How to write a restaurant business plan: food costs
This is the sixth guide in the series on writing a business plan for your restaurant (there are 10 in all). Make sure to go back and read the introduction and previous guides if you have missed them. A new spreadsheet which accompanies this guide is on our website hospitality page - go and download it now.
This week we are looking into the world of food costs:
What are food costs and why is it important
How much should my food costs be
How to calculate food costs
The low down on food costs
Food costs are generally referred to in percentage terms in hospitality i.e. 30% food cost. This means that the cost of a dish is 30% of its net sale price.
It is one of the biggest controllable costs a restaurant incurs, so it gets a huge amount of attention. In this guide, we're not going to look at how to keep your food costs down when you are operational (you could write a few guides on that) but we're going to look at how to work out what your food cost should be.
What your food cost should be is commonly called your theoretical food cost
Just give me a number
So what should your food cost be? A common number you'll see is 30% food cost. This comes from the old 30/30/30 rule of thumb (30% on food, 30% on labour, 30% on overheads, 10% for me thank you very much).
The 30/30/30 model is not one which stands up to much scrutiny in today's market, with many operators running models closer to 25/40/40 (which I hope you can see does not work out very well for those operators).
So what should your food cost be?
And it depends on quite a lot of things - but the main thing is going to be concept. As we have said previously, your concept drives everything and food cost is not exception.
Certain concepts lend themselves to a great food cost % - Pizza, for instance, is an amazing margin, with food cost below 20% at some restaurants.
But percentages don't pay the bills.
And getting fixated on food costs can twist your thinking.
If you have an option to offer two types of pizza to your guest, one with a 20% food cost and the other with a 30% food cost you instinctively want to sell the 20% cost pizza as it's a bigger profit margin.
But that doesn't necessarily result in a bigger profit as the below table shows;
Getting your food cost
There are a couple of ways to work out what your food cost will be before you open your restaurant - one great way is to ask! Seek out people who are currently operating a similar concept to what you're planning and speak to them about food costs. The industry is full of amazingly supportive people and lots of people will be happy to help you out (assuming you are not planning on opening up round the corner in direct competition).
But this will not get you back to YOUR food cost - it will get you a great ball park figure and often that is enough, but it won't reflect what you are doing.
The best way to work out your food cost is to roll your sleeves up and start costing out dishes. So this means thinking about each dish, working out how much you need of each ingredient and working out the price of this. This can be a very painful process, depending on your disposition, but it is a necessary step at some point before you open.
To make life easier, we have pulled together a menu costing over on our hospitality page which you can get to here. Scroll to the bottom and you will be able to download it from there.
Setting your menu price
When it comes to food cost %, a big part of the equation in getting our percentage is, of course, sales.
Food cost % = cost of food / net sales price of menu item
So this is the time where you start to think about your menu prices. But how do you price up your menu items?
If you have a google of menu pricing strategies you'll get around 40 million results so there is a little bit of info out there to support you in your decision.
But essentially, you want to charge as much as you can.
Now this looks like a flippant statement - but give it a little consideration - what are we able to charge? There are a number of constraints on what you can charge
the overall concept - a dive bar cannot charge £36 for a fillet steak - it does not fit the concept
the service steps - food that is ordered at the counter tends to be cheaper than when a waiter take the order. You can mess with this, but it is something which customers expect - use of their legs saves them money. In general, the better the service, the more that can be charged (again, this comes back to concept).
the competition - there are lots of other options for consumers and if your pricing is off, customers won't be choosing your place.
Availability of customers - linked to the above and to concept - do you have a captive audience like an airport bar or do you need to be giving great value to get customers back in each week?
When you are open, working out how much to charge for a new dish is much easier
come up with a number that seems sensible
stick it on the menu
get customer feedback and review sales data
The key is you can test your price and your dish on people.
Before you open, you cannot.
So find other concepts who are doing what you want to do and study those menus and concepts.
Are you going to be better, so can you charge a bit more? Or are you going to be in a site with lower footfall, so your prices need to be lower to drive customers to your door.
Our menu costing sheet has a space for menu prices - start getting this populated and reviewing what your menu will look like - head over to our hospitality page to download your copy of the sheet.
If you know anyone who these guides would help - please share it with them! And if you like what we're doing, share it on social so others can see.
If you want to see more of these guides as they are published, either connect with me or follow me (Tim Cundy) on LinkedIn.