Hi guys I need some expertise. I have been working on my operating budget and break-even analysis today and it appears that in a high rent area the 30 percent food cost rule does not apply. For example, here on Maui most 14-16" combo pizzas (4-5 toppings) run around $25. There is no way that the pure food cost is $7.50 for these pizzas. At 20 percent I get a $5 food cost which seems a little closer to the mark given the higher food costs here in Hawaii.
My question is to those who have shops in expensive or high rent areas what kind of food costs ratios are you dealing with. Is my 20 percent food cost out of line for high rent areas?
You’re considering only pizzas which will have a lower food cost than wings. 20% seems in-line for a pizza, when combined with the higher food cost % of wings, soda etc. Your overall percentage will be in the 30-35% range.
Congratulations to those who are able to achieve this… however, stating that rent should “never” be over 5% of gross sales is pure nonsense and is not a realistic standard for most businesses to shoot for.
Total food cost includes mistakes, waste, condiments, etc so it is always higher than the menu cost based on ideal portions. As pointed out by others, some food items carry much higher costs than pizza.
We operate in a Colorado ski resort… so I guess you would have to call it an expensive market. While our milk is not $6 a gallon, our average home price is higher than the number you mention and yes haircuts are over $20.
My experience has been that along with high prices comes an expectation of better product. We sell a lot of $25 pizza. We use expensive ingredients and generous portions. Over the years, our all-in cost of goods, which includes all supplies and paper etc has been about 29% of sales.
The numbers broken down by day in the post above might seem reasonable. Perhaps in the market you are looking at they are. What you will find, though, in any market, is that the biggest days/weeks are several times the average day or week. This relationship is 3-4X in most places. In other words, if your average day is 200 pies, you will be doing 600-800 on your big days. (There are VERY few Nora’s Fish Houses in the world and they take years to build that consistancy of traffic that allows a restaurant to run at nearly full tilt almost all the time)
A 1.8 million annual sales pizzaria is very busy place indeed. I would expect food cost to be several points lower due to efficiency and price power with the vendors. Perhaps as low as 25% all-in (the way I calculate it including supplies and paper etc) but not 20%. No doubt the menu/ideal food cost could be 20%.
You can also back into some useful numbers looking at total seating/table count and see if assumptions for table turn and average ticket make sense. I think you will find that doing that volume out of 2300 square feet is improbable.
Let’s say your average ticket is based on a $25 pizza and comes to $50. That means you have to do 100 tickets per day. That is tickets not people… In a typical place with 2300 square feet total I would expect to see about 1000 feet in the kitchen leaving about 800-1000 for seating after bathrooms, entry etc. How many tables are you expecting to have in that space? What is your expectation of table turn? Does that model reach 100 tickets a day… every day? Will it accomodate doing 300 tickets on a huge day? Do any other restaurants in the immediate area turn tables that often?
The reason I say 20 percent is because you have to charge more because of the cost of doing business here. For example the average electric/gas bill for a pizzeria here is $5,000 a month. We have the highest electricity cost in the United States.
If you had a 30 percent food cost you couldn’t make any money here. The rents, cost of food, utilities, etc. are too high @ 30 percent. Some call it a “paradise tax”. That extra charge is not for quality ingredients or big portions, its to keep the lights on. The roundtable pizza here charges $27 dollars for a pizza, even the pizza hut here best deal is a large two topping pizza for $17. That’s the “special”. http://pizzahuthawaii.com/offers/index.html
There is no way it cost pizza hut $5 to make one of their 14", two topping pizzas with silicone cheese and frozen dough. There are no $10 pizzas on this rock, there couldn’t your electric bill would put you out of business.
That is why I say in an expensive area, like hawaii, fishermans wharf san francisco, downtown disney, las vegas strip, downtown seattle, or in an airport food court, 30 percent food cost doesn’t work. Or does it?
I agree my numbers were probably a bit high, I was only plugging them in based on jokerjerms 5 percent number. I guess my point was the rent numbers were not that far out of the 5 percent realm of possibility. I was also including take out and within 6 months I plan on doing delivery so that skews the numbers a bit as well. Based on my numbers, anything over 40 tickets a day is profit based on 20 percent food cost.
No way you will hit 20% cost. Your vendors are going to charge you that “paradise tax” on your food so you will be paying more than others do for everything from flour to cheese to pepperoni. They do not grow much wheat out there in paradise and my guess is that you will be paying a hefty premium to have flour brought there. My bet continues to be that foods will be in the mid to high 20s even with high volumn and high prices.
Do yourself a favor when you are on some other island. Introduce yourself to the owner of a pizzaria that looks like a comparable operation to what you have in mind and ask if you can buy a couple hours of his time to pick his brain on things like appropriate costs for things in that market. I have done this for others in my area.
So then, if I understand what you are saying, you believe a large specialty pizza here in Hawaii cost 8.10 to make (30 percent of $27)? Why does it have to be 30 percent, if I am charging extra for my pizza then the food/cost ratio will go down.
Even @ 20 percent I get a $5.40 food cost on my large pizza. I am positive that that is a higher food cost than most you pay for your pizza and because my pizza is $27 it changes the food/cost ratio. It’s all relative to the price charged it makes no difference what my suppliers are charging me, I pass it on to the consumer.
I know exactly how much flour, topping, etc. cost here I have already priced it out. A large specialty in food cost ranges from $4.80-$5.50.
Let us use an airport Burger King in a food court as an example. The food there is at least 40 percent higher than the same Burger King outside the food court. Are their costs 40 percent higher to make the Whopper? No they are charging more because their overhead is so much more. I am sure the food/cost ratio in the airport burger king is far lower than the one outside the airport.
You continue to be focused on menu/ideal food cost. That is not the whole story. Everybody has lower ideal food cost than actual cost.
Yes, in a high priced market food is a few points lower as a portion of cost but it is not 1/3 lower. You will pay higher food prices than stores in other areas for the same reason your prices are higher… it costs every step of the chain more to operate.
What you make in increased margins you will give back in higher rent, higher wages, and higher marketing costs. When all is said and done, the numbers just don’t move that much.
“So then, if I understand what you are saying, you believe a large specialty pizza here in Hawaii cost 8.10 to make (30 percent of $27)? Why does it have to be 30 percent, if I am charging extra for my pizza then the food/cost ratio will go down.”
No, I said mid/high 20s not 30.
I also stated that I was describing all-in cost which includes condiments, paper, supplies, waste, mistakes etc… not the ideal menu cost.
Let’s say you manage to end up at 27%… a good 4 points of that is going to be all the other factors above and beyond ideal menu cost. That leaves you at 23% ideal cost. Do you feel better about that? Don’t get too comfortable, you have that big rent check to write and wages are higher in expensive places… so is advertising.
I think your confusing what I am saying. I’m talking strictly food cost/price ratio I am not saying I will make more profit than others based on this ratio. The pizza is higher price than would be in a normal area and that extra money all goes to the higher cost around me. But it does lower my food cost ratio because its relative to the price I charge.
In my Burger King airport example both the airport location and the neighborhood location make the same “profit” but their food cost ratios are definitely different. That’s all I was trying to say.
Does that make more sense?
I don’t think its realistic to have a universal food cost ratio for all pizza restaurants. Clearly a pizza shop in Bakersfield and a pizza shop in Caesars palace las vegas are not comparable when talking cost ratios.
Bodegahwy, can you give me a ball park figure of what your utility bill is @ your shop? It would be nice to have something to compare to. I wasn’t exaggerating when I said the typical pizza shop here pays $5,000+ a month in utilities.
TL;DR, but Bodegahwy has it right. Go to a high rent area, and try using the cheapest cheese you can find. Your place will quickly lose customers. In your example above, the sales figures will not be comparable, but the COGS ratio will be nearly the same. Labor as well.
You mentioned, " if I am charging extra for my pizza then the food/cost ratio will go down."
You really miss the point here. If you charge more for the same product, you will not sell any more of it. Go ahead and charge $100 for a large. We are talking basic economics, the law of supply and demand. PT Barnum might have been able to find the fools that were born every minute, but it doesn’t work in the pizza biz.
No one is saying there is a universal food cost of 30%. Just that that is about middle of the range that is most commonly seen. Food cost varies with volume, portions, local market for cost of goods, recipe and, of course, menu pricing. There is also significant variation is what people include when they say “food cost”. Some refer to ideal menu cost, others break out supplies and/or paper. I think most of us include everything that we use up when we talk about a cost in the range of 28% to about 32% as the most common range.
The market has a funny way of finding balance. Consumers have a finely tuned sense of value. In the end, high price markets charge more for food and the consumers there insist on value. Value can be size, quality or portion. A low price market can charge for a side of sauce. In a high price market you may not be able to.
You may well be able to drive cost down to the low mid 20%s in a high volume store in a higher price market. I do not think you will be able to see 20% and I certainly would not base a business plan on it. Like the electricty, I suspect you will find that the cost of everything from flour to boxes and pepperoni are higher. As pointed out above, your customer will not accept the cheapest ingredients.
What Burger King can charge is not really relevant. My guess is that they enjoy contract based costs with less variation than an independant restaurant does. They also do not need to differentiate their product locally to create value.
For the 10 years that I ran my second store we ran low food costs there. It was a slice business located in the pedestrian area of a million skier day ski resort. We ran as much as 4K per day in slices and soft drinks handed over a counter on a paper plate and did it all out of 420 square feet. We sold a 16" one topping pie by the slice at $21 and a five topping pie by the slice at $27. A bottomless soda in a 16oz cup was $2.75.
In that slice operation with menu cost for a 16" pepperoni at about 15% we were able to drive cost of goods (all in) down to about 21%-24%. With the two operations blended at 25K per week (peaking at close to 50K), we got costs as low as 24% a couple of times for a month at a time but 26% to 28% was more common. It is not easy for me to break out the costs between the two since everything was purchased out of one location.
Just when you think you have costs drilled down where you want them, the price of cheese and flour spikes and you jump several points in cost. Right now cheese is $1 a pound higher than I have seen at times. For me, that means that we are putting an extra 75 cents on a large pie compared to the low end of the price range we have seen in recent years. Guess what… for our average pie, that difference alone is almost 4 points. Just when I think I might see cost in the 28% range, I am back at 31% even though my menu cost for a basic pie is about 20%.
Either I am not making myself clear or you are not understanding what I am saying. This whole island is a high rent area, there is no low rent area. It also has nothing to do with using cheap ingredients, I never said that. Everything in Hawaii is more expensive and because of that the price of even an ordinary boring pizza is $27. Gourmet pizza would be closer to $35-$40. Because of the high cost of living everything has a premium price to it to cover all the higher expenses. Because of this when I do my basic food cost (no condiments, napkins, just what it cost in food to make a pizza) it’s lower (20%) because of the premium you have to charge for a pizza here. There are other factors at work. Perhaps you have to own a restaurant in a Caesars Palace, airport, Downtown Disney, etc. to understand.
In a nutshell you charge more for things here to compensate for the high cost of living. My food cost comes in @ 20% on a $27 pizza because the pizza is higher priced to compensate for all the other extreme prices here. I’m not making extra money but the ratio changes because of all the higher prices here. Thats all I’m saying. Everyone charges these prices, you have to or you go out of business. With $8,000 a month rent, $5000 a month electricity, mandated health care for any employee that works 20+ hours a week, in addition to higher food prices, the food ratio becomes less important and thus as a whole becomes lower than a regular place on the mainland.
It has nothing to do with supply and demand or gouging people, All pizza here is $17+. Nobody is getting “suckered” or using cheap ingredients to compensate for food cost. I’m not “charging more for the same product” I’m charging the same price for the same product. The price is the price.
I hear what you are saying. I was just doing absolute food cost, if I include napkins, condiments and such it would definitely rise a percent or two. I also understand what you are saying about price fluctuations changing the formula. Well said.
“Perhaps you have to own a restaurant in a Caesars Palace, airport, Downtown Disney, etc. to understand”
I do. My store is in a major Colorado ski resort town. Prices for pizza are what you describe in your area. Menu cost for for a pizza is also similar to what you describe. When all is said and done, food cost STILL comes out in the high 20s when we are cranking. Since we also have two low seasons a year where cost is higher, we end up around 29% all in for the year… (includes paper, supplies etc)