THE CONSIDERATION OF FOOD COST PERCENTAGE ABANDONMENT

Cost percentages are a common metric hospitality operators use to evaluate food and beverage department performance. I removed this strategy of menu pricing and performance factoring back in the early 90’s, and I am here to suggest you do the same. Percentages can be useful as a supplementary reference when read and understood correctly, although, misunderstanding or non-use of percentages is what I generally encounter when in the field.
 
For decades, chefs have been pressured to reduce their food cost percentages, however, this is an old-school approach and provides unreliable data with misleading interpretations of how well a business is performing. My suggestions of unstable results equally occur for the beverage side, but I will focus specifically on the food department. One significant misunderstood aspect evidenced is that an operator can encourage a food cost of 40% with higher profits compared to the 35% food cost they may be pursuing if the menu engineering is correct and the leveraging and selling of menu items is managed properly.
 
Another method that has been around for a long time but not as commonly used in the industry, is Contribution Margin¹. Contribution Margin (CM) is the amount each item contributes to profits and is more valuable as a tool than the food cost (FC) percentage. The method of CM includes knowing your actual recipe costs and adding a profit amount to the cost to establish the menu price instead of using a percentage. Using CM allows operators to understand and differentiate among the best items to sell for performance. A percentage-based consideration is not efficient and considers more parameters to generate answers. Contribution Margin use is simpler and when used in connection with Sales Mix² information improves a competitive edge with more profits from the same covers, thus increasing performance factors.
 
Comparing Percentage and Contribution Margin Strategies
 
When using percentages as a metric
($5 cost of recipe / 33% food cost assumption = $15.15 menu price)
1)      You establish recipe cost and menu price variances based on a balance of return that can accommodate a 33% food cost. (Adjusted based on your desired percentage)
2)      You must have control over your sales mix, which determines the balance of the food cost percentage you are trying to achieve, however, realize that a lower percentage does not mean the best profit. (Sales Mix is the variety of items you sell daily)
3)      Purchase and preparation costs must remain consistent. (When costs change percentages change)
4)      Cost Of Goods Sold data is required for daily and monthly percentage evaluations.
 
When using Contribution Margin as a metric
($5 cost of recipe + $10.15 = $15.15 menu price)
1)      You establish recipe cost and construct the menu price by adding the amount of profit desired to the cost reasonable to achieve the best profit on each item. (Percentage is not a factor)
2)      You must have control over your sales mix, however, when you know how much each menu item contributes to profits you have an advantage in knowing what to sell. (Percentage-based menu pricing does not readily offer this information)
3)      As costs change you know exactly how much this affects the item. (Percentage-based menu pricing does not readily offer this information)
4)      Cost Of Goods Sold data is not required in determining daily or monthly profits. (Daily and monthly profits are readily available with an Item Sales Report with corresponding CM profits applied)
 
Let’s assume you have a steak, potato, and vegetable plate where the recipe cost is $12 and the cost percentage on this menu item has been determined at 35 percent. Using a 35 percent food cost the menu price on this meal is $34.28, or a $22.28 Contribution Margin. Compare this with a chicken, potato, and vegetable recipe cost of $7 with a 30% food cost and the menu price for this meal is $23.33, or a Contribution Margin of $16.33, thus the chicken has a lower food cost but a considerably lower contribution to profits. With these considerations, you must decide if raising or lowering a price will factor into revenue or profits in any way, and at the same time the percentage changes. Applying percentages and chasing a target is difficult, but selling based on proactive considerations where you know the items to sell, based on what each item contributes to profits, leads to better performance
In both food cost percentage and Contribution Margin you need to understand processing, waste, and shrinkage in recipe and menu factoring.
 
Costs Management
Decisions immediately affect profits before they are realized in reports, and this becomes compounded in one direction or the other each time the process is repeated.
Methods supporting better performance have many instruments at our disposal. If you read my book Focusing On Expense Loss³, implementing cost management is essential in today’s success, and anyone who says otherwise is suggesting that expenses do not matter. Increased revenue does not equate to increased profits unless you are managing the expense side too. In today’s climate, this book offers excellent solutions.
 
Menu Mix Salesmanship
Innovative training to sell the correct menu mix is not a common tactic used by establishments as operators are afraid to share data with the teams responsible for marketing the menu. However, if your frontline people are provided the 5-10 most profitable items to market most often when tableside, higher profits will follow.
If you want higher profits, sell the higher profit items more often, but you must know what they are and not guess.
1.      Contribution margin - Wikipedia
2.      Sales Mix: Definition, Uses, and Examples (investopedia.com)
3.      https://www.lopolitohospitalityconsultants.com/focusing-on-expense-loss.html