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Wednesday, June 13, 2007

Food Cost Basics

Several people have emailed me in the past few months asking how to calculate their food cost percentage. In addition, many people have asked me for an industry benchmark for food cost percentage. While the food cost formula is straight forward, it may be impossible to arrive at a true industry benchmark percentage. There are far too many industry segments with unique cost characteristics.

Let's start with the basic food cost percentage formula:
FC% = (BI+P-EI)/S

FC%: Food Cost Percentage
BI: Beginning Food Inventory
P: Purchases
EI: Ending Food Inventory
S: Food Sales

It is absolutely necessary to use the same dates for sales and purchase activity. You need to take the inventory after all sales activity has ceased (either late at night or early in the morning). There should be no deliveries during your inventory.

Everyone has a personal preference for valuing the inventory. Traditionally, food service managers used the most recent cost paid for each item to value the ending inventory. Most people still follow this method which closely approximates FIFO. If you are concerned about the freshness of any food in storage, I'd recommend a zero value. For example, stale bread is not worth the same as a fresh loaf (but it can be used in stuffing and French Toast).

Regarding food cost percentage benchmarks, try to get a feel for the industry segment closest to your business model. There are public companies in almost every segment. In general, the faster the service the lower the food cost percentage. QSR operators experience food cost figures below 30% and four star fine dining operators typically approach 40%. Operations in urban areas run lower food cost percentages to allow for the higher rents. If you raise your selling prices to cover higher occupancy costs, you should see your percentage dip.

Many family run businesses operate in premises with no rent and no mortgage. Although I learned food cost percentages should stay below 35%, I have seen many successful family run businesses run above this number.

25 comments:

Anonymous said...

I have to do a work for school and I'm having a big question: how do you know when you have a good food cost percentage?
Allready thank you very much for your help!

Joe Dunbar said...

A good food cost percentage is indicated by your budget. If you have a properly prepared budget with a decent profit for the business risk, you have the benchmark. Use all the subsidies available in your budget process.

In a school setting, the actual percentage will often exceed 50%. This is OK as long as you meet or beat the budget.

Anonymous said...

What's the best way to cost a banquet buffet? Is there an average consumption rate, such as, 1.5 portions per person?

Joe Dunbar said...

I can't give you an educated answer without a proper menu analysis. This exercise is beyond the scope of the blog comments section. Please email me more info.

Anonymous said...

In addition to answer the question about what is proper food cost...Much depends upon your menu mix. There is an "ideal" food cost that can be arrived at. In other words, in the perfect world, without any variables, based on what I am selling, my food cost would be XX.X%. Then it is possible to get your actual percentage to see what your variance to ideal is. For instance, a steakhouse will have a MUCH higher actual and ideal food cost that a salad bar and burger place. Reason being is the money on the plate in a steak house is quite high. Hopefully when budgets are drafted for cost of sales, these variables are in the plan.
Hope this helps...
royalrider33@yahoo.com

Joe Dunbar said...

Steak houses run fairly high fc% numbers (seafood house too). They need to sell side, desserts, lots of beverages. I agree with everything you state. The key is knowing your unique value to the customer and delivering it profitably.

Anonymous said...

how to cost a dish to get the selling price at what percentage

Anonymous said...

I'm working on my thesis for my school about food cost control, and i'm looking for a problematic. In fact I'm looking for some ideas around food cost problem which I'll try to explain throughout my thesis and bring some solution with my training. I' actually in internship in Hotel as assistant cost control analysis.
Tk's for your help

Joe Dunbar said...

The current agricultural commodity market is volatile. You have an excellent opportunity to discuss the impact of market volatility in energy, grains, and proteins on food cost.

Closely allied to this issue is the current inability to pass along cost increases to patrons. You could analyze the food cost per cover (vs. as a % of sales) to see the change in the cost to feed a patron.

Anonymous said...

Tk's for your help sir.
I'm gonna look a bit deeper in this subject, too see if I can found all informations I need. Could you recommend me a book about food cost, for my theoritical part of my thesis?

Joe Dunbar said...

Books: SPECS, Food for Fifty, Book of Yields, Wenzels Menu Maker, Menu Engineering (good start).

Anonymous said...

After 20 years of running Full Service Restaurants. Food cost can be attacked by two basic angles. 60% of all food cost is in the garbage can (waste). The rest is over portioned. Focusing your coaching and training on these two key areas will typically keep your food cost in check. However, in some types of restaurants, such as Steak houses, you have to focus on your budgeted number and it will be much higher, but keep in mind RTN or return to net. If you sell a 24 oz cowboy Ribeye for $20.00 and it cost you $10. You have a 50% food cost, but your making $10 on each one sold. For a comparison, take chicken wings, you might sell them for $10 and have a cost of $3. You have a 30% cost, but your making $3 less than the 50% cost, Ribeye. Food for thought.

Joe Dunbar said...

Some of the best food service operators swear by garbage can checks. They thwart theft, monitor patron disapproval, and detect poor prep yields and chronic spoilage.

With so many food service pros (myself included) focused on gross profit rather than food cost %, why does the industry profit and loss statement still track labor and direct operating expenses as a % of sales?

The danger in selling high gross margin, high % cost items is not in the gross margin line. I think everyone gets this concept. The same people then track all other costs as a % of sales. A company running a 40% food cost % will have a tough time making money if they run the same direct labor cost % as a similar operation with a 30% food cost %.

There is a tendency to accept the higher labor cost as a % of gross margin since they don't extend the gross profit analysis to any other line items on the P&L. They simply see the direct labor as a % of total sales.

rey said...

Hi Joe.
I hope im posting this in the correct blog.
In order to cover our waste, free bread, staff food, and complementaries, we are planning to add a plate cost to our new recipes to cover these costs. We understand that this will push our selling prices up. My question is as follows:
Do we add the plate cost to the recipe or do we simply raise the selling price by the respective plate cost?
Ray

Joe Dunbar said...

Ray,
I created a new blog post to answer your question. You can read my reply at the following link:

http://foodcostcontrol.blogspot.com/2009/07/recipe-costing-technique-plate-cost.html

Thanks for the question!

Joe

nirmal said...

what will be formula for getting the food cost of a hotel which includes complemenatry food items to the guests.

Anonymous said...

Joe,

I am an old restaurant manager who happened to fall into Food Service in the Health Care industry. I understand the basic food cost formula. The company that had just hired me and has asked that I prepare a way to track food cost. I spoke with a friend of mine who worked in a community that tracked food cost. He said rather than use sales they would use a formula that included resident meal days. The end result would be a whole dollar amount not a percentage. The company would then use that dollar amount and compare it to the resident/per day allowance. Any help you can offer would be great. If it's easier I can email more detail. Thank you.

Joe Dunbar said...

Tracking food cost by resident days or patient days is much better than a percentage method. The industry I worked in from 1981-98 used cost per manday. We ran construction camps - food and housing services.

This is the preferred way to manage a 4 or 5 week cycle menu.

Percentages simply do not work well. The key is to manage the weekly menus (including inventory cutoffs) until you get a feel for the impact of costlier entrees on a particular week in the cycle.

We counted stock every Monday (Monday to Sunday activity period).

Anonymous said...

Joe,

Thank you for the feedback. Do you have an idea or remember the formula on how to figure the true cost? i'm guessing it still involves BI, EI, purchases and man day (resident days) I have a rough draft of a formula, however I'm not sure I have everything in order. Thank you again.

Joe Dunbar said...

Yes. The BI+P-EI=FC is still valid.
Rather than dividing by revene to reach FC as a % of sales, you want to divide the FC by the # of patient days. The result will be a dollar amount per patient day.

Anonymous said...

Good Day! Joe,
I would like to ask how can I comes up pricing my cook food in a restaurant. Im doing my feasibility study now.
Please help.

Joe Dunbar said...

Anonymous,
You need a list of menu items, standard recipes, and most importantly, a list of prices from the supplier you have chosen. They will generally setup an order guide for you for no charge.

Joe

Anonymous said...

Of all the Food Cost definitions,this is the best that I have seen.Simple to understand.Thanks mate!!!!

Joe Dunbar said...

Your welcome! Thanks for the reply.

Joe

zoe wassi said...

This is great work done .. i love this food cost as the best

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