The R&D Tax Credit Aspects of Kitchen Science



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        The economic climate has caused restaurants to look more closely at innovation than ever before. Restaurant margins, which have always been razor thin, face increasing pressure. Innovation is a key way by which restaurants are cutting costs without sacrificing quality. Chili's new $100 million 'Kitchens of the Future' campaign is a terrific example of how cost reduction need not equate to quality reduction.



The Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.



The Restaurant Business Challenge

        Restaurants operate on tight profit margins and now face increasing cost pressure from a number of sources, including employee wages and rising healthcare, shipping, and food costs. The Affordable Care Act requires companies with 50 or more employees to provide health insurance for any employee working 30 hours or more.

        Restaurants are hiring more and more part-time employees due to the increasing healthcare costs associated with full-time employees. In 2012, CKE Restaurants Inc., which owns the Carl's Jr. and Hardee's chains, began hiring more part-time workers instead of full-time workers and subsequently increased their workforce.

        In addition, many states are considering raises to the minimum wage, including the wage of tipped workers. Meanwhile, fast food workers in cities like New York have staged protests and walk-outs regarding issues of compensation. The ability to reduce labor needs through machine innovation is therefore a major way restaurants can continue to maintain margins.

        The escalating cost of ingredients is another cost pressure confronting restaurants. McDonalds, for example, forecasts a rise in the cost of its food from 2.5% to 3.5%. Kitchen science enables restaurants to be more creative with their menu offerings and to make dishes more efficiently. This helps restaurants from having to pass on the rising cost of food to their customers, and potentially losing business.

        Burger King, for example, offered a 55 cent hamburger promotion in December 2012. It is impossible for restaurants to offer promotions such as these and maintain their margins without constant innovation to their kitchen processes.


Chili's Kitchens of the Future

        Chili's has invested $100 million to overhaul the kitchens at 100 of its locations. New equipment will help shave five minutes off between the time a customer orders their food and the time they receive it. For example, combination ovens replace skillets and smokers. By finding efficiencies through innovation, restaurants are able to reduce costs without having to cut portions or reduce quality by using cheaper ingredients.

        Using The Middleby Corporation's innovative kitchen equipment, Chili's will be able to cut out 40 hours of labor each week, which amounts to a 75 basis point reduction of those costs. Much of that money has been reinvested in new equipment.

        Another benefit of the Chili's Kitchen of the Future is faster processing. Chili's now serves its food five minutes faster than before. Other restaurants have innovated by establishing stations where specific items are assembled. When a customer orders a chocolate shake, for example, the exact ingredients for the shake appear on a screen in front of the person in charge of making that particular item.

        Versatility is another major feature of the Kitchen of the Future. Chili's can now make more bakery-related products such as pizza and flatbreads thanks to its conveyor-belt ovens. The investment is key to remaining competitive with fast-growing fast casual dining restaurants like Panera Bread and Chipotle.

        Figure 1 below illustrates the R&D spend of the leading kitchen equipment companies.

Leading Kitchen Equipment Manufacturers: Book per Capita R&D Expenses

** Rational AG and GEA Group R&D Expenses are reported in EUR million and were converted to US Dollars using 1.236 EUR/$ in 2012, 1.337 EUR/$ in 2011 and 1.274 $/EUR in 2010.

** All employee figures include worldwide employees.


Innovation in Kitchen Technologies

Keurig

        Restaurants are incorporating today's innovative technologies to simplify various tasks in the kitchen. In addition to multi-tasking conveyer-belt ovens, Keurig coffee systems are being increasingly used in the restaurant industry.

        Green Mountain Coffee Roasters, Inc. introduced the Keurig B300SE and the Keurig K150 Commercial Brewing Systems, both certified for foodservice. These brewing systems alleviate the need to prepare multiple coffee pots (regular, decaffeinated, and flavored brews) and create process efficiency as tea, hot cocoa, or iced beverages can be brewed using the same machine. Green Mountain's Commercial Brewing Systems also create less waste and clean-up.

        A unique feature of these Commercial Brewing Systems is the ability to program brew temperatures and select multiple cup brews. The K150, in particular, has interactive touch screen and is now National Sanitation Foundation (NSF) certified.

        In late 2013, Green Mountain will make commercially available its new Keurig BOLT Carafe brewing system. As Green Mountain undergoes pressure from single-cup brewing competitors, innovation and expansion are increasingly important. The BOLT Carafe system is the first Keurig machine capable of brewing a full pot of coffee with the use of one 'K-cup' pod and is developed to make an eight-cup coffee pot for a larger outputs.

Coca-Cola

        The introduction of Coca-Cola's new 'Freestyle' soda dispensing machine has revitalized the traditional fountain soda systems. The Freestyle machine operates with a user friendly touch screen and can dispense over 100 drink choices, as opposed to traditional dispensers that typically offer between six and eight choices.

        Instead of using large boxes of syrup, Coca-Cola's machine works by "leveraging small cartridges of micro-dosed ingredients to create a multitude of choices" and the machine is able to identify when cartridges need to be replaced. This innovative technology allows customers to create and combine flavors that aren't available anywhere else, such as Diet Raspberry Coke, and is also much more time and cost efficient than traditional machines.

        Moe's Southwest Grill locations in Florida, Georgia, and North Carolina saw a 9% jump in sales after testing the Coca-Cola Freestyle and the machine is being used in additional Moe's restaurants as well as Burger King, Five Guys, Wendy's, and BurgerFi.

Starbucks

        In April 2013 Starbucks began testing their new handcrafted soda beverages in Seattle, Atlanta, and Austin. Offering lemon ale, ginger ale, and spiced root beer using a new carbonation machine, Starbucks is aiming to expand their market and increase customer traffic during off-peak times. The SodaStream-like machine allows for quick carbonation of beverages and may be the innovation Starbucks is looking for to vamp up afternoon and evening traffic and go further into the non-coffee market.


The Science Behind Flavor

        Companies like PepsiCo are working on ways to create healthier versions of their products while maintaining signature flavors. Senior vice president of PepsiCo R&D, Greg Yep, states that the challenge is "to have a great-tasting product without as much salt, fat, and sugar". This is especially true considering the national obesity epidemic.

        PepsiCo researchers have improved the nutrition content in products like Quaker Real Medleys (without adding sugar) and Lay's potato chips (with reduced salt) through exploring different ingredients and seasonings. Part of the same effort, more restaurant chefs are deploying different techniques to substitute for ingredients that add salt, fat, and sugar. Chefs incorporate parsnip and chestnuts in place of cream and butter, kelp and fresh herbs to replace salt, and fruits in place of added sugar.

        PepsiCo researchers utilize "flavor fibers", small chemical sensors, in the test kitchen to record chemical releases during the food preparation process. Using these flavor fibers, researchers can better understand what gives food its flavor and develop healthier substitutes.


Requirements for Energy Efficiency

        On March 31, 2013 the Obama Administration and the Department of Energy set new energy efficiency standards for microwaves that will start in 2016 and will save Americans billions in energy bills and significantly reduce carbon emissions.

        In 2009 the Department of Energy partnered with manufacturers to establish new standards for over 40 different appliance products and in conjunction with the recent microwave energy standards, consumers will save an estimated $400 billion and reduce emissions by 1.7 billion tons by 2030.

        Companies like General Electric are taking steps towards creating innovative appliances that will be consistent with the new energy efficiency standards. GE's Brillion appliances are designed to allow for communication between networked appliances and the energy grid, allowing users manage energy usage on a whole-kitchen scale.

        Manitowoc's Countertop Impinger 1300 and 2500 oven series now feature smoke, grease, and odor emitting capabilities with an updated catalytic converter. With this new feature restaurants will no longer need separate ventilation systems. Companies engaging in research and development activities in efforts to make appliances more efficient can qualify for Federal tax incentives.


University Efforts

        The number of accredited culinary institutes has been growing nationwide, up 43% since 2009, which goes hand in hand with the big changes in food preparation and presentation and the more demanding, educated customers. Joliet Junior College in Illinois has dedicated a new $50 million college facility to their kitchen science program. In the same effort, Kendall College in Chicago will be introducing a new molecular gastronomy course, which focuses on transforming food using science, technology, and natural enzymes.

        As part of a new culinary science program, students from the Culinary Institute of America (CIA) in New York have been experimenting with traditional food preparation. Using special ovens to control moisture levels, students experimented with roast chickens and discovered that the inside of normal ovens vary greatly in moisture levels and temperatures because of the evaporated water from the cooking food.

        On the goals of CIA's new program, Provost Mark Erickson says "deeper knowledge of science allows a chef to be more creative, more exacting and more effective in what they do". Students at the Culinary Institute of America also experimented with the basic procedure of making soup stock and discovered that it tasted better when simmered at 99 degrees as oppose to the traditional knowledge of 85 degrees.


Food Waste Disposal Equipment

        Kitchens and restaurants dispose of large volumes of food waste each day. In an industry where location, location, location is crucial for many popular food offerings, storing waste while awaiting trash pickup is extremely expensive. New systems that utilize enzymes and microorganisms are able to reduce water content and shrink waste volumes to a fraction of their raw state. In addition to reducing the expensive real estate space needed, this waste treatment eliminates odors and greatly reduces sanitation removal charges.

        Food2Water is one of the companies that provide this innovative food waste reduction technology. The revolutionary Food Waste Liquefier turns kitchen waste into water through an organic process using microorganisms to break down protein and fatty oils in food. The aerobic process can take 15 minutes to 24 hours depending on the type and amount of waste.

        The hands-free process breaks down the food waste into city complaint water that is washed down the drain, which means less time and money spent on waste management. Waste elimination systems offer a quick return on investment and have major positive impacts on the environment. The process lowers garbage bills by up to 70%, decreases odors and related critters and in one year of use, one Food Waste Liquefier prevents 443,000 lbs of carbon dioxide emissions and significantly reduces greenhouse gases.

        EnviroPure (EP) has also developed novel food waste elimination systems that can produce either a water or solid byproduct. The EP system uses an all natural 'BioMix' formula of natural nutrients, these nutrients are utilized by the bacteria in food waste products and the decomposition process is accelerated. The EP Wet System breaks down food waste into water and the EP Dry System breaks down waste into nutrient rich composting material, both systems utilize the BioMix formula.

Figure 2 below illustrates the cutting-edge EnviroPure process

cutting-edge-enviropure-process


Section 199 Domestic Production Tax Deductions

        As more restaurant food products are manufactured and processed centrally by machine, particularly for hybrid restaurants and food processors that have production facilities, there may be some IRS Section 199 Domestic Production Activities tax deductions.

        Examples of hybrid restaurant/production facilities that may present opportunities include:

  • Skyline Chili, the Cincinnati based franchise with central commissaries
  • Panera Bread with captive bakeries
  • Bob Evans Farms, Inc. with hog processing

        Pure retail restaurants are not considered manufacturing facilities. Food manufacturing facilities and restaurants that have food processing facilities on premises may be eligible for section 199 deductions. These situations are very fact and circumstance specific, therefore food industry taxpayers should utilize tax professionals knowledgeable about section 199.


Conclusion

        To offset the pressure of increasing operating costs, restaurants are able to incorporate today's innovative kitchen science technologies and become more cost efficient and environmentally friendly. Federal and State tax incentives are available to support companies engaging in kitchen science R&D efforts.

Article Citation List

   


Authors

Charles R Goulding , Attorney/CPA is the President of R&D Tax Savers.

Andrea Albanese is a Project Manager with R&D Tax Savers.

Charles G Goulding is the Manager of R&D Tax Savers.


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