I’ve been scouring the net for useful information on a variety of topics related to restaurant cost control. I have to tell you that it is a pretty discouraging task. The vast majority of the web sites and blogs offer very little useful information for a restaurateur who wants to manage his or her operations better. Many blog articles are far too simplistic to be of any use. It is a waste of time reading (or even scanning them)! Others offer a huge number of articles, videos and templates, but usually require you to sign up as a “member” (i.e. customer). A quick review of their offerings suggest that you are not likely to get your money’s worth. A few sites offer advice that is, well, wrong. I hope to correct this deficiency, with an ongoing series of blog entries on this site. In the mean time, you might consider Joe Dunbar’s blog, Food Cost Control. Joe’s blog is one of the best I’ve come across so far. Maybe I have a soft spot for his site, because he’s so analytical!
Today’s topic is restaurant costs. More specifically, the cost of sales figures. Most of the bloggers, consultants and web sites focus their articles on the percentages. “If your food cost percentage is more than 1.5% higher than the ideal, you have a problem.” That type of thing. This is bad advice. Period. Try as hard as you like, you simply cannot bank percentages. The only important figure is your gross margin dollars.
When I first got started in this business, armed with a background in accounting, I was more than a bit surprised to learn that many restaurateurs did not understand this concept. Most chefs were confused, too. Certainly, it is not as bad as it was back then, but I still find it necessary to explain the difference between percentages and dollars of gross profit.
Before I get into more complex and useful discussions about cost control and menu engineering, it is essential that we fully understand this concept. I’m going to simplify the analysis to demonstrate the concept with numbers. Let’s say a restaurant has only two menu items – a steak that sells for $40 and has a cost of $16, and a pasta dish for $15 with a cost of $3. The steak has a 40% COS and the pasta has only a 20% COS. If 10 guests come in and all order pasta, your COS percentage will be 20%. If they all ordered steaks, the percentage would be 40%. Which scenario would you prefer for your restaurant?
If you look only at the percentages, you would love to have all of your guests choose the pasta (20% vs. 40% food cost). If you are more interested in profit (or at least paying the bills), you would prefer the steak eaters. Ten orders of steak will generate $240 of gross profit [($40 - $16) x 10 = $240]. The pasta only generates $120 of gross profit. The point is that it is the gross profit dollars per plate that matters, not the percentage of profit that each generates.
While many restaurant meals tend to have similar food cost percentages, several higher priced meals will tend to have a higher food cost percentage. Steaks, rack of lamb and lobster are prime examples, where most restaurants charge a high price but have a high food cost percentage for the plate. The same concept applies to wines. Restaurants can have high mark-ups on lower priced wines, but generally have much lower mark-ups on the very high end wines. We still love to sell the higher end wines, because they bring in more dollars of profit.
It should be clear that you need to look only at the gross margin dollars generated by each menu item. If you insist on trying to compare gross margin percentages each period, you need to consider the sales mix. Only with the sales mix will you be able to determine what the cost of sales percentage should have been. Then you can compare your actual percentage with the “should have been” (or ideal) percentage.