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. In this article, we aim to provide insight on how to calculate a food cost percentage and understand what an ideal food cost percentage is.
So, what exactly is food cost, and why is it so important? In a nutshell, it’s the total cost of every ingredient that goes into each dish you serve. Think beyond the star protein; every spice, garnish, condiment, and even the napkin it rests on contributes to the final figure. Understanding this total cost per dish is the foundation for setting profitable menu prices and will help you calculate the food cost percentage.
Imagine navigating a blindfolded maze – that’s what menu pricing becomes without actual food costs. When overpriced, you will have good food costs, but you risk scaring away customers. Underprice, and you unknowingly chip away at your profits by being too high in food costs. Inaccurate food cost per menu item can have a domino effect, impacting total food sales, growth, and ultimately, your bottom line. Having properly costed menu items and being able to measure your actual food cost percentage will provide information to accurately price your menu and measure the success of the menu items’ food prices.
But fear not! This article is your guide to demystifying food costing and empowering you to price with confidence and hit your food cost percentages. We’ll delve into the “whys” and “hows”, and equip you with practical tools, and share valuable strategies to optimize your food cost percentage.
What are Ideal Food Costs, and Why Are They Important?
For most types of restaurants, food cost is the real star of the show. It’s not just about buying ingredients; it’s about understanding their true cost impact on your business. This includes every ingredient that touches your kitchen, from the premium cut of steak to the humble pinch of oregano.
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 equals less revenue generated. Picture it like a seesaw – on one side sits your food cost, on the other, your profit. The heavier the food cost percentage side is, the less profit you see.
Think of inaccurate pricing based on inaccurate food cost percentages a double whammy:
Underpriced dishes: You sell below cost, unknowingly eroding profits with every order. It’s like inviting guests to a party and paying for their food and drinks yourself!
Overpriced dishes: Customers balk at inflated prices of the menu items, leading to lost sales and impacting your overall growth. Remember, a restaurant thrives on foot traffic, not an empty dining room.
Finding the sweet spot where you optimize menu prices will entice customers while leaving enough room for profit – is key. A thorough business plan for your restaurant, which accounts for accurate food costs leading to effective financial projections, is the best way to start any successful business venture.
What Should Food Cost be in a Restaurant?
While there’s no magic number carved in stone in the restaurant business, but many restaurants consider a good food cost percentage between 26% and 32%. Remember, that a good food cost is just a starting point to a profitable restaurant. Just like snowflakes, 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 food costs, hovering around the upper end of the range.
Original: Conversely, fast-casual establishments focused on the affordability of menu prices and high sales volume might aim for the lower end.
New: Fast-casual establishments and food halls, which are focused on accessibility, affordability of menu prices, and high sales volume, might aim for the lower end.
By understanding your unique cost drivers, you can determine your target food cost percentage, ensuring long-term profitability.
But how do you translate this food cost percentage into real numbers for your menu? When calculating food costs, let’s use this formula:
Dish Price = Cost of Ingredients x Multiplier
If we are searching for a restaurant food cost of 25% then the multiplier should be 4. This multiplier is typically between 3 and 4. Another way to think about this is that we want a food cost ratio of 4:1. Setting a menu price at around 25% helps pay for the additional costs like labor and overhead and ultimately provides a desired profit margin. It’s the secret sauce that transforms the raw ingredient cost into your final selling price.
Remember, this is just the beginning. Let’s get hands-on with a real-world example…
How to Calculate Food Cost Percentage for Your Restaurant
Imagine you’re crafting a classic burger, a mainstay on most menus. Let’s break down the costing process, step-by-step:
Step 1: Calculate the cost of ingredients per serving. The food cost percentage formula.
Beef patty: $2
Bun: $0.50
Cheese: $0.30
Lettuce, tomato, onion: $0.20
Condiments: $0.10
Total cost per serving: $3.10
Dish Price = total food cost ($3.10) x Multiplier of 4
Dish Price = $12.40
Remember, this is just a simple example. To calculate the food cost percentage, you may have to also include other food supplies such as French fries, ketchup for the French fries, and take-out packaging when you calculate the food cost percentage.
Step 2: Menu engineering
Now that we have used the food cost formula and understand the cost per serving, we can look at how this item’s price, sales, and food cost fit with the rest of the menu items. In general, we want our biggest sellers to provide the best profit margins. If we think this item will be among the best sellers on the menu, then we should consider getting a lower food cost percentage so we can drive profits. In this example, perhaps we bring the price up to $13 or even $14 because we are sure the burger will sell, and we want it to provide a better than ideal food cost percentage.
Step 3: Compare to your actual selling price.
If your current burger price is $12, it suggests your food cost percentage might be higher than desired. By adjusting the menu price or finding cost-saving measures, you can bring the total food costs to the optimal range.
Strategies to Optimize Your Restaurant’s Food Cost Percentage
Pricing doesn’t get you all the way to an ideal food cost. Good management practices also help food cost control. Remember, there’s no one-size-fits-all solution, but these proven strategies can guide you toward optimal food cost management:
1. Utilize menu engineering and dish pricing strategies for each menu item
Classify your dishes based on their popularity and profit margin. Focus on maximizing profits from “Stars” and “Cash Cows” while strategically pricing “Plow-Horses” and minimizing losses from “Dogs.” This data-driven approach ensures your menu contributes to, not hinders, your financial goals. Here are some definitions for the terms I just provided.
Stars are menu items that are both highly popular and highly profitable. They are well-loved by customers and bring in a high margin for the restaurant. Because they excel in both popularity and profitability, these items are typically highlighted on the menu to draw attention and encourage orders.
Cash cows are menu items that are highly profitable but not as popular as stars. They generate a good profit margin but are not ordered as frequently. Despite their lower popularity, cash cows are crucial for the financial health of the restaurant because of their high profitability.
Plow-horses are a menu item that is very popular among customers but has low profitability. They are often priced lower, which makes them popular choices, but they don’t contribute as significantly to the restaurant’s overall profit. They can be important for drawing customers in and maintaining customer satisfaction.
Dogs are a menu item that is neither popular nor profitable. They have low sales and contribute minimally to the restaurant’s profits. Often, these items are candidates for removal from the menu or for revision to improve their appeal or profitability.
2. Purchasing strategies
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.
3. Master waste reduction techniques
Train staff on proper portion control, implement efficient prep methods to minimize scraps and donate excess food responsibly. Remember, every ounce wasted directly impacts your bottom line.
4. Regularly review and adjust your food costs
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.
5. Use technology to your advantage
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.
Measuring Food Cost Percentages
Measuring food cost percentages has three main elements. First, you must take a food inventory. We call this the beginning inventory. In the beginning inventory, you count the items you have and then apply value to those items. We can discuss technology to support this in just a minute. Second, you must track your inventory costs of purchases throughout a measurement time period (for example, one month) and finally you must take an ending inventory. This ending inventory is the value of items in stock at the end of the time period. Note that the ending inventory is also your beginning inventory for the next period. The final piece of information needed is your total food sales for the same period. This generally comes from your Point of Sale. Once you have this information, you can then calculate your cost of goods sold and your food cost percentage by utilizing the formulas below.
Cost of goods sold formula
Cost of Goods Sold = (Beginning Inventory Value + Purchases) – Ending Inventory Value
Total food cost percentage formula
Total Food Cost Percentage = (Total Cost of Goods Sold/Total Food Sales) x 100
Example
We started the month with $6,000 worth of beginning inventory value. We then purchased $15,000 worth of inventory during the period. At the end of the period our ending inventory value was $3,000.
Cost of Goods Sold = ($6,000+$15,000)-$3,000
Cost of Goods Sold = $18,000
Now, we need to calculate our food cost percentage using our food cost percentage formula. Let’s assume we did $60,000 in food sales.
Total Food Cost Percentage = ($18,000/$60,000) x 100
Our total food cost percentage = 30%
Technology to support the measurement of food cost percentage.
There are many software products on the market that support the calculation of food costs and provide you with an ideal food cost percentage based on your purchases and recipes. It then provides an actual food cost percentage. In most cases, the software will help in calculating food costs by pulling total food sales data directly from the POS or restaurant management system. It will then follow the same food cost formula that we have used to provide accurate information regarding your food cost per menu item. Many POS systems have it available as an additional feature and larger broad line food service companies such as Sysco and US Foods also provide a free food cost calculator. The tools are great for helping you manage food costs and to understand what your ideal food cost percentage should be.
Common Mistakes in Calculating and Pricing Food
Avoiding these pitfalls can save you from high food costs and keep you heading to your ideal food cost percentage.
- Inaccurate Portion Sizes: Oversized portions lead to higher costs and potential food waste. Standardize portion sizes across your menu and train staff on consistent serving practices. Remember, consistency is key when you want to calculate food cost percentages. 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. If possible, utilizing portioning tools to add the ingredients to a dish will help ensure your cost per serving is correct.
- Failing to Account for All Ingredients: Don’t forget the seemingly small stuff contributes to food cost of a menu item such as food and beverage supplies. Include garnishes, condiments, and even disposables in your cost calculations to avoid underestimating true ideal food cost. Every ingredient, no matter how small, contributes to the final food cost percentage.
- Not Adjusting for Seasonal Price Fluctuations: Seasonal variations in ingredient prices can significantly impact your restaurant’s food cost. Regularly review and adjust your menu pricing based on current market conditions. Don’t get caught off guard by sudden price hikes that increase your average food cost percentage. It is important to calculate the food cost percentage when ingredient prices change.
- 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. Remember, organization is key to cost control. One way to support inventory management is to create high-quality order guides. When utilizing an order guide, you estimate your total food sales for a week and then set pars based on those sales. You then count the items you have in stock and compare that to your pars.
- Overlooking the Cost of Waste: Food waste is a hidden cost killer. Implement strategies like portion control, proper storage, and creative utilization of leftovers to minimize waste and its impact on your food cost percentage. This will provide better results when you calculate food costs. Remember, every ounce saved is money earned.
An Example of Successful Food Cost Management
Remember the burger example? By implementing a multi-pronged approach, we helped the restaurant significantly improve their food cost situation:
Menu engineering: We categorized dishes based on profitability (Stars, Plow-Horses, Dogs, Cash Cows) and optimized pricing accordingly. Like discussed before driving up the food cost percentage of the bestselling items will produce those “stars” we are looking for and have a dramatic effect on our food cost percentage.
Portion control: Standardized portion sizes across the menu to prevent overserving and waste.
Supplier negotiations: Secured better deals with key suppliers, reducing ingredient costs.
These interventions led to a decrease in the burger’s food cost per serving to $2.80. This allowed them to maintain a profitable $13 selling price, decrease the client’s food cost percentage, and increase their profit margin.
Controlling Your Cost of Goods Sold is Essential for Success
Remember, restaurant food costs is just one piece of the 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 cost of goods sold (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 costing isn’t just about 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.
