fried chicken, chicken nuggets, chicken burgers, and so on, is a fast food leader. American style Southern Fried chicken is the most popular chicken product and a standard two-piece portion, retailing at around 95p (net of VAT) will produce a gross profit of 60%, calculated as follows
Chicken - 2lb 2oz bird (average cost £1.40) divided into 9 portions
|
Cost per portion = £1.40 |
= |
30p |
|
Chicken concentrate, breading and lemon |
= |
3p |
|
Paper packaging |
= |
5p |
|
Total costs |
= |
38p |
|
Average retail sale price |
= |
95p |
|
Gross profit margin |
= |
57p |
|
Gross profit rate |
= |
60% |
Chicken nuggets cost on average around 8p per piece and costings per standard five piece portion with sauce dip is as follows
|
Chicken nuggets 5 x 8p |
= |
40p |
|
1 packet of sauce dip |
= |
3p |
|
Packaging |
= |
5p |
|
Total costs |
= |
48p |
|
Average net sale price |
= |
£1.10 |
|
Gross profit margin |
= |
62p |
|
Gross profit rate |
= |
56% |
Burgers
Some basic examples of costings are shown below, but profit margins achieved by independent outlets may vary, depending on the quality of filling and size of burger. Generally a profit margin of at least 48% should be fairly easy to achieve, whatever the type of outlet.
Standard Burger
|
Burger |
= |
25p |
|
Seeded bun |
= |
7p |
|
Cheese and dressing |
= |
5p |
|
Packaging |
= |
4p |
|
Total cost |
= |
41p |
|
Sale price |
= |
95p |
|
Profit margin |
= |
54p |
|
Gross profit rate |
= |
57% |
Quarter Pounder
|
Burger |
= |
49p |
|
Seeded bun |
= |
10p |
|
Cheese and dressing |
= |
6p |
|
Packaging |
= |
5p |
|
Total cost |
= |
70p |
|
Sale price |
= |
£1.85 |
|
Profit margin |
= |
£1.15 |
|
Gross profit rate |
= |
62% |
French fries
French fries are a standard accompaniment to chicken or burgers with a 4oz portion retailing at around 40p, producing a gross profit margin of around 72.5 percent, calculated as follows
|
Costs of 4oz cooked fries |
= |
10p |
|
Oil |
= |
1p |
|
Food cost |
= |
11p |
|
Sale price |
= |
40p |
|
Gross profit |
= |
29p |
|
Gross profit rate |
= |
72.5% |
The catering examples shown above are based on averages and are given in order to demonstrate the costing process.
As a guide, the level of overall profit margins which might be expected to be achieved for the three main fast food lines are for
- ·Burger outlets - overall profit margin 40 to 50 percent
- Chicken outlets - overall profit margin 55 to 65 percent
- Pizza outlets - overall profit margin around 80 percent
3. Home delivery |
Pizzerias are a relative newcomer on the fast food scene and are in the main franchised outlets.
Pizzas are freshly made at each outlet as ordered. Delivery service usually serviced by small car/van or motor bike and heat retaining bags used to carry the pizzas.
There are now customised small vans with heated compartments, foreshadowing a future rapid growth of this type of home delivery service.
4. Cafes and snack bars |
Despite the spread of fast food outlets, there are still a large number of cafeterias, coffee shops and snack and sandwich bars, especially in town and city centre locations. Most cafes and coffee shops also have some form of take-away facility selling hot and cold snacks, beverages, sandwiches and filled rolls.
Cafeterias
In this category the old style cafeteria is perhaps a dying breed, not providing either the food or setting that will attract today's customers. The basic food format of this type of establishment has changed very little in the last 25 years, with menus including the usual food items, such as sausages, bacon, eggs, ham, pies, baked beans and chips in various permutations. Within this category there are also the establishments that provide good plan cooking, with main meals on the simple 'meat and two veg' format with pie and custard to follow, at prices which usually represent good value for money.
Cafeterias are usually open all day and in addition to cooked food sell beverages and snacks, such as biscuits, scones, cakes, pastries, toast, beans on toast, egg on toast, and so on.
Sandwich bars
Sandwich bars mainly cater for the lunch time trade in cities and towns. The better ones have facilities to make sandwiches and filled rolls on demand from a choice of meats, salads and dressings. Other snacks such as pizza slices, pies, sausage rolls, samosas, pastries and cakes are also sold, with microwave ovens used to heat food, on demand.
Coffee shops
Coffee shops are generally trendier and more up market establishments. Catering for both take-away and in-service, they provide a better range of hot and cold snacks, including sandwiches and rolls. They also sell such items as pizzas, lasagne, chicken kiev, a variety of salads and ploughman lunches and home-made cookies, cakes and pastries.
As an example, a successful coffee bar type restaurant in London claim they sell in excess of 2,000 sandwiches a day. Their best selling sandwich is prawn and they reckon to sell 800 - 1,000 of this type alone on a busy Saturday. Their menu consists of 45 to 60 different varieties of sandwich, about 30 to 35 different cakes and pastries and they specialise in 3 to 4 main meals every day such as lasagne, ravioli, chicken kiev, salad and quiches. It is reckoned that the average spend per head for take-away is £1.30 to £2.50 and for eat-in customers around £3.00 to £4.50.
Produced by the Inland Revenue
October 1990
© Crown Copyright 1990
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