How Food Margins Get You to the Bank

The majority of chefs and restaurateurs we talk with use food cost percentages as a primary measure of effective purchasing and implied profitability. Monitoring food cost percentages is certainly an important metric; however it is margin dollars that take you to the bank –not food cost percentages.

What if I told you that you could make more money, i.e. real margin dollars, with a higher food cost percentage? Crazy, right? Read on…

Percent V. Margin

The Food Cost Percentage measures the cost of the ingredients as a percentage of the menu selling price of a dish:10.21MarginCalc3

Most would agree this is a good metric that measures the purchasing side of the equation. However, it fails to tell you how much money you made and by itself paints an incomplete picture.

To calculate the food cost percentage for an entire menu in aggregate for a time period, inventories are necessary:

10.21MarginCalc2If you were expecting a theoretical food cost percentage to be 39% and your actual food cost percentage was 45%, that difference is a measure of inefficiency.

The reasons for such discrepancies may be caused by over portioning, theft, poor product rotation, spoilage or excessive waste. Subtract your Actual Food Cost from the Expected Food Cost and multiply that result by sales for the period, to understand how much money was wasted for that time period.

Actual Food Cost Percentages vs. Expected Food Cost Percentages can help you identify problem areas in the kitchen. However, looking at food cost percentages alone fails to tell you how much money you actually made or lost.  It’s margin dollars that pay the bills not food cost percentages.

Margins Bank Bucks

Your Food Margin measures the actual margin dollars a menu item contributed to your bottom line profits. You take margin dollars to the bank, not food cost percentages.

Focusing on a menu item’s contributing margin dollars versus food cost percentage can potentially make you more money despite a higher food cost percentage. Thus, focusing on Food Margins could then be a more impactful method to building a profitable menu.

Calculate the Food Margin of an item by subtracting the Total Item Cost from the Menu Selling Price. This will illustrate the profit made every time you sell this item:

10.21MarginCalc1The following example compares the two methods on a typical menu decision:

10.21MarginChartAt first glance, the steak sandwich cost appears significantly more expensive to produce than the chicken –until you take a look at the cash drawer.

In this example, the gross profit on the steak sandwich is 16% higher than the gross profit on the chicken sandwich, yet has a 12% higher food cost percentage. You will take more actual dollars to the bank with the steak sandwich in this case by focusing on Food Margins instead of Food Cost percentages.

Plus One

Add one more part to the equation – the psychology of your customer.

Consumers prefer to pay a little more when they perceive the item to be of higher value. It’s called the “Price-Quality Effect” as researched in Holden and Nagle’s book, The Strategy and Tactics of Pricing, A Guide to Growing More Profitably.

According to Holden and Nagle, price-quality research provides, “…customers worry less about the price if higher prices denote higher quality. Creating a perception of exclusivity, rareness or quality will persuade the buyer to be okay with spending more. The product itself doesn’t need to be of the highest quality. If the branding denotes a high-quality ethos, customers will spend.”

Bank on it!

The next time you review your end of period financial statements and think, my food cost percentages are too high, the ingredients I’m buying are too expensive, and/or I can’t afford to upgrade my food, figure the bankable math first!

Calculate your food margins and note all higher qualities on your menu. Train your wait staff to properly explain higher quality and leverage the psychology of the price-quality effect.

Bank on Food Margins versus Food Cost %.

From the desk of John Cecala || Website  LinkedIn  @BuedelFineMeats  Facebook

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6 thoughts on “How Food Margins Get You to the Bank

  1. Thank for breaking that down ,a lot of chefs always are trying to manage food cost .when manage product closer the cost should in to Place. I was wondering if there, any I can get copy of this to save for I can always referrer back to it.
    Thank you Joshua white

  2. John, This is absolutely the truth, i have been preaching this for years. All most people want calculate is the FC percentage because constantly working and adjusting margins requires more work.

  3. This is, of course, a simplification of how to price and manage menu items. The trick is to balance FC% with $margins. Reality check: to make the steak have a higher perceived value, you must have something that has a lower perceived value.

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