When trying to increase profit, most restaurant owners focus on increasing sales, while few focus on decreasing costs.
Simply put, controlling your restaurant costs is a sure-fire path to a more successful business. That's why focusing on lowering prime cost is an important move for every restaurant operator.
We’ll explain what prime cost is, how it differs from prime cost as a percentage of sales (which is another crucial metric), why you should try to lower your prime cost, and how you can go about making it happen.
What is Prime Cost?
Prime cost is the combined costs of your food (or Cost of Goods Sold, known as COGS) plus all of your labor expenses, as illustrated in the equation below.
Total COGS + Total Labor = Prime Cost
When I say total COGS (cost of goods sold), 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.
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, even though their sales are extremely high.
Below is the equation for prime cost as a percentage of sales:
Prime Cost as a Percentage of Sales = Prime Cost / Total Sales
Here’s an example scenario: 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.
Prime Cost = Total COGS + Total Labor
Prime Cost = $30,000 + $5,000
Prime Cost = $35,000
Knowing her COGS totaled $30,000 and her 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.
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%
What is the Average Restaurant Prime Cost?
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 as percentage of sales.
This only leaves about 25 cents per dollar for the rest of expenses – including rent, business services, and paying yourself.
The Ideal Prime Cost
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 cutting corners or taking advantage of your customers, which can hurt you in the long run: the best customers are the ones that keep coming back, and providing a great experience for a good value is a big factor in getting customers to return.
Comparing Prime Cost
Prime cost is extremely volatile and will directly fluctuate with your level of business. The goal here, however, is to keep your 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 dozens of factors that go into determining your food cost. Are you factoring in beverages, plastics, cleaning supplies, and to-go containers? Do you buy sustainable local produce?
The same goes for labor. If your staff is experienced and exceptionally trained, they'll cost you more, but they’ll also ensure a fantastic experience for your customers. That means you’ll be able to make up the difference with slightly higher menu prices, because customers are willing to pay more for an exceptional experience. You’ll also keep people coming back.
Because of this, food costs and labor costs should just be used to determine a benchmark for your own establishment that can be compared and referenced on a weekly or monthly basis – not as a measure of comparison against other businesses.
Why is Prime Cost Important to Track?
Food prices steadily declined from 2011 until June of 2016, but since then have been on the rise, and even more pressing is the steady rise in wages seen across the country. Some states have already reached a $15 hourly minimum wage.
With so many changing costs and demands, tracking prime cost monthly or even weekly keeps you informed so you can raise menu prices and alter your staffing strategies with more accuracy and confidence.
How to Maintain a Low Restaurant Prime Cost
If your restaurant is seeing higher-than-preferred prime costs, set a reasonable timeline and measure your expectations by following these steps:
1) Set a Goal
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."
2) Track Prime Cost Components Regularly
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, impressive items with lower COGS. 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.
Downloadable Prime Cost Calculator
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.