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These volatile times continue pushing restaurants to the brink. After navigating multiple years of COVID surges, restaurants are now faced with rocketing food costs, continued hiring and labor retention struggles, and shaky supply chains.
With so much stacked against the industry, restaurants have to seize all the advantages they can to achieve and sustain their profitability. It's important than ever for operators to take control of costs — this starts with your restaurant prime cost.
Continue reading to learn what restaurant prime costs are, why it’s a critical financial and operational metric, how to calculate and track it, and why operators should always be trying to reduce it.
RESOURCE
Restaurant Cost Control Guide
Use this guide to learn more about your restaurant costs, how to track them, and steps you can take to help maximize your profitability.
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What are restaurant prime costs?
Restaurant prime costs are the combination of your cost of goods sold (COGS) and your labor costs.
Your restaurant COGS includes food, alcohol & other beverages, packaging, and other costs associated with preparing and serving your menu items.
Restaurant labor costs include salaries, total hourly wages, payroll taxes, benefits, insurance, and more.
These "prime" expenses are directly controllable by restaurant operators and managers — which is why you'll see them also referred to as controllable costs. But just because you can control them doesn’t mean it’s easy to control them.
Why do prime costs matter?
Many operators focus on increasing restaurant sales as the primary lever to boost profits.
There’s nothing wrong with this approach. Restaurant email marketing, loyalty programs, and gift card strategies can all help you drive more sales. Generating sales is only half of the conversation though.
Picture your restaurant is operating at maximum capacity — not an empty seat from open to close, booming delivery business, catering on fire, even a food truck that’s booked for months. Not a single sale missed.
There are two ways to increase your profits in this packed-house scenario.
Raise menu prices
Lower prime costs
Here's a deep dive on restaurant menu pricing strategy — but for now, let's focus on lowering prime costs.
So to answer why prime costs matter — taking control of and lowering them can help you increase margins and boost your profitability.
For example, if your $10 chicken sandwich has a prime cost of $7, you’re walking away with $3 in profits. If you can drop the prime cost to $4 — whether that's through lowering food costs, labor costs, or both — you’ve doubled your profits without touching the price.
Prime cost matters because it presents massive exposure to lost margins if left uncheck. And it offers a great opportunity to boost profitability across menu items if managed strategically.
How to calculate restaurant prime cost?
Again, your restaurant prime cost is the combination of your COGS and your total labor costs. It’s represented by this prime cost formula:
Total COGS + Total Labor = Prime Cost
Total COGS
Total cost of goods sold refers to all ingredients and products purchased for use in your restaurant. We’re talking food costs, beverages, packaging, cleaning supplies—essentially anything regularly used to get your products to customers.
Read our restaurant COGS guide to learn more about calculating COGS.
Total labor
Total labor refers to your labor expenses plus taxes, benefits, food discounts, and insurance. If you pay an employee $10 an hour, it actually costs you closer to $12 or $13 an hour with added costs. Include that total number when you're calculating costs.
Read our labor cost percentage guide for more about calculating labor costs.
Restaurant prime cost ratio
You can get a prime cost ratio by comparing prime cost to your total sales. Here's the equation for prime cost as a percentage of sales:
Prime Cost as a Percentage of Sales = Prime Cost / Total Sales
Let's take a look at this example:
A bakery owner wants to know the prime cost of their business last month. They go over their sales reports and see they had a COGS of $30,000.
Looking over the labor reports, they see that the total labor for their team cost $4,000 for the month. But then they have to factor in taxes, comps, and other benefits, which they estimate will bring costs up to $5,000.
Using the equation explained above, this is now a pretty easy math problem to solve.
Prime Cost = Total COGS + Total Labor
Prime Cost = $30,000 + $5,000
Prime Cost = $35,000
Knowing that the bakery owner's COGS totaled $30,000 and their labor cost, including benefits, totaled $5,000, you just have to add these two numbers together to find their prime cost: $35,000.
If their sales for the month were $60,000, they would use that number to figure out the prime cost as a percentage of sales.
Prime Cost as a Percentage of Sales = Prime Cost / Total Sales
Prime Cost as a Percentage of Sales = $35,000 / $60,000
Prime Cost as a Percentage of Sales = 58%
Advanced restaurant operators can also drill down to the prime cost per individual recipe, menu item, or group of menu items. This allows you to quickly determine the profitability of specific items, which lets you see if prices need to increase or perhaps the item needs to be discontinued.
What is the average restaurant prime cost?
According to some industry averages offered by RestaurantOwner.com, a full-service restaurant’s prime costs are typically around 65% of total sales. A limited-service restaurant’s prime costs are typically around 60% or less of total sales.
The ideal prime cost
As a general industry benchmark, 60% or lower is a good benchmark to aim for—with half attributed to COGS (30%) and half attributed to labor (30%).
If you really want to crush it, shoot for 55%. A prime cost below 50% means you're likely cutting corners in some way, which will only hurt you in the long run.
The best customers are the ones that keep coming back and gaining that loyalty requires you to provide customers with a great experience at a good value.
How to maintain a low restaurant prime cost
If your restaurant is seeing a higher prime cost than you'd like, set a reasonable timeline and measure your expectations by following these steps.
1. Set a goal
Set a target prime cost percentage you want to hit by the end of the year and hold yourself accountable when it comes to meeting that goal.
Instead of saying, "I want a lower prime cost percentage," set a specific, measurable, and attainable goal. Plant a flag and engrain some accountability by saying, "I want my prime cost percentage to decrease from 72% to 60% in the next seven months."
2. Track prime cost components regularly
Tracking COGS and labor cost at least monthly can help you hit target prime cost goals. That way, you don't have to wait a full year to realize you should have adjusted menu prices.
Restaurant invoice processing automation is essential for optimally tracking COGS. This is the only way to automatically track product price fluctuations from your vendors.
With automated invoice management, your staff can simply take a photo of a vendor invoice and upload it. The system automatically pulls line-item pricing and quantity details while rolling up the payables to your chart of accounts.
3. Redesign your menu
Make sure your menu is engineered to take advantage of high-impact, impressive items with lower COGS.
If sales are decreasing, maybe it's time to reconsider your ingredients or portion sizes. Assuming sales stay the same after you make the change, you may see your prime cost as a percentage of sales even out.
And if you're not conducting recipe costing and calculating your plate costs regularly, your menu may be suffering from unfavorable margins due to increased costs.
RESOURCE
Menu Engineering Worksheet
Use this menu engineering worksheet, complete with intricate menu engineering formulas, to determine areas of strength and weakness in your restaurant's menu.
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