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:
- 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:
Separate Entity Method
Under this method, the commissary invoices each store as if that store was purchasing from the commissary like any other 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:
- Commissaries that also have other wholesale clients (other restaurants) besides their own stores, and
- the product that is 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.
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.
- 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.
If the commissary has other sales channels such as a storefront, wholesale customers, or catering, then knowing how much to invoice for labor becomes challenging unless there is a clear differentiation in roles; unfortunately, there is usually not. If there’s no clear differentiation of roles, you would need to add an estimated margin to the intercompany pricing to capture labor costs. For an estimated margin, you could use the average labor cost as a percentage of sales for the operation applied to the COGS amount that is being transferred for your labor margin. For example, if you are transferring $100 worth of bagels to another store that will sell to customers for $300, and your labor cost as a percentage of sales is usually 30%, then you would add a labor margin of $30 (30% x $100) to the intercompany pricing. This approach should only be used if the commissary has external sales channels with undiscernible shared labor. You could use the same approach for 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.