Welcome to the first installment of our sister site's new series, Bar & Restaurant Management 101, written by Doug Radkey, founder and president of KRG Hospitality Inc. (you may remember Doug from his How to Build a Menu series).
Consider this series your course on the fundamentals of running a bar or restaurant. Over the next few months, expect articles on how to budget, market, retain employees, and more. This month, we cover the all-important topic of food cost. So settle into class, flip open that notebook, and let's get to work!
Let’s start with a question: What is arguably the number one detriment to a restaurant generating the profit that it needs to be successful? The answer: Lack of food cost management.
Why is Food Cost Management Important?
Before we tackle how to properly manage your restaurants food costs, let’s outline why it is important.
Food cost refers to the ratio related to the cost of your ingredients (for example, your food inventory) and the revenue generated by selling those ingredients (your menu items). It's typically expressed as a percentage, known as your food cost percentage, and this key performance indicator (KPI) is instrumental in making business decisions and managing your profit potential.
Food cost, however, is more than just a number on a spreadsheet (and more on spreadsheets shortly). For many, it is the difference between success and failure. But for some reason—despite its level of importance—8 out of 10 independent operators don’t know their actual food costs, which contributes to the high rate of failure experienced within the industry.
In (any) business, you need to know your numbers. In today’s era, restaurant operators are faced with high levels of inflation, increased food prices, increased labor costs, and tightening margins.
Therefore, you cannot just guess or ballpark your way to success. To be successful, you need to control your cost of goods (COGs).
Controlling your food costs has never been more crucial than it is today and to be honest, it has also never been easier (we’ll get to that soon). As with many aspects of your restaurant business, it is about being proactive and strategic. And today, it is about pricing precision and labor optimization while leveraging the available technology to control your costs and to drive your profits to levels that many only dream of.
Basic Food Cost Calculation
The simplified formula is this: (Cost of Food / Food Sales) * 100 = Food Cost Percentage
The average benchmark within the industry is 28-32 percent, however, depending on your concept, market, operations, and executable strategies – it is not unheard of to be running overall food costs in the 24-26 percent mark (which will drive the profit margins you need to stabilize and scale your brand).
However, if your overall food cost is out of control, perhaps 32-38 percent or even higher, then you could be on the verge of catastrophic failure.
Costing Out Your Menu
Every item on your menu should have a standardized recipe that includes measurements and a portion control guide to curate accurate results. When you have standards in place, calculating the cost becomes incredibly easy. For example, let’s look at the cost breakdown of a popular smashburger with fries.
- Ground Beef (80/20 blend): 5oz patty / $5.50 per lb / $1.72 per serving
- Brioche Bun: 1 each / $0.55 each / $0.55 per serving
- American Cheese: 1 slice / $0.20 each / $0.22 per serving
- Butter (for toasting bun): .25 oz / $3.50 per lb / $0.05 per serving
- House Sauces: 0.5 oz / $0.10 per oz / $0.05 per serving
- Lettuce (shredded): 0.25 oz / $1.80 per lb / $0.03 per serving
- Tomato (sliced): 0.5 oz / $2.00 per lb / $0.06 per serving
- Red Onion (Sliced thin): 0.25 oz / $1.50 per lb / $0.02 per serving
- Salt & Pepper: Pinch / $0.02 per use / $0.02 per serving
- French Fries (skin-on): 6 oz / $2.25 per lb / $0.84 per serving
- Cooking Oil: Absorption Cost / $25 per 5 gallons / $0.10 per serving
- Take-Out Packaging (clamshell + bag + napkins + fork + knife + ketchup): 1 set / $0.50 total / $0.50 per serving
Total Cost per Smashburger and Fries: $4.14 per serving
As you can see, you want to account for every single element of production, no matter how small it might be, such as napkins or even a dash of salt & pepper.
Pricing Menu Items with Strategy
Now that you know the cost, what do you sell it for?
Pricing your menu items should never be emotional or based strictly on “what the competition is selling" a similar item for. If you execute market studies and craft your menu to your ideal guest profile, you can price your menu accordingly without the fear of losing a guest.
That said, pricing your menu should be 100 percent data-driven. With a proper financial playbook for your brand, you will understand what your ideal guests are willing to pay, the potential foot traffic, and what you need to charge to operate a sustainable business.
Now theoretically, if you wanted to maintain a 28% food cost percentage for example, you’d use this formula:
Raw Food Cost of Item / Ideal Food Cost Percentage = Price
Using the smashburger and fries as an example, this would be $4.14 / .28 = $14.78 where you’d likely round up to a retail price of $15.
However, could you be leaving money on the table? Let’s look at this comparison.
- Scenario 1: Burger and Fries / Food Cost 28% / Menu Price $15 / Profit $10.86 x 75 orders per day = $297,293 in profit.
- Scenario 2: Burger and Fries / Food Cost 32% / Menu Price $13 / Profit $8.86 x 100 orders per day = $323,390 in profit.
As you can see, with just 25 additional orders per day and a cheaper retail combo, the scenario with a higher food cost percentage made $26,097 more profit.
There may be some items on your menu that need to be higher than 28 percent and items that could be lower than 28 percent. Based on your intended or actual sales mix, you want to achieve the most optimized profit opportunity for your restaurant. Every restaurant and market will be slightly different.
So the question to ask is: How will you position your concept and menu within the market?
Do you want to be a leader in perceived value and quality? What is the economic state of your hyper-local area and target guests? Are you aiming to reach a specific high-income or low-income demographic? How many burgers do you intend to sell each day in comparison to other items on your menu? What are the margins you need to achieve to be financially sustainable?
The Impact of Inflation
Now that you have your intended cost and retail price—what about the economic environment?
A buzzword of the modern era is inflation (and yes, even tariffs). Ingredient costs are continuously on the rise. They’re also very unpredictable, meaning you likely have no idea when the next price adjustment will be.