Cost Reduction

The Changing Environment Leads Restaurants to Alter Menu Pricing

For most in the restaurant industry, calculating food costs and keeping them at a specific percentage has been the universal protocol for restaurant menu pricing. Targeted food costs usually run between 25 to 35 percent depending on the type of restaurant. This figure is calculated by determining the cost of all ingredients in a dish and then pricing accordingly.

For instance, all the ingredients included in your signature pork belly bun add up to $3.00. If you’re aiming for a 30 percent food cost, this particular menu item will be priced at $10.00. This seems, all-in-all, like a fairly straight forward process and protocol for a successful pricing strategy. Some will also include an “overhead burden” or a percentage of the fixed costs within their calculations.

It does not, however, take into account today’s changing environment—increasing minimum wages and changing tip-credit regulations that have caused food costs to take a back seat to labor costs as restaurant’s number one expense.

Changing your Food-Cost Equation

In addition to calculating food costs, some restaurants are now calculating the cost of labor per dish. This includes how much time it takes to prepare any items that are made in-house as well as taking into account the difficulty in preparation.

Others are looking more towards margins to ensure profitability.

Let’s take a look at your New York Steak entrée. You’ve taken a good assessment of your surrounding competitors and determined that the area will support a price of $44 for this dish. With a cost of $20 that includes all ingredients needed to create the entrée, you realize that your food cost is coming in at almost 45 percent! You begin to wonder if you shouldn’t convert to the increasingly popular fast-casual concept. And then you calculate your margins.

While the previously-mentioned pork belly roll is aligned with your current goal of 30 percent food costs, the margin or profit comes in at a mere $7. Comparing this to your New York Steak with a 45 percent food cost but a profit of $24 helps you to realize that your making a lot more on that one dish.

Valuing the Big Picture

With increasing competition, restaurants are finding alternative strategies that allow them to grow a loyal following while still maintaining their profit margin. Presentation and unique flavors can leave customers satisfied with smaller portions—which fits in well with the “small plate” or tapas trend.

An example of this is Yvonne’s in Boston which offers a tapa-like menu that includes “social plates” such as a Tico Tuna Crudo—a combination of tuna, jalapeno vinaigrette, pickled mango and black bean crema. While the price— $9 to $18 for a single item—may leave you wondering about their profit margins, this type of restaurant becomes a dining experience with patrons encouraged to order and share a variety of items, increasing average check totals considerably.  

Others are offering unique environments. This may include a dog patio in a neighborhood that offers few choices in pet-friendly eateries, or it may entail adding a distinctive entertainment strategy. Any of you that have witnessed the magic that is introduced into an environment by a flair bartender, understands the value, and additional profits, that can be made.

Taking Stock

Set aside time at the end of each week to look at what is selling and what is being wasted. This information will reflect the changes that need to be made such as deleting some items, repricing others, or adjusting portions or ingredients.

In addition, pull a test plate from the line a few times a month and take precise measurements including weight to check for portion control. Ensure quality by taking frequent taste samples.

There are as many reasons as there are restaurants—why people have entered this crazy and sometimes exhilarating industry. If you entered the business with heart but little background in accounting, know that the numbers aspect is easy to learn and is often the missing component required for success.



Cost Reduction
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