Sohrab Sitaram analyses some industry averages based on the figures of several successful restaurants (as per historical data) to help entrepreneurs benchmark their restaurant (s) against the industry standards.
Food & Beverage
Food cost is the cost of the raw material that has been used to create a particular dish of a restaurant – it consists of the total costs of all the raw materials divided by the total sale of the food items (beverage items and tobacco sales are not a part of the food cost). Technically, the food cost is defined as the percentage of total sales spent on food products in a restaurant; consequently, food cost can be defined as the amount paid in exchange for food. On an average, a typical food cost between 22 to 25 percent is considered a good ratio.
Alcohol sales (beverage sales) are an easy way to increase profitability because the costs are lower and the gross margin is far greater for beverage than for food. However, beverage costs must be controlled if an operation is to reach maximum potential of gross profit from beverage sales. A profitable restaurant typically generates 22 and 28 percent beverage cost. The typical formula to calculate beverage cost is: Beverage Cost = Cost of Beverage Sales/Total Beverage Sales
A very important tool to calculate food and beverage cost is something called recipe standardisation; this is done for both food and beverages. This tool gives information about the food cost of a particular menu item, and also helps in pricing the menu to achieve the desired food cost percentage.
Staffing
Labour costs are typically the second-highest cost in the food service industry, after food and beverage. The majority of labour costs stem from paying employee wages and salaries. As a small-business owner, also include the portion of all employee benefits such as a health insurance or any other benefit.
The industry standards of a typical labour cost or staff cost should not vary more than 20 percent of the total sales of a restaurant, typically the lesser the better. The most important aspect of controlling labour cost is to ensure that the organisation is not too ‘Top Heavy’. This means that in a restaurant the manager and the chefs’ salary should not be more than 20 percent of the total labour cost. Once this is achieved, it is easy to maintain a staffing cost of 20 percent of the total sales.
Another way to control labour cost is by cross-training the staff. For example, a waiter or steward can be trained to be a competent bartender, thus avoiding the need to hire a bartender. Or a steward can also be trained to double up as a cashier, or kitchen staff can be trained to handle two different sections.
Employee Meals
Employee meals should always be monitored very closely as they have a direct reflection on the food cost and are responsible for increasing the controllable cost, and is something that can go completely out of hand. A good benchmark for the employee meal cost should be between 1 and 1.5 percent of the net sales of the restaurant.
Occupancy
Occupancy costs are costs that a tenant incurs to occupy a property, and may include, but are not necessarily limited to, rent, taxes, insurance, landscaping, utilities, security, telephony, cabling, computers, furniture, fixtures and equipment. They have a big impact on the bottomline.
Occupancy costs are both expense-and capital related. These costs can also be affected by proximity to restaurants, entertainment, gyms, shops, residential housing and hotels. Closeness to public transportation can also affect costs as well as traffic in or around the property. The typical industry standard of the occupancy cost should be between 15 and 25 percent. However, anything more than 30 percent severely reduces the viability of a restaurant.
Gross Profit
Gross profit is a very important measure to consider when analysing the profitability and financial performance of a company. It indicates the efficiency of the management in using labour and supplies in the production process. It is affected by many factors. A company can have a high or low gross profit because:
• It has differentiated its products and therefore can charge high prices
• It is being managed efficiently therefore it has low cost of sales
• Its accounting policies move expenses from cost of sales to overheads (or vice versa)
• It is vertically integrated and can purchase raw material at lower costs
The industry standards for the gross profit for profitable restaurants should vary from 68 to 78 percent, depending on the kind of the restaurant in question.
Sale Per Square Foot
This is another ratio that is very important to a restaurant owner as it gives a perspective to the restaurant management as to what the ideal sales should be. A good way is to actually multiply the square foot area (carpet area) by a figure of Rs 20,000, which should ideally give the annual sale.
About the Author:
Sohrab Sitaram is Founder, CEO and Director of Square Root Hospitalities, MGS Hospitalities, and Sohrab Sitaram Consultancy.
