The 3x–4x Food Cost “Rule” Is Total BULLSHIT

Written by: Dana Calhoun

If you’re in the industry, you already know, profit margins in food service are LOW compared to most other businesses. Why do we still do this? That’s a whole other conversation.

I’m part of several catering and restaurant groups. Some are support-based, some are informational. The most frequent questions? Menu pricing.

In one of the catering groups I belong to, this question pops up frequently. Several times per day, in fact! “How much would you charge per person for this menu?” Then they list an insane menu: 3 proteins, 6 sides, dessert, beverage stations, the whole production.

Then come the comments.

They’re harsh. Keyboard warriors. Know-it-alls. “Chefs” who are ready to pounce on the newbies and tell them they shouldn’t even be in the business if they don’t already know how to cost-out a menu. (Just so you know, I fire back on the keyboard warriors and remind them that this is a MENTOR business. It is our job to help them and share our knowledge. Period.)

And then, like clockwork, this overused gem shows up from all the EXPERTS: “Just multiply your food cost by 3x or 4x. That’s industry standard.” Eww! No. It’s not.

So, where do they get this concept from? I know exactly where this advice comes from: managing corporate restaurants. Those of us who have been there, know that these “rules of thumb” were pounded into our heads, while some people just repeat what they’ve heard. 

Let’s take a quick trip down corporate memory lane… You know the drill. At 10:00 AM you run your labor report, not to check your labor goals, but to gauge where you will be after the lunch rush based on how many prep cooks you have working. After lunch, your report shows a 25–32% labor. Okay, great! Mid-afternoon lull, labor jumps up 6–8 points. But the dinner rush decreases your blood pressure as you see a 22% labor. You worked hard to make that happen! Good job!

What does this have to do with food cost? Well, as a manager, it is your responsibility to meet the goals of your forecasted Profit and Loss (aka, P’n’L). If you hit your labor goals - which is something you can manage minute-to-minute during your shift - then your food cost SHOULD fall in line IF the kitchen is following the systems put in place, and IF all other variable costs are also falling in line. In the back of your mind, you know that if labor is over by 2%, then your profit is down by 2%... in general terms (we know it’s a lot more complex than this, but you get the picture).

Don’t get me wrong, I’m not knocking the corporate system. I actually loved working for large corporations. I loved the structure, the goal setting, THE BONUSES, the education. It was all great and geared me up to be a restaurateur myself. Without that experience I would not be where I am today. 

But, there is a problem when it comes to modeling small business the P’n’L to the corporate standard. This model does not fit every scenario. This model does not translate to mom-and-pop restaurants or small concepts. And it surely does not apply to the catering business!

Stay with me on the restaurant side of things for a moment. Corporate has the ability to purchase in bulk, build commissary kitchens specifically for their sauces and other items that can be made in bulk, then delivered to all of their units. This is a major cost saving method! They have huge test kitchens (spend $1M to save $5M… see Give 'Em the Pickle), massive marketing budgets, and hundreds of units to offset thin margins. It’s a completely different machine. A completely different P’n’L. 

Now that we understand that, let’s talk about that “3x–4x” rule-of-thumb. If you multiply your food cost by:

3x → that’s a 33.33% food cost

4x → that’s a 25% food cost

Looking at those two scenarios above, there is an 8.33% difference. So, where does YOUR business fit in?

If you already have your business plan written out and you know you can make a profit if you hit a 25% food cost every time, then GREAT! That WOULD indicate a 4x rule-of-thumb. But, most likely, that is not the case. In this business, 5% can be make-or-break. So how are people casually throwing around a range that wide like it’s “standard”? It’s complicated, but let’s try.

Let’s compare two hypothetical concepts:

Restaurant A (Corporate Model)

Monthly sales: $450,000

Profit margin: 3.5%

Monthly profit: $15,750

Annual profit (1 unit): $189,000

800 units: $151,200,000/year

A lot of work… for relatively thin margins per unit, but scale makes it powerful.

Restaurant B (Lean Concept)

Monthly sales: $162,000

Profit margin: 13%

Monthly profit: $21,060

Annual profit (1 unit): $252,720

800 units: $202,176,000/year

What Do You Notice?

1. A simpler concept with fewer moving parts can produce a higher profit margin, even with lower sales.

2. The difference in profit margin is 9.5%.

That’s HUGE. If both concepts blindly followed a 25% food cost rule, neither model would work properly. You P’n’L must be customized to YOUR concept. Stop looking at other models. In fact, I challenge you to make yours MORE profitable!

Okay, now it’s time to turn our attention back to the catering business, specifically.

When you build a Profit & Loss forecast (your business plan), it has to reflect all of your costs. Your fixed costs (rent, insurance, phone, internet, ec.), and your variable costs (labor, food cost, repair and maintenance (R&M), etc. Some businesses pay $2,500 in rent, and some may pay $7,000. Some catering businesses may pay a commissary by the month (fixed), as well as a per-use fee (variable). Catering is a different business model (if you are solely operating a catering business) because, 1) It is seasonal, 2) You have monthly fixed expenses, even if you have no catering gigs, 3) Your expenses are gig-specific, 4) Unlike the full-service restaurant concepts, the increase in profit grows at a faster rate with increased guest counts because your per-gig costs do not increase as steadily with increased sales as a full-service concept. 

Can higher sales in a full-service concept increase profit? OF COURSE! Duh! But, so do your expenses. There are other things to consider as well. In a full-service concept, you only have so many seats within your 4 walls. Catering is a wild animal in the way that we can set up camp in a forest or a field and serve 5,000 people if we want to! That’s why I love this food-business model so much.  

Within the catering world, there are many types of caterers as well. Let’s take a look at some of the different types:

Full-service catering: Weddings, Fundraisers, etc. Offering plated or buffet service with full staffing, buffet set up, the whole nine! Low food cost, high labor cost.

BBQ Trailer catering: Hauls a bbq trailer to an event, sells by the plate (or pre-booked minimum guest count), walk-up concept, more casual. High food cost, low labor cost.

Charcuterie/Graze: Sets up and walks away, from minimal offerings to full finger-food spread, no table service. Low labor cost, high food cost. 

Drop’n’Go/PickUp Platters: No service, sells by the pan, probably has a brick and mortar food business, labor built into the restaurant, used to increase top-line sales.

Food Truck: Uses truck as concept (no buffet set up or plated, usually), walk-up to window, hopefully a pre-paid guest minimum. Usually a lower per person cost, slower service than full-service catering. Concepts vary greatly, costs also vary greatly.

…

Regardless of which type of catering you’re doing (with the exception of the add-on platters to an already established brick and mortar), catering is not a daily beast. When figuring your costs, your accrual amounts are more noticable than a business that is open 7 days a week. This is going to affect your food cost because if you do not have any catering gigs January - March, you still have to pay your fixed expenses. So, how do we know what to charge people for catering?

The Math

Step 1: Know your fixed costs accrued throughout the year. Here is an example: Annual: Business License, Permit Fees, Certifications, LLC Fees, tax preparer, etc. Let’s pretend the total is $1,000. Accrue that over 12 months to figure your monthly cost. $1,000 / 12 = $83.33.

Step 2: Know your monthly fixed costs. Here is an example: Monthly: Kitchen Commissary Rent, Website, Ongoing Meta Marketing, Other Online Subscriptions, Insurance, Legal Membership, etc. Let’s say these total $300.

Step 3: Add your accrued monthly fixed expenses to your monthly fixed expenses. In this example, your overhead would be $383.33 per month, or $1,999.96 per year. 

Step 4: Determine how much money you want to make on an annual basis. What number makes it worth it to you to stay in business? What number is realistic with the listed fixed expenses. (If you get busier, your expenses may change. You may need a bigger kitchen or a second catering van.) Let’s say you want to make [before paying your taxes], $100,000 per year (your hourly rate plus profit).

Step 5: Since catering is an event business, we need to determine HOW MANY EVENTS PER YEAR you need to book to hit your goal. Before we can do that, we need to look at your specific business. For an example, I will use full-service catering. A typical wedding will have 150 guests. Let’s say they order a buffet with 2 proteins (plus 2 sides, 1 salad, rolls and butter), a grazing table and a drink station. This will usually cost the client around $82 per person before tax. (Totally normal for the area I am in - California. These numbers are just examples, and I can help you figure out your numbers based on your demographics.)

I know I need 10 hours of prep labor total, 25 hours of event labor and 5 hours of clean-up labor. That totals 40 hours of total labor. I pay a $30 per hour flat rate to my staff. $30 x 40 hours is $1200. I add another 14% for federal employment taxes, work comp and payroll fees. The true labor total is $1368. I also pay an Event Lead $300 per event, and they are a 1099 employee. I add on my fuel/travel expenses to the invoice, which usually averages around $100. Depending on the menu selection, I will spend [for 150 guests] between $1000 and $1400 for the dinner, and another $500-ish for charcuterie and drink service. Let’s average food & beverage cost to $1800. I add the cost of usage of my equipment (wear and tear/depreciation) of around $150 per event. I buy drinks and snacks for the staff, another $50. I match our colors to the bride’s colors, whether it be table cloths, buffet decor, and/or colored ties for the FOH staff. I also ensure that my staff has matching black chef coats. I already invested in this expense, so I usually purchase 1 or 2 new coats per event, and perhaps another 2 or 3 new aprons, $100. An event like this usually takes up about 5 days of my time between planning, inventory, ordering/shopping, prepping, the event day and clean up. If I calculate my time at the regular hourly rate, at $30 per hour x 40 hours, my regular labor is around $1200. This is not my profit! I am in business to make profit, not an hourly wage!

Hourly Labor: $1368

Manager Labor: $300

Travel/Fuel: $100

Food & Beverage Cost: $1800

Equipment Usage: $150

Employee drinks/snacks: $50

Ties/Uniforms: $100

Owner Hourly Labor: $1200

….

Total Costs: $5,068

Client pays: $82 per guest x 150 guests = $12,300. (Add service charge of 18% + travel/fuel)

( + ) Income = $14,514

( - ) Expenses ($5,068) = $9,446 Profit before fixed business expenses (overhead).

Let’s say every event booked next year is exactly the same, and the owner (you) would take home, between hourly labor and profit, $9,446. In order to meet your goal of $100,000 (before taxes), you would have to book 10.5 events per year. Let’s round that to 11 events. 

NOW let’s figure out your food cost based on that goal.

Total Sales = $159,654

Food Cost for 11 of these events = $19,800

Food Cost % = 8%

Now before you freak out, this IS based on full-service catering, which is very labor intensive. But, this is the model! and 8% food cost!

If someone told me to multiply my food cost ($1800) x 3 to figure out what to charge the client, I would be writing up an invoice for $5400. As you can see, That would leave me with a $332 profit. I can make more Ubering. NO THANK YOU! 

You are worth so much more! The work that goes into catering - NOBODY UNDERSTANDS unless they are in the business. People hire caterers because they do not want this headache. There are so many details, so many moving pieces, this is a HUGE service you are providing. It’s physical, it is intellectual, it is creative. A professional catering service. And you deserve to be paid for it! 

8% food cost is a lot different than 25% or even 33.3%! STOP FOLLOWING ADVISE FROM OTHER PEOPLE WHO DON’T KNOW WHAT THEY ARE TALKING ABOUT! Break the mold. Be your own boss. Be the leader. Make money! You are in business to make money! This is not charity. This is not a non-profit organization. If you look at the numbers more closely, you can see that your total cost is around 35%, but that includes labor and other expenses too.

If you like this model and you want to figure out an easy rule of thumb, you can add up ALL of your expenses and multiply by 3. But I must caution you! These numbers only work with this formula. If you are paying a different amount or your food cost is higher in the state you live in, or you’re paying more for rent, then your numbers are going to be different. And that my friend, it my point! I hope this gives you a good indication of what your business could look like. And, who knows, maybe it’s even more profitable than this! I genuinely hope that it is! The bottom line is, know your bottom line! ←— cheesy, I know! I wish everyone the best and the highest profit possible!

If you want help calculating your exact numbers, you can book a consultation with me on our Resources page of The Mentor Project. Go to www.thementorproject.com to learn more. 

Cheers!

Dana Calhoun, B.S.

Founder, The Mentor Project