Lets be realistic – the primary job of a chef is to make money for the restaurant. Now the ways to get there are through creating a product that drives sales, exceeding customer expectations so they return, training the staff to be consistently great, and controlling costs. To this end, YES, food cost is important, however it is critical that chefs and managers understand that it is really contribution margin that holds the key to making money once the guest arrives.
Contribution margin refers to what the individual menu item contributes to the overall profitability of the restaurant. This can be tangible (the amount of money remaining after the expenses associated with making and serving that item are subtracted), and/or intangible (the item encourages the complementary sale of other items that are more profitable or helps to bring in future sales). Although I am not a great fan of “loss leaders” (items sold at or below cost to help generate volume), I do understand and support using certain menu items as a marketing tool.
Let’s first look at the tangible nature of contribution margin. Here comes the basic math…..
A menu item using chicken breast on your menu sells for $12 and costs the operation $4 to prepare. $4.00/$12.00 = 33% cost of goods. This falls within the normal range for food cost in full-service restaurants. Everyone is happy and the menu item contributes $8.00 to cover all other expenses in the restaurant (CONTRIBUTION MARGIN). A Veal Chop entree sells for $32.00 and costs $17 to produce. $17.00/$32.00 = 53% cost of goods. This is far beyond normal “acceptable” food cost for full-service restaurants. Management is not happy. Now here is the kicker: $32-$17=$15 CONTRIBUTION – much greater than the $8 from chicken, yet the other costs of operating the restaurant remain the same whether you sell chicken or veal. The veal is a greater contributor to the financial success of the restaurant even though the food cost % appears to be unacceptable.
The intangible is even more interesting: it is not always fair to make generalizations, yet if you were so inclined to build a statistical study you would probably discover that the person buying chicken is less likely to buy expensive wines, appetizers and desserts than the veal guest. So, one could assume that there is a greater likelihood of selling high profit “extras” with veal orders and contribute greatly to the overall profitability of the restaurant even though the food cost % seems out of whack.
One last measurement: as stated in a previous article: “The Top Line Drives the Bottom Line” – it is very important to convince your servers to up sell and increase sales volume. The 53% food cost veal chop is a natural tool to help sell all of the extras and raise the top line. For the server, the base for gratuity also increases: End of story – everyone wins!
Back to the original question: How Important is Food Cost? There is a case to be made for effective menu planning leading to better contribution. In either case, control to any budgeted percentage is essential for long-term success.
Do you need help with sales and cost of goods? Contact Harvest America Ventures for assistance. Look for Harvest Deep Dive Seminars for restaurateurs coming to a city near you. Coming to: Boston, Albany, Lake Placid, Burlington, and Rochester.
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