Food cost % in high rent / expensive areas.

[Pizzamancer]

Freddy_Krugerrand:

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.

You are making yourself very clear. You are trying to fit your desires into the reality of owning a pizza business, and it just is not going to happen.

If your $20 pizza only costs $4 to make, you customers will notice. Someone else out there is charging $16 for the same pizza. That is the only guarantee you have in the pizza biz.

You can wish on a pipe dream all you want, but it isn’t going to make it any more likely that you will succeed. There is a reason why that food cost ratio sticks between 25-33%. It is because the pizza shops that succeed have had a food cost that fell in that range. I have to bring up economics again. The law of supply and demand. If your food cost is 18%, the demand for you pizza will be low. If your food cost is 50%, the demand will probably be high.

Instead of shooting for a pipe dream (low food cost and high sales), you need to choose. High volume/low price or low volume/high price. You don’t seem to understand that distinction.

 

[system]

Freddy I think what you need to take from all the advice and comments that are being shared is that there will always be factors that vary from location to location. Rents are a big one. In the end, the local demand and acceptance of your offerings will dictate the final numbers and pricing. That said, using the generic number of +/- 30% for food cost will probably still hold true. Remember that this includes most consumables and not just base food items. The other reason this holds true is since you have higher rent and costs…you final price will reflect that. So on that sliding scale…you still will want to hit that 30% mark. The other reason you keep hearing the same comments is that this is a number too work towards for a good chance of make a profit. The ones that suceed need this number so the rest of the numbers add up for the business. Yes you will have some basic pizzas that cost 20% and maybe some unique island app that costs you 40% on the food cost. It all comes down to balance. The people that are giving you the most valid advice here do have experience in your type of market. The ones that do not…also make some valid points…you just need to use that sliding scale sometimes.

 

[Freddy_Krugerrand]

Pizzamancer:

Freddy_Krugerrand:

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.

You are making yourself very clear. You are trying to fit your desires into the reality of owning a pizza business, and it just is not going to happen.

If your $20 pizza only costs $4 to make, you customers will notice. Someone else out there is charging $16 for the same pizza. That is the only guarantee you have in the pizza biz.

You can wish on a pipe dream all you want, but it isn’t going to make it any more likely that you will succeed. There is a reason why that food cost ratio sticks between 25-33%. It is because the pizza shops that succeed have had a food cost that fell in that range. I have to bring up economics again. The law of supply and demand. If your food cost is 18%, the demand for you pizza will be low. If your food cost is 50%, the demand will probably be high.

Instead of shooting for a pipe dream (low food cost and high sales), you need to choose. High volume/low price or low volume/high price. You don’t seem to understand that distinction.

Lol this isn’t a pipe dream and its not low food cost. Its low food cost relative to the other expenses. For an extreme example, if everyone’s rent on this island was $20+ per square foot a month, so a 1000 square foot pizza shop was $20,000 a month just for rent. So now the pizza cost $200 (Because at $25 a pizza your oven couldn’t make enough pizzas to even cover the rent) but the price of the food to make the pizza is still $5. So now my food cost is 2.5% on a $200 pizza but that doesn’t mean I am using cheap ingredients or that I am making more money on my pizza. The food cost ratio would be lower than other mainland places because the expenses are so much higher making you have to charge more for your pizza.

That is absolutely as clear as I can make my example.

 

[Pizzamancer]

Freddy_Krugerrand:

That is absolutely as clear as I can make my example.

I think we have all been very clear here. Your example is based on your desire to make it so. The reality of the situation, is that that example is useless because you are going to sell exactly ZERO $200 pizzas. All the made up numbers in the world are not going to change the buying habits and perceived value of your customers. If your business model needs 20% food cost to make a profit, it is flawed. What is there not to understand about that? Hire a pizza consultant to tell you the same thing. Read a book about building a pizza business and you will see the same thing. If 20% food cost was a viable option, everyone would be doing it, even anecdotally this should make some sense to you.

Stop playing with numbers, set a reasonable and attainable ideal food cost, and then generate the sales to cover your expenses.

 

[Freddy_Krugerrand]

Pizzamancer:

Freddy_Krugerrand:

That is absolutely as clear as I can make my example.

I think we have all been very clear here. Your example is based on your desire to make it so. The reality of the situation, is that that example is useless because you are going to sell exactly ZERO $200 pizzas. All the made up numbers in the world are not going to change the buying habits and perceived value of your customers. If your business model needs 20% food cost to make a profit, it is flawed. What is there not to understand about that? Hire a pizza consultant to tell you the same thing. Read a book about building a pizza business and you will see the same thing. If 20% food cost was a viable option, everyone would be doing it, even anecdotally this should make some sense to you.

Stop playing with numbers, set a reasonable and attainable ideal food cost, and then generate the sales to cover your expenses.

Food cost is RELATIVE to all other COSTS!

If everyones pizza is $200 and gas for your car is $1000 and your mortgage here is 3 billion dollars but the cost of food is $5 you will have a low food cost relative to your other costs!!!

Answer these two questions, why is the airport Burger King double the price of the one down the street? And are both burger kings food costs percentage the same? If your answer is yes to the second question how is this possible, if it’s no then food cost percentage is relative to their higher costs.

Bonus Question: Is the perceived value of the burger king at the airport twice as good as the burger king down the street?

Again, It’s not LOW FOOD COST, its low food cost relative to all other costs.

“if 20% food cost was a viable option, everyone would be doing it, even anecdotally this should make some sense to you.”

Everyone doesn’t live in a place with $5000-$6000 utility bills.
Everyone doesn’t live in a place where rent is $3-$4 a square foot plus 4 percent tax.
Everyone doesn’t live in a place where health insurance is mandatory.
Everyone doesn’t live in a place with homes that cost $500,000 average.
Everyone doesn’t live in a place where a mile down the road are Louis Vutton, Saks 5th avenue, and Coach.
Everyone doesn’t live in a place where hotel rooms go for $300 (minimum) a night and up.

I actually wish the food cost was 30 percent, then it would be cheaper to open a restaurant here and my food would be more affordable. Wrap your mind around that.

 

[Daddio]

Freddy
I completely get what you are trying to say here. Your question is what should you expect food cost percentage to be when the other percentages are skewed by the fact they are extremely high. Lets forget the price of the pizza for now. Your profit is for arguments sake is 5% of sales which means your cost to obtain that profit is 95%of sales. That 95% includes everything from food to utilities. If all of the costs other than food add up to 75% then your food cost have to be 20%.

No matter how you shake up the numbers you take 5% profit and you spend 95%. If for the sake of argument you pay 50% of your sales toward rent all other expenses MUST come from the remaining 45%.

Using your airport example: Rent is higher meaning selling price needs to be higher(everything else being equal) in order to make the 5% profit. There in lies the food cost percentage difference. If rent in the low cost location is 30% of sales and the high cost is 50% of sales the 20% difference must be derived from all other costs being lower percentages of sales. This means the percentage of sales attached to the other costs will be lower in the high rent location than the low rent location.

The actual dollar amount of the food cost could be identical but the fact the high rent location charges more for the product means the percentage of sales is going to be a lower number.

 

[Freddy_Krugerrand]

Daddio:

Freddy
I completely get what you are trying to say here. Your question is what should you expect food cost percentage to be when the other percentages are skewed by the fact they are extremely high. Lets forget the price of the pizza for now. Your profit is for arguments sake is 5% of sales which means your cost to obtain that profit is 95%of sales. That 95% includes everything from food to utilities. If all of the costs other than food add up to 75% then your food cost have to be 20%.

No matter how you shake up the numbers you take 5% profit and you spend 95%. If for the sake of argument you pay 50% of your sales toward rent all other expenses MUST come from the remaining 45%.

Using your airport example: Rent is higher meaning selling price needs to be higher(everything else being equal) in order to make the 5% profit. There in lies the food cost percentage difference. If rent in the low cost location is 30% of sales and the high cost is 50% of sales the 20% difference must be derived from all other costs being lower percentages of sales. This means the percentage of sales attached to the other costs will be lower in the high rent location than the low rent location.

The actual dollar amount of the food cost could be identical but the fact the high rent location charges more for the product means the percentage of sales is going to be a lower number.

Exactly Daddio!!!
So let me ask this question instead. What profit percentage should I shoot for on a pizza? I have never seen this discussion before.

Is a 10 percent profit on a pizza crazy? 8 percent, 5 etc. Could some of you give me a ballpark of the profit you make on your average large pizza?

Or maybe a better question is what is everyone’s ideal profit percentage on total food sales (after all costs) ?

 

[Pizzamancer]

Freddy_Krugerrand:

Food cost is RELATIVE to all other COSTS!

Bonus Question: Is the perceived value of the burger king at the airport twice as good as the burger king down the street?

You are wrong when you say that food cost is relative. It isn’t relative to your rent. It is relative to what your customers will pay for a pizza.

As to the BK example, no customer puts a high perceived value on the taste of a burger. A BK in the airport’s sales reflect a premium you pay for speed in a captive market. It is the same reason you pay $5 for a pretzel in a stadium. There aren’t any alternatives. You pay or you don’t eat one. The airport BK is overpriced, everyone knows it is overpriced, and customers bite the bullet. You don’t have the brand recognition and you don’t have the captive audience. Using an anomaly or the exception to the rule to base your business plan off of is a waste of time.

 

[bodegahwy]

Excellent answer pizzamancer!

To respond to the profitability question: A well run high volume shop can easily make 12-15%. Rarely do they make more than 18% but some make 25%. In a location handicapped by high costs, you may well give up some of those points and be looking at high single digits.

In my best years, with two stores, my owners discretionary cash flow was better than 20%. In the depths of the recession, with one store, two years ago it made nothing at all.

It is possible to make no money at all or even lose any amount on sales when costs are not managed or if you do not hit the volume needed to succeed in a given market.

 

[Freddy_Krugerrand]

Pizzamancer:

Freddy_Krugerrand:

Food cost is RELATIVE to all other COSTS!

Bonus Question: Is the perceived value of the burger king at the airport twice as good as the burger king down the street?

You are wrong when you say that food cost is relative. It isn’t relative to your rent. It is relative to what your customers will pay for a pizza.

As to the BK example, no customer puts a high perceived value on the taste of a burger. A BK in the airport’s sales reflect a premium you pay for speed in a captive market. It is the same reason you pay $5 for a pretzel in a stadium. There aren’t any alternatives. You pay or you don’t eat one. The airport BK is overpriced, everyone knows it is overpriced, and customers bite the bullet. You don’t have the brand recognition and you don’t have the captive audience. Using an anomaly or the exception to the rule to base your business plan off of is a waste of time.

Define “Food Cost Percentage” to me please. I have a feeling you are not using the definition the rest of the board is.

Also you didn’t answer my questions.

 

[jokergerm]

my food cost includes everything that the customer get, food, drinks, boxes, plates, Toliet paper, towels, etc etc

we run about 33% with all those items

 

[royster13]

Why not buy a few pizzas and see what you get…

If you are basing your food cost on prices in a lower price market you might gain a little as your pizza price is higher…But in in a high cost market, I assume all your supplies (flour, meat, cheese, boxes, etc.) will be more costly…

Let me see if I can make an example to illustrate an idea I have…Lets use 30% as food cost…So in 1 market a pizza sells for 16.65 and you have a 30% food cost, your cost is 5.00…

But if you are in a market where you can sell for 25.00…If the same supplies are still 5.00 then your food cost is 20%…But if those supplies cost 7.50 your food cost is back to 30%…But say those same supplies are 6.25 then your food cost is 25%…

So in order to figure out anything (and other markets do not really matter) you need to construct a pizza and go to a local supply place and price out the supplies and see where you end up…

Any numbers for selling prices, rent, utilities, supplies, etc., will be unique to your location or others in you market…So you must figure out what they are in your market…

My “gut” tells me if a decent pizza is 30% in one market it will be darn close anywhere else…

 

[Pizzamancer]

jokergerm:

my food cost includes everything that the customer get, food, drinks, boxes, plates, Toliet paper, towels, etc etc

we run about 33% with all those items

This. Well, everything, but toilet paper. Food cost is your cost of goods sold (COGS). Even if your definition is backing out hi food cost items like drinks and wings, a profitable pizza shop is still going to come out around 25-30%. Trying to split hairs with some made up version of FLC isn’t going to fix the fundamental problems of opening a restaurant with an unworkable business model.

 

[Freddy_Krugerrand]

Pizzamancer:

jokergerm:

my food cost includes everything that the customer get, food, drinks, boxes, plates, Toliet paper, towels, etc etc

we run about 33% with all those items

This. Well, everything, but toilet paper. Food cost is your cost of goods sold (COGS). Even if your definition is backing out hi food cost items like drinks and wings, a profitable pizza shop is still going to come out around 25-30%. Trying to split hairs with some made up version of FLC isn’t going to fix the fundamental problems of opening a restaurant with an unworkable business model.

Pizzamancer we are gonna have to agree to disagree, everyone else on this thread seems to understand what I am saying but you and I are not seeing eye to eye.

I would like to add one more thing. In my “airport burger king” example, this whole island is the airport burger king. And the mainland is the burger king outside the airport. We agree that people pay those high prices because they have no other choice. Welcome to Hawaii, people pay those high pizza prices, rent, houses, etc. because they have no other choice.

Also I asked you to define “food cost percentage” not food cost. There is a world of difference between the two. Thanks for your contribution to the thread.

 

[system]

Freddy not wanting to get in the middle of this one, but you have actually supported the other side of your arguement. The BK at O’hare buys its supplies at the same price as the one 2 miles away off I-90. They sell that same Whopper for $6 instead of $3. Yes they pay more for rent, but their other expenses are the same. Customers just pay the premium for having it at the airport. Your arguement that the islands are the airport is not really correct. You pay higher costs across the board. On everything. That being said… your final costs will probably fall into the 30% range. The end user selling price is adjusted accordingly and in the end…the percentages still hold true. You want them to hold true. Otherwise your chance of profiting are lowered as your numbers fall apart. That is the point that many have tried to explain but the examples throw things off. I think the easy answer too your original question is that you should expect or strive for the same numbers that all the others do. Everyone is reading too far into the situation here and making it a whole lot more difficult that it should be. :idea:

 

[Pizzamancer]

Freddy_Krugerrand:

I would like to add one more thing. In my “airport burger king” example, this whole island is the airport burger king. And the mainland is the burger king outside the airport. We agree that people pay those high prices because they have no other choice. Welcome to Hawaii, people pay those high pizza prices, rent, houses, etc. because they have no other choice.

Having taken a look at a Domino’s P&L from Hawaii, and eating at Aoki’s the last time I was there, I can say that that too is not correct. Both of those chains run a 31-33% food cost. If you go in and charge more for the same product, your competition will eat you alive.

 

[Freddy_Krugerrand]

qcfmike:

Freddy not wanting to get in the middle of this one, but you have actually supported the other side of your arguement. The BK at O’hare buys its supplies at the same price as the one 2 miles away off I-90. They sell that same Whopper for $6 instead of $3. YES I AGREE Yes they pay more for rent, but their other expenses are the same. I PAY MORE FOR RENT AND MY OTHER EXPENSES ARE MORE Customers just pay the premium for having it at the airport. Your arguement that the islands are the airport is not really correct. You pay higher costs across the board. I PAY HIGHER EXPENSES ACROSS THE BOARD BUT MY OTHER EXPENSES DWARF THE SLIGHTLY HIGHER FOOD COSTS. On everything. That being said… your final costs will probably fall into the 30% range. I DISAGREE, BASED ON MY MUCH HIGHER OTHER COSTS IT THROWS THE ACTUAL PERCENTAGE A BIT LOWER. The end user selling price is adjusted accordingly and in the end…the percentages still hold true. You want them to hold true. Otherwise your chance of profiting are lowered as your numbers fall apart. I AGREE, IT IS VERY DIFFICULT TO PROFIT IN HAWAII. WE HAVE BEEN RATED WORSE STATE TO DO BUSINESS IN FOR THE LAST 20 YEARS. I SAID IN AN EARLIER POST THAT IT WOULD BE EASIER TO SUCCEED AND PROFIT IF I COULD KEEP A 30 PERCENT RATIO, BUT THOSE HUGE OTHER EXPENSES MAKE THAT DIFFICULT TO OBTAIN That is the point that many have tried to explain but the examples throw things off. I think the easy answer too your original question is that you should expect or strive for the same numbers that all the others do. Everyone is reading too far into the situation here and making it a whole lot more difficult that it should be. I AGREE, THE EXAMPLES WERE ONLY FOR PIZZAMANCER BENEFIT BUT IT IS CLEAR TO ME WE WILL NOT SEE EYE TO EYE. :idea:

 

[Freddy_Krugerrand]

Pizzamancer:

Freddy_Krugerrand:

I would like to add one more thing. In my “airport burger king” example, this whole island is the airport burger king. And the mainland is the burger king outside the airport. We agree that people pay those high prices because they have no other choice. Welcome to Hawaii, people pay those high pizza prices, rent, houses, etc. because they have no other choice.

Having taken a look at a Domino’s P&L from Hawaii, and eating at Aoki’s the last time I was there, I can say that that too is not correct. Both of those chains run a 31-33% food cost. If you go in and charge more for the same product, your competition will eat you alive.

You have a habit of saying things that I never said.

I never said i am charging more for the same product. I think i have said that now 3 times. I’m CHARGING THE SAME FOR THE SAME PRODUCT.

I do not know what Aoki’s is.

Could you post this P&L you have from Domino’s in Hawaii. We have no Dominoes pizza where I live. We did have one but it went bankrupt. Do you own a Dominos?

 

[Freddy_Krugerrand]

Freddy_Krugerrand:

qcfmike:

Freddy not wanting to get in the middle of this one, but you have actually supported the other side of your arguement. The BK at O’hare buys its supplies at the same price as the one 2 miles away off I-90. They sell that same Whopper for $6 instead of $3. YES I AGREE Yes they pay more for rent, but their other expenses are the same. I PAY MORE FOR RENT AND MY OTHER EXPENSES ARE MORE Customers just pay the premium for having it at the airport. Your arguement that the islands are the airport is not really correct. You pay higher costs across the board. I PAY HIGHER EXPENSES ACROSS THE BOARD BUT MY OTHER EXPENSES DWARF THE SLIGHTLY HIGHER FOOD COSTS. On everything. That being said… your final costs will probably fall into the 30% range. I DISAGREE, BASED ON MY MUCH HIGHER OTHER COSTS IT THROWS THE ACTUAL PERCENTAGE A BIT LOWER. The end user selling price is adjusted accordingly and in the end…the percentages still hold true. You want them to hold true. Otherwise your chance of profiting are lowered as your numbers fall apart. I AGREE, IT IS VERY DIFFICULT TO PROFIT IN HAWAII. WE HAVE BEEN RATED WORSE STATE TO DO BUSINESS IN FOR THE LAST 20 YEARS. I SAID IN AN EARLIER POST THAT IT WOULD BE EASIER TO SUCCEED AND PROFIT IF I COULD KEEP A 30 PERCENT RATIO, BUT THOSE HUGE OTHER EXPENSES MAKE THAT DIFFICULT TO OBTAIN That is the point that many have tried to explain but the examples throw things off. I think the easy answer too your original question is that you should expect or strive for the same numbers that all the others do. Everyone is reading too far into the situation here and making it a whole lot more difficult that it should be. I AGREE, THE EXAMPLES WERE ONLY FOR PIZZAMANCER BENEFIT BUT IT IS CLEAR TO ME WE WILL NOT SEE EYE TO EYE. :idea:

One more point I would like to make is that if the only reason people pay more for the whopper at the airport is just for the “premium of having it at the airport” then why doesn’t someone open a hamburger stand at the airport and charge $5 instead of BK’s $6?
My answer would be because that it the lowest price they can sell it for and make a profit/worth their while. My situation is the same, my prices are the same as the other pizza places but because of the other huge expenses I have it skews my food cost percentage. Just as I believe the food cost percentage of BK in the airport is skewed compared to the one outside the airport.

It really is just mathematics, $5 into $27 is lower percentage than $5 into 20 but the food cost is the same.

 

[system]

Freddy I think no matter what anyone says you are the only one that can answer your own question. Every business is unique to its own. Nobody can fill in the exact numbers to your location but you. You need to write the business plan and fill in the exact hard numbers and see how the percentages fall. There are people that include different items in the food costs and others that do not. The numbers are not apples to apples… and because of that the answers can always be read in two directions or more. The quality of food… distributor discounts… Coke or Pepsi… the list goes on and on. To touch on the TP comment…,. single ply or the quilted stuff! Go build your business on paper and work backwards from there. In the end… the real numbers will tell the true story. Just remember be honest, realistic, and conservative… otherwise you will be back asking about where to sell a slightly used oven that needs a boat to be shipped. That is not the outcome that anyone wants for you. Best of luck.