Market Segmentation & Costing (Part 1)

Costing is probably one of the most important things in F&B industry, but before we get to the subject, it’s crucial to pick the right market segment.

Judging from the sales record, you know exactly how much profit you’ll get this month. However, the amount of cash you received is not much as you’ve predicted. This scenario happens all the time, not only to new entrepreneurs, but also to established business owners. We talked to Chef Rahmat Kusnedi (CRK), owner of Physalis’s and President of Indonesia Pastry Alliance (IPA) to understand the costing and how to make financial strategy to run F&B business. But first, he suggested that the owners have already targeted their market segment correctly.

How does this costing issue concern the chefs?

Most of the times, chefs’ minds are focused on making great quality products. They request good ingredients and products with easy application while ignoring the final output, the selling price. They also want to work with experienced staffs because they don’t want the hassle of training new staffs, they also demand pricey equipments, but at the end there’s calculation for everything.

So, tell us how to make the costing plan for F&B business.
Before making the costing plan, you should determine the market segment of your brand. Which one do you want to aim? The high end, the middle up, middle low, or retail? Even each area and malls have their own segmentations, whether it’s class A, B or C. You have to do some research to tell the price range of each segment.

I’ll give you an example in the bakery industry. For the middle up, the price point is between Rp 8.000-Rp12.000, for the middle low, you’ll see bakery products that are sold between Rp 4.000 –Rp 7.000, and for retail (low end), it’s below Rp 4.000. If you take the volume of the market into your calculation, all of the segments will roughly give you the same amount of omzet.

Please explain the advantages, disadvantages, and characteristics of each market segment.
For the middle up market, you can expect high margin, around 30-50%, but
don’t expect high volume sales. You also have to hire experienced staffs, with the minimum requirement of SMK graduate and above. Actually, the retail segment promises bigger profit because of the high volume, but it also possesses higher risk because you hire people with low education, higher possibility of rejects and waste.

Let say a factory requests 1.000 breads for breakfast, and they want Rp 2.500/bread. It’s quite challenging for entrepreneurs to provide quality with such low price. Therefore, you have to sacrifice margin to get volume. In this segment (retail or low), the margin range is only around 5-10%.

You also need to understand the characteristic of each market segment. For the low end market, they want something big, satiated, cheap, and don’t care too much about presentation. Once I ran a catering company, and for this market segment I gave more of the carbohydrate (rice) and limited the protein (the meat). The higher end market thinks the otherwise. They care more about the quality of the ingredients, the nutrition, and the presentation. (to be continued)