In today’s world, food costs are a major concern for both consumers and businesses alike. Whether you’re shopping for groceries or running a restaurant, understanding how food prices are determined and how they fluctuate is crucial for making informed financial decisions. In this blog post, we will explore what factors contribute to food costs, why they are important, and how you can better manage them.
What are Food Costs?
Food costs refer to the total expenditure or purchases required to produce the food you will serve to the customer. For a business, particularly in the hospitality industry, food cost is a key metric used to determine the efficiency and profitability of operations. Food costs include the price of raw ingredients, packaging, transportation, labor costs related to food preparation, and waste management.
The Components of Food Costs
• Raw Ingredients: The price of ingredients plays a significant role in food costs. The type, quality, and origin of ingredients can significantly impact the total cost. For instance, locally sourced produce might be more affordable than exotic imports, depending on the season and supply chain fluctuations. It is important that food service operators constantly monitor food prices to ensure that they are maintaining their desired profit margins.
• Labor Costs: Preparing and serving food is a labor-intensive process. While we always prefer to separate food costs and labor costs, it is important to know the average hourly wage of your kitchen staff to determine if it make sense to prepare an item from scratch. We call this the “Make vs Buy” equation.
• Storage: Refrigeration, and storage all require significant investment to ensure that the items you are purchasing maintain their quality for as long as possible. In future post and podcast, we will explore the best practices related to inventory management.
• Waste: Waste is a significant cost component that often goes unnoticed. For restaurants, it could be leftover food, spoilage, or food preparation errors. Waste occurs in every element of a food service operation, from over ordering, to spoilage, to over production, over portioning, incorrect orders, and ultimately to leftovers being thrown out. With proper systems in place to forecast ordering, manage inventory and production, and ultimately track amount made, sold, and leftover, food service companies can save thousands of dollars monthly.
Why Food Costs Matter
• Profit Margins: In the restaurant industry, food cost percentage (the ratio of food costs to total revenue) is one of the most important metrics to measure profitability. Every segment of the food service industry will have different targets for food cost as a percentage of sales, but a broad industry standard is 28%-32%. This means that for every $1.00 in sales, roughly $0.32 of it will need to go to food purchases.
Tips for Managing Food Costs
• Plan Purchases – Use a system to forecast the exact amount of each item you will need to prepare the total amount of items to be sold. We recommend ordering based on weight or volume of items to be sold, and based on a dollar value budget pegged to estimated revenue for the time that the order will last.
• Negotiate with Suppliers: For businesses, negotiating with food suppliers for better prices or discounts, especially for large orders, can help bring down overall food costs. Also, consider diversifying suppliers to find the best deals. Food service companies should explore opportunities to partner with other companies through “Group Purchasing Organizations,” known as GPOs. Alternatively, small companies can choose to shop prices by using multiple vendors and search for the best prices or choose to partner with one key supplier in the hopes of negotiating better prices and better service for their loyalty.
• Shop Seasonally: Fruits and vegetables that are in season tend to be cheaper, fresher, and more flavorful. Taking advantage of seasonal produce can reduce costs while supporting local agriculture. This may mean that you will need to alter your menu occasionally to ensure that you remove items that are not available or are higher priced than normal. This will also allow you to highlight items that are at the peak of freshness and possibly lower priced.
• Reduce Waste: Monitor what you have on hand and be flexible to create weekly specials that will allow you to use up excess items in inventory. Monitor production (food prep) to ensure that staff members are utilizing as much of every item as possible and monitor portion sizes to ensure that staff is not overserving.
Finally, remember that every item in your walk-in cooler, dry-stock, and anywhere in your department for that matter represents money that was spent. It is your responsibility as an owner to ensure that your staff take costs as seriously as you do. If you feel that all of this is to much to worry about while trying to run your core business, reach out to us at Food Service Solutions LLC to get professional advice on how to improve every aspect of your food service department or potentially just have us operate it for you.
Imagine how easy life would be if you never had to worry about dealing with complaints from guests about cold food, late service, or even worse, worrying about health department scores and money literally being thrown in the trash all day every day. If you think you cannot afford to hire someone to help in controlling your food service, think again, most companies we partner with realize a net savings and increase in the bottom line even after factoring in our cost. Many of our partners are amazed at our initial business review results and astonished at how much money they have been losing in their food service department.
If this sounds interesting and you think that having us do a free business analysis could potentially benefit you, simply fill out the contact form on our website and we will have someone reach out to you very soon.
Thanks,
FSS
Food Service Solutions 