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:
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:
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:
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.
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 %.