You are here
NATIONAL REPORT — Inventory management is a basic principle studied in any university-level business program. Cost inventory — often referred to as the “first in, first out” (FIFO) method — values inventory by assuming that the first goods purchased by the retailer become the first goods out the door, and is commonly used in the small-business universe. The retail method of inventory measures the relationship between the cost of products and their retail price.
Which method is the best way for convenience store retailers to manage their ledgers when it comes to their foodservice operation? We petitioned members of the Convenience Store News How To Crew, a panel of leading foodservice experts, to find out.
“With foodservice, it’s all about cost-accounting principles,” said Mathew Mandeltort, vice president of foodservice strategy for convenience distributor Eby-Brown Co. LLC. He pointed to the fact that the obsession with gross profit margin (GPM) levels ignores the idea of contribution margin or the actual dollars generated from the sale of an item.
“If you have the option of selling an item for $1 with a low food cost [resulting in a high GPM] or selling an item for $6.99 with a higher food cost [resulting in a lower GPM], you should really choose the latter for the simple reason that you can’t take percentage to the bank — only dollars,” he advised.
Chad Prast, Murphy USA Inc.’s senior category manager of fresh foods and dispensed beverages, is also a fan of cost accounting. “It helps true-up your inventory each time the store does an audit count,” he said. “The drawback is if the store doesn't do very accurate counts, you can get wild swings from period to period.”
Although now a retail consultant, David Bishop, managing partner of sales and marketing firm Balvor LLC, is a veteran of the restaurant industry. As such, he favors cost accounting as well.
“In fact, having done a lot of activity-based costing work over the years, even the packaged good side of the business could benefit from cost accounting,” he explained. “Retail accounting distorts the information in ways that makes it harder to make a better decision.”
According to Bishop, counting coffee cups or fountain cups should be for inventory or ordering purposes, rather than a way to determine how much to write off at full retail value.
“Cost accounting helps manage distinct aspects of the business, which are critical to a c-store’s success,” he continued. “For instance, if you know you have an initial inventory of 100 small coffee cups, bought another 200, ended with 150 but only sold 100 [including free drinks], then you have reason for concern.”
Drilling down, you might find that customers are “double-cupping,” the result of pouring a cup that is too hot to hold. “If you find that to be the case, you should consider other options, such as offering a sleeve or sourcing a different, better-insulated cup,” said Bishop.
Editor’s note: Check out the August issue of Convenience Store News for our full report on how to track your foodservice financials. A digital edition of the issue can be accessed by clicking here.