Ultimate Guide To Restaurant Cost Of Goods Sold (COGS) in 2024

As a restaurant owner, you're all too familiar with the constant struggle to stay profitable amidst rising costs. For instance, lettuce and eggs, which are used for burgers and breakfast items, increased by 10.3% and 9.5%.

As such, monitoring the cost of goods sold (COGS) can make the difference between a thriving business and one that struggles to stay afloat. Whether you run a casual dining spot or a full-service restaurant, we’ll delve into what COGS is, the factors that affect it, as well as how you can calculate and control it.

What is cost of goods sold (COGS)?

The cost of goods sold (COGS) is a restaurant metric that shows you the cost of all ingredients used to prepare a menu item, including the food, beverage costs, and other direct expenses. It represents everything it takes to get a meal on the table, from the raw ingredients like meat and vegetables to the packaging for takeout orders.

COGS is based on your inventory, meaning it includes the value of what you start with, what you purchase, and what’s left at the end of the period.

COGS can be expressed as a percentage of your sales, often referred to as the COGS ratio. A lower ratio indicates that you're spending less on goods sold relative to your sales, which typically means higher profit margins.

For example, if a restaurant's COGS percentage is 30%, it means 30% of your sales revenue is going toward the cost of goods sold. The remaining 70% can cover other expenses like labor, rent, and marketing, with the rest contributing to profit.

Why monitoring COGS is crucial for restaurants

Tracking your COGS helps you maintain a healthy business. As you monitor this metric, like in your restaurant P&L statement, you can spot potential issues, like rising ingredient costs or inefficiencies in your kitchen, allowing you to take action before they eat into your profits.

Factors that affect restaurant COGS

Different aspects of your restaurant affect its costs. Ingredients and labor take up most of your COGS, but other factors like packaging, portion, and menu also play a role. 

Ingredients

Ingredients are one of the major restaurant costs that impact your COGS. The prices of ingredients can fluctuate due to several factors, including seasonality, supply chain disruptions, and changes in demand.

The quality of the ingredients you choose also plays a crucial role in determining COGS. Higher-quality ingredients often come with a higher price tag, but they can also justify higher menu prices and attract customers who are willing to pay for quality.

A full-service restaurant that uses premium, locally sourced ingredients may have food costs of around 28% to 30%, while a pizza place may have lower expenses due to bulk purchasing and more affordable ingredients, with a COGS percentage closer to 18% to 22%.

Labor

While COGS typically refers to the cost of food, beverage costs, and other ingredients, labor also plays a crucial role in determining the overall cost of preparing and serving meals.

Ideally, labor cost percentages shouldn’t go beyond 30% of your restaurant’s gross revenue. Nonetheless, labor still takes up a significant portion of your overall costs.

Efficiently managing labor can help you keep your restaurant COGS under control. For example, overstaffing during slow periods can increase labor costs unnecessarily, while understaffing during busy times can lead to poor service, affecting customer satisfaction and sales.

Phil Gadd, owner of The Loaf Bakery, said their company saved on labor costs by 4% when they used 7shifts with their POS system. 

Packaging

Packaging is a critical yet often overlooked component that directly impacts a restaurant's COGS. It not only includes the containers used for food but also the bags, napkins, utensils, and any branding materials that accompany an order.

For instance, if your restaurant spends $0.50 on packaging per meal and serves 1,000 takeout orders per month, that’s an additional $500 in monthly costs.

Proper management of packaging costs is crucial, as it can significantly impact your restaurant's COGS. Regularly reviewing and negotiating with suppliers, exploring eco-friendly options, and optimizing portion sizes can help minimize packaging expenses. 

Additionally, incorporating the cost of packaging into your menu pricing can ensure you maintain your desired profit margins.

One way to control packaging costs is switching from branded, custom-printed boxes to high-quality but unbranded containers. If this isn’t possible, you can reduce the cost per unit by buying in bulk. 

Portion control

Portion control or managing the amount of food served to customers can help you reduce waste, use ingredients wisely, and maintain consistent restaurant food costs. For example, if a dish calls for 6 ounces of meat, portioning it out precisely can prevent overserving, which would increase your COGS.

Standardize your cooking processes by religiously using scales, measuring cups, and ladles so that each dish contains the exact amount of ingredients specified in the recipe. Prepping and portioning food items ahead can also help you control costs and stay consistent.

Menu

A well-designed menu not only attracts customers but also strategically guides their choices toward higher-margin items. First, you categorize dishes into four groups: Stars (high profitability, high popularity), Plowhorses (low profitability, high popularity), Puzzles (high profitability, low popularity), and Dogs (low profitability, low popularity).

If your best-selling pasta dish has low COGS and high sales, it’s a Star and should be placed either at the top-left, top-right, or center of your menu. Additionally, use appealing descriptions and high-quality images to make these items more attractive.

On the other hand, items with high COGS but low sales might be better off at the bottom of the menu or removed altogether.

Make sure to price your menu items accurately as well. Typically, restaurants price food at three times its wholesale cost. Each dish’s price should reflect the overall cost of all ingredients used to prepare a menu item, along with labor and other related expenses. 

How to calculate cost of goods sold for restaurants

The COGS formula is designed to give you a clear picture of the cost of goods sold in your restaurant over a specific period. The formula includes the beginning inventory, purchased goods, and ending inventory.

• Beginning Inventory: The value of your inventory at the start of the period.

• Purchased Goods: The cost of any additional inventory you bought during the period.

• Ending Inventory: The value of your remaining inventory at the end of the period.

Formula: COGS = Beginning Inventory + Purchased Goods - Ending Inventory

Suppose your restaurant had $5,000 worth of food inventory at the beginning of the month. During the month, you purchased an additional $3,000 worth of ingredients and supplies. At the end of the month, your remaining inventory was valued at $2,000.

COGS = $5,000 + $3,000 − $2,000

The month’s COGS was $6,000, which is the total amount you spent to prepare the meals and beverages you sold for that period.

What’s a good COGS percentage for restaurants?

For most restaurants, a good COGS percentage for food costs falls between 28% and 32% of total sales.

However, the actual average can vary depending on the type of restaurant. For instance, full-service restaurants may have higher COGS because they tend to use more expensive ingredients and have higher labor costs.

Quick-service restaurants, on the other hand, may have a lower COGS percentage since they can buy more ingredients in bulk and have streamlined operations. Coffee shops and food trucks also typically have lower COGS because they can purchase supplies in smaller quantities and often have simpler menus.

How to control restaurant COGS

Taking control of your COGS lets you maintain profitability. Strategies to accomplish this include conducting regular inventory audits, setting par levels, and negotiating better pricing with your suppliers.

Audit your inventory regularly

Auditing your inventory regularly helps you get a clear picture of the overall cost of all ingredients used to prepare a menu item. When you know exactly what’s on your shelves, you can make better decisions about ordering, pricing, and menu design. Regular audits also help you spot inconsistencies that might indicate over-ordering, spoilage, or even theft.

Start by counting all the food, beverages, and other ingredients in your inventory. Make sure to include everything, from the main ingredients like meat and vegetables to smaller items like spices and sauces.

After counting your inventory, calculate the value of goods based on current prices. This way, you get a clear understanding of your beginning inventory, ending inventory, and purchased goods.

Set par levels

Par levels are essentially safety nets that ensure you always have enough stock to meet customer orders, but not so much that it leads to unnecessary waste.

For example, if your restaurant sells an average of 200 burgers per week and each burger requires one patty, you might set a par level of 250 patties to account for fluctuations in demand.

To set par levels, start by analyzing your sales data. Look at the historical sales for each menu item and determine the average usage over a specific period, such as a week or month. Once you have this data, consider factors like delivery schedules, shelf life, and seasonal variations.

Track inventory turnover rates

Tracking your inventory turnover rate is a crucial part of restaurant inventory management. This rate measures how often your inventory is sold and replaced over a specific period.

Calculate it by dividing the COGS by your average inventory. If your turnover rate is low, it might indicate that you’re holding onto too much inventory, which ties up capital and increases the risk of spoilage, especially with perishable goods.

One effective strategy to improve your inventory turnover rate is to order smaller quantities more frequently. Doing so reduces the risk of overstocking and helps keep your food inventory fresh.

If you have items that are not turning over as quickly as you’d like, consider promoting them through specials or menu highlights. Let's say you have an excess of chicken breasts that are nearing their expiration date. To help move this inventory faster, you could create a special chicken breast parmesan dish.

Negotiate better pricing with suppliers

Securing lower prices on ingredients and goods lets you reduce your COGS and improve your restaurant’s profitability.

Before going into negotiations, you must have a clear understanding of your current costs. Review your invoices and track the prices you’re paying for key ingredients and supplies to serve as the baseline for your request.

Establishing and maintaining good relationships with your suppliers can give you leverage when negotiating prices. Suppliers are more likely to offer discounts or better terms to restaurants that are loyal, reliable, and have a good payment history.

Sometimes, getting a better deal is as simple as asking for it. Don’t be afraid to ask your supplier if they can offer a discount for early payment, bulk purchases, or loyalty.

Additionally, negotiating more favorable payment terms, such as extended payment periods, can improve your cash flow and make it easier to manage your COGS.

Bulk purchase frequently used items

The first step in bulk purchasing is identifying the ingredients and supplies you use most often. These are typically staples like rice, flour, cooking oil, and certain meats or vegetables.

One of the challenges of bulk purchasing is ensuring you have the proper storage to keep your ingredients fresh and safe. Before placing a large order, make sure your restaurant has enough space in refrigerators, freezers, or dry storage areas.

Consider using seasonal ingredients

Seasonal ingredients are typically more abundant and less expensive, which can help lower your overall costs while also providing fresh, high-quality dishes to your customers.

Since the availability of certain ingredients will fluctuate throughout the year, your inventory turnover rates might change. Monitoring your inventory closely during these transitions ensures that you’re not over-purchasing items that might soon go out of season or under-purchasing items that are in high demand.

Redesign your menu

Putting a lot of thought into your menu can help you sell high-profit items. Before you start the redesign, check the performance of your current offerings. Determine which dishes are popular and profitable and which ones are underperforming.

Then, make sure to highlight the dishes that sell best and have high profit margins. Make them easy to spot by placing them in the right spots and using eye-catching fonts and images.

Research different restaurant menu ideas for inspiration on how to optimize your menu. You can try hand-drawing your menus or adding playful touches like linking to a Spotify playlist you curated.

Repurpose leftover ingredients

Repurposing ingredients lets you turn potential losses into opportunities for additional revenue and lower your overall costs.

One of the easiest ways to repurpose leftovers is by incorporating them into daily specials. This allows you to use up ingredients that might otherwise go to waste while offering customers something new and exciting.

For instance, if you have leftover roasted vegetables, you could create a hearty vegetable soup or a special quiche for the day.

As you start repurposing ingredients, keep track of sales and customer feedback to ensure that the dishes are well-received and profitable. If certain repurposed dishes become popular, consider adding them to your regular menu.

Create a thriving and profitable restaurant

Reducing your COGS is an ongoing process that requires careful monitoring and planning. Implementing these best practices can help you optimize your inventory and processes to boost profitability.

Aside from food costs, take control of your labor costs with 7shifts. Our restaurant management software lets you optimize staff schedules based on forecasted sales. This way, you avoid overstaffing and having to pay extra while still meeting demand.

Vahag Aydinyan

Hello! I am Vahag, Content Marketing Manager at 7shifts. I am writing about content marketing, marketing trends, tips on restaurant marketing and more.