What Is Your Restaurant’s Ideal Prime Cost Makeup
I bet you’ve heard that a typical restaurant makes a nickel to 8 cents on every dollar they bring in. I bet you’ve heard about the study Ohio State University did more than a decade ago where they learned that 60 percent of all restaurants fail within their first 3–5 years of business. I bet you’ve heard that a typical full-service restaurant is supposed to run a 65 percent prime cost. I bet you’ve heard the National Restaurant Association many years ago said that the average full-service restaurant typically runs a 34 percent food cost and a 32 percent labor cost. My goodness! That’s a lot of numbers! And how do they apply to your restaurant?
The truth is… THEY DON’T!
In this video I explain what YOUR restaurant’s ideal prime cost makeup.
Don’t get me wrong. You need numbers to go by for your restaurant. The challenge I have with benchmarked data is it is all about averages. The average restaurant makes; the average restaurant runs a, the average, etc. Is your restaurant average? How many independent restaurants with different owners do you know that are on the same corner, serve the same food, provide the same style and level of service, serve the same quality products and serve them at the same price point? The answer is NONE! If you’re not the average restaurant, what are benchmarks good for? Absolutely nothing!
Let’s break the numbers down to find your personal benchmark, which is your target prime cost. How do you arrive at your prime cost? The short answer: it’s your total cost of goods sold (to be calculated properly requires weekly or monthly inventories to calculate use because purchases divided by sales are NOT accurate), plus your total labor cost, including taxes, benefits and insurance, then divided by your gross sales (sales before discounts, not including sales tax).
When I first started coaching independent restaurants in 2003, the target prime cost was 65 percent for a full-service restaurant and 60 percent for a quick-service restaurant. But then in 2007 the economy took a major hit. You remember. Before that, after the worst day in modern American history, 9/11, food costs went through a major adjustment and pricing continued to rise. Today there are additional costs and added expenses in our operations that drive our potential for profit down, such as rising minimum wages, and you can quickly see that those targets don’t work anymore.
If you have a restaurant that does $850,000 a year or more in gross sales, your new prime cost target is 55 percent or lower! That means for a restaurant that does $1 million a year in sales operating at a 65 percent prime cost, thinking they are doing well, there are 10 points on the table, or $100,000, in bottom-line profitability. This money is available if they are willing to do the work to get it. And the crazy part is the higher your sales, the lower that number can go. I am currently working with more than 300 restaurants and many of them now operate at 50 percent, 42 percent and even as low as 34 percent! They are achieving these low prime costs without changing product quality or levels of service.
How you get to your prime cost target depends on your financial situation, your core values, what you’re willing to change, and, ultimately, your budget. It all starts with an annual budget which allows you to easily see what needs to be done to achieve these kinds of numbers and then proactively apply systems that change your operation to achieve those numbers. Your budget will ultimately determine where your costs should be.