It doesn't matter how fancy or niche your restaurant is unless, as you run it, you are able to keep costs low and make a profit from your business. At the end of the day, that's what makes a promising business. And that's where the Restaurant Food Cost comes into the picture. Food Cost is integral and key to the success of any restaurant or bar because it has a direct impact on the profit a business makes.

A profitable restaurant typically operates between 28-35 percent food cost. That is also believed to be the ideal food cost in the hospitality industry. After adding the labor cost and other expenses, the total cost goes as high as up to 75 percent of the total sales.

Simply put, food cost percentage or average restaurant food cost is a way to regulate the profit on any given menu item in a restaurant. A menu item's food cost percentage is the ratio of ingredients used and the revenue that those ingredients generate when sold.

It is easier to calculate food costs with an equation. Add your beginning inventory and purchases together, then subtract them from your ending inventory. This is the actual food cost, which is then divided by the total food sales. The result is the food cost percentage.

To calculate food cost percentage, follow this simple formula-
Food Cost = (Beginning Inventory + Purchases - Ending Inventory) Food SalesMenu Pricing

The average food cost is one of the highest expenses and the most integral aspect of Restaurant Management. If you calculate the food cost per month or per week, it ensures that you are aware of the budget spent in food inventory. Besides, it helps in determining menu pricing and optimizing prime costs. Prime cost includes two major items in a Restaurant Accounting budget total Cost of Goods Sold (COGS) and the total labor cost. COGS includes food, alcohol, and other beverages, packaging, and other costs associated with preparing and serving the menu items.


Analyzing food cost percentage ensures that the customers are not being overcharged and returning unhappy, while you too are making a profit per serving. Understanding food cost also means that you are paying attention to each menu itemper serving. The benefits of calculating food costs are multifold. For instance, menu items can't be priced correctly until you have an accurate food cost. The more specific the total food cost, the easier it is to price per dish.

Three benefits of calculating food costs are-

1. Allows you to objectively compare your business with competitors
By comparing your food cost with the average restaurant food cost in the segment you operate in, you can determine if you're within the normal spending range or do you need to make changes to stay competitive. Knowing the prices of your competitor's menu items gives you a reference point for creating an ideal food cost.

2. Helps in effective menu engineering
Menu engineering is the systematic process of studying restaurant sales and inventory data. Strategically studying the menu over time helps a restaurant business to understand how popular a particular menu item is and what is its profit percentage. With menu engineering, you can balance the high and low food cost items, or strategize to promote certain items with low food costs to reach your targets.

3. Helps in identifying items that are no longer profitable
Menu prices are a determining factor to stay competitive in the business. Having the food cost data helps in identifying the ingredients that are costing too much without turning in the required profit. The cost of ingredients and portion sizes of a menu item affects the cost per serving.

Once the identification is done, you can resize the portion, revise the price, or even retire the item/s from the menu. Successful restaurants track the effect of menu prices on sales. Efficient inventory management helps in keeping food costs under control. A point of sale (POS) system with inventory management software also makes it easier to track and refigure the total cost.

For a restaurant to be profitable, most restaurant business operators prefer the food costs to be between 28 and 35 percent of the revenue. There is no defined average food cost percentage, but 28 to 35 percent has been the standard for the US-based food business operators as well.

For instance, food and paper costs accounted for around 38 percent of McDonald's company-operated restaurant expenses in 2020. In the same year, Chipotle Mexican Grill's food costs accounted for 34.3 percent of the revenue.

But that being said, there is no ideal Food Cost percentage. A lot of factors affect the food cost percentage depending on the type of food a business operator serves. Especially, in the current times when there are so many disruptions, food prices will continue to be a major variable in the restaurant business.

Food cost percentage is of extreme importance for any restaurant business operator big or small. When a restaurant business knows the value of its inventory and the food cost percentage, it helps in pricing a menu item accurately. It also helps in deciding portion sizes, creating menu pricing and navigating challenges arising due to prices of raw materials.

For instance, if you are aware of the average food cost percentage and still struggling with your profit margin, one way to tackle this problem is to balance high-cost menu items with low-cost ones. It won't be in an instant to figure out these details. But keenly observing and keeping a track of the average food cost percentage, or any changes in the food cost can eventually help in increasing the revenue.

In the face of the pandemic, a lot of restaurants through creative menu engineering and strategic price planning have been trying to turn their food cost challenges back into growing revenue centers.

The cost of dining out for customers may change as one moves from one country to another. But that would also be true if one just moved from a budget restaurant to a fine-dine. As far as the restaurant food cost is concerned, it is almost standard for restaurants across the world.

Most full-service restaurants who pay attention to details like inventory management, supply chain disruptions, the cost of goods sold, etc, also pay critical attention to food cost. Most roughly spend 25 to 30 percent of a meal's menu price on its ingredients, other expenses include labor costs, equipment cost and others.

Using the Food Cost formula in this article, it is simple to determine the cost of each menu item by calculating the price of each ingredient. It helps in analyzing if the menu prices are comparable to the cost of the item, or if you need to make some adjustments to both the ingredients and the price. Calculating and analyzing food cost may take a little time, but once mastered, it ensures that your business remains profitable.


To determine that the food cost is under control-

1. Food costs should be updated regularly.
   
2. You should be aware of the menu pricing per dish.
   
3. Implement a point of sale system to generate accurate product mix reports.
   
4. Understand the principles of menu psychology and menu engineering to increase profit margin.
   
5. The price of each menu item and continually updating the menu with changing prices of ingredients helps control the average food cost percentage.