Average Food Cost Percentage: Calculate It In 3 Steps + Increase Your Profits

If you talk to the most successful restaurant owners what’s the most important cost to watch, they’ll all say food costs. 

Food cost percentage is one of your restaurant’s vitals and it’s simple to calculate. You can’t have a healthy business without getting it right. But it’s a number that’s often over-simplified — and you need to know what related numbers to look at.   

Not knowing your relative food costs is the quickest way to sink even a successful restaurant. Because the more customers you bring in, the less profitable you are. It’s a critical number to get right so a growing restaurant can grow profitably.

While the fast-casual and takeout industry's average food cost percentage falls between 28% and 30%, it's important to remember this isn't a one-size-fits-all number. It is likely higher for fine dining restaurants. For example, a small pizzeria with lower ingredient costs might have a similar food cost percentage to a fancy steakhouse, even though they're spending very different amounts on ingredients. 

I’ll explain in plain language how to calculate your food cost percentage — no TI-84 calculator required. We’ll also go over how to think about this for your restaurant, as will as its limitations. If you want to explore my high-level key points, check out the video below:

What Is Food Cost Percentage?

Food cost percentage tells you what proportion of your restaurant's income goes towards buying all the ingredients that make up your dishes. The lower the percentage, the less you're spending on ingredients compared to what you're selling them for. 

Imagine you run a pizzeria. You buy flour, cheese and other toppings to create those amazing pizzas. Food cost percentage is all about how much those ingredients cost you compared to how much money you make selling those pizzas. 

As mentioned above, this percentage will fall somewhere between 28% and 30%, but I like to split the percentage up into more specific ranges: 

• Drinks should be at or below 15%
• Appetizers should fall between 10% and 20% 
• Main dishes should be between 25% and 40% 

Let's explore why calculating this is important for your restaurant below. 

Why Is Calculating Food Cost Important?  

In a world of slim restaurant profit margins, keeping a close eye on your food cost percentage can mean the difference between being highly profitable and struggling to stay in business.

I’ll break down why this restaurant cost is important:

• Profitability: Food costs directly impact your restaurant's profit margins. A lower food cost percentage means more money left over after you account for ingredient expenses. This translates to higher profits and a healthier bottom line.
• Menu pricing: Knowing your food cost is crucial for setting the right menu prices — prices that will make you money after you buy ingredients. Factor in ingredient costs to ensure your dishes cover their expenses and generate a profit. This means 
• Inventory management: Calculating food costs helps you track how much you’re spending on each ingredient. If your food costs are higher than expected for a dish, it might indicate you're using more of an ingredient than intended in the recipe, or signal that you should swap for a more cost-friendly option. This allows you to spot potential waste and areas where you can cut down inventory costs. 
• Sales optimization: Happy customers mean happy wallets and boosted loyalty. Food cost optimization is key to keeping everyone happy. By ensuring your menu prices are profitable, you can attract customers and keep your restaurant thriving.
• Budgeting and forecasting: Knowing your food cost percentage lets you plan your spending and even guesstimate what inventory will cost down the line.  This translates to setting realistic goals that make sense for your business — not just keeping the doors open but turning a real profit and thriving!

Now that you know why it’s important, I’ll explain how to calculate your average food cost percentage with some real-life examples. 

How To Calculate Food Cost Percentage 

Calculating your food cost percentage is easier than it appears at first glance: Just take the total amount you spend on food for a specific period and divide it by your sales from food sales during that same timeframe. I’ll drop the formula below: 

Food cost percentage is broken down into costs of goods sold (COGS) and your overall sales. Let’s first find out how to calculate COGS:

Step 1: Determine Your COGS

Your COGS, or cost of goods sold, is how much you spend on all the ingredients that go into your dishes, like a grocery bill for the restaurant. Here’s the formula I recommended using: 

Let’s put this in a real-life scenario 

You’re the owner of a pizzeria. You take stock of your pizza supplies at the beginning of the month and find that you have $1,000 worth of flour, cheese, pepperoni, veggies and other pizza essentials. 

Throughout the month, you continue buying new ingredients to keep your inventory stocked. Your receipts show you spent an additional $1,500 on cheese, pepperoni, flour and other supplies. 

At the end of the month, you do another inventory check and see you have $700 worth of leftover ingredients. 

Now, you’re ready to plug your numbers into the formula:  

So, your COGS for the month would be a total of $1,800. Next, let’s factor in your overall sales. 

2. Calculate Your Overall Food Sales 

Your overall sales is the total amount of money you bring in by selling your menu items. To find this number, you can:

• Gather sales data: You'll need information on the total revenue generated from selling your food items during the same period you used for your COGS calculation (for this example, we’ll focus on the month). This data can come from your point-of-sale (POS) system or sales receipts.
• Focus on food only: While your POS system might track all your sales (including drinks, merchandise, etc.), for average food cost percentage, you only need the revenue specifically from your food items.
• Manual calculation (optional): If you don't have a fancy POS system, you can manually calculate your food sales by totaling up your receipts for food items during the chosen period.

Let’s apply this to our pizzeria example from above. Looking at the same month you used for COGS (where you had a COGS of $1,800), you see your POS system shows your total food sales for that month were $5,000.

Now, you have both numbers you need to finish calculating your average food cost percentage. 

3. Find Your Food Cost Percentage 

As a reminder, here’s the formula for finding your food cost percentage: 

Let's revisit our pizzeria example for this final calculation: 

• We found that your COGs for the month were $1,800
• We also found that your total sales were $5,000 for that same month

Your pizzeria's average food cost percentage for the month is 36%. This means that, on average, the cost of your ingredients makes up 56% of the revenue generated from your pizzas, which is aligned with the 20%-40% range for entrees I mentioned at the beginning of this post.  

But don't get too hung up on that perfect food cost percentage. It can wiggle a bit, depending on your situation. And, it’s an average. It gives you a general idea of how food costs are affecting margins but without looking at specific dishes, a lot of information is still in the dark. 

For example, fancy dishes with premium ingredients will naturally cost more than, well, a hamburger patty. So, restaurants with pricier menus can expect a slightly higher ideal food cost percentage than your local burger joint.

Also, if you have a higher sales volume, like a burger restaurant, you’ll likely get better deals from suppliers who sell in bulk, which will lower your average food cost percentage. Also, these high-volume items will likely cost you less on labor since they tend to be so easy and quick to make compared to other labor-intensive dishes.  

On the other hand, a steakhouse will have lower sales volume for expensive items, like quality meat, so the food cost percentage will be higher.  

The key is to keep an eye on these things and adjust your menu prices or swap out ingredients as needed. This way, you can make sure you're raking in the profits, no matter what kind of food you're selling.

How To Use Food Cost Percentage To Maximize Profitability

Food cost percentage is more than just a number — it's a powerful tool to boost your restaurant's profitability. Here's how you can leverage it to cut down on costs, save money and become a profit powerhouse:

• Reduce waste: Food cost percentage can indirectly highlight areas where ingredients might be going unused. For example, inaccurate tracking and forecasting could lead to ordering more inventory than needed, which could result in excess food that goes to waste. Implement better inventory control practices to minimize waste and keep your food costs in check. 
• Cut spending: Food cost percentage can tell you a lot about how much you’re spending on ingredients and menu items. If certain menu items aren’t selling well, you’ll know not to include them in your next inventory order. Consider using an inventory app that can help you organize your inventory. ‍
• Bulk up your savings: Knowing your food cost percentage helps you understand your ingredient usage patterns. Use this knowledge to negotiate bulk purchase discounts with suppliers. The more you buy, the more you save.‍
• Optimize your menu: Leverage food costs to identify profitable menu stars and find ways to promote them, like upselling. For example, restaurants target a 3x markup, but some dishes can get too pricey. Instead, I recommend strategically pricing key items on the higher end and then suggesting inexpensive add-ons, boosting overall meal profitability. And, Owner.com can help automatically suggest these upsell items for your dishes via our online ordering and branded mobile app.

Even negotiating with your supplier and saving on those bulk purchases can make a big difference! Imagine your food cost is 32% now. By cutting that by just 2%, a restaurant making $50,000 a month could see an extra $1,000 in profit every month. That adds up fast.

Limits of Food Cost Percentage

As I mentioned above,  a menu item can make up for a “worse” food cost percentage by selling for a higher volume, netting the restaurant more in the end. Food cost percentage isn’t perfect, so I wanted to cover some limitations and considerations: 

• Factor in your other costs: Food cost percentage alone doesn't account for other significant expenses like labor, rent, utilities and equipment maintenance. So you shouldn’t assume you have a “clear bill of health” just because your food cost percentage is within the recommended range. 
• Food costs vary: Food costs vary for restaurants (like fine dining and fast food restaurants) due to different expenses and business models. Even within a menu, some items might be priced or upsold to encourage buying higher-profit dishes.
• There’s no magic number: The “best” or ideal food cost percentage can vary greatly. For example, a restaurant with an expensive wine list could decide to absorb a higher food cost on their dishes since the high-quality food led to the guests ordering the costly wine. 

As you get a grasp on food costs, understanding these limitations can help you get a full picture of your restaurant’s financial health so you can ensure you’re growing in the right direction and remaining profitable. 

Master Food Cost To Maximize Profits

Food cost percentage might seem like a back-of-house number, but I’ve seen it play a huge role in attracting customers and boosting your sales. Chefs know how to make great food; restaurant owners know how much great food makes their business. Keeping your food cost in check ensures your menu prices are competitive and still generate healthy profits. 

Remember, happy customers come from delicious food and a thriving business. So, I recommend making the food cost percentage your secret weapon. Be sure to regularly calculate and analyze this metric to unlock its power and watch your profits climb.