One of the biggest hurdles convenience-store retailers face when evolving their foodservice offering is mastering foodservice financials. Understanding factors such as food cost and food cost percentage will help you identify the true cost of an item, forecast better and fine-tune your menu for maximum profitability.
My company comes from a retail mindset, where margins reign. What are some of the basic principles of foodservice financials that we should add to our practices?
Like retail, food establishments watch expenses very closely because margins tend to be small. One key expense for restaurants is food cost.
I divide food cost into the food cost of each dish and total monthly food cost. Knowing both is critical. For individual menu items, food cost is the actual cost of the food needed to prepare the dish. It is expressed as a percentage of the menu price. If a dish contains $3 of ingredients and is sold for $10, the food cost percentage is 30%. Restaurants strive to keep this percentage as low as possible without damaging the consumer’s perception of appropriate value.
On most menus, not all items share the same food cost percentage. For instance, bulk purchasing or stronger negotiating can lower food cost percentage if the menu price stays constant. (The next step in this happy scenario is to sell as many of this item as possible through proper menu engineering. But that’s a topic for another issue.) Differences between menu items can also be due to the nature of the ingredients and what a consumer is willing to pay for a certain dish. For example, noodle and pasta dishes can represent low food cost percentage, while high-quality steaks may have a higher food cost percentage. But the actual dollars made on each of these two options may still favor selling the steak even with the higher food cost percentage.
Knowing each dish’s food cost and food cost percentage helps the operator respond to negative fluctuations in food costs. In such a scenario, you can quickly calculate the effect on food cost percentage and make adjustments such as ingredient substitutions, smaller portions, higher menu prices or even elimination from the menu.
While it is important to know individual food costs, it is imperative to know your overall food cost percentage. This is calculated as follows and over a specific amount of time (e.g., monthly): Food cost % = (beginning inventory + all purchases - ending inventory) / food sales.
This important diagnostic tool provides data for knowing if your food expenses are on target. Many restaurants’ food cost percentage is somewhere around 30%, depending on many factors within the business model. Tracking monthly food cost percentage helps in understanding trends, forecasting seasonal fluctuations and highlighting problems such as theft, excessive waste and rising food costs. With this knowledge, you can respond quickly to protect the business model and your profitability.
Christopher Koetke is vice president of Kendall College School of Culinary Arts in Chicago. He is a certified executive chef and certified culinary educator by the American Culinary Federation. Have a question for Chris? Email awestra@cspnet.com, subject “Ask the Chef.”
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