With so much on their plates, foodservice operators may be tempted to make quick decisions when it comes time to buy new pieces of equipment. But not considering a unit’s total cost of ownership may end up costing an operator thousands of dollars in the long run.
Anyone who says choosing a new piece of foodservice equipment is easy is probably making bad choices. Most operators expect their kitchen equipment to last 7, 10, even 15 years. Over just a few of those years, units purchased without much consideration, usually on sticker price alone, can cost their owners thousands of extra dollars in energy, water, maintenance and more.
Instead of making snap decisions, operators should slow down, examine their needs and research which pieces of foodservice equipment will actually send the most money to their bottom lines not just this month but for years to come.
In the foodservice industry, this sort of calculation goes by a couple of different names, including lifecycle costing and total cost of ownership, or TCO. While there isn’t a universally accepted way to calculate TCO, most companies and organizations agree on a handful of common factors.
A leading voice in this conversation is Pacific Gas & Electric’s Food Service Technology Center (FSTC). Richard Young serves as the group’s senior engineer and director of education. “Often in the foodservice world, operators only include first cost and installation,” he explains, “but in order to really make a good business decision, the TCO should also include the cost of energy and water (where applicable) as well as maintenance and any other inputs — for instance, the oil used in fryers. The TCO should also [factor in] any cash benefits such as utility energy-efficiency rebates.”
While these factors can result in lots of number crunching, foodservice operators and their supply chain partners can calculate many of them using online tools provided by different organizations. The FSTC, for instance, offers calculators customized to more than 20 commonly used types of foodservice equipment. In addition, the North American Association of Food Equipment Manufacturers (NAFEM) offers a downloadable spreadsheet that will also perform TCO calculations.
While these online tools are useful, getting some of the numbers to plug into them can be a challenge. For example, repair and maintenance represent one of the more difficult costs to predict.
Breakdowns really can’t be budgeted for because they’re unexpected and there’s little publicly available information on the reliability of specific pieces of equipment. Operators can project and manage certain maintenance costs, though. Operators can budget for the costs associated with extended warranties and planned maintenance agreements and plug these figures into TCO calculations.
With a little extra legwork, operators can get an idea of how reliable a piece of equipment is, which they can use in their TCO calculations. Operators can ask their service agency if a specific piece of equipment breaks down often and if it has any problems that come up regularly.
They can also turn to colleagues for insight, says Mike Dykeman, technical manager for Webb Design, a Tustin, Calif.-based foodservice design firm. Large institutions like schools and hospitals often have their own maintenance staffs, which allows them to track repair costs. In addition, chains can rely on the large number of identical units they have in the field to get a clear picture of how much it costs to own and maintain specific pieces of equipment.
“Every time I go to a conference or listen to one of these webinars like FE&S does, those guys start talking, and you can sort of hear it in their voice,” Dykeman says. “Even though they don’t disclose everything they know, you can hear that they’ve been through this before, and they have some of this data. Try and solicit this data to get an honest, concrete evaluation . . . A good professional network is great as far as those types of things.”
While purchase price and maintenance costs play important roles in determining total cost of ownership, operators need to weigh other factors too. Utilities represent one such example.
Utility costs can be relatively easy to calculate — all you need is the amount of energy and water the unit consumes, the price per unit of energy or water, and how many hours the unit operates in a given time period. But most units will be in service for years.
“It’s a pretty good guess that energy costs are going to be higher in the future and water costs are definitely rising faster than inflation and have been for a while,” Young says. “The big message is that if you buy an efficient piece of equipment your [return on investment] looks more attractive as the cost of energy increases. Conversely, if you purchase a guzzler, the cost to operate will become more painful over time as those energy prices rise.”
Operators, then, may want to give extra consideration to a piece of energy-efficient equipment. Even if it doesn’t come out ahead in TCO calculations now, the numbers may change significantly in just a few years.
Labor costs represent another key consideration. Many sophisticated operators do consider labor in their purchasing decisions but don’t include this expense in their formal TCO calculations. One of these is Cici’s Pizza. According to Alan Daoust, the chain’s director of operating systems, Cici’s excludes labor costs from TCO, “because you’ll have wage rate changes, and you’ll have different average hourly wages because positions are paid differently . . . Labor is part of the purchase decision but not the TCO calculation.”
In some situations, of course, labor costs can be calculated very clearly. A large warewashing system, such as those found at schools and hospitals, may require a set number of staffers to operate, while cook/chill systems can reduce labor costs through batch cooking. Both of those cases may generate a hard number for labor savings that can be put into a TCO spreadsheet.
Operators should also think about how they may use the equipment in the future. As consumer tastes change and menus evolve, a higher-TCO piece of equipment that can do more may be more valuable to an operator that a lower-TCO unit with less functionality, Dykeman says. “Factor in how a more flexible piece will allow you to expand your menu in five years without investing in a new unit.”
While calculating total cost of ownership may be a lot of work for operators, it pays off in the long run. By doing their research, using the tools available to them, and thinking about how their operations may change in the years ahead operators could end up saving themselves time, aggravation and a lot of money.
“If you really want to get a good picture of the true return on your investment in a piece of equipment,” Young says, “then the more info you can add to the model, the better.”
How Cici’s Slices Up the TCO PIE
Total cost of ownership has been on Steven Jones’ mind a lot lately. The chief operating officer of Cici’s Pizza is developing a new prototype for the buffet chain with the goal of sending the most money to the bottom line for both company-owned and franchised units over the long term. This process includes reworking the chain’s equipment package.
“We’re speccing new equipment and [TCO] is one of the things we definitely want to look at. It may be an additional amount of money initially, but you’re going to save money because you’re buying a better piece of equipment: more energy efficient, designed better so you’re not going to have the repair and maintenance issues with this if it’s properly maintained,” he says.
While the logic is clear, this requires a bit of a cultural shift for Cici’s. The chain is built on value, and that emphasis can be seen in Cici’s old kitchen package, where the sticker price drove purchasing decisions, Jones says.
As a result, Cici’s leaders expected getting buy-in from their franchisees would be a challenge. These conversations haven’t been as difficult as the operations team expected, though. Franchisees dealt with their fair share of reliability and maintenance issues in the old equipment package, according to Alan Daoust, director of operating systems. That’s made them receptive to spending a little more now to make life easier — and more profitable — down the road.
“Because they’ve been down the path of a lower-cost piece of equipment, they know what struggles they’ve had . . . So we’re not actually running into as many challenges as we thought we would,” Daoust adds.
Still, lifecycle cost calculations aren’t the final word on Cici’s purchasing decisions, Jones says. The chain tries to keep the sticker price for new equipment within $500 to $750 of the older, lower-cost items. Part of this does come down to sticker shock but part of it is how quickly they want to recoup the extra upfront costs. Cici’s wants to get that money back within three years of purchase, Jones says. Beyond that, it’s too big an expense to justify and too many variables can change the cost equation.
TCO relates to how Cici’s presents its return on investment (ROI) to potential franchisees, Jones adds. The chain doesn’t perform ROI calculations for individual pieces of equipment, but for the whole store, including facilities, fixtures and equipment. Calculations consider the equipment package’s throughput, the revenue from that food and the profit from revenues.
TCO issues also come into play when Cici’s decides whether to repair or replace a unit in its corporate stores, Jones notes. Considerations include the cost of maintenance, the cost of a new unit and the likelihood that the old unit will break again. “I can’t say we have a particular break point, but the decision gets into the repair, the cost of the repair and the frequency that goes into the decision that maybe we ought to go ahead and replace this,” said Jones.