[00:00:00] I want you to imagine that your chef walks into your office at the end of the month. She's holding the latest P and L in her hand, and she doesn't look happy. Hey, boss, Food costs came in at 34%.
[00:00:11] You look up at her. 34? I thought we were targeting 28. She says. We were. You say, so what happened? She sort of shrugs and says, well, you know, beef prices went up.
[00:00:23] And there it is, the explanation I hear all the time. Beef prices went up. Seafood prices went up. Produce prices went up. Our vendors are killing us. There's nothing we can do.
[00:00:33] Well, I've got a question.
[00:00:35] How do you know your vendors are the problem? Seriously, how do you know? Did you cost out every dish on the menu? Did you account for every ounce of product that came into your restaurant? Did you compare what you should have spent with what you actually spent? Did you measure how much food was wasted, spoiled, over portioned, given away, or simply never rung into the pos?
[00:00:55] Or did you look at one number on your P and L, get frustrated, and decide that the problem must be something outside your control?
[00:01:02] Because, see, those are two very different situations. One is a restaurant with a pricing problem. The other is a restaurant with an operational problem.
[00:01:09] And until you know which problem you have, you have no idea what to fix. So today we're going to answer a question I get from restaurant owners constantly. What should my food cost actually be? But I want to do something more useful than just give you a percentage and send you on your way. I want to show you how to determine the right number for your restaurant, how to figure out why you're missing it, and. And what to do next. Because food cost is not some mysterious number that your accountant hands you at the end of the month. It's the result of decisions your team makes every single day. Which means, guess what? You get to do something about it. All of that on today's episode of Restaurant Strategy.
[00:01:46] There's an old saying that goes something like this. You'll only find three kinds of people in the world. Those who see, those who will never see, and those who can see when shown.
[00:01:56] This is Restaurant Strategy, a podcast with answers for anyone who's looking.
[00:02:17] Hey, everyone. Thanks for tuning in. My name is Chip Close. This is the Restaurant Strategy podcast. We are cruising towards 600 episodes. We put out two episodes every single day. We've been at this for the last seven years. Hope you get a lot out of this show. One episode a week focuses on operations. The other one on marketing. All of it is meant to help you level up. If you need more individualized, personalized attention, well, that's what coaching is for. I run something called the P3 mastermind. You can learn more about that
[email protected] as always, you're going to find that link in the show notes. But it's all about getting you to 20% profit consistent, predictable 20% returns. If you think it's crazy or outlandish or, or or out in left field, I'm here to tell you the best owners and operators in the world, the biggest restaurant groups and chains in the world know that they have to target 20% or more. And quick service and fast casual are more like 25, 30, 35. I promise you it's possible. We've worked with hundreds of people over the last five years since launching the program. Go to RSProphit.com to learn more.
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[email protected] and yes, you'll find that link in the show notes.
[00:04:23] Okay, so what should your food cost actually be? If you followed my work for any length of time. If you've been listening to this show, you know I teach something called the 303020 rule, right? 30% for cost of goods sold, 30% for labor, 20% for everything else you spend money on over the month. That adds up to 80% in expenses, which leaves 20% in operating profit. It's a framework for building an insanely profitable restaurant, not a claim that every restaurant in every market will have the same the exact same expense structure.
[00:04:55] Some businesses will need to spend more in one category, less in another. The goal is to balance all those three buckets so that the business produces the return you're targeting. But here's where owners sometimes get confused. When I say 30% for cost of goods sold, I'm talking about blended combined cost of the products you sell. So food, wine, beer, liquor, whatever else your restaurant sells. That does not necessarily mean your food cost should be 30% and your overall cost of goods should be 30%.
[00:05:26] Those are two very different calculations in the restaurant profit playbook. I lay out some starting targets. You can get this book in January 2027, but I already wrote it, so I'll tell you what it says. Food cost should be 30% or lower, wine cost around 25% or lower, with exceptions obviously for high end offerings. But 25% is the number. Beer cost 20% or lower, unless you're brewing your own. And liquor cost should be no higher than 15%.
[00:05:53] Now those aren't universal laws. They're simply targets you can use to start building your budget. But once you blend those categories together, your overall cost of goods sold may be considerably lower than your food cost alone. At least they should be. Let me show you what I mean. So imagine a restaurant generating $125,000 in monthly revenue. 65% of sales come from food, 20% from liquor, 10% from wine, 5% from beer. If food cost is 30%, liquor is 15, wine is 25, beer is 20, meaning they hit all their numbers. Then combined cost of goods sold comes out to 26%. If you don't believe me, I've got a great chart in the book. When the book comes out, I'll tell you how to get it and you can look at it. But trust me, when you do all this, the blended cost of goods sold number should come out to about 26%.
[00:06:39] Not 34, not even 30, but 26.
[00:06:44] And see, that's the power of understanding your sales mix. And it's why I don't want you comparing your food cost percentage to, to another restaurant's overall cogs percentage. See, because you might be looking at two completely different businesses. A restaurant that does a tremendous amount of, let's say liquor sales will have a different blended cost structure than a restaurant that does almost nothing but food. A pizza restaurant will have a different cost structure than a steakhouse. A high end restaurant might intentionally run a higher cost percentage on a particular dish because that dish contributes a substantial number of dollars to the bottom line.
[00:07:18] So the question isn't what number did somebody on the Internet tell me to hit?
[00:07:22] The question is, what number does my restaurant need to hit in order to generate the profit I'm targeting? And once you Establish that target. Then we can start figuring out how to get there.
[00:07:33] We start with theoretical food cost, right? And this is the distinction we need to understand. First, there's theoretical food cost, and then there's actual food cost. Theoretical food cost is what your food should cost based on your recipes, portions, ingredient prices, and what you sell.
[00:07:51] But actual food cost is what it did cost, and it's based on the product your restaurant used during the period. And if you're trying to get your food cost under control, I want you to start with a theoretical right? Why? Well, it's because if your menu isn't profitable on paper, you have no chance of making it profitable in the real world. Let's say you sell a steak for 40 bucks, right? The steak itself costs $8. The potatoes cost a dollar. The vegetables cost a dollar. The sauce garnish, everything else on the plate costs maybe another dollar. So your total cost is $11, right?
[00:08:26] Divided by 40 is 27.5%. That's the theoretical food cost for that dish. Now, imagine you sell a different steak for $36, but it costs you $14 to put it on the plate. And that's almost 39% cost. Those two dishes may sit right next to each other on your menu. They may look equally attractive. They may both sell well. But their economics are very, very different. And unless you've done the math, you might have no idea.
[00:08:55] So here's the first assignment I'm going to give you today. You got to cost out every item on your menu. Every single one. And I mean the whole dish, not just the protein, the sauce, the garnish, the oil, the side everything.
[00:09:07] Take the price you pay for an ingredient, convert it into the unit you use in the recipe, and calculate the cost of the portion. Then add up the cost of every single component. Ta da. That gives you the plate cost. Divide that number by the menu price. And now you've got your theoretical food cost percentage. You do that for every dish. And guess what? Suddenly you have a map for your menu. You know which items are comfortably within your target. You know which items are borderline, and you know which items need attention.
[00:09:36] See, you're no longer guessing now. Now I hear. I can hear somebody saying, well, Chip, that's a lot of work. And I'm here to say, yeah, it is. But you know what else is a lot of work? Running a restaurant that loses money because nobody knows what the food cost actually is. So you don't have to personally build out every recipe card. You can delegate the work, right? Give your Chef and kitchen manager, clear deadlines. Then you review the results. Right. Remember, many hands make light work, but you have to get those cards. And once those cards exist, you update them when ingredient prices change.
[00:10:10] This is foundational work. And when you do it, I'm telling you, you gain something incredibly valuable.
[00:10:16] What? You know, what your food cost actually should be.
[00:10:20] Now, before we look for problems in the kitchen, right. Before we address actual food cost, we need to talk about theoretical and how to actually get them in line. Right? We need to make sense of the menu.
[00:10:30] So if an item's theoretical, food cost is too high. I want you to work through these five levers, right?
[00:10:36] In this order.
[00:10:38] First, you renegotiate with your current vendors. Meaning if something's out of whack, you call your rep, you show them the numbers, you explain what you're trying to accomplish, and you ask whether they can help you get the price to where you need it to be. Don't assume the price on the invoice is the best price available.
[00:10:52] Second source alternative products. So maybe the exact cut of beef you've been using has become prohibitively expensive.
[00:10:59] Well, maybe. Could you use another cut and make an equally compelling dish? Could you maybe change a side or a garnish without diminishing the experience?
[00:11:10] See, your vendor may be able to help you find alternatives. The third piece. The third lever is to explore other vendors. I believe in building strong relationships with our partners, with our suppliers. But a strong relationship doesn't mean that you never compare prices. I want you to go get quotes, understand what other options are out there, and then I want you to give your current vendor the opportunity to compete. Right? So you ask for a better price. He says, no, there's nothing I can do. You look for other SKUs, right? Other cuts of beef or whatever, and he either works for you or not. And your next step is to go to another vendor. And then you compare apples to apples, and you go back to your existing vendor and you say, hey, listen, this guy's giving me a better price. Can you beat that one? You give him a chance.
[00:11:50] The fourth lever is you revisit your portions.
[00:11:54] And I want to be careful here. I'm not suggesting that you secretly make every dish smaller and hope nobody notices. No, what I'm asking you to do is think about what the guest actually values. Meaning if you're serving an eight ounce burger, would a six ounce burger with a better bun, better toppings, and a more thoughtful presentation create an equally satisfying experience?
[00:12:16] Maybe, maybe not. But it's certainly worth Asking finally. Then the fifth lever, and it's always the last one. The last one is to raise prices, Right? Because sometimes that's exactly what you need to do.
[00:12:27] I don't want it to be the only tool you reach for. Right? Meaning if every time food prices go up, you simply increase menu prices, you're ignoring other opportunities to actually improve the operation. You always work through the other four levers first. Then if the dish still needs a higher price to deliver the margin you require, well, then you make that decision deliberately. And those are the five levers. Renegotiate with your vendors. Source alternatives, explore other vendors, revisit portions and raise prices. They address the profitability of the menu. Again, on paper. But see, now we have to talk about the more frustrating situation. When the menu looks profitable, the recipe cards are beautiful, and the P and L still looks terrible.
[00:13:09] This is where we look at the gap between theoretical and actual.
[00:13:13] So let's say your theoretical food cost is 28%. But your actual food cost, like the story I used before, comes in at 34. That's a six point gap. So if your restaurant generates $100,000 in food sales, that difference represents $6,000 variance in a single month, $72,000 over the course of an entire year. If that gap persists, I don't know about you, but that's real money. I could think of very cool things to do with $72,000 this year. And the answer probably isn't to raise every menu price, because the menu, according to your recipe cards, is already capable of producing the result you want.
[00:13:50] What your P and L is telling you is that the problem is that you're using more product than the recipes say you should.
[00:13:57] So where's it going? In the book the Restaurant Profit Playbook, I identify five culprits. The first is portion control. Right? Meaning the recipe calls for a six ounce portion, but the cook is serving seven. The cocktail calls for a measured pour, but the bartender is pouring heavy. Your side dish calls for one scoop, but the person on the line is giving guests two. One extra ounce might not sound like much, but multiply that by hundreds of plates, dozens of shifts, and I promise you, it adds up. The solution is to make consistency easy. You pre portion expensive proteins. You use scales and standard scoops on every station on the line. You use jiggers at the bar. You check stations before service. You make sure the team knows what the standard actually is. Is the second culprit is theft. Now, before you picture somebody walking out of the restaurant with a case of steaks. I want you to consider the less dramatic version. A bartender is getting slammed on a busy Friday night and forgets to ring it around. A server asks the kitchen for an extra side and forgets to add it to the check. An employee makes themselves a drink or a snack without recording it. See, product leaves your inventory, but no corresponding sale gets recorded.
[00:15:06] And whether the omission is intentional or not, the financial result is the same. So build systems that make it easy to record what gets used so you can see what's actually being stolen.
[00:15:18] The third culprit when it comes to getting a handle on actual food cost is waste. Meaning a server enters the wrong order, a cook misreads the ticket, a dish gets dropped, a plate gets sent back and has to get remade. Mistakes obviously happen, but if you're not tracking them, you can't see how much they're actually costing you. So I recommend keeping a simple waste log. And it doesn't have to be sophisticated. The 3 clipboard system works just fine. Meaning you record the item, the reason, and the date. Then you review the patterns. Are mistakes coming from one station, one menu item, one point in service, Right? And now you have something to fix. The three clipboards go on the server side of the pass, the cook side of the pass, and over by the walk in. Because that's where most of the errors happen, right? Things spoil in the walk in, so you throw them out. You want to be able to record it right? Then there, you know, cook thinks it was medium well. It was actually medium rare. So he overcooks it. He wants to record it right there. Tracking that will help you get eyes on whether this is a problem. And again, where the pinch points are, the fourth culprit when it comes to this is spoilage. So you bought too much product, you didn't rotate it properly, Your pars were wrong. Or an item simply didn't sell as quickly as you expected. And now that stuff's in the trash. See, that's why inventory and pars matter. I know you know that. If you know what you have, what you're likely to sell, and what you need to keep on hand, well, then you can order more intelligently. That's the key to managing spoilage. Inventory and pars. The fifth final culprit is discounts and untracked comps. So maybe your staff meal policy allows employees to order anything off the menu. Maybe your team routinely comps food without recording it. Maybe the restaurant gives away more product than people are really realizing it. I'm not telling you to stop feeding your team.
[00:17:04] I'm telling you to establish a policy, then budget for it and actually track it. A planned family meal is very different from an unlimited number of unrecorded orders throughout the day. You can be generous and still be accountable. And see, that's the larger point. Your actual food cost is the result of the systems you've established in your business. If you don't have systems, you're leaving the result to chance.
[00:17:31] Next, I want to talk about how we build guardrails, right? So now that we know where the money might be going, I want to give you a way to keep the problem from repeating. We start with inventory. Take a proper inventory at the beginning and ending of each accounting period so you can calculate the cost of the product you actually need. Your basic calculation is beginning inventory plus purchases minus ending inventory. That gives you the cost of goods used during the period. Divide that by the corresponding sales and ta da. You have your actual cost percentage.
[00:18:04] That's different from simply looking at how much you purchased. See, you might buy a large quantity of product on the last day of the month, but if it's still sitting in your walk in when the month ends, it shouldn't be treated as though you sold or consumed all of it. So you only record what actually got used.
[00:18:20] Next, you got to set pars, right? Know what you need to have on hand and recognize that the right par on a Friday in December may be very different from the right par on a Friday in February.
[00:18:31] Once all that's set, you put a budget in place. One of the tools I teach all of my clients is a declining budget. It's part of the P3 scorecard, meaning at the beginning of every period, you establish how much your team is allowed to spend on product.
[00:18:43] Every time an invoice comes in, you record it. The remaining budget declines as you spend. So now you, your chef, your manager, they get to see how much money is actually left. And you can see whether purchasing is on track way before the P and L arrives at the end of the month. See, that's what a guardrail does, right? It gives you an opportunity to correct course while there's still time before you fly off the cliff. You just sort of ding the side of the car. One more thing. Give somebody ownership of the process, meaning who's responsible for inventory, who's responsible for maintaining recipe cards, who approves orders, who reviews the waste log, who checks the declining budget. And remember, if everybody is responsible, nobody is responsible. Make the assignments, set the deadlines, review the numbers, then Repeat, month after month after month.
[00:19:33] In closing, right, I want you to stop blaming the price of beef. I want to bring it back to that chef who walked into your office at the beginning of the episode. Right. Food costs came in at 34%. The target was 28. And the explanation was that, quote, unquote, beef prices went up. And yeah, I think we're, we're all watching what's happening. Maybe beef prices did actually go up. That's entirely possible.
[00:19:54] But now you know that isn't the end of the conversation because you know how to calculate your theoretical food cost and you know, you know how to compare it with your actual food cost. You know the five levers you can pull when the dish isn't profitable on paper. And you know you should be looking at this ahead of time so that you see when the beef prices are going up. You also know the five culprits to investigate when product is disappearing between the loading dock and the plate.
[00:20:19] Most importantly, you know how to put systems in place. You're not having the same conversation month after month after month. You know we love homework around here. So here's your assignment this week. Choose your five highest selling menu items. Right? Print out the PMIX look and see what your five best sellers are and make sure the recipe cards are accurate for those items. Calculate their theoretical food cost. Then review your actual food cost for the most recent period and if there's a gap, you start investigating. Don't guess, don't blame the vendors, and don't immediately raise your prices. Just find out where the money is going. Because the difference between a restaurant that struggles with food cost and one that manages it successfully is often not the price of the ingredients, it's the discipline of the operation.
[00:21:03] Listen, if you need help with any of this, it's very much what we do in my coaching program, the P3 mastermind. Go to RSprophet.com and learn more about what we do. There's a video there. There's tons of information. You set. Set up a call with me or someone from my team and we'll talk through, answer all of your questions so you understand what the program is all about. Again, my name is Chip Close. I am your host here of the restaurant strategy podcast. I appreciate you making this show part of your week. I will see you next time.
