Food Cost Percentage: How To Calculate Food Cost Percentage

Successful restaurant operators share a common goal: boosting revenues while effectively controlling costs, with a particular focus on food costs. Profits in the restaurant industry hinge on informed decisions regarding supplier costs, a task complicated by the ever-changing restaurant supply chain. Consequently, it is crucial for restaurant owners, operators, and managers to consistently monitor food cost percentages to achieve cost control and maximize profitability. This comprehensive guide will delve into the intricacies of food cost percentages. 

Understanding Food Cost Percentage: 

Food cost percentage (FCP) is the yardstick for evaluating how much your business spends to create menu items in relation to the prices you charge. It serves as a critical performance indicator that influences menu pricing and overall profitability. By comparing your restaurant's food cost percentages to industry benchmarks, you can make well-informed decisions regarding menu pricing and inventory management. 

Setting the Food Cost Percentage Benchmark: 

What should be your target food cost percentage? If you lack historical data from your own restaurant, industry benchmarks offer valuable insights. As a general guideline, restaurants typically aim to keep their food expenses within the range of 25% to 40%. In essence, this means that for every dollar in revenue, restaurants allocate 25 to 40 cents toward covering the cost of the ingredients used in their dishes. It's worth noting that higher-end restaurants often maintain higher food cost percentages, generally ranging between 38% and 40%, while establishments with simplified menus, such as pizza parlors, can achieve food costs as low as 20%. 

Calculating Food Cost Percentage: 

Your restaurant's food cost is also referred to as Cost of Goods Sold (CoGS), representing the cumulative cost of all the ingredients used to prepare the menu items sold within a specified timeframe. Food cost percentage is computed as a fraction of total sales. 

In essence, the food cost percentage unveils the relationship between the cost of creating a dish and the profit generated from that dish. You can calculate this percentage for each location by comparing your overall inventory CoGS to your sales, or even at the level of individual dishes. 

Accurate food costing necessitates the use of specialized Restaurant Enterprise Management software, integrated to consistently provide precise data. Consistent and accurate recipe costing is pivotal. This process dissects menu items into precise cost per portion, factoring in specific ingredients. Your food cost percentage is a product of the exact food cost of a dish, calculated using up-to-date vendor pricing and standardized recipes from your kitchen. 

For the most precise data, opt for inventory management software tailored for restaurants. Such software effortlessly syncs with your accounting and Point of Sale (POS) system to align inventory with sales. For those without automated tools for inventory control and recipe costing, the formula below can be used to compute food cost percentages at the store level: 

Formula: 

Total food cost percentage = (total cost of goods sold / total food sales) x 100 

Determining the Ideal Food Cost Percentage: 

Optimal food cost management requires not only calculating your food cost but also understanding where it should ideally fall. Measuring actual versus theoretical (AvT) food costs is a potent strategy. This approach involves assessing the variance between your actual inventory costs and recipe costs and what you had planned for. This variance quickly pinpoints the origins of unexpected expenses and opens avenues for improvement. Calculating the ideal food cost percentage involves multiplying your theoretical food cost by the cost of preparing all menu items within a specific timeframe, assuming perfect portion sizes, zero waste, no errors, and no theft. Your ideal food cost percentage is a representation of your theoretical food cost as a fraction of sales. Comparing this to your actual food cost, based on current sales and inventory levels, uncovers differences possibly attributed to food waste, breakage, or theft. Any such variation is a red flag indicating potential profit margin erosion and should prompt investigation using restaurant operations reporting software. While hitting your target food cost every time may be a challenge, understanding where you can enhance efficiency is the initial step toward narrowing the gap. 

Calculating Menu Item Prices: 

Your restaurant probably has a predetermined profit margin target. However, it's vital to remember that achieving your target profit margin hinges on reaching your target food cost. With a comprehensive understanding of your food costs, you can make informed menu decisions. The restaurant industry typically suggests maintaining food cost percentages within the range of 28% to 32%. The average food cost percentage varies between fast-food restaurants and fine dining establishments and can even fluctuate within the same restaurant depending on the daily menu. While each dish on your menu may not share the same food cost percentage, the overall aim is to meet your target food cost percentage. Regardless of your restaurant's specific food cost percentage, keeping this figure in mind while setting menu prices ensures that every menu item contributes to your profit margin. This knowledge is also invaluable for menu planning, enabling you to identify less profitable items and make informed choices, such as raising prices, altering ingredients to meet a new food cost percentage, or removing items altogether. 

Calculating Cost Per Serving (Cost Per Dish): 

Determining the food cost per dish allows you to analyze the expenses associated with each menu item, enabling you to optimize your menu while maintaining your budget. The formula is straightforward: 

Formula: 

Food Cost Per Dish = Food Cost of Ingredients * Weekly Amount Sold 

Managing Restaurant Inventory to Minimize Waste: 

Streamlining food costs rapidly involves setting standards and procedures for restaurant inventory management. Since your food cost percentage considers all inventory used to prepare menu items, reducing waste is a primary strategy. Optimization of food costs largely depends on waste reduction throughout your operation. 

Understanding the Significance of Food Cost Percentage: 

Food costs in the restaurant industry are a substantial component of overall operating expenses, alongside labor costs. Together, these two factors constitute your prime costs or variable costs, distinct from fixed costs such as rent, mortgages, insurance, and other unchanging expenses. Food cost percentages offer restaurant operators a means of monitoring overall costs and specific ingredient prices. This insight facilitates data-driven decision-making, contributing to improved profitability. 

Illustrative Scenario: 

Consider Mary, who operates a profitable restaurant serving 250 customers daily. Failure to manage food costs accurately and pricing menu items $0.95 lower than they should be can lead to significant annual revenue loss. The potential annual revenue loss can be computed using the following formula: 

Formula: 

(250 customers x 365 days per year) x $0.95 = $86,687.50 

In this scenario, Mary could lose $86,687.50 in annual revenue if her menu items were underpriced by $0.95. 

It's crucial to recognize that even seemingly insignificant costs can accumulate, particularly if there is room for cost reduction. Consequently, savings achieved through lowering food costs can significantly bolster your bottom line, particularly if there's room for improvement. 

Revealing Insights through Granular Calculation: 

Calculating food cost percentages and analyzing costs of goods sold at a granular level can unveil essential trends and insights. Moreover, determining plate costs allows you to consolidate recipe portions and understand the precise impact of each menu item. 

Benefits of Calculating Restaurant Food Cost Percentages:   

Calculating restaurant food cost percentages offers several advantages: 

1. Prudent Spending and Earning: 

Pricing each menu item based on its food cost percentage and Cost of Goods Sold (COGS) ensures that each item aligns with your food cost margins. This knowledge empowers you to identify the most profitable menu items and prioritize their promotion. 

2. Strategic Menu Planning: 

Data on food cost percentages allows you to make informed decisions regarding menu items that are no longer profitable. Connected to your restaurant's Point of Sale (POS) system, this data supports menu engineering, offering insights essential for devising a profitable menu pricing strategy. 

3. Insight into the Supply Chain's Impact:  

The restaurant supply chain can be unpredictable. Managing inventory costs requires monitoring trends in farming and international trade negotiations. For instance, in July 2023, avocado prices surged by 58%. Having a food cost calculator to detect such fluctuations is invaluable for mitigating supply chain instability. 

FAQs about Food Cost Percentage: 

1. What Constitutes a Good Food Cost Percentage? 

In general, most restaurant owners and operators target food costs ranging from 25% to 40% of revenue to maintain a profitable business. However, this is a guideline rather than an unbreakable rule, as the average meal cost percentage varies across fast-food establishments and fine dining venues, and between different cities. 

2. What's the Average Food Cost Percentage for Restaurants? 

Restaurant owners typically determine an optimal food cost percentage based on various factors, including their other expenses such as labor and rent. Many restaurants aim to keep food costs within the 25% to 40% range in relation to revenue, but this figure can vary significantly depending on the specific needs of the business. 

Get in touch with Restaurantify if you'd like to learn more about food cost percentages.