Blog
How to Calculate Food Cost Percentage
SevenRooms
5 min read
Apr 27, 2022
SevenRooms
5 min read
Apr 27, 2022
Understanding your restaurant’s finances is critical to running a successful, viable business. While most restaurateurs already focus on profit margins, food cost percentage is a critical metric you should also be paying attention to. When you know the food cost percentage for the items on your menu, you can make sure you’re charging enough for dishes.
We’re doing a deep dive into everything you know about food cost percentage.
Food cost percentage (FCP) measures how much menu items cost your restaurant to make relative to how much you sell them for. This key performance indicator can help you set menu prices and ensure you earn a profit on every item on your menu. By comparing your restaurant’s food cost percentages to benchmarks, you’ll find out if you need to charge more for menu items and/or reduce your inventory costs.
So, what food cost percentage should you aim for? If you don’t have historical data from your own restaurant to go by, it can be helpful to look at industry benchmarks.
In general, restaurants should keep their food cost percentage of between 25 and 40%. That means that for every dollar of revenue a restaurant earns, it will have spent between 25 and 40 cents to buy the ingredients that make up that dish.
Higher end restaurants tend to have higher food cost percentages, usually in the 38 to 40% range. Restaurants with simple menus (like pizza parlors, for example) can have food costs as low as 20%.
Now let’s find out how to calculate food cost percentage by learning its formula and walking through a real-world example.
The formula for food cost percentage is:
Food Cost Percentage = (Cost of Goods Sold/Revenue)*100
In this formula, cost of goods sold (COGS) is how much money you spent purchasing the inventory that went into a menu item. It’s the total cost of the ingredients in the dish(es) in question.
Revenue is how much you charge customers for that dish. In other words, it’s the price for that dish on your menu.
You can calculate food cost percentage on several levels:
Let’s pretend you run a gastropub. Over the last two years, your food costs have gone up, but you haven’t changed your menu prices. You want to calculate the food cost percentage for every menu item to determine whether or not you should raise prices.
You decide to start with your steak caesar salad. As you know, the food cost percentage formula is:
Food Cost Percentage = (Cost of Goods Sold/Revenue)*100
According to your menu, you charge $14 for a steak caesar salad, therefore your revenue for this dish is $14.
Revenue = $14
To find your COGS, you look at your POS system. It tells you that the ingredients for this dish cost your restaurant $5.88
COGS = $5.88
If your POS doesn’t indicate your food costs, you’ll have to calculate them manually by referring to your recipes and invoices from your vendors. According to your recipes, each salad consists of 4 ounces of steak, ¼ head of Romaine lettuce, ¼ cup caesar dressing, ¼ cup croutons and 3 tablespoons of parmesan cheese. Based on the invoices, you’re spending $4 on steak, $0.25 on lettuce, $0.50 on dressing, $0.50 on croutons and $0.63 on cheese, for a total cost of $5.88 per serving.
Now we input those figures into the food cost percentage formula:
Food Cost Percentage = (Cost of Goods Sold/Revenue)*100
Food Cost Percentage = $5.88/$14 = .42*100 = 42%
The industry benchmark food cost percentage is between 25 and 40%. At 42%, your steak caesar salad’s food cost percentage is higher than it should be, so you decide to raise your prices to lower your food cost percentage.
If you need to lower the food cost percentage at your restaurant, you have two options: reduce the cost of goods sold or increase revenue.
Here are several strategies for reducing your restaurant’s food costs, and ultimately your food cost percentage.
Suppliers are known to increase prices pretty regularly. If your vendors are getting too expensive, look for new ones who can offer you better prices on similar items.
The more you order, the better a deal a supplier can give you. However, small restaurants may not be able to access bulk rates because they don’t need as much inventory as larger restaurants. Consider joining a group purchasing organization to access lower prices.
Another way to reduce the numerator of the food cost percentage equation is to reduce portion sizes. With smaller portions, you can spend less on each plate without reducing menu prices, resulting in a lower food cost percentage.
Commission fees from third-party online ordering apps and reservations platforms increase your COGS. Lower your COGS by relying less on these third-party platforms. Instead, look for direct booking and ordering solutions that don’t charge you commission. Then, do your best to convert third-party customers into direct customers.
Follow these tips to boost revenue and reduce food cost percentage.
The most obvious way to make more money while maintaining food costs is to increase menu prices. While customers don’t love it when prices go up, they’re used to it because of the current supply chain climate.
Try to increase prices gradually over time, instead of making a big jump all at once. Update all of your menus – in print, on your website, Google My Business profile, Yelp, etc. – to ensure that customers access the most up-to-date prices everywhere.
Menu engineering means designing your menu to highlight your most profitable items to influence customers to purchase more of them. By increasing food sales of your most profitable items, you’ll boost revenue and lower your overall FCP.
Beyond nudging customers towards your more profitable items, your servers should upsell premium menu items and tasting menus, and cross-sell complementary sides and dishes. When your restaurant uses a customer relationship management (CRM) system that’s equipped with guest profiles, servers will know customers’ preferences and be able to upsell and cross-sell with ease.
Marketing is one of the best ways to increase revenue, but it can be time consuming to implement multiple marketing strategies all at once. Work smarter, not harder, by using marketing automation software to send the right offer to the right customers at the right time.
Food cost percentage is a critical metric to keep track of when you run a restaurant. This figure can help you understand how much you’re spending on food and drinks versus how much you sell them for. Knowing food cost percentage can help you make business decisions that impact pricing, purchasing and portion sizes.
SevenRooms can help you maintain a low food cost percentage with commission-free online ordering, automated marketing, guest profiles and more. Request a demo today.
To run a profitable business, most restaurant owners and operators keep food costs between 25 and 40% of revenue. However, this benchmark is more of a guideline and less of a universal rule for every restaurant. Average food cost percentage differs between fast-food restaurants and fine dining concepts, as well as between different cities.
Restaurant owners typically set an ideal food cost percentage based on a number of factors, including their other expenses for labor and rent. Many restaurants aim to keep food costs between 25 and 40% of their revenue. This number can vary significantly based on a particular business’ needs.
