Commissaries and shared central kitchens have always been advantageous for single-concept restaurant groups. Due to increased off-premises dining and high labor costs, commissaries are becoming more and more advantageous. In this article, we’ll cover when a commissary is beneficial, and two of the most common and simple methods of invoicing and accounting for food and labor costs in this model.
Should I Start a Commissary?
Commissaries are natural cost-consolidating gems. Commissaries consolidate costs by using the same assets and overhead sources to cover multiple restaurant locations. For example, if you open a bakery of five stores, the instinct might be to have five different kitchens (one at each location). With a commissary as either your fifth location or as a sixth operation without a storefront, you can have one large (and nice) kitchen to create your foods and serve all of the bakery storefronts for less capital outlay than it would take to set up and man each of the four or five storefront bakeries. For restaurants, consolidating the equipment alone can significantly reduce operating costs. When you consider the extra space you would need to buy or lease to run each separate kitchen, the extra expenses you pay in utilities for each kitchen, and the extra talent you hire for each location, it’s obvious why you should at least consider starting a commissary.
Consider starting a commissary when:
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- Signature menu items can be prepared with consistency and quality at a lower price when doing high volume due to economies of scale (think producing bread, fresh pasta, sauces, etc. at high volume).
- Your stores are in high-rent areas, so you need to limit the size of the kitchen/prep area.
- Off-premises dining (catering or third-party delivery) is consuming most of your capacity
- You have concerns about food safety at your stores.
- There is potential for a good distribution system.
There’s no rule of thumb for when you should implement a commissary, but a stand-alone commissary could make sense financially with as few as 3 stores depending on the volume of overlapping menu items that the commissary will be producing, and the occupancy costs of each of your locations. At 2-5 stores, one of your stores might be able to serve as the commissary equivalent as well. Incubation kitchens are gaining popularity due to the ghost kitchen concepts and are always a good gateway into testing out a commissary kitchen model before committing to a long-term lease and large build-out investment. These situations frequently apply to single-concept chains and operations that produce large amounts of multi-use foods like bread, pasta, and sauces.
Invoicing Between Commissaries and Storefronts
The accounting and transfers between each location can get complicated, especially if your commissary is also a storefront or a customer-facing location.
There are two approaches to accounting for commissary expenses and invoicing: the Separate Entity Method and Pass-through Method.
To illustrate these methods, we will use the term “invoice” to refer to requisition documents for intercompany transferring of labor, cost of goods sold (COGS), and overhead between a commissary and the locations it serves. However, we highly recommend replacing the manual invoicing, requisition document, or spreadsheet with an automated cost allocation process using a restaurant inventory management system such as Marginedge or Restaurant365.
Separate Entity Method
Under this method, the commissary invoices each store as if that store were purchasing from an external vendor. The pricing for the food in the invoice includes labor, overhead, etc.
You will need to decide on an appropriate selling price that includes the total cost of labor and materials to prepare, pack, store, and ship the product and the overhead, including rent, utilities, and other operating expenses of the commissary so that the commissary breaks even.
This method works best for:
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- Commissaries that also have other wholesale clients (other restaurants) besides their stores, and
- the product prepared by the commissary would otherwise be purchased as a finished product from any other vendor/distributor.
Separate Entity Method Accounting and Reporting:
On the P&L and prime cost report of the commissary, the amounts invoiced by the commissary will show up in the sales, and expenses will remain as is. The profit should be break-even as a result.
On the P&L and prime cost of the store, the total invoice amount will appear in COGS and not be allocated to labor and overhead, unlike the next method we will discuss.
Pass-Through Method
Under this method, the commissary invoices each store by passing on their cost by category to the stores. The food cost, labor, and overhead are separated in the invoice. You can get as specific as you want with the separation of overhead, but we prefer using the fewest number of accounts as possible to keep the calculation straightforward while still ensuring the P&L provides valuable information.
Recommended for:
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- Commissaries that are fully supporting their own stores and don’t have any outside customers.
Pass-Through Method Accounting and Reporting:
On the P&L and prime cost report of the commissary, the amounts invoiced by the commissary will show up in sales like the separate entity method. The profit should be break-even as a result. If the commissary is a store and commissary, then the invoice should reduce each respective expense account. For example, if the commissary transfers bagels with COGS and Labor of $100 and $300, the invoice would reduce COGS by $100 and labor expense by $30, instead of reporting $130 of sales. The overhead line can be reported as other income if the break-out is not practical.
On the P&L and prime cost report of the store, the invoice will be separated between COGS, labor, utilities, rent, etc, unlike the separate entity method where the entire invoice amount appeared in COGS.
Commissaries That Generate Their Own Revenue
In both approaches above, the intercompany pricing should be set so the commissary breaks even. This is straightforward if the commissary doesn’t have its own sales channels.
Suppose the commissary has other sales channels such as a storefront, wholesale customers, or catering. Knowing how much to invoice for labor and overhead becomes challenging because commissary labor and overhead are typically not clearly distinguished from labor and overhead attributable to the other sales channels. You must figure out how much to invoice so the intercompany pricing captures labor costs and overhead as accurately and reasonably as possible.
How you allocate labor and overhead between the commissary’s sales channels and the transfers to the other stores will be based on the peculiarities of your business. Nonetheless, below are some ideas.
Invoice Gross Up for Commissary Labor and Overhead
If you understand your labor and overhead as a percentage of sales, you can gross up each invoice to capture labor and overhead based on these percentages. For example, if you are transferring bagels that cost you $66 to another store that will sell to customers for $300 (22% food cost = $66 / $300), and your labor cost as a percentage of sales is usually 30%, then you would add a labor cost of $90 (30% x $300) to the intercompany invoice. If you know your back-of-house overhead is roughly 10% of sales, you would add $30 (10% x $300) for overhead to the intercompany invoice.
Weekly True-up for Commissary Labor and Overhead
A simple and effective alternative is calculating transferred labor or overhead based on weekly transfers instead of per invoice or transfer. For example, in a given week, commissary X transfers $3000 of inventory to store A, $2000 to store B, and retains $500 to sell to wholesale customers. Commissary X has $6,000 in labor costs for the week and $1,000 in overhead costs. Therefore, it allocates these costs based on the percentage of COGS transferred to each store. 54% ($3,000 divided by $5,500) of labor and overhead are allocated to store A, 36% ($2,000 divided by $5,500) of labor and overhead are allocated to store B, and the rest are assigned to the commissary’s wholesale business.
It would be even better if you could distinguish and track labor hours attributable to each distribution channel. You can calculate the portion of labor costs attributable to your transfers and reclassify that from the labor costs of the commissary’s additional sales channels to the labor costs of each store. For example, 45% of the $6,000 labor costs from above were spent on store A’s COGS, 40% on store B’s COGS, and the rest on the commissary’s wholesale COGS. You could allocate the labor as such. You could use the same percentages to allocate total overhead costs for the week.
These approaches should only be used if the commissary has external sales channels with undiscernible shared labor and overhead.
Confused About Commissaries?
If you’re wondering if a commissary is the right choice for you, or if you want to know more about the financial impact of adding a commissary to your concepts or starting a new entity, schedule a call with us to get clarity.
