A Low Food Cost Percentage—the Cost of Ingredients Divided by the Selling Price—is Not Always the Answer to Profitability.
Looking Beyond Food Costs
The food cost percentage is an indicator of the raw product cost. That’s it. It is one number that holds a spot upon the pedestal of all that is sacred in the restaurant world – and that pedestal is on a very unstable foundation. Running an operation with a shaky approach to finances – especially based wholly on the sacred food cost percentage – is troubling at best, dangerous on a good day, and fatal when the planets align to destroy your operation. You need to consider more than just food costs.
When 300 customers don’t help.
Imagine selling 300 orders of just french fries. Are you busy? Yes. Are you profitable? Yes. Are you viable? No. There is no way to keep an operation moving forward on a high-volume, low-sell-price item. As you will see below, it simply doesn’t work. Are there exceptions? Of course. Ask Starbucks – they make money one cup of coffee at a time. Or do they? Starbucks figured out that quick-hit low-cost items need to be intertwined with higher-cost gift cards, music, and take-out packs, as well as food.
When super low food costs don’t help, either.
In a conversation with a local coffee shop owner, we were ruminating about the biz. I remarked that he seems to always be busy. He agreed. But he’s still having a hard time covering all his bills. Why? If 125 people come in on a busy Tuesday morning and their check average is $3.25, the gross take is $406.25. Back out the cost of the coffee and condiments. What’s left? Labor and rent. Even with a nominal product cost percentage, there isn’t enough revenue generated to push the pale of lower wages, deal with preventative maintenance, and the myriad trivialities that pop up for business owners. Do the math.
A low food cost percentage — the cost of ingredients divided by the selling price— is not always the answer. It is only one piece in a very complicated game of what it takes to make and keep an operation profitable and growing. This is chess, not checkers.
Better formula?
Combine the cost to produce every dish on your menu. Call that the cost of goods. Add the selling price of each dish on your menu. Call that the sales price. Divide the cost of goods by the sales price.
For example, imagine a 3-item menu:
- Hot Dogs $4 (food costs: $1)
- Hamburgers $6 (food costs: $2)
- French Fries $2 (food costs: $.50)
Now, calculate the cost of goods by adding up the total food costs ($1 + $2 + $.50 = $3.50). Next, grab the total sales price of your menu ($4 + $6 + $2 = $12). Finally, divide the cost of goods by the sales price ($12 / $3.50 = 29%).
Does that number keep you competitive?
Get even more accurate and run a sales report from your POS. How many of each dish did you sell over an average month? Multiply the cost of producing that item. Call that the sum cost of goods. Add the sales price of each dish multiplied by the number of each item sold. Call that the sum sales price. Divide the sum cost by the sum selling price. That is a much better snapshot.
Using the same menu but scaling it out with the frequency of sales in mind:
- Hot Dogs $4 (food costs: $1), sold 63
- Hamburgers $6 (food costs: $2), sold 11
- French Fries $2 (food costs: $.50), sold 70
Now get the sum of the cost of goods ($63 + $22 + $35 = $120), and the sum sales price ( $252 + $66 + $140 = $458) and divide the sum cost of goods by the sum sales price ($120 / $458 = .26 or 26%).
Why you need higher priced items, too.
Menuing a $38 filet that costs you $18 is better than selling a $6 burger that costs you $2. While the holy food cost percentage is lower for the burger, it isn’t the optimal menu mover. Why not? It takes five burgers to generate the margin equivalent to one filet. Rent stays the same. Utilities stay the same. Labor stays the same. You simply don’t put percentages in the bank. It does not mean that you abandon low cost items. It means that you put the buying power into the items that matter more than the ones that don’t.
Running a restaurant isn’t hard, just hard work. Establish a mix that capitalizes on getting away from the bottom line and moving the focus to top-line sales. The food cost percentage does not matter if the overall take isn’t enough to pay staff, cover the rent and keep the lights on.