The Food Cost Calculator Myth

The Food Cost Calculator Myth: What You Need to Know About Pricing Your Menu

The Food Cost Calculator Myth

Fact: There is no single magic food cost calculator for a restaurant. Businesses have a myriad of spreadsheets and tools they use to track costs and price their menus; different restaurants have different requirements and considerations. The most important thing is that restaurants consider all of the factors that can affect food cost so that they are working under accurate assumptions at all time.

We talked to Jeremy Threat, president of the restaurant accounting and consulting firm Vine Solutions, to learn how he advises his own clients when it comes to food cost. Here are six facts and tips to keep in mind.

Be prepared to spend more on food than ever before.

“As a whole the industry is trending up,” says Jeremy. The demand for organic, locally-sourced products are high, and that means it’s more expensive, too.

Overall it’s a positive shift, as consumers are becoming more educated about what they eat and demand better quality, but it can be tricky for business owners. Guests often are not aware of the cost associated with these products, so when a restaurant raises its prices to account for greater costs, guests may complain.

The fear of upsetting their customer base means that most restaurants take a wait-and-see approach in regards to pricing adjustments. It takes a few brave souls to make the leap before you start to see other restaurants follow suit.

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Let the concept determine the cost.

For the average restaurant, the cost associated with food is around 28 to 32 percent of total costs.

If you’re running a restaurant that features a menu with a high concentration of protein-based dishes, your costs will be higher. Food cost for a steakhouse can run around 35 percent, Jeremy says. Conversely, restaurants that specialize in items such as pasta or pizza have costs that are much less, but this also can vary drastically depending upon the quality of ingredients you use.

Jeremy says, “Having items that are less profitable from a cost standpoint but more effective from a dollar standpoint is okay, as long as your menu can offset this increase with other more cost-effective items.”

The Food Cost Calculator Myth: What You Need to Know About Pricing Your Menu

Start with the menu price.

Many people look to food cost formulas when they are trying to create menus. They start with the standard cost of sales, then think about how to price each item.

It’s easy to start with an assumption, such as wanting your food cost to be 30 percent, but it’s unlikely that every single item will actually be 30 percent cost of sales. The majority of dishes will have fluctuation.

Take a veal chop, for example. The product is expensive, but you accept the higher cost because you’re getting a higher dollar amount back. You may also have a side dish that uses trim, which can be very profitable, around 10 or 15 percent cost of sales. Ultimately, you have to look at the balance.

And it gets more complicated from there. If you have the veal chop on the high end and you sell a substantial number of chops in comparison to the rest of your menu, that item’s impact is weighted; costs will be extremely high because that’s what is selling.

Instead of starting with cost of sales, Jeremy recommends that you first identify the price that is going to be appealing to your consumer. If your menu needs a fish dish at $20, how will you build an option that is cost effective and actually sells?

“You need to know what you can charge to bring people back in,” says Jeremy. “Where does that fit in with the scheme of the entire menu? You may need to make a cheaper item; identify that and built it. Ask, what prices can I set that will instill trust in my guests, encourage sales and at the same time maintain a profitable business?”

Appeal to many experiences, not just one.

Building dishes starting with the menu price is a good strategy from a marketing standpoint because it allows you to identify your various customer segments – the people you’re actually building the restaurant for.

Think about the different types of clientele you’re appealing to. What experience are they looking for? What range are they paying? Is it $20, $40 or $70 per person? First identify what your menu looks like as a whole, then figure out how to appeal to every one of those segments through your menu.

“A white-tablecloth restaurant is great for a romantic date, but it is typically very singular in who it appeals to,” Jeremy says. “Smart restaurants in the industry are really learning to have mass appeal. A great concept is good at being multifaceted.”

Identify your customer segments, understand your value proposition to each one, and develop a menu that is balanced. A successful menu will guide guests onto the journeys they are looking for without compromising the core values of your business.

The Food Cost Calculator Myth: What You Need to Know About Pricing Your Menu

Using pricing to build trust.

“If you are building a menu right out of the gate, your pricing is the key to building trust with a customer.”

When Jeremy was working in Sacramento, a certain bottle of cabernet was popular with guests. Every restaurant in the area carried it for about $70 to $80. Some high-volume restaurants charged more than the typical markup because they knew it would sell well.

Jeremy, however, decided to sell the bottle at $67 a bottle, just a little lower than everyone else. After six months the winery called to ask what they were doing: they were selling more cabernet than any other restaurant in northern California. This also improved his overall wine sales, which were over 30% of his total sales mix.

“The consumer is not dumb. In fact, the consumer is getting smarter and smarter.” Jeremy says. “That makes it more likely for a restaurant to make another sale, because you’ve earned the customer’s trust. Also, they’re more likely to come back.”

Keep track of inventory and invoices.

To stay on top of costs you need to have an accountant or someone within the company produce a monthly financial statement showing what your total cost – food, labor, wine, everything – is running.

But even that information can be misleading. Many factors make the costs inaccurate; you need to have effective inventory procedures in place so that you are able to see what you paid for the item and factor in inventory adjustments.

If you start the month with five lamb shanks, sell four, and then buy another five, the assumption is that you should have six at the end of the month. However, you might only have five because a unit is missing. This is why a strong beginning and ending inventory is important. Someone may have stolen the missing item, but if you are not tracking this, you may never understand where you are losing money until it is too late. This is why taking an accurate and regular inventory is so vitally important.

“You need to make sure your variables are accurate to understand your cost of sales,” says Jeremy. “The key items that have a negative effect on an accurate cost of sales are accurate inventory and invoice control.”

Photo Credit: Erin Kunkel

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