Most restaurant owners are focused on increasing sales, while very few focus on decreasing costs.
Controlling your restaurant costs is a sure-fire path to a more successful business. That's why focusing on lowering prime cost is a natural move for any business-minded restaurant operator.
What is Prime Cost?
Prime cost is the combined costs of your food (in your restaurant's case, your COGS) and labor expenses, illustrated in the equation below.
However, this isn't the end of the story. You'll need to compare your prime cost to your total sales. Otherwise, high-volume and heavily-staffed restaurants may be seen as less efficient because they have a larger prime cost.
Below is the equation for prime cost as a percentage of sales:
Let's look at each of these components.
When I say total COGS (cost of goods gold), I am referring to all products purchased for sale in your restaurant.
Click here for a quick way to calculate costs of goods sold.
Total labor refers to your labor expenses plus taxes, benefits, food discounts, and insurance. An employee that you pay $10 an hour actually costs you more like $12 or $13 an hour, so you must include the total number when calculating costs.
Click here for a quick way to calculate your labor costs.
A bakery owner wants to know the prime cost for her business last month. She goes over her sales reports and sees she had a COGS of $30,000.
Looking over her labor reports, she sees that the total labor for her team cost $4,000 for the month. However, she then has to factor in taxes, comped food, and other benefits, which she estimates will bring costs up to $5,000.
Using the equation explained above, this is now a pretty easy math problem to solve.
Knowing the COGS totaled $30,000 and the labor cost including benefits totaled $5,000, we simply had to add these two numbers together to find the bakery owner's prime cost, $35,000.
If her sales for the month were $60,000, she would use that number to figure out her prime cost as a percentage of her sales.
Use the calculator below to calculate your restaurant's prime cost and prime cost as a percentage of sales!
According to BACON, a software tool specifically designed to track restaurant prime cost, the average new user is running between a 74% and 76% prime cost.
This only leaves about 25 cents per dollar for the rest of expenses – including rent, business services, and paying yourself.
Generally speaking, you want your prime cost to be below 60% of sales. If you really want to crush it, shoot for 55%. A prime cost below 50% means you are likely taking advantage of your customers, which can hurt you in the long run and create opportunity for competition.
Prime cost is extremely volatile and will directly fluctuate with your level of business. The goal here, however, is to keep the prime cost as percentage of sales number as consistent as possible. If you own a seasonal business, you will expect to sell less in slower months, but you can also expect to have a smaller staff for every shift. Plan accordingly so your prime cost percentage doesn't shoot up when your sales mellow out.
The biggest piece of advice I can leave you with is this: do not compare bulk prime cost with another restaurant's and consider yours to be better or worse. Why? Think about the multiple factors that go into determining your food cost. Do you include beverages, plastics, chemicals, to-go containers, etc.?
The same for labor. If your staff is experienced and exceptionally trained, they'll cost you more. That said, these costs are reflected in menu prices, since guests pay more for this type of service.
Because of this, food costs and labor costs should just be used to determine a benchmark for your establishment that can be compared and referenced on a weekly or monthly basis by you and your team – not your friends in the industry.
Food prices steadily declined from 2011 until June of 2016, but since then have been on the rise. In fact, according to the U.N. Food Agency, food prices rose 8.2% in 2017 and nearly 17% from the lows in 2016.
With so many changing costs and demands, tracking prime cost monthly or even weekly keeps you informed in your role so you can raise menu prices and alter your staffing strategies with more accuracy and confidence.
Remember, your prime cost can get too low. If your restaurant is seeing higher-than-preferred prime costs, set a reasonable timeline and expectation by following these steps.
Set a target prime cost percent 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 like "I want my prime cost percentage to decrease from 72% to 60% in the next seven months."
Track your COGS and your labor cost at least monthly to help you hit your goal. That way, you don't have to wait a full year to realize you should have changed menu prices.
3) Redesign Your Menu
Make sure you have a menu that is engineered to take advantage of high impact items with lower COGS but still impress your guests. If sales are going down, 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.
Want to be able to calculate your restaurant prime cost wherever you go? Download this free restaurant prime cost calculator to keep on your computer or phone.