Restaurant cost of goods sold (COGS) is one of the most important metrics you need to track for your restaurant business.
Why?
Because it gives you an accurate picture of what exactly you’re spending on each menu item. You get greater control over your restaurant costs, and you can make better decisions on menu pricing, vendor selection and overall inventory management.
But what exactly is COGS? How do you calculate it? And how do you lower your COGS to increase profit margins?
We answer all these questions (and more!) in this article.
Let’s dive in.
What is a restaurant’s cost of goods sold?
The cost of goods sold (COGS) is the total cost of the ingredients and materials used to make a menu item. This includes everything that goes into producing the item, but doesn’t include indirect costs (such as labour costs and overhead expenses).
Let’s use a cheeseburger as an example. To produce this item, the COGS includes the bun, the burger patty, the cheese, the salad, the sauce and so on. If the burger is for delivery, the COGS also includes the packaging.
It’s an important metric for calculating your gross profit. For gross profit, the COGS is taken away from total cost of sales. To calculate your net profit, you deduct payroll, rent, bills and equipment costs.
How do you calculate restaurant costs of goods sold?
COGS can be broken down into this formula:
Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of goods sold
Here’s what each one of these parts of the formula means:
- Beginning inventory — The amount of inventory you have left over when you begin. Say you have £2000 of inventory from the week before on a Monday when you begin counting, that’s your beginning inventory.
- Purchased inventory — The inventory that comes in during the week – £1000 of orders could come in during the week
- Ending inventory — The inventory you have at the end of the week. For example, you could have £500 of inventory left on your shelves at the end of the week.
Using the formula this would mean that the total cost of goods sold is £2500:
Beginning Inventory (£2000) + Purchased Inventory (£1000) – Ending Inventory (£500) = Cost of goods sold: (£2500)
Why is COGS important for your restaurant business?
This metric is important for a few reasons:
- To control costs — Analysing COGS gives you an accurate insight into the true cost of your menu items. This means you can identify cost-saving opportunities, such as negotiating better prices with suppliers, optimizing portion sizes, or sourcing alternative ingredients.
- To increase profitability — COGS is a major component of a restaurant’s operating expenses and overhead costs. By controlling COGS, you can maximise your gross profit margins, which ultimately increases profitability.
- To optimise menu pricing — Properly calculating COGS helps you determine optimal menu prices to ensure they cover your costs but remain competitive in the market.
- To improve inventory management — COGS is closely tied to inventory management because you’re so focused on what items you’re buying and how much they cost. As a result, you can prevent waste, spoilage, and overstocking, which can inflate COGS and reduce profits.
- To aid financial planning and analysis — Monitoring COGS helps you track performance, identify trends, and make informed decisions about purchasing, pricing, and menu changes.
5 simple but effective ways to lower your restaurant COGS
Ideally, your COGS should account for no more than 31% of your sales. However, if you feel your COGS is a bit on the high side, we’ve outlined several tips to lower this number in the next part of this article.
Get the best value from your vendors
One way to lower your COGS is to buy ingredients from your suppliers at a lower price point. This means negotiating prices or finding lower-cost ingredients, but without sacrificing the quality of the products you are buying.
In some cases, lower prices = lower quality ingredients. If you want customers to keep returning to your restaurant, you must continue to deliver good quality food. So, if you decide to shop around and find a better deal, make sure the quality is just as good as before.
Hot tip 🔥 It’s also worth taking sustainability into account. Studies show that diners want environmentally-friendly food, with 70% of diners saying that they’d pay more for their dish if it’s sustainable.
If you start looking for other options, take this into account. You might not lower your COGS, but you could increase your prices to boost profit margins.
Buy in bulk
There are other ways to get better deals with suppliers – one of these is to buy in bulk. Suppliers usually give a discount on ingredients when they are bought in greater volume. Why? Because it’s easier for them to get rid of more ingredients in one go than it is to find different buyers.
The only thing about this strategy is that you need to be careful about what food you buy in bulk. For example, you may not want to buy meat or vegetables in bulk if you aren’t sure you will sell it all – the danger is that it could spoil.
We recommend buying non-perishable items or items you know you are going to sell out quickly. Also, consider if you have the proper storage space for excessive items as it could start getting in the way!
Hot tip 🔥 Use a restaurant management platform like Nory to ensure you only bulk buy ingredients that meet customer demand. That way, you can minimise your COGS and reduce your food waste. It’s a win-win!
Track and reduce your food waste
Food waste is a key issue in the industry in general. It’s a silent killer that eats away at your restaurant’s bottom line. And, big surprise, it contributes to a high COGS.
The bedrock of any food waste reduction plan is tracking your waste. When you know what ingredients you have in your kitchen, you can try to utilise them before they go to waste.
This is where a lot of restaurants are falling short. Analyse food waste – this will allow you to monitor over time where you’re wasting food. Doing this should help save on costs. In fact, a 2018 study found that for $1 invested in reducing food waste, hotels saved $7.
Hot tip 🔥 Inventory management software can reduce food waste by ensuring you only order items that meet predicted demand. In other words, you don’t over-order food, which reduces your food waste and your COGS.
See how Nory provided Hatshorn – Hook with granular visibility into inventory management, enabling more precise control over food costs and reducing waste.
“Nory’s insights mean we can make informed decisions because we know exactly where the business is at. This has been the most important thing as we guide our business into growth.” – George Hartshorn, Food and Beverage Director
Create a lean, optimised menu
A lean, optimised menu is the cornerstone of any successful restaurant. It provides a better experience for your customers, serving them food they actually want to order – and hopefully bumping sales and reducing COGS in the process.
Sales and performance insights are valuable to creating an optimised menu.
With Nory, for example, you can analyse previous sales to identify popular menu items. Then, you can update your menu accordingly to meet customer preferences. You can also cut items that don’t sell well, which increases your COGS across the board.
Find out more about how to price your menu for profit! Hot tip 🔥 You can also track your sell-through rate, which means looking at the amount of food you sell to meet demand over a certain time period. This will help you predict exactly how much you need the next time a similar time comes around.
Think about seasonality
Refreshing your menu every couple of months based on seasonality can be a good way to minimise COGS. This is because locally sourced, seasonal ingredients tend to be cheaper than imported goods. It also keeps your menu interesting and showcases a willingness to support your local community (which diners love).
It’s important to be smart with seasonal produce. It’s fresh, so you should only purchase what you can sell. Keeping an eye on the sell-through rate is key here, as is using inventory management software to ensure you only order ingredients that meet demand.
Hot tip 🔥 This strategy may not suit everyone, as it depends on the type of food you sell. For example, if you’re a steak restaurant, seasonal items don’t really come into play. But if you’re a salad bar? Seasonal ingredients can make a big change to your COGS!
Use technology to track and lower your restaurant COGS
Keeping on top of your COGS is crucial to lowering costs and bumping up your profit margins. The key is to not wait until things are too late to take action on a rising COGS number – once it starts increasing, start looking into the areas we’ve laid out.
If you want to be proactive about it, use AI-powered technology (like Nory) to stay ahead of the curve and keep your COGS low.
Take a look at how Clean Kitchen uses Nory to boost their gross profits by 4%.
FAQs about restaurant cost of goods sold
What are cost of goods sold in a restaurant?
In hospitality, COGS refers to the direct costs incurred in producing the food and beverages sold to customers. This includes ingredients, raw materials, and any other costs directly related to preparing menu items.
How do I calculate my cost of goods sold?
To calculate COGS, subtract the value of ending inventory from the total cost of goods available for sale during a specific accounting period. The formula is:
Beginning Inventory + Purchases – Ending Inventory = COGS.
Scroll back up for a more detailed breakdown.
What percentage should the cost of goods sold be?
The ideal percentage varies depending on factors like your cuisine, location, and pricing strategy. As a general guideline, COGS should typically range from 25% to 35% of total revenue.