Market Segmentation & Costing (Part 2)

After doing some research on your market segments, it’s time to do the actual costing

There’s no exact way for success, but trying to be “everything for everybody” sounds like a highway to failure. Therefore, you can’t be greedy by targeting all market segments. In this session, Chef Rahmat Kusnedi (CRK) gives some illustration to do the actual costing with the focus in the middle up market segment

Let’s do the actual costing!
Basically there are 3 variable costs you need to watch closely: the food cost, the labor cost, and utility cost (overhead), these contribute to the final selling price. Here’s the typical structure of the cost in the middle up segment: (click this to view the presentation)

For restaurant and bakery in this segment, ideally the food cost is around 30-35%. When you have the total of 70%, it means that you have 30% margin (tax excluded). It’s the ideal number of margin, it’s better if it’s bigger, but it’s dangerous to go below 30%, I’ll explain the reasons later.

As the business runs, your staffs will get experience and they become more efficient, the labor and utility cost might be lower, as a result, you’ll have bigger margin. To be efficient, you need better production planning, for example: if you have a 4 tray oven, baking 1 tray of dough or full 4 trays will consume the same amount of energy. Therefore, why don’t you wait until you have full 4 trays before you start the baking process?

It’s the same thing with managing the labor. When you have high season, instead of hiring more employees, why don’t you hire daily workers? When you pass the high season, you may cut the daily workers out. After Eid, practically the bakery has nothing to do; perhaps it’s cleaning time. You can spend 2 whole days just to clean the tools and equipment, and after that you can give extra holidays to conserve the electricity. The point is, each one of these 3 variable costs is manageable.

What is the most common mistake made by entrepreneurs?

It’s common to see that the margin prediction of the owners and the actual cash they got doesn’t match. I mean, in the costing, they should have 30% margin but most of the times they got less. This where they should investigate, it could be waste, rejected products, or even theft. These factors will affect the food cost. When you order 100kg of chocolate, how come there’s only 80 kg? I know some kitchen staffs brought home tiny pieces of the chocolate, perhaps 200 gram. Imagine if they do it every day for a month! I know this kind of stuff because I worked in the kitchen for a long time.

What is the minimum labor necessary to run a small bakery?

At the very least you need 3 people: 2 for the production, and one for the delivery if you do B2B, or one at the counter if you are B2C. These are the minimum number. In Physalis’s (CRK’s business), I started out with 5 people: 3 for the production, 1 for delivery, and 1 to supervise everything.

The thing is, you need to focus on your market. If you decided to supply bread to school, you can start by supplying one school, then 2 schools, 3 and so on. Don’t change focus by supplying to other place, such as factory, it will be more efficient that way. As you grow, the cost will also rise, it’s on how you manage those 3 variable costs.

By the way, have we forgotten about the rent price? Where’s its position in this costing?

I’ve told you before, the minimum margin in this business middle up segment should be 30%, If it is less, there’s a high chance that the owner should cover the extra expenses. The food cost, labor cost, and utility cost is known as variable cost, but we also have what we call fixed cost. Fixed cost are the type of cost you should pay each month no matter what, such as the rent, insurance, loan interest, property taxes, and depreciation cost. When you subtract the margin to the total fixed cost, you’ll have the nett profit.