Restaurant profitability and success can be traced to various factors. These factors can include: location, demographics, and concept.  Another key factor to consider is the restaurant’s prime costs.

Prime Costs and Restaurant Profitability

What are prime costs?  It is the total cost of food, beverage and labor. The food and beverage costs will typically be included in the company’s cost of goods sold (COGS) section of the income statement and can also include items like paper products. Labor can be found in both COGS and the operating expenses section of the restaurant’s income statement.  Labor is not simply wages.  It also can include items such as payroll taxes, workers’ compensation and insurance.

Unlike insurance, utilities or rent, prime costs are eminently more controllable. These costs are so important to the success of a restaurant, they are monitored and tracked regularly by managers and owners. Many successful operators review these costs on a weekly basis, enabling the restaurant’s management to timely identify and address problems.

Why Track Prime Costs?

For full-service restaurants, prime costs typically range from 60 – 65 percent (with better and more efficient operators keeping these costs closer to 60 percent or even less) of total sales. These costs are often split 50/50 between 1) food and beverage and 2) labor costs. If total prime costs exceed 65 percent, the cost overages generally fall directly down to the businesses’ bottom line and hurt profitability, and negatively impacts the operating sustainability of the restaurant.

For the restaurant, actively tracking prime costs is helpful and provides opportunities to make corrections before it is too late. If these costs are rising, management may need to explore menu changes or find new vendor(s) for certain food/paper goods. Consistent reviewing of prime costs may also identify that the restaurant is overstaffed, and provide management with an opportunity to make appropriate changes to the workforce or work schedule.

Operators who don’t actively review prime costs and address any issues which arise immediately, may be putting at risk all the time and effort spent cultivating the restaurant’s concept and clientele.