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Tuesday, November 29, 2016

Finding Your Ideal Food Cost Number

I find attempts to benchmark food cost overly simplistic.  My favorite factors in determining food cost benchmarks are annual sales, competition and monthly occupancy cost.  These factors vary widely by market segment and geographic zone.

There are times when a higher food cost percentage is desirable.  Operators suffering from minimum wage laws and mandatory employee health care costs may improve their operating profit by purchasing prepped food items.

A fresh vegetable prep team with three full time workers can cost well over $100,000 in cities and states with $15 minimum wage laws.  Qualified butchers are only justified in a small number of restaurants.  Multi-unit operators may create commissaries to butcher and prep items for their entire chain.

Commissary operators need delivery vehicles and personnel.  In addition, they need tight controls over commissary transfers.  Auto insurance rates are higher in urban and suburban areas.

A savvy operator will create a profit and loss statement designed to show a subtotal used to net sales, cost of sales, direct labor and occupancy costs.  This number should be at least 30% of sales.

There are plenty of ways to get the 30% net.  Restaurant managers in urban areas with high rents need to offset their high occupancy costs with higher sales and lower percentages for cost of sales and labor.

If you are in a city with high rents, $15 minimum wage laws, and have recently offered your entire staff health care insurance, you most likely need a low food cost %. Some of you may face a 15% occupancy cost.  If you can manage to hit a 25% cost of sales and a 30% labor cost, you can deliver a 30% profit before your other operating expenses.

You may operate over an hour from the nearest city in a mortgage free restaurant.  The local minimum wage laws may allow you to pay a premium wage in the $12/hour range.  A large kitchen with adequate storage capacity could allow you to purchase farm delivered produce and large cuts of meat and fish.

The best strategy for the operator with low occupancy expenses is to always price menu items below the competition.  You can make it impossible for competitors to attack using borrowed capital.

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