December 21, 2017 |

Do You Know Your Prime Cost?

By Pizza Expo


David Scott Peters, founder, TheRestaurantExpert.com

David Scott Peters, founder,
TheRestaurantExpert.com

I bet you’ve heard that a typical restaurant makes a nickel to 8 cents on every dollar it brings in. 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! A lot of numbers! And how do they apply to your restaurant?

The truth is… THEY DON’T!

The challenge I have with benchmarked data is it is all about averages. The average restaurant makes; the average restaurant runs, the average . . . . Is your restaurant average? No! So if you’re not the average restaurant, what are benchmarks good for? Absolutely nothing!

Let’s instead focus on finding your personal benchmark, which is based on prime cost. Simply put, prime cost is your total cost of goods sold plus your total labor cost, then divided by your gross sales. The resulting number is multiplied by 100 so your prime cost can be expressed as a percentage.

Say you have gross sales of $850,000 with cost of goods sold at $350,000 and labor costs of $300,000. Divide 650,000 by 850,000 and get 0.76. Multiply it by 100 and you’re operating at 76 percent prime cost.

You have a problem.

If you have a restaurant that does $850,000 a year or more in gross sales, your prime cost target should be 55 percent or lower! That means a restaurant that does $1 million a year in sales operating at a 65 percent prime cost, is leaving 10 points on the table, or $100,000 in bottom-line profitability.

This money is available if you are willing to do the work to get it. And the crazy part is the higher your sales, the lower that number can go. Many of our member restaurants 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.

When I grew up in the business, we referred to prime cost as controllable expenses. They are in the direct control of management. That’s the good news. But you must take a systematic approach to keeping them in check. And that is what I intend to show you during my workshops at Pizza Expo in March. The numbers for cost of goods and labor can be controlled and measured. They become your report card.

There are things to know about calculating your prime cost so it will be more accurate. (For example: you can’t get accurate cost-of-goods numbers without doing inventories.) And you must know how to apply you prime cost goals to your budget. Once you do, you can easily see what must be done to achieve your profitability target.

For example, a family casual full-service restaurant might run a 35 percent cost of goods sold and a 20 percent labor cost. A quick-casual pizzeria might run a 25 percent cost of goods sold and a 30 percent labor cost. Both of these scenarios equal 55 percent prime cost. Their targets have nothing to do with industry averages. And everything to do with running a 15 – 20 percent profit margin.

David Scott Peters, founder of TheRestaurantExpert.com, will present Restaurant Business Essentials, Parts I and II, as School of Pizzeria Management workshops on Sunday, March 18, and Monday, March 19, at Pizza Expo in Las Vegas.

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