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Charley's Family Steak House (A)

Charley's Family Steak House (A) - CHARLEY’S FAMILY STEAK...

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Unformatted text preview: CHARLEY’S FAMILY STEAK HOUSE (A) Charley Turner was in an unusually good mood as he pulled into the parking lot of Charley’s Family Steak House No. 2. It was a beautifill day in mid-December 2002, and he was about to have a meeting he had been looking forward to for several weeks. Mr. Turner was scheduled to meet with Alex Pearson, the new manager of Charley’s Family Steak House No. 2, to finalize the 2003 operating plan for the restaurant. He hoped this meeting would be a good first step toward increasing sales and improving profitability at all of his restaurants. BACKGROUND 150 Unit No. 2 was one of four Charley’s Family Steak Houses owned by Mr. Turner through a privately—held corporation. He opened his first family steak house in 1992 on the west side of a rapidly growing cosmopolitan city in eastern Texas. He managed this restaurant for three years, experimenting with various menus, pricing strategies, and customer service concepts. Mr. Turner’s goal was to create the best steak house in the city — one that was known for having a pleasant atmosphere, fast and courteous service, high-quality, freshly prepared food, and reasonable prices. As with many other family steak houses, the menu was posted on the wall, and customers went through a cafeteria- style line to place their orders, pick up their beverage, and pay the cashier. The food was then prepared and brought to the tables by a staff of servers. The servers also provided chocolate mints and comment cards to customers once they had finished their meals, and Mr. Turner utilized the customer comments and suggestions to make continuous improvements at his restaurants. By 1995, Mr. Turner knew he had developed a solid recipe for success. Customers raved about his restaurant’s food, service, cleanliness and overall value. During the next few years, he took his finely-tuned formula and replicated it on the east, north, and south sides of the city. As each new restaurant was opened, Mr. Turner would manage the unit himself until operations had achieved the “Charley’s Style” of friendly customer service and consistent, high-quality food. By the end of 2001, Mr. Turner owned four restaurants, all of which were similar in size and appearance. None of Charley’s Family Steak Houses served breakfast, although Mr. Turner was thinking seriously about test marketing the idea at Unit No. 2 as a means of obtaining greater utilization of his facilities and covering some of his fixed costs. All Charley’s Family Steak House restaurants had identical menus, and prices were similar, although not necessarily the same. Each restaurant manager had the authority to raise or lower specific prices by an amount not to exceed five percent of the suggested prices provided by Mr. Turner. His restaurant pricing strategy was intentionally simple: he determined the expected food cost for each menu item and then applied a predetermined uniform markup to that cost. Food purchases were done centrally by Mr. Turner or his assistant in response to orders placed by the restaurant PART V: MCS: PLANNING, BUDGETING, AND STRATEGIC PROFITABILITY ANALYSIS managers. The chain’s menu, shown in Exhibit 1, had fiom four to seven items in each of four categories, ranging in price from $1.99 for a side salad to $16.99 for a lobster dinner. Menu prices were reviewed semi-annually by Mr. Turner. MANAGEMENT CONCERNS Charley Tumer truly enjoyed restaurant management, but he was becoming increasingly frustrated by the challenge of managing Unit No. 4 while continuing to support and monitor the activities of the other three restaurants. As an entrepreneur, Mr. Turner was extremely attached to his restaurants, and he often wished he could be in all four locations at once. Although he controlled the advertising and purchasing for all four locations, he felt removed from the day to day operations of Units 1, 2, and 3. Consequently, he felt like he didn’t really know everything that was going on at these restaurants. In addition, Mr. Turner was troubled by the fact that every year the restaurant with the highest sales and the largest profit was the one he managed. He wondered if this was because he just happened to be a particularly gifted manager, or if other factors caused his restaurant to outperform the others. Furthermore, he was concerned about the quality of the information he was receiving from each restaurant. A few months earlier, Mr. Turner had discovered that Unit No. 2’s previous manager had been falsifying the weekly financial reports sent to headquarters, and he couldn’t help but wonder if he needed to improve his overall planning and control system. Mr. Turner knew he should probably promote one of his assistant managers to be the manager of Unit No. 4, which would enable him to spend all of his time overseeing the operations of all four restaurants. In addition, Mr. Turner was interested in implementing some type of bonus system in 2003 that would make each restaurant manager eligible to earn up to an additional 25 percent of his or her salary. He hoped this system would encourage improved performance, which would increase sales and profits at all of his of restaurants. Although he had not finalized all the details of the management bonus program, Mr. Turner knew that one of the most important performance measures of the program would be the achievement of predetermined annual sales and profit goals. In the past, each restaurant manager had prepared a forecasted operating statement for the year. However, Mr. Turner had been busy getting new locations up and running, and thus had not had much time to oversee each manager’s planning and budgeting process or to analyze fully any differences between budgeted and actual results. He believed the implementation of a bonus system would significantly increase the level of attention his managers paid to their own annual forecasts. In addition, he felt that a more rigorous budgeting and planning process might lead to improved sales and profitability at all four restaurants. He scheduled budget planning meetings for 2003 with each manager, and he viewed these meetings as opportunities to influence their thinking. FORECASTING REVENUES Mr. Turner and Alex Pearson began their December planning meeting by discussing Unit No. TS 2002 sales volume. Toward the end of 2001, Mr. Turner had installed a new touch screen restaurant POS system at each of the four restaurants. Cashiers entered customer orders into the computer system, and orders were immediately ———.___—_.—————_—————-——I—-I——“— CASE: CHARLEY’S FAMILY STEAK HOUSE (A) 151 transmitted to a computer screen located in the kitchen. Each week, Alex obtained a printed report from the POS system, which showed gross sales by menu item, discount coupon usage, and net sales for Unit No. 2. Based on the POS reports for the first 50 weeks of 2002, Mr. Turner estimated that a total of 182,000 meals would be sold during the entire year. He suspected this figure was low due to mismanagement of the restaurant throughout much of the year, and could be improved. In addition, he knew that a 100-room economy motel with no restaurant was scheduled to open very close to Unit No. 2 in June 2003. He estimated the hotel would generate an additional 100 to 120 meals per week for the steak house during the latter six months of 2003. Therefore, he targeted a ten percent increase in meals sold in 2003 over the 182,000 meals sold in 2002. Alex thought these projections were rather optimistic, but Mr. Turner insisted the sales target was achievable. The POS reports also showed that about 38% of the unit’s meals were sold during the hours of 11:00 am — 3:00 pm. Alex knew the restaurant was underutilized at lunch-time, and he expected that some of the planned increase in meals sold would occur then through greater promotion of lunch services and healthy, affordable menu items. At the same time, Alex wanted to grow the restaurant’s profitable dinner business. With Mr. Turner’s consent, Alex decided to set a target of 40% of meals sold at lunch—time in 2003. Average gross revenues per meal were forecasted to be $7.50 for lunches and $10.50 for dinners. Mr. Turner and Alex turned once again to the POS data, this time to determine the effect of the use of discount coupons on the steak house’s net sales. At least once a month, Mr. Turner placed coupons in local newspapers to attract customers. The coupons expired after two weeks, and they could be used any time at any Charley’s Family Steak House location. Based on the POS data, coupon usage was expected to average fifty cents per meal for both lunch and dinner. FORECASTING EXPENSES 152 Alex was aware of Charley Turner’s menu pricing methodology, and he actually thought it worked rather well. Thus, Alex readily accepted Mr. Turner’s suggested prices for each menu item. Therefore, food costs for Unit No. 2 were based on the expected total sales of each menu item and the predetermined markup. For 2003, food costs were expected to be 55% of gross sales. Labor costs at the steak house varied by type of employee. Unit No. 2 employed four full—time cooks, each of whom worked 2,000 hours per year, and sixteen cashiers and servers who worked an average of 1,800 hours during 2002. Labor cost for the cooks was expected to be fixed, while labor cost for the servers and cashiers was expected to vary with the number of customers. In 2002, cooks were paid an average of $12.00 per hour, while cashiers and servers were paid an average of $3.00 per hour.1 Alex planned to give his cooks a wage increase of $1 .00/hour beginning January 1, 2003, but wages for the cashiers and servers were expected to remain unchanged. 1Consistent with industry practice, cashiers and servers at Charley’s Family Steak Houses were paid low hourly wages but garnered additional income from shared tips. Employers of tipped employees were required to pay only $2.13 per hour in direct wages if that amount plus the tips received at least equaled federal and state minimum wage requirements. PART V: MCS: PLANNING, BUDGETING, AND STRATEGIC PROFITABILITY ANALYSIS Other operating expenses for the steak house included supplies, maintenance and utilities. Alex thought these costs were primarily driven by customer count, but Mr. Turner disagreed. He felt these expenses were primarily fixed in nature and that they varied with customer volume only above a certain base amount. Alex eventually agreed, but he noted that it would be very time consuming to identify the fixed and variable portions of each of these operating expenses. Although Mr. Turner wanted the 2003 forecasted operating plan to be as accurate as possible, he admitted that Alex had a point. Actual other operating expenses were 8% of gross sales in 2002, and Mr. Turner and Alex compromised and agreed to budget these same Operating expenses for 2003 at the same percentage of gross sales. Mr. Turner managed the advertising for all four steak houses at corporate headquarters. Advertising campaigns promoted Charley’s Family Steak Houses across the city, promoting the chain’s friendly service and great food. In addition, the restaurant managers were allotted a small budget for unit—specific promotion. For 2003, Mr. Turner plaimed to incur advertising expenses of approximately 3.5% of gross sales for the entire chain. Of the 3.5% of gross sales included in the plan, 0.5% was for use by the restaurant manager, 1% was for broadcast media, 1% was for print media, and 1% was for ad preparation. Throughout the course of a year, each restaurant incurred certain miscellaneous expenses that were hard to predict. Some of these expenses were fixed, and others varied with customer count. Based on past experience, Mr. Turner and Alex decided to budget the 2003 miscellaneous expenses at a fixed amount of $3,000. Depreciation on furniture, the POS cashier system, and other equipment historically approximated $2,000 per month. Alex informed Mr. Turner that no new equipment would be needed for Unit No. 2 during 2003. M. Turner’s corporation held a property and liability insurance policy which covered all four Charley’s restaurants. Premiums expense was allocated to each restaurant based 011 square footage. In 2002, Unit No. 2’s portion of the insurance premiums was $9,400. Mr. Turner thought his insurance company might increase the premiums in 2003, but he had no way of estimating the potential increase. In addition, he was considering adding another restaurant in 2003, and he realized that any expansion would raise the total insurance premiums paid and affect the premiums allocated to Unit No. 2. After some discussion, Alex and Mr. Turner decided to assume the 2003 insurance premiums for Unit No. 2 would remain unchanged from 2002 for budgeting purposes. Mr. Turner paid all of the licenses and fees for all four steak houses at corporate headquarters. In 2002, the licenses and fees applicable to Unit No. 2 were $11,250. He expected the total amounts for all four restaurants to increase by 4% in 2003. Mr. Turner had signed a ten—year lease on the restaurant property in 1996 which required minimum rent payments of $6,000 per month. In addition, the lease terms stipulated that additional year-end rent payments be made equal to 5.0% of the excess of actual gross sales above $1,800,000. The only other expense listed in the 2003 operating plan was titled “Management.” This expense consisted of salaries for Alex and his assistant manager, an allocated charge to cover Mr. Turner’s salary, and Unit No. 2’s portion of the purchasing, accounting, and other service activities that occurred at corporate headquarters. This expense was estimated to be $95,000 for 2003. The comprehensive operating plan for 2003 for Unit No. 2 is shown in Exhibit 2. __._—_____——__________ CASE: CHARLEY’S FAMILY STEAK HOUSE (A) 153 REQUIRED 1. Verify and be prepared to explain the amounts presented in the 2003 operating plan for Charley’s Family Steak House No. 2 shown in Exhibit 2. 2. Assume that the forecasted sales volume for Unit No. 2 in 2003 is reduced to 3,700 meals per week from 3,850 meals per week. What is Unit No. 2’s revised projected profit for the year? ——————_.____._______—________ 154 PART V: MCS: PLANNING, BUDGETING, AND STRATEGIC PROFITABILITY ANALYSIS Exhibit 1 CHARLEY’S FAMILY STEAK HOUSE (A) MENU Top of the Line Lobster Dinner :3 16.99 New York Strip 11.99 Jumbo Shrimp 10.99 Prime Rib 9.99 mm Sirloin 8.99 BBQ Ribs 8.99 Seafood Platter 8.99 Sirloin Tips 8.79 Chicken Breast 8.29 Rib Eye 8.19 Value Chopped Sirloin 6.99 Country Fried Steak 6.79 Baked Fish 6.79 Fried Shrimp 5.99 Ham Steak 5.79 Sandwiches and Salad Bar Chopped Steak 3.99 Fish Fillet 3 .79 Beef BBQ 3.79 Barbeque Chicken 3.59 Jumbo Hot Dog 2.99 Salad Bar Buffet 5.99 Side Salad 1.99 CASE: CHARLEY’S FAMILY STEAK HOUSE (A) 155 Exhibit 2 CHARLEY'S FAMILY STEAK HOUSE (A) 2003 Operating Plan Gross Sales $ 1,861,860 Net Sales 1,761,760 Food 1,024,023 Labor 200,096 Other Operating Expenses 148,949 Contribution 388,692 Advertising 65,165 Miscellaneous 3,000 Depreciation 24,000 Insurance 9,400 Licenses and Fees 11,700 Rent (Base) 72,000 Rent (Overage) 3,093 Management 95,000 Profit ' § 105,;gg Supporting Data: Average weekly customer count 3,850 % customers - lunch 40% % customers - dinner 60% Average gross check - lunch $7.50 Average net check - lunch $7.00 Average gross check - dinner $10.50 Average net check - dinner $10.00 ——-———-—-—-——______.____—___ 156 PART V: MCS: PLANNING, BUDGETING, AND STRATEGIC PROFITABILITY ANALYSIS ...
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