There once was a chef, let's call him Fred.
Fred had a dream of starting a food business that sourced ingredients from organic farms, paid staff well, used sustainable packaging and priced almost below market value. His goal was for everyone to have access to good food in his community.
He understood flavour profiles, had friends who believed in his vision and even sourced sustainable containers. However, he had no idea what a P&L was, and barely understood how much he was paying for his ingredients.
Surprisingly enough, and for many other reasons, his dream was short-lived. As you may know, the journey from farm-to-table or even kitchen-to-plate is not as romantic for the business owner as it is for the customer.
Whether you’re a seasoned professional or you’re ready to take a hobby to the next level, a pillar to sustainable business operations is understanding your food costs.
Why Should You Care?
Understanding your food cost, or otherwise how much you are spending on your ingredients versus how much a menu item costs you, can empower any food business owner to make informed decisions based on data rather than fear.
1. Research and Development With the current state of supply chains and the cost of ingredients and packaging only increasing, by properly understanding how much this is all costing you, you’re able to make informed decisions with your creative process by factoring in accurate numbers.
2. Menu Engineering An accurate representation of your food cost percentages can not only make or break a dish, it can influence a menu pricing strategy ideal for your business.
3. Promotions For food businesses promotions are a great way to grow your consumer base. Knowing how much a menu item costs you, and in turn, what has a higher profit margin, can dictate what menu items you’re able to holistically promote.
What is Food Cost?
Simply put, food cost is the difference between how much you spent making your food, compared to how much you have made back. This number is typically reflected as a percentage of your total sales, aptly called your food cost percentage.
Although, most food operations understand their food cost per menu item, it’s fundamental to understand this number as a business.
As we mentioned, your food cost percentage is calculated by taking how much you have spent on your ingredients and existing inventory (COGS: Cost of Goods Sold) divided by how much you have made (Sales).
How Do You Calculate Food Cost?
We first need to understand your Cost of Goods Sold, and this begins by taking an inventory of what you currently have. The frequency of inventory can be done either on a daily, weekly, or monthly basis and really is based on your business and capacity.
At the start of the week, create a list of all of your supplies and how much you currently have on-hand. A trick to ensure smooth operations is to standardize this process. In other words, to use similar units of measurement in your inventory process, as well as in your recipes (grams, kilograms, ounces, etc) .
Calculate the total dollar value of your inventory. Ie. How much did 5 kg of those organic Cello Carrots cost compared to Horse Carrots?
Add on any additional purchases you may have made throughout the week after taking inventory.
Repeat this process at the beginning of next week, and calculate what your total sales were as well.
Calculate your food cost percentage for the week, by following this equation:
What is Good Food Cost?
What is deemed a “good” food cost percentage can vary based on your business. For example, at our East Georgia location, Khoe is a vegan Vietnamese ghost kitchen who specializes in bowls and noodles. From the same station, they recently launched their second brand, Doi, featuring delicious banh mis and baos.
Although the products are different, both concepts are made from similar ingredients, and are priced in the same price range. Their food cost percentages may slightly differ based on key differentiating factors like the cost of vegan baos or rice noodles.
Compare this with Takenaka: a ghost kitchen and food truck specializing in high-end sushi and bento boxes. Their price is much higher and reflects not only the quality of their product, but also the cost of sashimi-grade fish and boutique packaging.
By working in a commissary kitchen, you have lower expenses which affect your overall profitability, but it’s generally assumed for food cost percentage to hover around 28% - 30% of your total sales.
There is also something called “Ideal Food Cost”, which reverse engineers the above formula, and is based on menu item and your target food cost percentage. This formula is here:
A Few Tips to Help Manage Your Food Cost From a Commissary Kitchen
Coho offers group purchasing, at a lower cost for high volume ingredients, such as salt, oil, flour, as well as packaging.
By taking into consideration who your target market is, sales channels, and branding, you can try to increase or decrease your menu price while monitoring sales volume to find your sweet spot.
Research and development starts with knowing your consumer. Although this is easier done in person, try monitoring reviews, engaging with customers online or establishing B2C revenue streams. All of this ensures your product is aligned with your market, and your portions match your price.
Food cost is one of the many ways to keep your business alive and thriving. However, as important as it is to understand your overall food cost percentage, we’ve created a very exciting sheet to help you calculate your food cost percentage per menu item.
Our calculator not only factors in ingredient costs and has a unit converter, but is also built to include labour cost and any packaging costs, all while calculating cost per portion, food cost percentage and profit margins for wholesale. For access to this calculator click here.