The cost of goods sold, or COGS, are hands down something anyone who’s run a restaurant knows about. They can impact everything from menu prices to labor decisions and can vary from week to week.
This blog looks at COGS basics (in case you want a refresher), their financial impact, the COGS you should be aiming for depending on your type of restaurant, and how and when to monitor them.
As a refresher, COGS = beginning inventory + purchased inventory – ending inventory.
Restaurants typically break COGS down into 4 (or sometimes more) categories. The most universal categories are food, beer, wine and liquor (FBWL), but depending on what type of restaurant you run, these may vary. For example, a sushi restaurant might also want to track sake as its own COGS category.
Purchases are separated into these different categories because the margin on sales between them can vary by quite a bit.
Take sushi vs beer. When you purchase fish for sushi, oftentimes you need to trim the fish or other ingredients (meaning there’s going to be some waste) before the product makes it onto a plate. So even if you buy 10 oz of tuna for your 2 oz portion in a sushi roll, you won’t get exactly five portions or even sell all those five portions every time.
Fish, especially, can go bad before you sell it if it’s a slow week, which can really jack up your COGS because you made zero revenue on the purchase. This means your COGS percentage on perishables will most likely be a little higher, because you’re not using everything you purchased.
With bottled beer, you buy a bottle and mark up the price by a certain amount, which automatically gives you lower COGS percentages because there is less waste. Wine and liquor COGS especially can also be super low (which we’ll get into a little later).
Waste can still happen with BWL products, even though they don’t go bad the same way perishable products do. If you’re not seeing the numbers you’d expect for these categories, it might be time to do some digging. Accidentally over pouring is an easy mistake and can add up over time making a big impact if it happens frequently enough. You could also have a POS error where the buttons aren’t ringing in correctly, servers could be giving away beer to drive tips, or someone could just be really bad at counting inventory. Either way, tracking COGS is critical to controlling and understanding where waste occurs. If you’re looking for a simple way to track and measure waste in your restaurant, download this free calculator.
When you look at your restaurant’s COGS, it can be used along with labor data to understand your prime costs (prime costs = COGS + labor). Prime costs are kind of like the restaurant world’s version of a report card for management, measuring how well they are doing keeping the joint profitable. This is a major key performance indicator (KPI) for restaurants in terms of gauging the financial health of the business. If your COGS are out of whack, your profits will be too.
To keep this in check, many restaurants or hospitality groups will offer bonus or performance compensation structures based on meeting prime cost targets, and therefore COGS targets. Incentivizing chefs and managers to keep COGS in check from both an organizational perspective and a personal income perspective is an effective method and encourages operations teams to take personal ownership over the business processes.
If you’re looking to grow your business, keeping COGS in check is crucial to supporting any kind of growth as part of your overall prime costs.
Based on industry best practices, we recommend having your COGS around 30% and labor costs around 25%, giving you a 55% prime costs goal for growth. With 55-60% prime costs you will have enough buffer to not only keep the lights on and payroll steady, but also enough to expand your business.
If your prime costs range from 60-65% most likely your business is sustainable; however, you won’t have much wiggle room or profit. You’ll be able to do things like afford repairs or maintenance, but won’t have much to invest past that.
Prime costs above 65% means you’ll probably be able to keep the lights on (we hope!) and not much else. Keep in mind, one month or period of prime costs being above your target isn’t necessarily a death knell, but it should be a wake up call that your current trends are unsustainable and changes potentially need to be made.
Seasonality can also be a factor, so even if things look dicey in January with prime cost percentages are in the high 60’s, by the time May rolls around you might be closer to that 55% ideal (or lower!). Keeping COGS in check is like running a marathon, not a sprint, so have a little faith, a good pair of close-toed shoes, and a few bandaids on hand (like these tricks for lowering food costs) for when things get painful.
COGS can vary greatly by restaurant type simply because of the types of products being purchased. Restaurants with the lowest COGS often will include pizza places, fast-food restaurants and everyone’s go-to hangover cure (or maybe just mine): made to order “Mexican” restaurants that have customers act as human conveyor belts, slowly making their way from tortilla warmer to register in exactly the way the good lord intended.
A general rule of thumb for these operations is to aim for 20-25% COGS, as a majority of the products can be purchased from national broadliners, which will typically have lower prices than local or specialty purveyors for common items.
Fine dining or restaurants that use specialty products will usually tend to have higher COGS, closer to 30%.
Bars, on the other hand, typically have very low COGS, as beer, wine and liquor tend to have steeper mark ups and profit. Think $25 for a 750ml bottle of Jack Daniels, sold for $8-12 a shot (roughly 44ml) or part of a $14-17 cocktail with other liquor or juices that are also typically low COGS, and you’re looking at around 14% food costs.
In some cases, bars even offer free food or discounted food (hello happy hours) as an incentive to get customers in the door because the profits they make from beer, wine and liquor sales offset the costs of bar or snack sized foods. We’re looking at you, salted mixed nut bowl.
With a restaurant management system (RMS), you can view your COGS as soon as they are updated based on processed sales, invoices and, most importantly, inventories. This way you can track weekly spend against your budgets, and then see your COGS as soon as you do inventory (that way there are no surprises).
Checking in after each completed inventory count can be helpful for keeping tabs on your budget, but in order to understand trends in your restaurant, it’s also important to look at a monthly or quarterly view. Weekly numbers can have big swings that might make things look amazing (or scary) in the moment, but the best way to see a clearer picture is over time.
Your RMS might also be able to send you Price Alerts to let you know when key or high volume products jump higher than a certain price point, which is a game changer when it comes to monitoring COGS. This means the next time chicken wing prices jump up 150%, you’ll know as soon as your invoice processes, rather than two or four weeks down the line.
Another way an RMS can help you monitor and manage your COGS is through Theoretical Usage reporting, which compares what you actually used (beginning Inventory + purchases – ending inventory), against what you sold. The RMS integrates sales data from your POS by mapping each button in your POS to a product or recipe with quantities in the RMS. This type of instant feedback makes it incredibly easy to uncover where your problem areas are so you can make the necessary adjustments to be more profitable.
Monitoring COGS on a frequent basis can also alert you to potentially missed invoices or incorrect inventories. For example, if you notice that your COGS are markedly lower than your typical percentage for a week, you could be missing a big invoice that either hasn’t been processed yet (which you can check the status of in your RMS) or maybe it just fell off the office desk and disappeared (hey, it happens!).
Above all else, we recommend setting a goal and staying consistent with measuring how well you’re doing. Whether you’re able to do this on a cash basis looking solely at invoice amounts for what you’ve purchased vs. what you’ve sold, or can take it a step further and analyze COGS and recipe costs against theoretical usage and targets with an RMS- tracking and monitoring COGS is just one part (but a super important one at that!) of managing the overall financial health of your business.