Counting the Costs: A Guide to Menu and Food Costing
For someone new to the food service industry, pricing food for sale in a cafe or restaurant may appear as simple an equation as: ‘Cost of ingredients’ + ‘An adequate profit margin’.
As anyone who has ever owned or managed a food establishment can confirm, the calculations are far more complex. The true cost of producing a single meal needs to take into account a myriad of overheads aside from the mere cost of ingredients - get that formula wrong and you may cost yourself out of the market or leave yourself little to no profit.
By the time the menus are printed, the window of opportunity to easily modify your pricing has closed. This means that getting your pricing structure in place needs to be done early, even while writing your business plan. An ongoing formula should be adopted to streamline the pricing process, ensuring competitive yet profitable business dealings.
Eating Up Profits - The True Cost of Food
As mentioned previously, the true cost of food must involve every expenditure which has brought it to the point of sale. To get a clear picture of the retail cost of a single ingredient, you must include in the final figure - everything from rental of the premises, to the cost of waste disposal - into the final equation to ensure a restaurant is operating profitably.
To accurately price food, it is essential to identify three main points:
- Direct Expenses - Cost of ingredients.
- Indirect Expenses - Peripheral costs and overheads.
- Profit Margin - Targeted for to be competitive and viable.
Food Formula - Calculating Costs
When setting up a restaurant, deciding on a pricing formula suitable for your establishment is a long term approach. If you plan on having a fluid menu, a recipe costing formula which is fast and effective is essential. Putting in place a workable system which can be easily updated will make the process of menu pricing far more streamlined.
Pinpointing an optimum food cost percentage is imperative to a food establishment due to the fact that, combined with labour costs, these often consume well over 50% of total sales.
Whilst software packages are available which have the capacity to input, track and monitor a restaurant's food inventory and pricing, an Excel spreadsheet can suffice to create a workable recipe costing sheet. Using basic mathematical functions it is possible to calculate inventory and recipe costs through simple formulas.
FIG 1.
Recipe Building
Whether or not you are creating the menu yourself or are working alongside a chef, all kitchen staff should know the importance of portion control and recipe adherence with each meal. Variances in serving sizes and portions can make the following process redundant.
A simple standardised recipe costing sheet should be drawn up, with the capacity to enter:
- Meal name.
- Recipe identifier or code.
- Recipe yield.
- Portion sizes.
- An area to allow for chef’s notes.
- A table showing the breakdown ingredients of the recipe - include seasonings, oil and additives.
- Revision fields - food costs are constantly changing and regular audits should be held fortnightly or monthly to ensure pricing remains relevant.
Hard copies of the sheet can be printed and regularly reviewed and updated by management staff to ensure relevancy.
FIG 2.In the scenario given in FIG 2, the cost of ingredients for the Chicken Curry recipe is $47.22 based on the pricing on the inventory in FIG 1. As can be seen in the illustration, the recipe yields 8 meals of 400 grams each, thus the ingredient cost for a single meal is $5.90.
The next step in the process will be identifying and calculating the total costs associated with preparing that meal.
Margin for Error - How to Calculate the Cost of Overheads
The list of indirect costs, which all come into play when costing a menu, can be extensive. Things to consider in the final figure should be:
- Restaurant or Catering Equipment - including loan repayments or leases.
- Consumables - paper towels, takeaway food containers and kitchen cleaning supplies.
- Kitchen furniture and establishment furnishings.
- Premises - including leases, fees and taxes.
- Staff - including in-house and off site administrative and accounting staff.
- Utilities - gas, electricity and water.
- Advertising and marketing.
- Taxes - council, state and federal.
- Food waste including preparation discarding, perishables and stock loss.
- Waste management.
- Insurances.
- Delivery fees and charges.
- Licences - including alcohol licensing.
Whilst many of these items are tax deductible, they will still have an effect on your bottom-line and need to be factored in as expenses.
To accurately assess the cost of overheads ask the following questions:
- Taking all expenses into account, how much is my daily overhead cost?
- How many meals do I serve on average per day?
To accurately determine the daily cost of running your restaurant, begin by creating a list of indirect costs or overheads such as those listed above. Break each expense down to a daily dollar amount.
Next calculate the average number of meals served per day. Each meal served must absorb a percentage of your overhead costs - the more meals, the less cost burden they bear.
Food Cost Percentage Formula
Using overhead costs as a guide, determine your target food-cost percentage. This will ensure your sales will be kept within a cost positive range.
An example of this could be drawn from FIG 2. using Scenario B above and a profit of $2 per plate:
| Cost of Food | $5.90 |
| Overheard Cost | $10.00 |
| Profit | $2.00 |
In this example, the sale price of the meal will be $17.90 and the food cost percentage will need to remain within 33% of the total cost of the meal. If the cost of the ingredients should rise to $7 then to still remain at a food cost percentage of 33%, the sale price of the meal must increase to $21 and profit will rise to $4.
President of the Restaurant Advisory Service (RAS) in the US, Ron Gorodesky, believes that the most successful restaurants generate food cost percentages in the low to mid 30’s.
There is some variance in this rule, with cheaper fare such as Italian cuisine often running around 28% and higher expenditure steak houses closer to the 40% range.
Price Break - A Word About Profit Margins
Understanding how to calculate a profit margin should begin by assessing your market. High turnover and custom might mean you can have a smaller profit margin and still have a healthy bottom line.
One way to calculate a profit margin is to begin at the other end of the equation. You may decide that you want your combined food and overhead cost to be 75% of the final sale price. This would mean your pricing equation would look something like this:
| Cost of Meal: | $12 |
| Overheads: | $9 |
| Menu Price: | $28 (ex-GST) |
This results in a profit of 25% of the sale price - $7.
Alternatively, if you wish to calculate your final figure based on a per plate profit of $5 the equation would look like this:
| Cost of Meal: | $12 |
| Overheads: | $9 |
| Menu Price: | $26 (ex-GST) |
The resulting profit margin in this case is 19%.
Depending on your fare, profit margins may need to be variable on some dishes. Meals which are labour intensive and time consuming may attract a higher premium over the quick and easy.
You may decide to build a contingency into the final cost to account for seasonal price fluctuations and incidentals which cannot be predicted such as drought which substantially increases the cost of food production.
A contingency also allows for marketing campaigns which may include discounts, loyalty programs or two for one vouchers to encourage repeat custom.
Up or Down - Identifying Your Market
So how does identifying a restaurant start-up’s core business demographic translate to setting appropriate menu prices?
Fast food, cafes or fine dining - the type of food establishment you own directly affects menu prices. Whilst customers may have lowered expectations surrounding service and prices in a fast food eatery, fine dining is associated with silver service wait staff, opulent premises and exquisite food presentation. In other words customers pay a premium for their dining experience.
It stands to reason that premium pricing can be a reflection of expectations, premises, the fare and type of custom you attract. Business clientele compared to local neighbourhood - inner city versus outer suburbia - will all affect the perception of a business and in turn, its pricing.
Being competitively priced is far more of a concern to those who have a business where there is substantial competition. This is where location can have an impact on menu prices. One example of this is airport pricing which is commonly acknowledged to be far higher than the norm. Why? Part of the answer may lay in the isolated location and lack of competition.
TIP: Play on your restaurant's location advantages. A revolving restaurant or one with ocean views can add a premium to your pricing.
Conversely, those located in a food court or mall will be more dictated to by their competition and thus at the mercy of tight profit margins.
If you find yourself surrounded by competitors all vying over the same market, make a thorough review of their menu pricing compared to your own. Identify opportunities to offer a point of difference on your menu or a speciality item or service which will separate you from the competition.
Staking a Claim - Overheads, Consumables and Depreciation
Whilst kitchen supplies and consumables may be tax deductible, catering equipment and commercial kitchen machine values can only depreciate over time.
Operational costs including leasing, utilities and non-food consumables costs (such as food prep gloves, chefs clothing and cleaning supplies) are all tax deductible.
The restaurant business is a business of margins. By leasing catering equipment or borrowing money to purchase catering equipment or machinery it’s possible to create an ongoing tax deductible operational expense rather than an asset depreciation expense.
Liquid Assets - Costing Alcohol and Drinks
Having the capacity to serve alcohol on your premises can be a lucrative asset to your business because there is often good profit margins attached to the sale of alcohol. However, bear in mind the ability to do this carries additional costs such as licensing premises, staff accreditation and labour costs of more mature staff.
Costing alcoholic drinks can be performed in a similar manner to that of costing food and non-alcoholic beverages.
Drinks containing multiple ingredients such as cocktails can be broken down into individual units the same as food. Thus a simple example could be a Scotch and Coke:
| Bottle Scotch | 1 Litre - $35 | Serving size: 35 ml | Cost per glass: $1.22 |
| Coke | 1 Litre - $2 | Serving size: 100 ml | Cost per glass: $0.20c |
The industry standard for beverage costs stands around 20% to 25%. Thus the $1.42 cost of ingredients above would cost the customer $5.68 to $7.10 before GST.
Lifting the Bar - How to Improve Profit Margins
Put simply, all successful restaurants must formulate business plans which maximise income and minimise outgoings.
Being smart about your menu can help improve profit margins considerably. What is popular? What is profitable? What should be removed, and what needs a refresh? Design your menu to emphasise the items that are stars, and consider offering specials in line with seasonal changes.
Knowing how to improve sales is important when it comes to broadening your customer base, building relationships and updating existing customers on discounts, news or specials. Online marketing and social media done in-house is a wonderful way to boost sales without heavy advertising budgets.
Article: Need a hand creating a strong marketing campagin? Take a look at our complete guide to marketing your restaurant or cafe.
Establishing an ongoing relationship with a competitively priced catering sales business who supply equipment and consumables which are durable and backed by a impeccable industry reputation, can be a strong ally.
Savings can be made in catering supplies such as crockery, bar supplies, cookware, glassware, kitchen consumables and also be garnered from loyalty discounts, bulk buying and special sales.
Clever Cuts - How to Reduce Costs
Understanding how to monitor catering supplies is one of the major methods to cut costs. As we will see in the next section, reducing food waste can save substantial outlay over the course of a year.
Another method many restaurants have implemented involves a move away from mains-with-sides-included, which may not be desired by the customer, into more customised ordering systems. By making sides such as bread, chips, salad and vegetables an optional extra, you can reduce the cost of the meal, making it more competitively priced and also reduce food wastage.
Article: Reducing food waste dramatically cuts costs. Take a look at our restaurant's guide to food waste to see what you can do.
Portion control is a vital cog in keeping costs uniform and predictable. Precision kitchen scales and measuring jugs are a commercial kitchen’s best friends. Tableware and serving crockery should also be of a uniform size across the board to allow for standardised measurements.
An expert accountant can be a powerful weapon in your cost cutting arsenal. It is their job to understand maximising claims surrounding catering supplies and disposables along with equipment depreciation.
Trash Talk - Limiting Waste
The majority of managers working within a restaurant or foodservice establishment can attest to the fact that rubbish and food waste accumulation can resemble battling an unslayable monster - one which regenerates daily despite best efforts to keep it at bay.
There are two facets to limiting the impact of food waste:
- Wastage during the meal preparation stage.
- Cost of disposing all waste.
Waste Whittling - In-house Strategies
Audit, review and assess food ordering and storage practises. Streamlining and making these more efficient can result in less waste and reduced costs. Track food waste cycles. Look for more effective and sustainable packaging.
Unless properly informed and trained, staff can take a light view of food loss. They often don’t understand the financial and environmental ramifications of improper food ordering, preparation and storage methods. Implement a system which includes pre-emptive ordering strategies.
74% of food waste occurs even before it has reached the consumer through:
- Spoilage.
- Contamination.
- Exceeding ‘Use By’ dates.
- Product quality not meeting aesthetic standards.
- Poor food preparation methods.
Preventing spoilage through temperature control is not just a cost management issue. Pathogenic bacteria growth resulting from inadequate storage methods and unsuitable temperatures can be a major food safety issue.
This is not simply the problem of keeping food cold, it also means reheating food to the optimum core temperature (at least 70°C for two minutes), storing perishables in suitable commercial fridges (1–4°C) and freezers (below -18°C) and holding food at the correct temperatures - hot above 63°C and cold below 8°C.
Train staff in food rotation procedures for cold and dry storage. Clearly differentiate stock which needs to be used first by creating a system or food labelling strategy.
Control of food waste is out of your hands once a customer has their meal in front of them. Over a quarter of diners have food leftover on their plate at the end of their meal.
Article: Train wait straff to advise diners regarding serving sizes and recommended portions so they do not over order.
Wasting Away - Disposal Expenses
When starting out in the restaurant business, most owners are focussed on just keeping their business afloat. Any mention of food waste or methods to reduce the environmental impact of it, are pushed to the back of the proverbial stove as business matters demand constant attention.
It doesn’t take long however, before the problems surrounding waste disposal become very real on both the environmental and economic front - costing businesses time and money as they look to find manageable, feasible and environmentally ethical methods to manage the considerable waste produced every day.
Modern solutions to waste management are enabling businesses to embrace both environmentally sophisticated disposal methods whilst saving the foodservice industry considerable cost.
Economically Speaking - Seeking Sustainable Solutions
As a nation, Australia makes a staggering contribution to landfills with approximately four million tons of waste being discarded annually. Consider this, every year across the globe, around one third of all the food produced for human consumption goes uneaten - it is either wasted or lost. That equates to around 1.3 billion tons annually.
Discovering effective methods to reduce food waste is not merely a matter of convenience or environmental importance.
Forewarned is Forearmed - Avoiding the Pitfalls
So what are the best strategies to avoid the vagaries of price fluctuations and circumvent the problem of having to change your entire menu pricing constantly?
- Predictive Evaluation - identify foods which have the most variable prices and the highest price change impact - seafood, lamb or beef may fall into this category.
- Use Buffers - to balance the seasonal or market fluctuations for higher cost items, build in low cost/high return dishes into your menu. Dishes based on staples, vegetables or chicken may absorb some of the impact of unexpected price variations in your high end fare.
- Working Relationships - listen to staff feedback regarding pricing especially those working face to face with customers.
- Menu Boards - the use of menu boards for chef’s specials or dishes which contain variable cost ingredients, can allow you to adjust prices simply and quickly. Train staff to highlight those meals during the seating process.
Learning how to cost a menu is a fine balancing act. Managing customer expectations whilst remaining competitive and profitable can take time to perfect.
With menu pricing being one of the biggest controllable factors within running a successful food establishment, it literally pays to do your due diligence prior to structuring your menu price list.
By understanding how to do food costing and implementing strategies which will reap the highest return for the lowest outlay, you will maximise your chances of running a profitable and viable restaurant.