Food Cost as a Factor for Menu Development

“Ask the Expert” features advice from Wade Winters, Vice President of Supply Chain for Consolidated Concepts Inc.

Please send questions for this column to Modern Restaurant Management (MRM) magazine Executive Editor Barbara Castiglia at bcastiglia@modernrestaurantmanagement.com.

Q: What’s the best way to approach menu development?

A: Besides site selection, developing the right menu can make the difference between a successful restaurant, or just another failed restaurant statistic.  Menus must be cost effective from a product and labor standpoint, be sustainable from an availability perspective, and be versatile.  The primary goal is to develop a menu mix that ensures you are always profitable. 

When developing a menu, questions to ask might include:

• Are you going to utilize ingredients in multiple menu items? Are there any ingredients that are only used in one dish?
• What new ingredients will be required? Are the ingredients readily available and will the product cost be steady during the period it will be on the menu?
• What is the food cost, and can the staff execute the dish effectively and consistently?

Many restaurants may think they know their food cost.  But often this is based on the initial cost when the dish was developed.  This changes almost immediately due to fluctuations in the cost of goods. 

Operators must routinely review their menus and calculate their food costs to determine if adjustments are necessary.  While operators tend to think of food cost as a business metric, it should also be heavily factored into the development of any menu. 

If your food cost is low, you have some wiggle room to develop and test more premium offerings in the future.  Conversely, if it is too high, you likely need to restructure the menu.  Food costs for the restaurant industry run typically from 25 percent to 38 percent, depending on the type of restaurant and the sales mix.

So how do you calculate food cost? 

Theoretically, you would add the total cost of ingredients to prepare the item, and then divide the menu price by the food cost to determine the food cost percentage.  You would not factor in labor or waste.  However, to determine Actual food cost you must consider inventory (weekly/monthly).  Take the beginning inventory dollar value, add in purchases, subtract ending inventory dollar value and you get Cost of Goods Sold.  Cost of Goods Sold divided by food sales gives your Food Cost percentage.  Price changes and inventory value costs must be updated based on last purchase price to be accurate. 

As you can imagine, keeping prices and inventories updated is time consuming, especially if it is being done manually and for more than one location.  However, it is critical to the success of any restaurant.  There are many “back-office” software solutions for the restaurant industry that provide inventory management, labor scheduling, and food costing.  Operators should strongly consider one of these systems if they want to know what really is going on with their costs.

While having a unique, craveable menu is the key to getting customers through your door, you won’t be around very long to enjoy the success of the menu if your food costs aren’t in order.