MarketMan customer The Other Bird, a Canadian hospitality group, got serious about optimizing inventory management and implemented strategies to lower Cost of Goods Sold (COGS) by 10%, adding tens of thousands of dollars to their annual bottom line.

How did they go about it?

Strategies to Lower COGS: Know Your Costs

Successful industry veterans know their food costs. To be successful, and to know the path to profitability, you need to be intimately aware of the accounting components of restaurant profitability.

Let’s take a quick refresher course on standard restaurant costs.

Variable Costs are those that are based on creating the dishes and beverages that are delivered to customers. Ingredients, beverages, packaging, and cleaning supplies are just a few examples of variable costs. These costs can vary greatly over even a short period and can affect short-term profitability.

Fixed Costs are just that – more predictable costs with less change over time. Leases, payment processing, utilities, taxes, license fees, and employee compensation and benefits are examples of fixed costs. Unlike variable costs, fixed costs are difficult to lower with any agility.

Food Cost and Cost of Goods Sold (COGS) are related but not the same thing.

Food Cost is the cost of the food items used to prepare a menu item. Food cost includes the cost of ingredients and any other costs associated with the preparation and presentation of a dish like garnishes and staff labor costs directly associated with food preparation. Food cost is often expressed as a percentage of the menu price of the menu item.

COGS includes all costs associated with producing and delivering the menu item to a customer. In a restaurant, COGS would include the cost of not only food items, but also any other items that are directly related to the production of a dish, such as beverages, cooking equipment, packaging, kitchen supplies, cleaning supplies, and similar.

The average COGS for a successful restaurant can vary widely depending on factors such as the restaurant type, location, menu prices, and operational efficiency. But recent industry benchmarks have reported a target COGS of 28-35% of total revenue for a successful restaurant.

COGS is important to calculate Prime Cost. The equation for prime cost is calculated by adding COGS and labor cost.

Both prime cost and COGS are important in the calculation of Prime Cost Ratio. The prime cost ratio is a measure of a restaurant's overall profitability and is calculated by adding together the cost of goods sold (COGS) and total labor costs, then dividing that sum by total revenue for a time period (usually a week or month.). Like food costs, the prime cost ratio can vary widely depending on the type of restaurant, location, menu prices, and staffing levels.

According to industry benchmarks, the average prime cost ratio for restaurants is around 60-65%. This means that the combined cost of goods sold and labor costs make up 60-65% of total revenue for a typical restaurant. Note: this average can vary significantly depending on the type of restaurant, the location’s cost of living, and variables in a restaurant's operations.

It's also worth noting that while the prime cost ratio is a useful profitability benchmark, it’s not the only measure of success. Factors like customer satisfaction, repeat business, and revenue growth may be just as important.

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