# The ultimate guide to food cost restaurant

Published on 02/28/2022Sébastien Vassaux

Managing a restaurant requires asking the right questions in order to control its profitability as well as possible. The prosperity of an establishment depends on its profitability. In order to optimize the latter, it is necessary to work on all the components of your restaurant. Discover more about food costs and how to reduce them.

## 1. food cost restaurant : the basis for restaurant owners

### Food cost restaurant : definition

In simple terms, it is the cost of the food products needed to prepare a given dish served in a restaurant, bakery, food-truck... In the case of beverages and all kinds of drinks, the equivalent of food cost is beverage cost or bev cost for short.

The food cost shows you how much you have to spend before the dish is put on the table. By knowing the cost of the ingredients, you can more easily estimate what the final price of a dish on a menu should be. You will also know what the total expense of buying products will be.

The food cost percentage consists in making the difference between the profits generated by the sales and the expenses engaged for the purchase of the raw materials in order to evaluate the profitability of the company.

### Food Cost and Prime Cost, is it the same?

First, it's important to know the difference between Food Cost and Prime cost. Prime cost is also a significant indicator for your restaurant. It is equal to the total sum of your labor and your cost of good sold. Sometimes, Prime cost is also called direct costs.

### What is the ideal food cost percentage ?

Traditionally, it is estimated that the correct food cost percentage is between 25 and 30 % of the price of a dish. Of course this rule is not set in stone and obviously depends on the specificities of your establishment

The profitability of your dishes does not depend exclusively on the food cost percentage, other hidden costs can be added, such as human costs.

### How to calculate restaurant food costs

To calculate your food cost percentage, it's easy. Take the cost of goods sold and divide it by the revenue generated by the sales of that finished dish.

It’s nice to know if individual items are profitable or not, as we’ll explain below. But it’s critical to know if your entire business is on track for success.

## 2. How to control your food costs

#### Refer to several suppliers and put them in competition

You certainly don't want to have only one supplier at your disposal. The latter could unfortunately fail you, which could impact your budget and force you to find a last-minute solution.

Referring to only one supplier also means that you will not be able to compare the purchase cost and negotiate with your main supplier if you find that the difference between its prices and those of its competitors is too great. Be sure to regularly monitor price variations to ensure your dish margin levels.

##### Do you know what Bargaining Power is?

Bargaining Power is a concept borrowed from Michael E. Porter's 5 forces theory. It refers to the pressure that customers can exert on their suppliers in order to obtain better quality products, better customer service, or... lower prices.

The power of buyers allows them to put pressure on suppliers in order to make them reduce their margins and thus fatally allow them to increase theirs.

For Porter, there are 4 major factors to take into account in the negotiation process:

• The number of buyers compared to suppliers: if the number of buyers is small compared to the number of suppliers, the power of the buyer will be stronger.
• Dependence of a buyer on a particular supplier: If a buyer is able to get similar products/services from other suppliers, the buyer is much less dependent on a particular supplier. The buyer's power will therefore be greater.
• Switching costs: If there are hardly any alternative suppliers available, the switching cost is high. The power of the buyers will therefore be lower.
• Upstream integration: if the buyer is able to integrate suppliers into his organization, he has a higher bargaining power over existing suppliers.

That's the theory. What you need to remember is that as a buyer, you have significant negotiating power, which you will need to exercise in order to reduce your purchasing costs.

To do this, start by tracking your orders. You will have visibility on your past purchases and the material to negotiate with suppliers. Then, make the most of the business volume generated with your suppliers.

#### Make group purchases

Volume is a fundamental parameter in negotiation. Ordering with a larger volume is very often the assurance of obtaining a lower purchase price. Group purchases of raw materials are obviously an option to consider.

However, there are other options to consider. Some purchasing platforms offer grouped orders for indirect purchases (telephony, cleaning products, small kitchen equipment, etc.), which often generate additional costs for professionals in the sector.

### Manage Restaurant Inventory

Inventory is a necessary tool for restaurant professionals. It must be done regularly in order to establish a reliable balance sheet of the company. It allows to :

#### Analyze the main items and their evolution month by month

You can analyze the profitability dish by dish = (price of the dish - cost of the dish) / price of the dish

We can also analyze the profitability globally = (total sales - total costs) / total sales

the total sales correspond to the POS system

the total costs correspond to the inventory N+1 = inventory N + purchases - consumption (+ losses)

#### Understand where the losses are

In the restaurant industry, losses, thefts and delivery anomalies are referred to as shrinkage. Traditionally, it is estimated that shrinkage represents about 2% of an establishment's sales. Not insignificant. Thanks to the inventory, you will be able to know the products in stock as well as their expiration date and thus, not to lose products unnecessarily.

The inventory also allows you to make the difference between your purchases and sales to know more precisely where your losses are.

If the total of the difference between inventories (Inventory N+1 - Inventory N) is exactly equal to the difference between purchases and consumption (purchases - consumption) then there are no losses. This is particularly the case when there is no stock (often the practice in collective catering = we consume all that we buy, the surplus is thrown away)

It is often different, there are losses that cannot be explained at the end of the month. It is therefore in your interest to qualify them progressively. Identify inventory movements that do not correspond to the receipt of raw materials or their consumption in production.

#### Prevent too much cash flow from being tied up

If you don't have inventory, you take a business risk. For example, not having enough material to produce what customers want to consume.

On the other hand, if you have too much stock, you take the risk :

• to have losses: perishable ingredients thrown away because of expired shelf life
• to immobilize cash: to block money useful for financing other items that contribute to the working capital requirement*.

The WCR (working capital requirement) corresponds to what allows financing the short-term debts: small equipment, recurring expenses, cash flow accident, salaries at the end of the month.

Food waste is a key issue for restaurant operators. It is not only a problem for the environment, but also for restaurant managers who are cutting into their profitability every month.

Paying attention to food waste is an effective lever for any restaurant professional who wants to rebalance their margin levels by reducing their losses.

Here are some tips to implement to reduce your food waste:

#### Order according to your needs

If there's one thing you don't want to do, it's order more than you need to. To do this, prepare your production plan for the upcoming week and place your orders accordingly. If you are rigorous in your orders, you will already drastically reduce your losses.

#### Fewer production errors:

One of the reasons for losses in restaurants comes from production errors in the kitchen. To avoid this, make sure you give clear instructions to the kitchen.

Do not leave the quantities served to chance. Everything must be written down and validated somewhere and this information must be shared with the kitchen team.

Also use precise utensils to calibrate your production. If you don't make the effort to calibrate your recipes, your losses over a year will be considerable. For the utensils, you can, for example, make containers dedicated to the recipes (bowls, yogurt pots)

#### Reduce the quantities served

Start by distinguishing portion sizes and favoring a higher margin on small portions. It is not mandatory to decrease the price linearly. Also analyze the type of customers in your restaurant. Try to identify personalities (who eats a lot, who eats a little...) and analyze the leftovers on plates in order to re-engineer your dishes.

### Increase the selling price of your dishes

#### What is willingness to pay in the restaurant business?

Willingness to pay is the maximum price a customer is willing to pay for something. Different consumers have different willingness to pay for the same good or service. Understanding your customers' willingness to pay helps build your pricing and make it more effective.

In many restaurants, there are often prices that could be considered too low. For example, sometimes all entrees are almost the same price. If you want to capture all willingness to pay, this is not a strategy you want to adopt. Vary the prices to make sure you can reach all your customers.

#### What is price elasticity in restaurants?

Price elasticity is the point at which a change in the price of a product will result in a change in the desire to purchase it. In general, the desire to buy a product decreases when its price increases.

However, there are products for which this rule does not apply and even tends to reverse. This phenomenon is called the Veblen Effect, named after the economist and sociologist Thorstein Veblen. Indeed, there are products which, when their prices increase, are subject to an increase in consumer interest. Individuals tend to desire more certain products with a high value.

### Use the art of copywriting to sell for more

Copywriting is a writing technique that aims to persuade customers to perform an action. If you want to sell your dishes at a higher price and stand out from the crowd, it is very important to take care of the writing on your card.

There is one mistake you should definitely not make: using a lot of adjectives to season your menu items. According to a study by First Monday, it seems that the untimely use of adjectives such as "delicious" can undermine the effectiveness of your copywriting and produce the opposite effect in your customers.

Try to replace these adjectives with a concrete explanation of the transformation of your products. For example, if you offer a "delicious beef bourguignon", change it to "beef bourguignon, simmered for 14 hours".

It is useless to tell your customers that something is good. Instead, suggest it by highlighting your expertise and the characteristics of your dishes.

#### Write like you're starving

If you are not the chef of your establishment, I strongly advise you to spend several hours in the kitchen before writing anything. Watch the chef cook, smell the smells, taste the preparations little by little, take notes.

You must be able to talk about the ingredients of each dish, to know where they come from and their specificities. At this point, everything will become clear to you. Think about what makes each dish special, what makes them unique. In short, put yourself in the shoes of a culinary critic whose mission is to transcribe his or her gustatory experience.

## 3. Make your life easier with a restaurant food cost app

### The advantages of a kitchen management software

#### Save time

Miscalculations are common in the kitchen. When you have to produce recipes for a large number of people, it is not always easy for your employees to calculate the right quantities.

With the use of kitchen management software, you will be able to easily calculate the quantities of your recipes and sub-recipes to produce, which will save you precious time during production.

With a kitchen management software, you will also save time in the construction of your technical sheets. Exit Excel and the rigidity of use, make way for an ergonomic tool designed for that.

#### Manage your profitability even more finely

As seen previously, recipe data sheets are an essential way to optimize your profitability. By designing your data sheets with a kitchen management tool, you can manage your profitability with a higher level of precision.

First of all, a software will always be more precise in its calculations than you (no shame in that, it is designed for that).

You will be able to take into account the weight variations of your food. Indeed, some foods undergo a first transformation necessary to their integration in a recipe. This is the case for many fruits and vegetables (potatoes are peeled, grapes are deseeded, carrots are shredded, etc.).

Once you have created your data sheets, the software will allow you to classify your recipes by increasing margin and to go into details: wrong proportions, costs too high, price too low, quantities too high...

Structuring your recipe knowledge with data sheets is very good. However, it is important to secure your data. A kitchen management software allows you to ensure that your information is centralized, protected by user rights and duplicable between multiple sites if necessary.

### Criteria to be taken into account

#### Security

In any industry, the data you have is very valuable. When it comes to managing a kitchen, it's exactly the same. Your data must be protected.

#### Flexibility

Your kitchen management software must adapt to you: not the other way around. It is only a tool to help you optimize what you do on a daily basis, i.e. cooking.

Make sure you choose a software that is flexible enough and adaptable to the specificities of your establishment, but also to your daily organization. Changing your whole routine to integrate a software will probably lead to failure.

#### User rights management

Many kitchen management software now offer the possibility to manage user rights. To make it simple, you can add your colleagues by email, and give them an invidual access that you can set up according to their needs.

For example, if you are a chef, you probably don't want a clerk to be able to modify recipes. However, you probably want to give him the possibility to consult them.

#### Accessibility

Accessibility is the key to a smooth and pleasant use. Do not neglect the ergonomics of your software, at the risk of not wanting to use it in the medium term. A mobile application is also a big plus for your daily use.

#### Support

We all hope to never have to deal with software support... and yet when you need help, there is nothing more frustrating than a ghostly support. So make sure that online support is built into the application first.

#### Open API

This criterion is quite specific and does not apply to all institutions. However, it is no less important. As a reminder, an API is a programming interface that allows two software applications to communicate with each other and exchange data in a reciprocal manner.

With an open and functional API, you will be able to integrate additional functionalities and further customize the software to your needs.