Food costs in restaurants have traditionally been evaluated in terms of percentages. A $5 menu item with ingredients costing $1 have a food cost of 25%. But the costs that go into a dish are more than just what’s on the plate, and a new approach to the math will have a greater impact on your business’s bottom line.

Food costs have stayed relatively consistent for several years, but overhead—especially labor and occupancy costs—have gone up significantly, moving food ingredients from first to third place. It’s no longer the best practice to consider only food cost percentages when setting menu prices, nor are the lowest-percentage items necessarily the most profitable.

Margin Over Percentage

Lower-priced menu items often have small food cost percentages, but premium dishes—even with their higher food costs—will generally net more profit at a higher margin. An $8 appetizer with a 10% food cost yields a profit of $7.20. But a $32 steak with a 35% food cost generates almost $21 in profit. To stick rigidly to a food cost percentage would either prevent you from offering premium dishes or would greatly compromise the quality of the ingredients (and then no one wins).

Accounting for All Food Costs

The ingredients for each dish, of course, don’t account for the total cost that goes into preparing and serving it. The labor and overhead costs must be factored in as well, plus side dishes, sauces, dressings, and other elements added to the plate. With the increasing trend in house-made gourmet items, labor can include more than plating, serving, and washing dishes. If the tortillas are hand-made, or the rolls and buns are a house specialty, then labor time (plus ingredients) factor in.

The popular method of calculating food cost percentages and tacking on a few pennies to account for labor won’t do the job. Actual food costs (in dollars), plus labor costs for each part of the process (from kitchen to table to kitchen) will help you get to a realistic margin upon which you can set a menu price. Without understanding these actual costs (or at least far better estimates), it’s difficult to juggle pricing and profit that will add up to success.

• Set prices too low, and you’ll hemorrhage cash.
• Set prices too high, and you’ll lose customers.
• Underestimate labor costs and you’ll be blindsided with minimum wage increases.
• Focus too much on food cost percentages, and you’ll cut corners on ingredients, and possibly damage your reputation.

Delighting Customers

Food value is much more than pricing to customers. Attractive plating, generous portions (especially of sides), and unique presentations convey pride and appeal to customers—and can even increase your profit margin. Generous sides cost less than entrée proteins, but leave customers feeling satisfied. Sauces add flavor and spice, and can jazz up a basic grain like rice. Trying out different plating methods (which costs you nothing) can help you find a method that increases the perceived value of a dish that you could actually charge more for it. Ultimately, the value of your menu items is what your customers are willing to pay.

Reducing Waste

Rather than skimping on ingredients or even staff costs, find savings by running a more efficient kitchen. Reuse kitchen scraps creatively (such as fruit and vegetable trimmings in cocktails), use sustainable products, buy whole animals to butcher in-house, and use vegetables that are perfectly fine even if they’re not the prettiest. Waste-reduction not only has immediate cost benefits, but as consumers increasingly demand sustainable and responsible practices from the restaurant industry, you’ll gain a loyal and enthusiastic clientele that appreciates that you share their values.

For the best financial outcome for your restaurant, it’s time to rethink restaurant food costs, accounting for dollars (not just misleading percentages), labor costs, overhead, and customer demand. You may even be pleasantly surprised not only by how much you can save, but how much your customers are willing to spend.

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