Prime cost is a key metric in hospitality that combines COGS and direct labour costs. It’s the cost of producing and serving food and beverage in restaurants, cafes, bars and hotels. COGS is the cost of ingredients and materials to make menu items, and direct labour is the wages of staff involved in food prep and service.
Understanding and controlling prime cost is crucial for any hospitality business. It helps owners and managers control costs, set menu prices and maintain profitability. By monitoring prime cost you can see where costs are too high and make informed decisions to improve. The industry rule of thumb is to keep prime cost below 60% of total revenue, but this can vary depending on the type of business.
Let’s say you’re the manager of a busy city centre restaurant. You notice your prime cost has gone from 55% to 65% over the past month. To investigate, you break it down. You find COGS is the same but labour costs have increased due to recent overtime payments. Now you can adjust staff schedules, cross-train employees for better efficiency or consider hiring part-time staff to cover peak hours. By doing this you can get your prime cost back to industry standards and improve your restaurant’s profitability.'