Food Cost Percentage vs. Margin. Post-COVID-19 Restaurant Menu Update
April 28, 2020 • 7 minutes
Re-opening a restaurant after the coronavirus shutdown ends will be among the most challenging endeavors most restaurants have ever attempted. New health guidelines will make it more difficult to re-open and probably more costly as sanitation practices & equipment costs will increase. At the same time, social distancing will probably mean fewer tables resulting in fewer guests and therefore less revenue.
And what will be the guests’ response to restaurants upon re-opening? Will guest patronage be a slow trickle, a steady flow, or a floodgate (doubt that it will be a floodgate!) With restaurant profit margins being one of the tightest of most industries, the challenge to succeed -vs- the chances of defeat are higher than ever.
We asked David Buchanan, Chef, Consultant, and Founder of the Chef’s Resources blog, to advise restaurant owners on how to make a restaurant menu after the crisis. Check the examples David gave and learn how to choose the best menu pricing strategy.
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Profit margin -vs- food cost percentage
One of the key strategies for a successful re-opening is a total analysis of your menu pre-COVID-19 to optimize it based upon margin and popularity. And to be clear, just because something on the menu was very popular does not mean that it should not change when you re-open. You may need to modify the recipe, increase the price, or remove it completely.
If you don’t know your sales mix and theoretical food cost percentage then you have already lost the war! Margin is the amount of money you earn from a menu item after the cost of the food is removed.
If your restaurant POS system provides you with a robust food costing software tool, you should have all the necessary numbers at hand and know how to calculate food cost percentage in the system. The higher the margin, the greater the revenue collected and therefore the greater the chance of having a successful restaurant. Now more than ever, margin is more important than food cost % or popularity.
Food cost percentage is valuable only to the extent that it is a relative measuring tool used to compare your theoretical food cost % to your actual food cost %.
If your numbers on the P&L are higher than the average restaurant food cost, it doesn’t necessarily equate to an unsuccessful month or poor kitchen management. The image below examines this in more detail.
These two examples demonstrate the need to track and know your theoretical restaurant food cost. If we look at the restaurant food cost formula, we’ll see that it is basically your food cost based solely upon menu item sales (i.e. does not include waste, over-portioning, theft, or anything else which impacts your food cost). It simply shows the effect of sales mix on your restaurant food cost and profits.
Both examples assume that 1,000 meals were served. One month it was more lobster, the next month it was more spaghetti. With the high lobster sales, you had a 49.6% food cost. With the high spaghetti sales, you had a 37.1% food cost with the same number of total items sold (1,000).
Which is the more successful month? Which P&L meeting will be considered more successful? If you (or your company) think the 37.1% food cost month is more successful, then you need to take a deeper look at the numbers, a look at the ‘bigger picture’.
The month with the high lobster sales generated $46,000 in sales and $23,000 in margin for a 49.6% food cost. The month with the high spaghetti sales generated only $14,000 in sales and $8,800 in margin for a 37.1% food cost. Which would you rather have…$23,000 in margin, or $8,800? Money in the bank is better than low restaurant food cost therefore margin is more important than food cost percentage.
For this reason, knowing your theoretical food cost % (sales mix) is vital to making informed decisions about the health of your restaurant. It is also important to note that during the high lobster sales month, it would have been impossible to have better done than a 49.6% food cost. If you do not know your theoretical food cost, then you would not be able to adequately defend yourself in your P&L meeting.
Menu item popularity advantages and disadvantages
Are your most popular menu items in each category (appetizers, entrees, etc.) driving revenue or cannibalizing revenue? Menu item popularity does not necessarily mean that it is an item you should keep on the menu. This is true for both pre-coronavirus and post-coronavirus. All menu items need to be reevaluated to determine if they meet the minimum average margin needed to keep them on the menu. If your most popular items are below the average margin for that category, then they are probably reducing your overall revenue and they need to be re-examined for their financial contribution to success.
The only time it is worth keeping a high-popularity but low-margin item is if you sell a TON of this item AND it is responsible for drawing people to your establishment who otherwise would not come. If you remove the item, would you lose guests?
The reason menu items are popular is because your guests either love the item, or they love the price. If they love the item, then raising the price will not matter much, sales will continue to be high. But if they love it simply because it is the cheapest item, then you are losing money with that dish. Replace it with a more cost-effective (better margin) yet inexpensive item. Or do both! Guests who love the original dish will pay the higher price, and guests who are looking for that ‘value-added’ or inexpensive item will have a new dish to choose. If the margin on your popular items are askew, here are several solutions that you can try:
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Raise the price.
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Modify the recipe by reducing its cost while keeping the same price (reduce portion size or expensive ingredients).
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Add an additional side/accompaniment to the dish to increase both price & margin
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Replace it with another inexpensive but better margin dish.
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Remove it from the menu (maybe you can add it back after things return to normal.)
Many independent restaurant menus have been static for months, or perhaps even years. Now is the time to try new things. People are used to change right now (a very unusual thing to say!) Most guests are expecting change post coronavirus. Take this opportunity to reconsider restaurant food costing and to experiment with your menu items, your margins, and prices.
Post COVID-19 menus need to revolve around margin more than they do around restaurant food cost percentage or simple popularity. And menu mix analysis should be done every month in order to stay on top of changing prices, margins, and item popularity. In the best-case scenarios, your most popular menu items will also be among the highest margin items on the menu. The hospitality industry is in for some massive changes…be ahead of the curve rather than falling behind it!
