Evaluating The Costs Of Food And Setting Prices
Designing the food cost is essential to every culinary-oriented business, from restaurants and caterings to cooking schools and working as a personal chef. Wrong food cost percentage can take you out of the business or it can help you become sustainable fast. Check your numbers with us and bring your project more profit by understanding the fundamentals of creating a recipe.
When the foundations of a business are strong, the business would grow. It is in foundations like food cost where you have the control and the power to design a sustainable algorithm for your restaurant, fast food place or catering service. Yet it is one of the things we often see people struggle with. We will go through the real importance of the food costs and how to find percentage that would work for your business the best.
Restaurant managers often set the final price of a dish. However, the chefs are the ones who are the creators of the menu. What is the main job of a chef when it comes to numbers?
It is essential that the chef is in charge of defining the price. The chef is the person closer to the ingredients and the one to be able to evaluate what could be the right price, based on the season, quality of the produce, the work put into their recipe and so on. There is a big responsibility for the chef to provide an experience, involving the price, quality and ratio. Although, while the chef should provide an estimated price as a suggestion, it is down to the manager or the owner of the restaurant to adjust the price to local competition, especially if he or she wants to offer something more attractive in order to bring more customers. The price the chef provides is only based on the ingredients and on what it takes to make a certain portion before serving it. In this approach, the chef is able to suggest a price without needing to consider the HR costs, rent, insurance, electricity and everything that goes into the profitability and sustainability of the restaurant. None of these are needed for the chef to evaluate his food costs. That is why using percentages, in particular the 30% rule, is very useful and interesting for chefs because they don’t need to look at things beyond their scope. They only focus on their scope: quality of the ingredients, what you can offer, the size of the portion, packaging, labelling or so on. Everything related specifically to the food and how people will experience it.
What is the 30% food cost rule, known as the magical number in the culinary industry? We know that the lower the percentages the better, but are there different standards for different types of businesses?
First, we need to look at why use a percentage. The reason to use a percentage is that it can be limited to 100%. It cannot, for example, be 120%. Everything that contributes to the cost of the dish will have to be below the 100% base. If 30% of our costs is in foods, it means that we would be left with 30% for the staff - everything related to HR, uniforms and so on - and potentially 30% for the rent and all the running costs, like electricity, water, insurance, payments systems, single points of sale and similar. Considering all of these, we already have 90% of costs covered. If we want to make any small profit before tax we are only left with 10%. This reveals that for that everybody who wants to open a restaurants, it often happens to be a terrible business idea because it is a business model that doesn’t bring a lot of profit. At best you have 10%, only if, for example, you are achieve an affordable rent. Since it is not the best business idea ever that limits you to 30% in order to make sure that the costs of food do not impair the capability to cover other running costs. That is why food costs for restaurants will be most of the time around this 30%. When defining food costs, you may have packaging or takeaway boxes that are related to the selling of the produce. These should all be covered within the food costs. However, all HR-related costs, rent and other running costs are not included in the calculation.
Even though 30% food cost for restaurant is a standard, each of your dishes from the menu may have a different percentage. At best, you want to be below or around that 30% mark on average. Ideally, you would always be below to make sure you are respecting the 30% rule. A very easy way to do so is by multiplying by three once you have calculated the total food costs. If a dish costs 5 euros to make, you would say 15 euros. If that is unrealistic then there is something wrong. This approach is a very simple way for the chef to realize how realistic his or her price is. Now, some business have lower food costs, such as takeaways, junk foods, fast-foods. The idea is that they have low margins but high volumes. In order for this approach to still make profit, they need to have low food costs. Their food costs are often around or below 25%. Indeed, when you go into a place like this you are not expecting high quality ingredients, therefore they tend to provide foods at a cheaper price.
Is there a case where a food cost percentage greater than 30%, or even 40%, is justified?
I would not say that it is justified to have a food costs higher than 30%, but sometimes you just don’t have the choice. Sometimes the quality you want to provide prevents you from achieving 30%. For example, if you want to have organic food or very good local or sustainable food sourcing, such as in gourmet restaurants, food costs can be at 35% or 40%. For example, in Europe, at the moment organic food is about 30% more expensive than conventional food, so if I choose to only source organic produce then my food costs would be more expensive. In the case of the well sourced, high quality or organic foods, your food costs are at about 35% or 40%.
Now, as we said at the beginning, you cannot exceed 100% in food costs. What this means is that many very high-end restaurants ended up setting up in a very nice palaces or hotels, where the real state is managed by a separate company meaning that they don’t pay rent. For example, Luxury palaces or very high-end hotel in Paris want to have a gourmet restaurant for their customers, where they make money on room nights and do not expect to make large profits on the restaurant. Instead, the restaurant helps their communication and marketing while adding value to the hotel experience. If you go in Paris and stay in a nice palace, you now expect to be in one of the best restaurants as part of your experience. These locations will search for high quality restaurants and do not expect the same margins. It is therefore critical for a high-end restaurants to either make money by having people staying overnight or to be managed by a company that has its own real state so that there is no rent to then be able to give 50% of the sale. Otherwise they would to be to maintain all costs at that high level for everything because financially it would be impossible. This also explains why to become a high-end restaurant, and to be independent at the same time, it is a real challenge without having prices that are over the roof. These would be the types of restaurants that could have percentages of food cost that are higher than 30%.
Could you talk us through the whole process of deriving food cost and deciding what numbers are the best for our business?
Let’s dive in and look at numbers using a simple recipe to understand the process of evaluation your food costs and making sure that you are within the 30% mark. Firstly, you need to have the grams or kilograms of your recipe. When you buy ingredients, most of the time they are measured by weight, therefore in your recipe don’t put volumes but instead use weight in g and kg. That way, you use one single unit to evaluate the costs of food. For precise evaluation, you must also remember that a cooking recipe is not the exact same measures relating to the costs. Food costs should mention the overall weight used. For example, let’s say for Thai pomelo, you need to peel them before using them. However, in the market you buy the full pomelo at its full weight with skin. But 40% is just the skin that you do not eat. Here can you see that the weight that being used for the recipe is different than the overall weight that you need to buy. Same thing with bananas. You don’t use the skin in my recipe but the fruit. Therefore in food cost calculation we will use the overall weight that we buy.
When we want to make yoghurt, we know that one batch could feed 10 people, producing 10 portions. For example, a shared cashew yoghurt is a very simple recipe with four ingredients: cashew to do the cream, lemon juice, orange juice and some seeds to make it thicker. I first look at the weight that I am using per ingredient and adding everything together to then multiply it by the price of each ingredient. This would give me my total cost to produce 10 portions. If I then divide this by 10, I would have the cost per portion. Let’s say my total recipe costs is $2.50, which divided by 10 is my portion cost. Then, my cost per portion would be 25 cents. However, let’s also say that in order to sell it, I need to put some granola on top and present it in a cup that you can take away with you. The cup costs 20 cents, 20g of granola on top cost 15 cents. Adding one portion of yoghurt, which is 25 cents, would make my overall price for one portion be 60 cents. My culinary food cost is then 60 cents.
Finally, we also need to add something called the Q-factor of 3%. This represents things like the cinnamon that I couldn’t measure precisely inside the granola because it is of too little quantity, or maybe the loss of some of my ingredients in the conversion. Therefore, I will add the 3% to the food costs, making them 62 cents of preliminary food costs when integrating the Q-factor. Now, in order to have food costs at 30% I need to multiply this amount by 3.33 times, resulting in a suggested price by the chef of $2.00. If the price of the dish is $2.00, then 30% of this is about 62 cents. This price that I’m giving is an indicative, suggested price. It is now up to the restaurant manager to decide at what price he or she want to sell. Maybe they price it under 2 euros because they want to have a psychological price and therefore balance it with something else in the menu where we make more margin. Maybe they will want to sell it without any problem at $4.00 to achieve more margin. Ultimately, this decision is for the owner of the restaurant or the restaurant manager to make. What is important is that the chef has been able to base this price on the real cost of the ingredients and in its recipe, as well as the serving packaging, by respecting the 30% food cost rule.