How to calculate food cost percentage for your restaurant

Food cost is a key indicator in the restaurant business. Broadly speaking, it refers to what you spend to create a dish. Why is it important? Because a profitable, sustainable restaurant requires good food and good strategy. So, what's the ideal food cost percentage for your restaurant? How can you optimize it? What to do if it's too high? 

What is food cost percentage?

As its name suggests, food cost refers the cost of the ingredients in a dish.

👉 The food cost percentage represents the percentage of the cost of the ingredients invested in relation to the revenue generated by the sale of a dish.

Example: your menu offers a burger for $10.

The ingredients (bun, steak, salad) to make this burger cost $3.

The food cost of this burger is therefore 30%.

This means that 30% of the burger's selling price is spent on ingredients. 

This leaves margin of 70% to cover : 

• All other restaurant costs (labor, fixed costs, etc.) ;
• The profit you will generate. 

A restaurateur generally assesses his food cost percentage as soon as he opens his restaurant, or even much earlier, when he draws up his business plan. He then reassesses it once a month or every two months to optimize his day-to-day costs (we talk about this in part 3 of this article👇).

How to calculate your restaurant's food cost percentage?

💡Food cost of a dish = (total cost of raw materials / selling price of dish) x 100

👉 You can also calculate your restaurant's overall food cost.

💡Overall food cost percentage = (beginning inventory + purchases ) - ending inventory / total sales

Example: your initial kitchen stock is $10,000.

Your extra ingredient purchases cost you $6500.

Once the dishes have been prepared, your final stock is $13,000.

Your total sales amounted to $7,500.

(10000 + 6500) - 13000 / 7500 = 0,30

Your overall food cost is therefore 30%. 

But what does this figure mean for your restaurant?

Why is food cost percentage important?

Food cost percentage should be taken very seriously if you want to ensure the profitability of your restaurant. The better you understand it, the better equipped you'll be to make important strategic decisions.

👉 Estimating the costs for each dish makes it possible to :

• Set all your prices right ;
• Review your prices over time (using menu engineering or renegotiating with your suppliers, for example);
• Control your margins and optimize your costs;
• Know your food cost percentage per establishment if you manage several restaurants.

💡The lower your food cost, the more you have left over to cover all the other costs of your restaurant (staff, rent, etc.).

Warning: a food cost that's too low affects the quality of the dishes and customer satisfaction. However, a "high" or "low" food cost is not always a problem (see below). You need to find the balance that works for your restaurant!

What should a restaurant's average food cost percentage be?

You often hear an ideal food cost percentage should land between 28 and 35%. In other words, your raw materials should represent no more than 35% of your sales. 

Actually, there is no "ideal" percentage. A healthy food cost will vary according to the food you serve, the market you're targeting, and even the time of year (higher during the holidays)...

👉 A restaurant specialized in premium steak cuts will have a food cost percentage close to 35%, which is normal for a premium concept such as quality meat. A pizzeria, on the other hand, can afford to aim for 28%, especially if it buys wholesale dough and seasonal vegetables. 

When calculating your own percentage, bear in mind that the higher the quality of the ingredients, the more prices will have to be adjusted accordingly.

💡According to Lighspeed, the formula for calculating the ideal food cost percentage is: total ingredient cost / total food sales.

This formula should enable you to set the prices of your dishes.

Example: your new dessert, a pecan pie, costs you $1.80 to make per portion.

If you want to achieve a food cost of 30%, then the selling price should be $6 per share (1.80 divided by 0.30).

If you want to achieve a food cost of 40%, then the selling price should be $4.50. 

Food cost percentage too high or too low?

When measuring food cost percentage, other factors have to be taken into account. 

For example: 

• The amount of work required for a dish (long prep time can increase the cost even though the ingredients remain the same);
• High demand for a dish (the cost is high, but is offset by enormous customer demand and a strong value proposition. For example: a starter based on foie gras);
• The difference between theory and practice (poorly standardized portions, food waste, major losses);
• Economic and social phenomenons such as inflation (which will rise all your suppliers's prices).

Many elements will make your food cost percentage vary so consider all the facts.

Best practices for optimizing your food cost percentage 

You should: 

• Estimate the portion of food cost intended solely for team meals and remove it;
• Keep an impeccable inventory to limit losses (expiration dates) or surpluses (unnecessary supplies);
• Check your stocks daily to make sure you're using everything;
• Use 100% of your produce (peels to make broths, low-waste cooking techniques such as fermentation or jarring);
• Choose good products that offer the best value for money (local and seasonal products, short distribution channels like farm-to-table, etc.).
• Create data sheets, weigh ingredients and standardize portions;
• When you throw away a product, make a note of the reason so that you can tackle the problem in the future.

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Food costs percentage hold no secrets for you! Interested in profitability? Don't miss out on our latest e-book: "how artificial intelligence can boost restaurant revenues" 👇