The Importance of Margins over Food Costs

Jun 27, 2019

The bottom line is top-of-mind for all restaurant owners in an industry where margins are very slim. Naturally, operators are seeking ways to reduce costs. The importance and logic behind this is sound. However,  we want to dispel the notion that keeping food costs as low as possible alone, is the key to running a profitable restaurant. 

There are multiple operating expenses to focus on to optimize in order to increase profit margins. Food cost is certainly a large factor, but it is not the only area you need to examine when seeking to increase profitability. For example, often restaurant operators seek to purchase the lowest cost ingredients or buy in bulk to take advantage of a discount. This type of practice can inadvertently lead to more food waste (overbuying and the resulting risk of spoilage) and ironically, increases food costs.


The formula for calculating your restaurant profit margin is:

Net profit margin percentage = (net profit / revenue ) x 100

Think about additional areas that can cut into your bottom line, such as labor, rent, marketing, repairs/maintenance, technology, and other overhead expenses. Can you make your labor processes more efficient? Can you utilize better technology and equipment to increase production?

Another opportunity to help increase your margins is strategic menu pricing.  Steer away from pricing menu items solely based on food cost percentage. Hard and fast rules do not apply to menu pricing. However, a deep look at your target market, food cost percentage, labor, and competition will be required. It is wise to examine your menu and look at each item’s contribution margin (menu price – food cost). You will notice that it’s not always the items with the lowest food cost percentage that are the most profitable! This type of analysis can help you further identify ways to increase your margins.

Think of the old saying, “You can’t save your way to prosperity,” which is very fitting when it comes to food costs at your restaurant! If you would like your menu or labor processes analyzed for efficiency, please reach out to Synergy.