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Menu Costing Explained: Run a Profitable Hospitality Business

Running a hospitality business is one thing, running a successful one is another. Profit margins are tight for this industry and are unfortunately reducing more and more thanks to rising inflation and energy costs. The average profit margin for a restaurant is between 2-6%, and will vary depending on the location and type of business. Food will be the main item for sale in your restaurant, and so you will need to pay a lot of attention to what you are offering, how much it will cost, and how much you will make from it.

It may sound complicated, but with a little bit of basic maths you can keep on top of your costs, and this article will show you how.

 

What is a good food cost percentage

 Your food cost percentage will tell you how much of your selling price has been eaten up by the cost of the food.

 A good food cost percentage will traditionally sit between 28%-32. In other words, 28-32% of the selling price should cover the cost of that dish.

An ideal food cost will vary depending on the type of venue and style of dining. Fast food will usually have a high turnover with less profit per dish, while fine dining will need to have a higher profit per dish to allow for the reduced number of covers and longer prep time.

 

How to calculate food cost

Food Cost for a menu item can be calculated by adding up each individual ingredient used in the dish.

First, take your recipe and list each ingredient with the exact quantity used in the dish. You can then work out the cost per ingredient portion using the following:

(Bulk Ingredient Cost ÷ Bulk Weight (g)) x Recipe Weight (g)

For Example: A dish requires 50g of pasta, and you buy your pasta in 5kg bags for £10.00.

£10.00 ÷ 5,000g = £0.002 or 0.2p per gram

£0.002 x 50g = £0.1 or 20p per portion

Work this out for every ingredient in order to work out the food cost for each of your menu items.

 

How to calculate menu pricing

Now you have your cost price, you will need to set your menu price. If you are creating a brand new menu, then you may not know the ideal cost percentage and this will develop over time.

Here is the formula you will need:

Food Cost (per serving) ÷ Ideal Cost Percentage

For Example: Our pasta dish has a cost of £3.20, and we want a Cost Percentage of 30%.

£3.20 ÷ 30% (0.30) = £10.67

You will need to find a competitive price for your location and menu type, while also remaining profitable enough. Taking a look at similar menu items from competitors in your area will help you to refine this, allowing you to find that sweet spot.

 

My Menu Competition 1 Competition 2 Average
Cost Price £3.20 £3.20 £3.20 £3.20
Sale Price £10.70 £9.90 £11.00 £10.53
Cost Percentage 29.91% 32.32% 29.09% 30.44%

 

Managing gross profit for different menu items

Not every dish on a menu will have the same profit margin. Dishes will vary in labour time along with popularity and longevity of ingredients, meaning that a good cost percentage doesn’t always translate to good profit. Keeping on top of your sales to determine which dishes perform the best in terms of popularity and profit.

Menu items can be broken down into four categories:

  • Stars High Popularity & High Profit. These are dishes you want to sell the most of and should have pride of place on the menu. Delicious and Instagrammable.
  • Workhorse – High Popularity & Low Profit. These items should be easy to make reducing labour costs, but popular with the masses. Think poached eggs on toast for a brunch restaurant. High volume, but the potential for profit-adding extras (bacon, avocado etc.)
  • Challenge – Low Popularity & High Profit. Dishes that will hopefully become Stars one day. Usually where the more creative menu items start their lives, allowing restaurants to carve their own personality. If you want to be unique in your offering, then Challenge dishes will always be part of your menu.
  • DogLow Popularity & Low Profit. The menu items to keep an eye on the most as the higher ingredient cost can eat up your profits, especially if food is going out of date without customers buying them. Some dishes can be tweaked and improved, others may need to be cut from the menu.

 

Ideal vs Actual Food Cost Percentage

Unfortunately, your ideal food cost percentage won’t always translate into reality, so it is important to keep on top of your actual food cost percentage. This is more difficult as you need a good idea of your spend for a particular period (a week, month or quarter), for both purchases and current stock use:

Value of Stock Used + Food Purchases = Actual Food Cost

To turn this into your Actual Food Cost Percentage:

(Actual Food Cost ÷ Food Turnover) x 100

For Example: Your Actual Food Cost for a week is £3,000.00, and you took £10,000.00 in Food Turnover that week:

(3,000 ÷ 10,000) x 100 = 30%

It is important to keep on top of cost percentages, as a slight variation in cost price can have a huge impact on profit:

Scenario 1 Scenario 2
Cost Price £3.20 £3.70
Sale Price £10.70 £10.70
Number Sold 500 500
Profit £3,750.00 £3,500.00

In the scenario above, let’s say that the cost of a burger patty has increased by 50p. This may seem quite insignificant, but quickly adds up to £250.00 for every 500 sold.

If you couple this with other small cost increases on your menu, then the loss of profit can be huge.

 

How to deal with poor actual food cost

 If your Ideal and Actual Food Cost Percentages are too far from each other, then it is important to take a look at your stock and spending in order to find out why:

  • Waste – Most commonly from food which is out of date. This can come from over-ordering stock, or not adjusting buying levels to suit the season. Good stock management can help to reduce waste, along with good forward planning, and keeping an eye on your Dog menu items.
  • Quality Control – Are the dishes being made to a consistent quality and in the correct amount of time, are you having meals returned to the kitchen for being wrong or cold etc? Making a dish twice can see the cost percentage double!
  • Cost Prices – Don’t get complacent with your suppliers and make sure you check every invoice. Try to get any price increases communicated in advance so that you can adjust your menu to suit. This may not be possible with fresh produce though.

Read more about choosing food suppliers.

 

How to calculate spend per cover 

Once you have worked out your food costs and cost percentages, you can go a step further and work out the costs for each customer (cover) that you have during a given period:

Total Food Spend ÷ Number of Covers = Average Food Spend per Cover

You can combine this with drink sales to give an average spend per customer. Taking this a step further, you can estimate the spend per seat (if you have them) in your restaurant:

(Total Covers per day ÷ Number of Seats) x Average Food & Drink Spend per Cover = Spend per Seat, per day

For Example: If you served on average 150 covers per day, with an average spend of £25, and had 50 seats in your restaurant, then:

(150 ÷ 50) x £25 = £75 extra per seat per day

 

This information is useful if you are thinking of expanding, but is only an estimate, and will only work if you are already full for most openings. It is no use having 200 tables, if you only serve 50 covers per shift.

 

Tips for a good food cost percentage

 

  • Seasonal Menu – Out of season fresh food can be expensive and having a menu which changes with the season will help to keep food costs down.
  • Returned Food – Don’t let the dishwasher be the only one to see the leftovers on the plate. If you are regularly seeing a dish not quite finished, then the portion may be too large and you may be able to reduce it without lowering the price.
  • Use Shared Ingredients – Having a varied menu can be great for the customer, but not so much for your shopping list. See what ingredients can be shared among dishes without sacrificing variety to help buy in bulk and keep costs down.
  • Optimise Your Menu – Make your Star dishes the literal star of the show. Keep tweaking your menu layout and make the high profit dishes really stand out from the crowd.
  • Increase Spend per Cover – Side dishes, appetisers and drinks are all high-profit, low effort food items which can really bulk up the spend of a customer. Having fewer, but high-spending customers, is more profitable than churning through a lot of low-spend customers.
  • Educate the Front of House Team – Customers like recommendations, so your front of house team should be recommending those Star and Challenge menu items to them. Your customer is also more likely to order an extra such as a side dish, if they are asked by their waiter.
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