Food sales are the chief source of revenue for most restaurants. That's why calculating key metrics such as your food cost percentage will help you determine a menu pricing strategy that maximizes profits and appeals to target customers.
In this article, we'll share everything you ever wanted to know about food cost percentage, as well as how you can optimize this metric and improve your restaurant profit margin.
What is food cost percentage?
Food cost percentage is the cost of the ingredients used to make your menu items as a percentage of your restaurant sales. For example, if you have a food cost percentage of 28%, that means for every dollar your restaurant makes, you're spending about 28 cents on food.
You can calculate your food cost percentage for your overall business, a specific location, or even a single dish. It's a great way to understand your profits and whether you need to adjust your menu prices.
Why is food cost percentage important?
Food cost percentage helps restaurant operators make sure their dishes are profitable. If the food cost percentage for a dish is too high when compared to your benchmarks, you can raise the price, change the recipe to use lower-cost ingredients, or potentially remove the item altogether. If a menu item has a low food cost percentage, you can find ways to encourage sales of this item to boost your profits. And before launching a new menu item, calculating the food cost percentage will help you determine whether it aligns with your profitability goals.
In addition to menu pricing, calculating your food cost percentage helps you understand whether you're overpaying for ingredients and need to renegotiate with your suppliers or find new ones.
By monitoring your food cost percentage, as well as your other costs such as labor, equipment, rent, and more, you'll be able to improve your restaurant profit margin and maximize your bottom line.
What is a good food cost percentage?
Most restaurants across the industry aim for a food cost percentage between 28 and 35%. That said, every restaurant is unique — a lower food cost percentage may still drive profits for a quick-serve restaurant, or a restaurant located in a small town. Use this range as a general guideline, but know your restaurant may have different profitability needs based on the type of food, the level of service, and the location.
How do you calculate food cost percentage?
Many restaurants are able to automatically calculate their food cost percentage by integrating their POS system with inventory management software. Calculating your food cost percentage by hand will require quite a bit more time and effort, but can be done if you have accurate, detailed inventory and sales records.
Total food cost percentage formula
To calculate your total food cost percentage — meaning, the food cost percentage for a specific store or your overall business — use the following formula:
Total Food Cost Percentage = (Total Cost of Goods Sold / Total Food Sales) x 100
Operators calculate food cost percentage over a specific period of time, so when implementing this formula, be sure to use the same time range to calculate each of the variables.
You'll be able to calculate the total Cost of Goods Sold by taking the value of your existing inventory at the beginning of the time period, adding the cost of any new inventory purchases during that period, then subtracting the value of your inventory at the end of that period. See the formula below:
Total Cost of Goods Sold = (Beginning Inventory + Food Purchases) – Ending Inventory
Food cost percentage formula for individual menu item
If you want to calculate the food cost percentage of a specific menu item, you can use the following formula:
Food Cost Percentage Per Dish = (Total Cost of Dish Per Serving / Menu Price of Dish) x 100
This formula requires you to list each ingredient that goes into this dish and their cost (including garnishes), then determine the quantity of each ingredient that goes into each serving so you can calculate the cost per serving.
How do you price your menu based on food cost percentage?
While there are several menu pricing strategies to help optimize your menu for profitability, one common tactic is to use your food cost percentage to inform menu prices. For example, if a burger costs $3 to make, and your target food cost percentage is 30%, then you should charge customers $10 for that burger.
That said, menu pricing depends on a number of factors besides the cost of food — including your cuisine, service level, and location. Operators should also know their target demographic and what they expect prices to be, as well as what nearby competitors charge.
In addition, don't forget about the indirect costs of a dish. If a certain menu item requires a long prep time, expensive equipment, or advanced cooking techniques (and therefore a higher-paid chef), be sure to include that in your price. More generally, food sales have to cover all of a restaurant's costs — including labor as well as rent, utilities, equipment, marketing, and other operating costs.
How do I optimize my food cost percentage?
Now that you know what your food cost percentage is and how to calculate it, here are some ways you can optimize your operations to reach your ideal food cost percentage and drive profitability for your restaurant.
Adjust your menu prices: As we mentioned earlier, many restaurants use their food cost percentage to inform menu prices — but don't forget to factor in other costs such as labor and rent.
Conduct a menu engineering analysis: Menu engineering is a strategy to help restaurant operators analyze the profitability and popularity of menu items. Start by breaking down costs for your dishes to determine the exact cost of each menu item. Then, categorize menu items by profit and popularity levels to understand which items you should remove or give extra attention to, and adjust your offerings accordingly. Finally, redesign your menu including writing new menu descriptions with these insights in mind, using visual cues and compelling descriptions to highlight the most profitable and popular items that will increase your restaurant sales.
Reduce food waste: Whether due to over-ordering, over-prepping, or oversized portions, the restaurant industry adds 17.09 million tons of food waste to landfills each year. Operators can take a number of steps to reduce food waste — including better managing inventory, finding creative ways to use surplus ingredients, or running limited time specials. These strategies will not only minimize your food costs — they'll also help the planet.
Find lower-cost suppliers: While restaurant suppliers appreciate loyalty, it might make sense to ask around your network and find options for new suppliers if you feel you're being charged too much for raw materials. Perhaps you'll be able to purchase the same quality ingredients at a lower cost. Alternatively, you can talk to your current suppliers about renegotiating your rates.
Decrease portion sizes: Are your customers always taking home doggie bags, or finishing their meals with food left on their plate? Consider plating with smaller portions, or offering smaller sizes so customers can choose how much they want to eat. You'll not only reduce waste but can also save money on inventory.
Invest in technology: It's difficult to stay on top of your food cost percentage and other calculations on your own — but setting up the right technologies can save time for you and your staff while also providing the data you need to identify opportunities for optimization. Some digital restaurant solutions include a POS system and inventory management software, as well as the DoorDash Merchant Portal, which provides DoorDash partners with valuable sales and customer insights.
By putting systems in place to regularly monitor your food cost percentage, you'll be able to take control of your restaurant's profitability — which provides new opportunities for you to expand your business.