The aroma of sizzling steaks, the vibrant buzz of conversation, the satisfaction of a happy customer – running a restaurant is a dream for many. However, beneath the glamorous exterior lies a crucial but often underestimated element: food cost. It’s one of the ingredients that shapes your profit margins, dictates menu prices, and ultimately determines your restaurant’s success.
But what exactly is food cost, and why is it important? It’s the total cost of every ingredient that goes into each dish and is the foundation for setting profitable menu prices and how you calculate food cost percentages.
This article is your guide to demystifying food cost and food cost percentage in your restaurant and empowering you to price with confidence. We’ll delve into the “whys” and “hows” and equip you with practical tools and strategies to optimize your food cost percentage.
What Are Ideal Food Costs, and Why Are They Important?
For most restaurants, food cost isn’t just about buying ingredients; it’s understanding their impact on your business. Every ingredient — from the premium cut of steak to the humble pinch of oregano — can be measured in your restaurant’s food cost percentage.
Why is food cost percentage important? Because it directly affects your prime cost and profit margin. Simply put, the higher your food cost percentage, the more the restaurant spends, which means less revenue. Picture it like a seesaw: one side has your food cost, the other has your profit. The heavier the food cost, the less profit there is.
Once you know your costs, you can calculate the cost per serving, which helps you more accurately price your menu, enticing customers while leaving room for profitability.
What Should Food Cost Be in a Restaurant?
While there’s no “perfect” number, many restaurant owners consider a good food cost percentage between 26% and 32%. But each restaurant’s food cost is unique, with factors like cuisine type, location, and labor costs influencing their ideal food cost range.
Upscale restaurants with premium ingredients might have higher costs, while fast-casual restaurants or food halls might have lower costs. By understanding your unique cost drivers, you can determine your target food cost percentage, ensuring long-term profitability.
But how do you translate food cost percentages into real numbers for your menu?
Food Cost Formula
The quickest and easiest way to calculate your food cost is to use this food cost formula:
Cost per serving = Cost of Ingredients x Multiplier
The multiplier is typically between three and four. For example, if you want a food cost of 25%, the multiplier would be four. Setting menu prices at around 25% above food cost helps pay for additional costs like labor and overhead while providing you with a profit margin.
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How to Calculate Food Cost
Let’s break down the costing process, step by step:
1. Calculate Ingredient Cost
Let’s use the humble hamburger for this example. Each ingredient has a known cost and, therefore, we can calculate the total cost of the dish:
| Ingredient | Cost |
| Beef patty | $2.00 |
| Bun | $0.50 |
| Cheese | $0.30 |
| Lettuce, tomato, onion | $0.20 |
| Condiments | $0.10 |
| Total cost per serving | $3.10 |
2. Calculate the Food Cost
Using the food cost formula, we can calculate the food cost percentage. In this example, we’re shooting for 25%:
$3.10 x 4 = $12.40
So, the total food cost for this hamburger is $12.40. But, if fries are included, you need to factor that into the food cost percentage. The same is true if this is a takeout order. You should include the cost of the ketchup packets and takeout packaging.
3. Menu Engineering
Once you calculate your food cost, you can see how this item’s price and sales fit in with the rest of the menu. In general, you want the biggest sellers to provide the best profit margin. Ideally, your biggest sellers should have a lower food cost percentage to drive profits.
For example, if your burger is a popular item, you may want to set the menu price at $13.00 or even $14.00 because you know it will sell, and it can provide a better than ideal food cost percentage.
4. Compare Prices
If your burger is currently $12.00, this calculation suggests your food cost percentage is too high. Adjusting menu prices or finding cost-saving measures brings the total food cost down to the optimal range.
Calculate Food Cost Percentages
Food cost percentages are another important way to measure the success of your restaurant and your pricing strategy. The food cost percentage is the amount of money you spend on ingredients compared to the revenue they generate. This ratio is a percent of total revenue from food sales.
To calculate food cost percentage, you need four things:
- Food inventory. The beginning inventory is a count of every supply you have that week (in dollars)
- Inventory costs. How much did you spend on inventory during a specific period? For example, how much did you spend on supplies in one month?
- Ending inventory. The value of your inventory at the end of the time period. (This is also your beginning inventory for the next time period.)
- Total food sales. While not part of the food cost percentage formula, you’ll also need your total food sales for the same period, which you can get from your point of sale system.
Food Cost Percentage Formula
To calculate the food cost percentage, you first need to calculate the cost of goods sold. That’s done using the cost of goods sold formula:
Cost of Goods Sold (COGS) = (Beginning Inventory Value + Purchases) – Ending Inventory Value
Take the total costs of goods sold, and plug them into the total food cost percentage formula:
Total Food Cost Percentage = (COGS ÷ Total Food Sales) X 100
Here’s an example.
Let’s say you start the month with $6,000 of beginning inventory. You buy $15,000 worth of inventory during the month and have an ending inventory value of $3,000:
($6,000 + $15,000) – $3,000 = $18,000
Now, you can calculate the food cost percentage. Assuming you had $60,000 in food sales for the month:
($18,000 / $60,000) X 100 = 30%
Your food cost percentage is 30%.
While you can calculate food costs and food cost percentage by hand, there are many software products that do the math for you and give you an ideal food cost percentage based on your purchases and recipes. They can also calculate your actual food cost and food cost percentages by pulling total food sales information directly from the POS, then run the calculations for you.
Strategies to Optimize Your Restaurant’s Food Cost Percentage
Pricing alone won’t get you to an ideal food cost. Good management practices help.
Use Menu Engineering and Dish Pricing for Everything
Classify your dishes based on their popularity and profit margin. Focus on maximizing profits from popular sellers and strategically price or minimize losses from less popular ones. This data-driven approach helps you price menu items appropriately, improves your bottom line, and enhances revenue.
Strategize Purchases
Embrace bulk buying for frequently used ingredients, explore local sourcing for competitive pricing, and build strong relationships with reliable suppliers. Remember, negotiation is key – don’t be afraid to advocate for better deals.
Master Waste Reduction Techniques
Train staff on proper portion control, implement efficient prep methods to minimize scraps, and donate excess food responsibly. Remember, every wasted ounce directly impacts your bottom line.
Regularly Calculate and Adjust Your Food Cost
Don’t set it and forget it. Regularly analyze your food cost data, identifying areas for improvement. Adjust menu prices, portion sizes, or purchasing strategies as needed to maintain your target food cost percentage. Remember, the market is dynamic, so your approach should be too.
Take Advantage of Technology
Invest in restaurant management systems that track inventory, automate ordering, and provide real-time food cost calculations. This data-driven approach empowers you to make informed decisions and optimize your bottom line.
Common Mistakes in Calculating and Pricing Food
Food cost control is part art and part science. Avoiding these pitfalls can save you from high food costs and not reaching your ideal food cost percentage.
Inaccurate Portion Sizes
Oversized portions lead to higher cost per serving and potential food waste. Standardize portion sizes across your menu and train staff on consistent serving practices.
One way to improve portion control and achieve your ideal food cost percentage is to utilize portioning tools. When you calculate your food cost, you are using a recipe that has specific quantities of product. Using portioning tools to add the ingredients to a dish will help ensure your cost per serving is correct.
Not Including Every Ingredient
The smallest ingredients contribute to the food cost of every menu item. Don’t forget about garnishes, condiments, and even disposables (like straws) when you calculate your food costs. Every ingredient, no matter how small, contributes to the final food cost percentage.
Poor Inventory Management
Overstocking leads to spoilage and waste, while understocking can disrupt operations. Implement effective inventory management practices to ensure you have what you need when you need it without unnecessary waste.
Food Waste Cost
Food waste is a hidden cost killer. Strategies like portion control, proper storage, and creative utilization of leftovers will minimize waste and its impact on your food cost percentage. This will provide better results when you calculate your food costs. Remember, every ounce saved is money earned.
Controlling Your Cost of Goods Sold is Essential for Success
Restaurant food costs and food cost percentage are only part of the revenue and profit margin puzzle. You also need to consider other expenses like labor, rent, utilities, and marketing. You gain control over your overall profitability by effectively managing your COGS, which includes food costs.
Think of your COGS as the foundation of your financial house. If it’s shaky, the entire structure becomes vulnerable. By diligently managing your food costs, you solidify this foundation, ensuring the long-term stability and success of your restaurant.
Accurate food costs and food cost percentage aren’t only numbers; it’s about understanding the true cost of each dish and its impact on your business. By implementing the strategies outlined above, you can optimize your food cost percentage, set profitable menu prices, and, ultimately, steer your restaurant toward long-term success.
If you need help getting control over cost per serving, food cost percentage, portion control, or even minimizing waste, Kezner Consulting is here to help. Our seasoned experts have years of experience in the restaurant industry and will help you find the right strategy to get costs under control. Contact us today for your free consultation.
