The most profitable restaurants know the importance of controlling food costs. Food sales are important, but so too is food expense management, especially during times when the cost of food is increasing.
By effectively managing revenue and expenses, you can maximize your restaurant’s profits, reduce food waste, and ensure the long-term sustainability of your business.
Today, we outline a few of the various strategies and techniques that can help you get the most out of food cost decisions. The first section defines food costs.
Let’s dive right in!
What is the Definition of Food Cost?
Restaurant food cost refers to the direct costs of making the food your customers eat. That includes purchases and handling of all ingredients and supplies that your restaurant needs to prepare all menu items. It is a crucial aspect of restaurant operations as it directly impacts the profitability and success of the establishment.
These numbers can vary greatly from month to month but include raw ingredient costs (such as meat, seafood, vegetables, and grains) as well as the cost of condiments, spices, and other pantry items. It also takes into account any food wastage, spoilage, or pilferage that may occur during storage or preparation. Additionally, the cost of packaging materials, such as containers and wraps, is included in the food cost calculation.
Other factors that contribute to food cost profitability, even if indirectly, are staff wages, utilities, and overhead expenses related to the storage and preparation of food. Thus it’s important to find the ideal cost of each of these items and make changes accordingly.
How do we calculate food costs, though?
Methods for Calculating Food Costs in Your Restaurant
There are two methods for calculating the overall cost of food in a restaurant: cost-per-dish and actual food cost. Note that labor costs are not included in these numbers because they are incorporated elsewhere.
With the cost-per-dish method, you first find out how much each recipe costs by summing the cost of all ingredients required in the recipe, including trimmed and wasted portions that are part of the process. Then you sum all the cost-per-dish totals together. This would look something like:
| Example ingredient costs for a BLT: | Example costs per day (5 items for simplicity) |
|---|---|
| Bun: $0.25 | BLT: $2.50 x 500 = $1,250 |
| Bacon: $0.50 | Pastrami Burger: $3.50 x 150 = $525 |
| Cheese: $0.75 | Regular Burger: $1.00 x 1,000 = $1,000 |
| Lettuce: $0.25 | Chicken Sandwich: $2.25 x 500 = $1,125 |
| Tomatoes: $0.25 | Cheeseburger: $1.50 x 2,000 = $3,000 |
| Total cost per BLT: $2 | Total costs per day across all dishes: $6,900 |
For the actual food cost method, you add your initial inventory to your inventory purchases, then subtract your ending inventory. Note that your actual costs figure is also called the Cost of Goods Sold (COGS), and indicates the money you spent on ingredients. For example:
| $50,000 worth of initial inventory |
| + $25,000 worth of inventory purchased |
| – $45,000 worth of ending inventory |
| = $30,000 in actual costs (or COGS) |
This calculation is more accurate than cost-per-dish because you’re using tangible inventory and purchase price numbers. See a more in-depth explanation of COGS here.
The Importance of Restaurant Food Cost Percentage
Once you have your overall figure, you’ll want to calculate your food cost percentage so you can protect your profits and keep customers satisfied through high-quality dining experiences.
The restaurant food cost percentage formula is pretty simple. To calculate, you take your overall figure from a given period and divide it by your revenue numbers during that same period, then take the result and multiply by 100. Let’s say your overall food costs were $25,000 and your revenues were $75,000. (Note that the top number (overall food costs or COGS) can come from either the cost-per-dish method or by the actual food cost method). This would look like:
($25,000 overall food costs or COGS/$75,000 total revenues) x 100 = 33%.
This would be a perfectly acceptable food cost percentage in your restaurant because you need to keep that percentage within the industry averages, which is usually a desirable range of 28 to 35%.
But what if your food cost percentage is outside the ideal range? You’ll need to make some adjustments to your strategy to get the ideal food cost percentage for your restaurant.
How to Get to the Ideal Food Cost Percentage for Your Restaurants
Getting to your ideal food cost percentage is pretty simple: all you need to do is change your food cost percentage formula inputs. If you reduce overall expenses, increase total revenues, or do a combination of the two, your food cost percentage will likely shift to exactly where you want it to be.
Let’s start with reducing expenses.
Reduce Overall Expenses
There are a few ways you can directly impact your food costs. Here are a few tips:
- Examine your relationships. Are you getting the best deal possible? If you can build a stronger relationship with current providers or strike up a partnership with other businesses to buy in bulk and split the cost of ingredients among you, you may be able to significantly cut expenses.
- Evaluate commission fees from delivery options. Perhaps you can negotiate for a lesser fee, do delivery yourself, or cut delivery altogether. The last two are less ideal since more people are ordering takeout or delivery than ever before, but if it helps put money back in your budget, why not give it a try?
- Examine your menu. Do you have imperfect portion sizes or is your cost per portion where it needs to be? Could you simplify or standardize your menu so you need a smaller variety of ingredients? In particular, standardized recipes use fixed ingredient lists and quantities and make a direct impact. Finally, do you need to adjust your menu prices or is the current price where it needs to be from both customer and business standpoints?
Now, there’s only so much you can do to eliminate costs, so the typical next place to look is at revenues.
Increase Total Revenue from Food Sales
This one can be tricky, but there are plenty of things you can try. Here’s a brief list to get you started:
- Engineer your menu. Menu engineering involves making profitable items more prominent to the eye through featured item boxes, to-die-for food photos, and similar tactics.
- Raise menu prices. This is a tricky one that requires a masterful balance of supply vs. demand. Either your sales will continue as usual and you’ll make an extra margin, or sales will decline and you’ll have to try something else.
- Train staff. It can be rewarding to train staff on upselling and cross-selling techniques. You must incentivize these extra sales, however, so that employees feel rewarded for their extra efforts and are thus motivated to keep going.
- Offer promotions. Whether you offer promotions on specific menu items or capitalize on experience-specific offerings (10% off online orders only, free dessert with dine-in, etc.), promotions are a great way to boost sales. After all, who doesn’t love a good deal?
- Offer delivery or takeout options. Let’s face it, post-COVID, many of us prefer to eat in the comfort of our home, so as long as the additional expenses are accounted for, this is a great way to boost revenues. Bonus points if you run a promotion for delivery and/or takeout.
Work on your SEO strategy. Search engine optimization and social media presence are as vital today as the food itself because everyone is online these days and the best way to increase your revenue is by driving foot traffic. By having an active presence on your social media and optimizing your website for search engines, you’ll find that traffic increases.
Hybrid Techniques
These hybrid strategies are often just as effective, if not more so, than increasing revenue or reducing expenses. Nevertheless, these are trickier to use because they often involve increased investment.
- Ensure quality. Consistently delivering an amazingly positive, quality dining experience drives customers to come back again and again. People often forget that food can be affected by different conditions and thus can taste different from experience to experience as a result. Ensure that every ingredient is produced by a supplier that strives for top-notch quality. Step up your customer service game and go above and beyond to make your customers welcome.
- Invest in your business. Initially, your overall business costs will increase if you spend more on marketing, search engine optimization, social media presence, technology, and the like. However, it will be well worth the effort and extra expense. After all, increased foot traffic typically means increased profit margins and an improved food cost percentage.
Effects of Balancing Out Food Cost Percentage
Finding balance in your restaurant’s food cost percentages can yield several significant benefits and help you avoid major pitfalls. Here are a few of the top advantages:
- Inventory Control: By tracking, analyzing, and managing food costs effectively, inventory costs will be lower and inventory management will be more efficient. You will improve portion control and avoid over-purchasing ingredients. You will also enhance your restaurant’s profitability and contribute to the reduction of food waste, a critical concern of today.
- Better Menu Pricing: Knowing exact and even estimated food costs allows restaurant owners to accurately determine the price points of dishes on the menu and ensure a profit margin. Also, balanced, correct pricing ultimately leads to customer satisfaction, increased sales, and greater capacity to compete with other restaurants.
- Increased Revenue: Food cost calculations provide critical insights into ingredient consumption and popularity. By identifying high-demand dishes, restaurant owners can adjust inventory levels accordingly, preventing potential shortages and loss of sales. It also helps a restaurant streamline its supply chain operations.
- Profitability Analysis: A comprehensive understanding of food costs allows restaurant owners to analyze the overall profitability of the establishment. By comparing costs against sales, owners can identify areas where profitability can be improved, and take necessary steps to increase revenue. They can negotiate better deals with suppliers, identify cost-effective alternatives, and make strategic purchasing choices.
These are but a few of the advantages that are instrumental in running a successful and lucrative restaurant business. What’s more, you’ll be able to deliver top-notch culinary experiences to your customers, key to the highly competitive restaurant industry.
Conclusion
We hope you now have a better idea of what the food costs in your restaurant are. If you’re not tracking, analyzing, and controlling food costs in your restaurant, your restaurant is not living up to its full potential. It takes practice, time, effort, and money to do, but it is essential for your restaurant’s success.
In particular, you need to understand and utilize food cost percentages. It is up to you now to take advantage of the revenue-increasing, cost-saving, and other tactics we mentioned. You should see an increase in profitability in your restaurant.
To assist you with this, we have restaurant management software tools for your restaurants. Learn more about our custom back of house suite today!
