Mastering Restaurant Prime Cost: The Key to Profitability

For those who've been following me, by now you should know that I refer to the major key performance indicator (KPI) called prime cost as the one number you must know to have any chance of making money in your restaurant. Today I'm going to talk about mastering restaurant prime cost, the key to profitability.

I recommend you watch this video to take a deeper dive into that calculation again. The short explanation is prime cost is your total cost of goods sold plus your total labor costs, including taxes benefits and insurance. You take that number, divide it by gross sales, then use divided by sales gives you your Prime cost percentage. If you do at least $850,000 a year in gross sales annually or more, your prime cost target is 55% or under. It’s not 65%, which is a number old-time experts have been preaching year after year.  That ship has sailed.

Think about how your food costs have risen, how your labor cost has risen, how your tech stack has grown with necessary tools to run a restaurant. Think about how rents have gone up and interest rates have gone up and all these things. Well, 65% doesn't work anymore. You have to be thinking 55%. You must run more efficiently to make money. Side note: If your sales are lower than $850,000 a year in gross sales, your target is 60%.

It doesn't matter how you get to 55%. You could run a 25% cost of goods sold and 30% labor cost, or vice versa, and every combination in between. There is no one-size-fits-all plan to achieve a 55% prime cost. I've been talking about prime cost for 20 years now as a restaurant coach and there's a lot that goes into how you get your restaurant to that target. There are a number of factors that go into deciding where you're going to be, how you're going to decide if your cost of goods sold is higher or your labor cost is higher or lower.

Factors to consider are things like where you're located, the style of service you offer, your restaurant's price point, the quality of product you buy, your state's minimum wage, even your core values. It's not going to be a cookie cutter answer because you're not the same restaurant on the same street corner in the same city serving the same product. Heck, I would even tell you that a concept that has multiple locations, depending on where they're located, are going to have different prime cost targets based on factors that affect each restaurant.

The only way to get to a point where you know where your target should be is with a budget. You heard me. I say that dirty word over and over again. To learn more about budgeting, be sure to watch this video. It's one of those things you need a deeper dive on, but I'm going through it quickly here. At this point in time, I've probably created or helped restaurant owners with well over a thousand budgets by now and that's probably a conservative guess. I've been coaching restaurant owners for 20 years and budgeting is critical.

Hare are some of the things that I talk about with my members when we go through this budgeting process.

1. In today's day and age, your menu must be on the table when it comes to becoming more profitable. With prices rising everywhere we look, the number one tool you have to reduce your prime cost is your menu. You cannot get married to those menu items. You have to be willing to put everything on the table. Heck, I have a member who eliminated their top three items off their menu because they required too much prep. It was costing them too much money. They fired their top customers because it couldn't be sustained. The only way to know that is with a budget.
2. Reduce your food cost and understand it's not just about raising prices. You have to implement things like the waste tracker to stop dumb mistakes on a daily basis. Use the key item tracker to count 5 to 15 items every shift to make sure they're not stolen. Implement a system I call the Restaurant Checkbook Guardian where I teach you how to give up ordering without giving up your checkbook. You tell whoever orders product how much money they can spend. They can go over by $500, but if they need to go over by one penny more, they have to find you and ask permission, explaining what went wrong and what they did to correct it. Recipe costing cards are critical because this allows you run the Menu Profitability Monitor and find your ideal food cost – no waste, no theft, no spoilage, a perfect restaurant, which does not exist. Do you know that a typical restaurant runs 7–9% above their ideal food cost? That means you're putting yourself in a position where often the things that you do wrong in your business are really what's increasing your food cost. It's not your purveyor and the cost of the food. It's what you do with it. When you start implementing time and temp checklists, line checklists and portion controls, prep systems, weekly inventories and much more, with that ideal food cost, you can menu engineer.
3. When it comes to reducing your labor cost, it isn't just about cutting hours. That's what I hear all too often. “Oh my, God, I'm gonna lose people. I'm already short-staffed, blah blah blah.” Sometimes you have enough people but you're using them incorrectly. It's about training, training, training. You must make sure your people are more efficient. Instead of needing four Cooks on the line, you can do it with three because they're cross trained. From this section to that section, each station is something that they know how to do or at least more than the one they've started on.
   
   You also have to reduce your labor cost by changing your prep. When you see that your menu is prep heavy and it's chewing up hours upon hours of prep, changing that menu will reduce your labor cost. Your line must be set up properly and efficiently. No one should have to take three steps around two cooks to get the bread for their station. They can end up walking miles whereas if they pivot from one section to another to grab items they can be more efficient. Reducing the amount of labor you need, you might again reduce the number of items you sell to reduce how much workload there is on the line. You can look at your dollars per labor hour worked to find efficiency. This is where we find out through dollars per labor hour calculation, is finding how many dollars per hour each person produces. For instance, if I produce $150 per labor hour worked in the kitchen, and I've got two cooks on the line in that hour, you’d bring in $300 in sales. When you analyze that $150 and find the average ticket per person for food is $25, and you divide that into that $150, you find that your kitchen is putting out six items or six customers’ worth of food every single hour. That is not pushing it. With this information you can make decisions about stagger-starting kitchen staff, or raise the bar on efficiencies and work with fewer cooks on the line. It's not just cutting hours; it's about becoming more efficient.

The key to mastering your profitability is through implementing systems to control your restaurant prime cost.

Be sure to visit my YouTube channel for more helpful restaurant management video tips.