Understanding the Cost of Goods Sold (COGS) in Restaurants
Cost of Goods Sold (COGS) refers to the direct costs associated with producing the food and drink items sold by a restaurant. This includes the cost of ingredients, and the labour involved in food preparation, such as chefs, prep cooks, and kitchen staff.
Tracking COGS is vital for understanding profitability at both a restaurant-wide and menu-item level. Whether you operate a fine dining establishment or a quick-service restaurant, managing COGS effectively can make a significant difference to your bottom line.
Given the volatility of the hospitality supply chain—fluctuating ingredient costs, supplier pricing changes, and shifts in consumer demand—having a technology partner like Net Essence helps you implement data-driven solutions to control costs and boost profitability.
Why COGS is Critical for Restaurant Profitability
COGS directly impacts restaurant profitability because it represents the money already spent on producing food and beverages. It is subtracted from gross revenue in a profit and loss statement (P&L), meaning higher COGS leads to lower profits.
A key metric to is the COGS-to-Sales ratio, which indicates how much you’re spending relative to revenue. A lower ratio is preferable, as it suggests that you’re keeping costs under control while maintaining strong revenue generation.
COGS Varies by Restaurant Type
COGS is not a one-size-fits-all metric. A fine dining restaurant will naturally have higher COGS due to the use of premium ingredients. However, they typically balance this with higher menu prices.
A fast-food restaurant will benefit from lower COGS due to bulk purchasing and standardised preparation methods.
An industry benchmark for a healthy COGS percentage is generally between 30-35% of revenue.
How to Calculate Restaurant COGS
The standard formula for calculating COGS is:
Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (COGS)
For example:
- Beginning Inventory: £3,000
- Purchased Inventory: £8,000
- Ending Inventory: £2,000
Using the formula:
COGS = £3,000 + £8,000 – £2,000 = £9,000
This means the restaurant spent £9,000 on food and beverages over the period.
While manually calculating COGS is possible, leveraging the right hospitality technology solutions makes the process significantly more efficient and accurate. Fractional improvements in data accuracy can make massive differences to the bottom line, especially as a business scales. It’s vital to have accurate data, not best guesses.
How Net Essence Reduces COGS
Traditional methods of COGS tracking and inventory management are time-consuming and prone to error. However, with the right technology partner, such as Net Essence, restaurants can implement simple, integrated cloud-based solutions to automate these processes, reduce waste, improve purchasing efficiency, and enhance menu profitability.
1. Optimising Inventory Management
Effective restaurant inventory management is crucial for controlling COGS. With digital inventory solutions, you can:
- Track real-time stock levels and avoid unnecessary purchases.
- Minimise food waste and spoilage through improved forecasting.
- Ensure accurate portion control to reduce overuse of ingredients.
Net Essence works with trusted technology providers such as Zonal, Oracle, Toast and The Access Group to help restaurants implement cloud-based inventory management systems that integrate seamlessly with POS systems and supplier platforms.
2. Tracking Food Cost Percentage Automatically
Calculating food cost percentage manually is inefficient. Technology-driven solutions allow restaurants to track food costs in real-time by integrating POS sales data with inventory systems.
The formula for food cost percentage is:
(COGS ÷ Total Sales) x 100 = Food Cost Percentage
By automating this calculation, restaurant owners can monitor cost fluctuations instantly, making it easier to adjust pricing or renegotiate supplier contracts.
3. Achieving Real-Time Recipe Costing
Knowing the exact cost of each menu item is crucial. Recipe costing software, integrated with automated invoice processing, allows restaurants to:
- Track the true cost of ingredients as prices fluctuate.
- Adjust menu pricing based on real-time data.
- Identify low-margin items and adjust portion sizes accordingly.
Net Essence can connect you with leading hospitality software providers that automate recipe costing, helping you increase menu profitability.
An example is Prepsheets, a cloud-based tool for on-boarding new chefs and kitchen staff that provides instant, scalable recipe, ingredient, preparation, allergen and budgeting information all in a robust and neat touch-screen tablet device. Prepsheets cuts the time needed to get new staff up to full productivity and reduces risks due to misinformation or mistakes around allergens, and wastage due to incorrect procurement or preparation.
4. Implementing Menu Engineering for Profit Optimisation
Menu engineering is a strategic approach to balancing menu popularity and profitability. By analysing sales data and food costs, restaurants can:
- Identify high-cost, low-profit items that need pricing or portion adjustments.
- Promote high-margin dishes that drive profitability.
- Eliminate underperforming menu items.
With data-driven menu engineering tools, Net Essence can help restaurants maximise revenue while maintaining an optimal COGS ratio.
5. Using a Restaurant-Focused POS System
Your Point of Sale (POS) system should do more than just process transactions. A fully integrated POS system can:
- Track real-time food costs.
- Integrate with inventory and supplier systems.
- Provide actionable insights to optimise purchasing and pricing decisions.
Net Essence specialises in helping restaurants implement cutting-edge POS systems that seamlessly integrate with inventory and accounting solutions, enabling a holistic approach to cost management. With over a decade of hospitality-focused support and projects, we have worked with all the leading vendors across multiple national hospitality brands.
As a certified Toast EPOS Partner, we’re the expert resource to plan, implement and customise Toast’s leading cloud-based EPOS solution for UK hospitality operators.
Final Thoughts: Partnering with Net Essence to Reduce COGS
Managing COGS effectively is critical for maintaining healthy restaurant profit margins. However, manually tracking food costs and inventory can be time-consuming and prone to errors.
By partnering with Net Essence, you gain access to best-in-class hospitality technology solutions that:
- Automate COGS tracking
- Optimise inventory management and reduce waste
- Enhance menu engineering strategies
- Provide real-time recipe costing
- Reduce risk and ensure consistency in product preparation
Streamline supplier and invoice management
With the right tools in place, you can reduce costs and risk, improve efficiency, and maximise profitability.
Ready to take control of your restaurant’s COGS?
Contact Net Essence today to discover how our trusted hospitality technology solutions can help you drive sustainable business success.