Introduction 

We are in the midst of a food sector with razor-thin profit margins. Restaurants are struggling, and controlling food expenses is more important than ever for maintaining a profitable business.

Additionally, the prices of the dishes on your restaurant’s menu can make or ruin your business. People won’t order a dish if you charge too much. If you set a dish’s price too low, you won’t make enough money to pay for it.

So, to make the most money from your restaurant menu with every dish served, you need to start calculating your food cost statistics. After all, it has a direct effect on your menu price, budgeting, planning, sales profitability, and more.

In this post, we’ll go over the food costing formulae, figures, and percentages that every food business owner should be aware of to run a profitable business.

So, without any further ado – let’s get started.

Also Read: How AI is helping in boosting restaurant revenues and Profits

What is the food cost percentage? 

The food cost of your business refers to the entire amount spent on food and beverage ingredients to prepare menu items. This covers every item in your food stock, from premium cuts of meat to simple seasonings and everything in between and beyond. 

It’s critical to comprehend the precise cost needed to prepare a single meal. The food cost percentage is the amount of money that is spent on food as a percentage of the money that is made from its sale. It assists restaurant operators in determining how much money they make on the sale of a dish vs how much it costs to create that meal.

By comparing your restaurant’s food cost percentages to industry benchmarks, you can determine whether you need to raise menu prices and/or reduce inventory expenses.

Also Read: AI for Restaurant Marketing for Maximum Conversions

The Basics of Food Cost Benchmark Percentage! 

While you know about what is food cost percentage and how important it is for restaurants to calculate it – you might be thinking about what is the benchmark to aim for while establishing the food cost percentages.  

This is especially important when you do not have historical data from your restaurant, looking at industry benchmarks can be beneficial.

Generally speaking, restaurants should keep the percentage of their food expenses between 28 and 32%. This implies that a restaurant will have spent between 25 and 40 cents on the components that go into that meal for every dollar of revenue.

The food cost percentages at upscale restaurants are generally higher, typically around 32%. Food prices in restaurants with small menus (such as pizza parlors) can be as low as 20%. 

For instance, due to the significantly greater cost of its products, a steakhouse can have a food cost percentage that is around 35%. However, a restaurant that specializes in pasta, which is inexpensive to purchase in large quantities, may have food costs of about 25%. In light of the restaurant’s circumstances, both percentages are appropriate.

Also Read: Retail Pricing Strategy AI for Right Prices and Maximum Revenue

Benefits of Calculating Food Costs!

1. Recognize your food’s prices and costs

Calculating your food cost percentage necessitates a thorough examination of the products you’re purchasing and the individual costs of each ingredient. You may discover that a particular ingredient is more expensive than you had anticipated and may no longer be useful in your recipe to maintain its profitability. When you understand food prices, you can decide what to keep and what to avoid, allowing you to price your things appropriately while being profitable.

Also Read: How to Increase Restaurant Sales Without Advertising

2. Experiment with new ingredients.

After you’ve completed your food cost percentage study, you can do A/B testing to check that your food expenses are within the benchmark. Start by identifying high-cost dishes or underperforming items and replace expensive or low-yield ingredients with more cost-effective alternatives without compromising quality. 

Prepare two versions of the same dish—one with the original ingredients and one with substitutes—and test them with customers or staff to gather feedback. Evaluate the impact on food cost percentage, taste, and overall satisfaction. This process ensures that any changes align with your cost goals while maintaining or improving the dining experience.

Also Read: Improved Decisions Through Decision Intelligence

3. Learn about your top sales and underachievers.

Do you frequently run out of certain items? Are there any foods that people don’t often order? Do you know if your most popular things are also the most profitable? When evaluating your menu, having access to this data can make all the difference. There may be menu items that generate greater revenue at a lower cost of production. 

There might be some menu items that sell a lot but have higher food costs and lesser profitability. Understanding your food cost will help you get a clearer picture of menu performance and make the right decision such as promoting the items with less costs and higher profitability to ensure an improved bottom line. 

4. Support New Menu Development

Understanding your food costs is essential when creating new menu items. By calculating the costs during the planning stage, you can ensure that ingredients and portion sizes align with your profit goals. This helps you avoid surprises later and ensures every dish contributes to your bottom line. For example, if a new dish is too expensive to make, you can adjust the recipe or portions to keep it profitable without losing its appeal.

Also Read: How AI is Improving Table-Turnover rate

5. Smarter Purchasing Decisions

Knowing your food costs helps you make better purchasing decisions. If a particular ingredient is too expensive, you can look for alternatives like buying in bulk, using seasonal ingredients or switching suppliers. This reduces costs while maintaining quality. It also helps you manage your inventory more efficiently by aligning purchases with actual usage, saving money, and minimizing waste.

Also Read: AI Solution for Reducing Restaurant Waste

How to Calculate the Food Cost Percentage? 

After a certain amount of time, you can quickly calculate your food costs by utilizing a food cost calculator. This can occur after a week, month, quarter, or year.

However, you’ll need two crucial restaurant metrics before you can make this calculation:

This will represent your total food sales (including beverages). After a specific amount of time, you may easily obtain this information from your sales report.

The second metric is COGS (Cost of Goods Sold). It includes all of the expenses related to producing and purchasing the food you sell. The obvious one is the overall cost of all ingredients.

Also Read: How to Use AI in Restaurant Business

How is the cost of goods sold determined?

The following standard formula can be used by businesses to determine their COGS:

Cost of Goods Sold = (Beginning Inventory + Purchases during a period) minus Ending Inventory

• Beginning inventory is the amount of inventory you have on hand at the beginning of a specific time frame (such as a week or a fiscal year).
• Purchases made over a specific time period. These are extra expenses related to inventories during the same time frame. They are included in the initial inventory.
• The final inventory value. This represents the entire amount of your inventory that remains unsold at the end of the time frame. It is removed from the total to determine your COGS.

With these two metrics in place, calculating your food cost percentage becomes considerably easier.

Also Read: AI for Restaurant Inventory 

The food cost percentage formula for calculating your food cost over a certain period is as follows:

Food cost percentage = (Cost of Goods Sold / Total Food Sales) x 100%

This formula solely determines your restaurant’s overall food cost percentage. However, if you want to make an impact with this amount, compare it to the ideal food cost percentage. The industry average for many full-service and limited-service restaurants varies based on the type of restaurant (such as fine dining, QSR, and fast food), operating costs, cuisine, and current market conditions.

If it is somewhere around 28% to 32% – then it’s great. If it is lesser then it is great too and it leaves you with an opportunity to make things better(if needed). If it’s higher, then you need to work towards reducing it.   

Tip: In general, there is less opportunity for profit and lost revenue if your overall food cost percentage is higher than the suitable food cost. For example, higher overall food costs may limit your capacity to cut menu prices. It may also compel you to increase menu prices in order to stay profitable in spite of rising food expenses.

Let’s Understand with a Simple Example: 

Let’s examine how “Steak House in the USA” would determine their food cost % using the aforementioned formula.

Sales of food in total: $12,000.

Initial value of inventory: $13,250

Purchases totaling $4,400

Inventory value at the end: $12,200

Percentage of food costs = (13,250 + 4,400) – 12,200/12.500

The percentage of food costs is 43.6%.

This suggests that the steakhouse spends 43.6% of its income on ingredients. Given that this percentage is significantly higher than the industry norm of 28–35%, Pizza Kitchen & Cafe ought to consider either their menu prices or their ingredients. 

Now while calculating the food cost percentage is one metric, there are other metrics as well that you need to consider. One of the popular ones is cost per serving. Let’s get to it.

Cost per serving explained.

Before you can begin calculating your optimum menu prices to optimize revenue, you must first determine how much it costs to prepare a given meal, specifically one serving. This approach allows you to maintain profitability while setting competitive menu prices.

Andrea, the owner of Downtown Steak House, wants to know how much their popular ribeye steak costs per serving. Here’s how it goes: 

• 8 ounces of ribeye steak
• 1 baked potato
• 1 tablespoon of garlic butter
• 1 slice of bread
• 2 slices of grilled tomatoes
• 1 serving of steamed vegetables (broccoli and carrots)

Andrea purchases the ingredients in bulk, and the costs are as follows:

• $25 for five pounds of ribeye steak (8 ounces = $2.50)
• $0.75 per baked potato
• $0.15 per tablespoon of garlic butter
• $0.30 per slice of bread
• $0.60 for two slices of grilled tomatoes
• $0.80 per serving of steamed vegetables

Cost per serving calculation:

Cost per serving= 2.50+0.75+0.15+0.30+0.60+0.80=5.10

The ingredients used to prepare one steak dish at Johnny’s Steakhouse cost $5.10 per serving. Based on the total cost per serving, the steakhouse can add its profit margins accordingly to ensure profitability and affordability while considering other expenses as well. 

How to Set Menu Prices at Downtown Steakhouse

At Downtown Steakhouse, it costs $5.10 to prepare a steak dish, and the current food cost percentage is 43.6%. This means the current menu price is:

Menu price = Food cost percentage/Cost per serving ​=0.436/5.10​≈11.70

The current price of $11.70 may not align with Downtown Steakhouse’s profit goals. As, Andrea, the owner, wants to reduce the food cost percentage to 31%. Using the ideal menu item price formula: 

Menu price = Cost per serving/ Ideal food cost percentage = 5.10/0.31 ≈ 16.45

Updated Menu Price for the Steak Dish: 

To achieve the ideal food cost percentage of 31%, Andrea should price the steak dish at $16.45, which is a $4.75 increase.

Impact on Revenue

While $4.75 might seem like a small change, it can lead to a significant increase in revenue. For instance, if Downtown Steakhouse sells 50 steak dishes daily, the additional revenue would be:

Daily increase = 50×4.75=237.50

Annual increase = 237.50 × 365 ≈ 86,688

By optimizing the price of just one menu item, Andrea could potentially boost annual revenue by over $86,000, all while ensuring profitability aligns with their target food cost percentage. If Andrea adjusts the pricing of other menu items as well, the profitability could improve even further! Now Andrea is prepared to update the menu and monitor the changes in sales and overall profitability.

The Best Tips to Reduce the Food Costs & Optimize Profitability

1. Optimize Your Inventory Management

One of the biggest culprits of high food costs is poor inventory control. It’s not just about knowing what’s in your stock but also how much you’re using and when to reorder. Start by implementing inventory tracking tools to monitor usage and avoid overstocking, which can lead to spoilage, or understocking.

Also Read: AI For Retail Inventory Management

2. Negotiate with Your Suppliers

Building strong relationships with your suppliers can pay off—literally. Talk to them about discounts for buying in bulk or locking in long-term agreements. Don’t be afraid to get quotes from multiple vendors to get the best deal. Local suppliers can also be a great option for fresh, seasonal ingredients, often at a better price. It not only helps you save money and optimize profitability but also offers the right price to the customers.

3. Reduce Food Waste in the Kitchen

Food waste can sneak up on you and eat into your profits. It’s time to get creative. For example, vegetable trimmings can be turned into stock, stale bread into croutons, and unused proteins into specials. Portion control is another lifesaver here—train your staff to serve consistent portions to avoid over-serving. A regular waste audit can also help you identify where most of the waste is happening and what you can do to fix it. 

4. Revamp Your Menu

Your menu might hold some hidden gems—or some unnecessary expenses. Start by analyzing which dishes perform well and which don’t. If a menu item costs a lot to make but doesn’t sell much, it’s time to rethink or replace it. Sometimes, swapping out an expensive ingredient for a more cost-effective alternative (without compromising taste) can make a big difference. Focus on popular dishes that are also cost-friendly, as these are your real moneymakers. 

Bonus Tip: Integrate the Best Technology

All the above tips that we discussed to reduce food costs are somehow related to data. You need to leverage your business and customer data to reduce your food costs, update your menu, and boost business profitability and customer satisfaction. 

While you are looking for one, what’s better than getting your hands on a best-in-class data platform with the capabilities of artificial intelligence? AI is on the rise and for all the good reasons. 

To find out, you can check out Livelytics. It is a one-of-a-kind AI data platform that is customized for restaurant businesses and helps businesses collect and transform all the crucial data to optimize costs, menu, and business profitability. 

To know more about it, you can schedule a free demo right away. 

To Conclude 

Understanding and managing your food cost percentage is key to running a profitable restaurant. From calculating the cost of goods sold to setting the ideal menu prices, these steps provide a roadmap to control expenses while maintaining quality. 

Combine this with inventory management, supplier negotiations, waste reduction, and menu optimization, and you’re well on your way to improving your restaurant’s bottom line.

With the right tools and strategies, you can achieve more than just cost control—you can drive growth and set your business apart in a competitive industry. And, if you are willing to try out Livelytics to track costs and streamline the pricing – book your free demo right away. 

With Livelytics you can start crunching those numbers and see the difference in your profitability!