Food cost percentage is a key metric for any restaurant that wants to optimize its menu and profitability. It measures how much you spend on ingredients for each dish compared to how much you sell it for. In this article, you will learn how to calculate food cost percentage and why it is important for menu engineering.
Food cost percentage is the ratio of food cost to food sales, expressed as a percentage. For example, if you spend $10 on ingredients for a dish and sell it for $25, your food cost percentage is 40%. This means that 40% of your revenue from that dish goes to cover the cost of food, while the remaining 60% is your gross profit margin.
When it comes to profitability of the business, food cost is the one expense that can be measured and should not change based upon business levels. If food cost percentage is managed correctly, it should give you your baseline for how much you can spend on other expenses.
To calculate food cost percentage, you need to know two things: your food cost and your food sales. Your food cost is the total amount you spend on purchasing or producing food for a given period, such as a week or a month. Your food sales are the total revenue you generate from selling food for the same period. You can then use this formula to calculate food cost percentage:
Food cost percentage = (Food cost / Food sales) x 100
For example, if your food cost for a week is $2,000 and your food sales are $5,000, your food cost percentage is:
Food cost percentage = ($2,000 / $5,000) x 100
Food cost percentage = 0.4 x 100
Food cost percentage = 40%
I don't totally agree with this method, when I did food cost for menu items I always factored in labor and overhead. You could have one dish that's inexpensive to make, but labor intensive and it costs more than your most expensive dish, you could have one dish that's inexpensive to make, low labor but requires a lot of time to prepare, ie. a three part dish, the sauce uses gas to simmer for an hour, an ingredient needs to be steamed and then the final product baked for an hour+. I've seen too many restaurants fall into the trap of just costing the food portion out and not estimate labor and overhead. Some restaurants add a set average for each menu item to account for it but that's still not really tracking the true costs properly.
Food cost percentage is important because it helps you evaluate the profitability and efficiency of your menu. A high food cost percentage means that you are spending a lot on ingredients, which reduces your profit margin and may indicate waste, over-portioning, or theft. A low food cost percentage means that you are spending less on ingredients, which increases your profit margin and may indicate high demand, efficient production, or competitive pricing.
However, food cost percentage alone does not tell the whole story. You also need to consider other factors, such as the popularity, quality, and contribution margin of each menu item. Contribution margin is the difference between the selling price and the food cost of an item, which shows how much each item contributes to your overall profit. For example, a dish with a low food cost percentage but a low selling price may have a lower contribution margin than a dish with a high food cost percentage but a high selling price.
Another factor with food cost percentage is you are dealing with perishable product that has a very short shelf life. The most expensive product that you purchase is the product that gets thrown away. If a steak goes bad it may only cost $8 but the dish would have brought in $20. You not only loose the $8, but also the other $12 of profit. You know have to sell 2 more just to break even, so instead of having a profit of $36 you only have a profit of $4. This is made even more important because you also have to account for time and labor to put out that dish.
Menu engineering is the process of designing and optimizing your menu to maximize profitability and customer satisfaction. The menu matrix is one of the tools you can use to do this, which categorizes items based on their food cost percentage and sales volume. There are four quadrants: Stars, Plowhorses, Puzzles, and Dogs. Stars are items with low food cost percentage and high sales volume; Plowhorses have low food cost percentage but low sales volume; Puzzles have high food cost percentage and high sales volume; Dogs have high food cost percentage but low sales volume. With the menu matrix, you can identify the strengths and weaknesses of your menu, allowing you to make strategic decisions to improve your performance.
In order to accurately determine if a certain food cost percentage is good, you need to look at the overall operation of the business. If you have a high food cost because of quality and the effort and labor to produce it is low, you're better off than to have a low food cost that takes high effort and labor to produce. To help understand what I am explaining in food cost is if your food cost is 50% on a $100 plate, you make an quick $50 within a small amount of time. Whereas if you have a 20% food cost on a $10 plate you only make $8 for the same effort. You would have to make more than 6 plates to equal the same revenue of the one. There is no magic percentage, the important part is that you thoughtfully manage your food cost.
To effectively track and improve your food cost percentage, you need to monitor your food inventory, waste, portion sizes, and menu prices regularly. Utilizing software, spreadsheets, or apps to record and analyze your data can help identify any issues or opportunities. To lower your food cost percentage, it’s best to negotiate with suppliers for better prices or discounts. Incorporating seasonal, local, or alternative ingredients can also be beneficial. Additionally, reducing the menu size and complexity can minimize waste and simplify production. Training staff on proper food handling, storage, and preparation techniques is essential. Moreover, implementing portion control and standard recipes will ensure consistency and accuracy. Lastly, adjusting menu prices according to the food cost percentage, market demand, and competitor analysis is key. By calculating and managing your food cost percentage accordingly, you can optimize your menu and profitability while delivering value to customers.