Margins in the restaurant sector are tighter than they’ve ever been. Supply chains remain unpredictable, food prices are astronomically high, and growing customer expectations mean that operators have to scrap for every single pound of profit. So pronounced are these challenges that even the smallest inefficiencies can slowly erode your bottom line.

For restaurants, profit margins live or die by how well costs are controlled. And the most volatile, but controllable of these is your cost of goods sold (COGS). As we’ll see, the only truly effective recourse for operators is to rely on tech. But before we get to that, let’s start with the basics. So how does COGS apply in the restaurant sector?

What is COGS in the Restaurant Industry?

Restaurant COGS refers to the direct expenses arising from the production and service of food and beverages to customers. This basically means everything used to create a dish, such as the ingredients, and packaging – anything that gets used up.

What Does Restaurant COGS Include?

Typically, restaurant COGs include:

• Raw Ingredients - meat, fish, vegetables, grains, dairy, spices
• Beverages - bottled drinks, coffee, tea, alcohol
• Garnishing and Condiments – dips, sauces, herbs, spices
• Ready-Made Items – pre-baked bread, sauces, desserts, cereals
• Packaging and Disposables – takeaway containers, cutlery, straws, napkins
• Waste and Spoilage – over-prepped food, expired stock, unsold items
• Ingredient delivery costs (depending on accounting process)
  
  

How to Calculate Restaurant COGS?

To perform an accurate calculation of the cost of goods sold for your restaurant, you’ll need to know the monetary value of your:

• Beginning Inventory – the monetary value of your food and beverage inventory at the start of the period you’re calculating
• Inventory Purchases – the monetary value of every single food and beverage that you’ve purchased during the period you’re calculating
• Ending Inventory – the monetary value of your food and beverage inventory at the end of the period you’re calculating

So, let’s say the beginning inventory value for the month was calculated at £3000, you purchased £4000 worth of inventory, and your ending inventory amounted to £1500.

Your COGs for that month would be:

£3000 + £4000 - £1500 = £5500

From this, you can also calculate your COGs ratio as a percentage of your restaurant’s total sales. Let’s assume that your total sales for the month were £17,000.

COGs (£5500 / £17,000 x 100) = 32%

What is Considered a Good Restaurant COGS Average?

According to data from a variety of sources including Bloom Intelligence, Backbar and Netsuite, the average cost of goods sold percentage for restaurants is as follows:

• Quick Service Restaurant (QSR): 25-30%
• Casual Dining: 28-34%
• Fine Dining: 30-35%
• Bars and Beverage-Led: 18-24%
• Draft Beer: 15-18%
• Wine: 35-45%

While these percentages can vary according to source, they provide a good rule of thumb for operators looking to reduce COGs. Therefore, once you’ve used the restaurant COGs calculator above, and understand your financial position relating to industry benchmarks, you’ll be in a position to look at ways of controlling and reducing your direct operating expenses.

How to Lower Your Restaurant COGS with Tech

Lowering your restaurant’s cost of goods sold doesn’t mean reducing dish quality or cutting back on menu creativity. Instead, it’s about running a smarter, leaner operation in which your inventory is tracked in real time, waste is kept to a minimum, purchases are backed by accurate data (not hunches) and every portion is consistent. What follows are the key tech-driven features that help to reduce COGS in a restaurant business, as well as most food service operations.

Real-Time Inventory Tracking

Keeping a close eye on inventory is essential for controlling restaurant costs. Indeed, it’s one of the most effective levers you can pull to reduce restaurant COGs - you basically need complete and up-to-date information so that you can identify issues early, reduce waste and make smarter purchasing decisions.

In this area, the use of integrated POS restaurant management systems are fast becoming the norm throughout the restaurant and food service sectors.

The level of automation present in the latest tech stacks, as well as the use of machine learning, means that operators have up-to-the-second information about what’s in stock, what’s running low and what doesn’t need to be re-ordered.

Purchases can also be automated which helps to avoid expensive last-minute purchases that drive up your COGs. On the flip side, over-purchasing is also eliminated, thus reducing waste and spoilage, while freeing up your money to be used elsewhere in your business.

This provides a rock-solid foundation from which accurate forecasts can be generated about future demand fluctuations.

How Tech Helps

• Provides Up-to-the-Second Inventory Data
• Avoids Last-Minute Purchases
• Avoids Over/Under Purchasing
• Ensures Optimum Inventory Levels
• Reduces Waste

AI-Driven Forecasting

Like purchasing, restaurant sales forecasting has long been plagued by intuition, guesswork and gut feeling. Inaccurate projections lead to over-ordering, understocking or both – as we’ve just seen each can drive up COGs.

The increasing prevalence of advanced forecasting is putting an end to this ruinous practice, effectively taking the guesswork out of purchasing.

The latest restaurant management systems harness the power of machine learning to identify historical sales patterns and trends not immediately apparent to the human eye.

Some systems produce forecasts with up to 98% accuracy. This means that operators are able to align their inventories with fluctuations and improve their kitchen prep.

How Tech Helps

• AI-Driven Analysis Captures Hard-to-Identify Sales Patterns
• Produces Sales Forecasts with up to 98% Accuracy
• Prevents Ingredient Shortages
• Reduces Spoilage
• Optimises Stock Levels for Demand Fluctuations

Guided Stock Checks

Stock checks can have a significant impact on a restaurant’s COGS. Without an effective, structured process in place, blind spots quickly emerge which drive up food costs. Typical culprits include inaccurate counts, disconnected data, and inconsistent stock-taking methods among staff and across shifts. Over time, these gaps distort your inventory data, leading to over-ordering or undetected waste, all of which inflate your cost of goods sold.

Whereas previously, stocktakes were error-strewn, time-consuming headaches, modern tech now simplifies the entire process so that it’s less burdensome and far less prone to mistakes.  

The more sophisticated tech stacks feature fully-integrated, guided mobile stock takes that direct staff to the right storage areas and provide predefined counting lists. Data is also captured in real time which eliminates data gaps.

How Tech Helps

• Prevents Staff from Neglecting Storage Areas
• Predefined Count Lists Reduces Errors
• Real-Time Data Capture Eliminates Data Gaps
• Standardised Procedures for Consistent Counts

Centralised Portion Control

Reducing waste is one of the main operational areas that should be addressed when attempting to reduce restaurant COGs. While it’s unavoidable to a certain degree, in todays’ brutal climate, it comes at an even heavier cost.

Of all the food waste generated by UK restaurants, uneaten food accounts for around 30% each year, costs restaurants more than £3 billion. But at operator-level, the true cost rarely appears on the balance sheet. Unless you’re actively monitoring plate waste, it gets quietly absorbed into food costs and margins. The result? Inflated COGs and reduced profitability.  

For many restaurants, portion control is at the heart of the problem. Poor prep and a lack of oversight tend to be the root causes, themselves brought about by a lack of standardisation and a reliance on human judgement.

As we’ve seen, automated purchasing puts paid to the problem of spoilage arising from over-purchasing, as well as over-production.

Tech can also play a key role in cutting back on plate waste, with electronically stored recipes, ingredient lists and prep instructions helping with consistency. With centralised access for all kitchen staff, from Executive Chefs right down to the lowly Commis, meals can be prepared with precision, y ensuring optimum ingredient usage and dish uniformity.

How Tech Helps

• Centralised Prep Instructions and Ingredient Info
• Centralised Access Ensures Prep Consistency
• Optimises Ingredient Usage
• Ensures Dish Uniformity

Spoilage Alerts for Ingredient Repurposing

Like all food waste, spoilage directly drives up a restaurant’s cost of goods sold. When ingredients spoil, you’re literally throwing away inventory that you’ve paid for. And because it gets logged as being used, your usage data becomes distorted.

We’ve already talked about some of the tech-driven methods that can help, including real-time inventory monitoring, automated purchasing and portion control. But there’s another strategy that’s often neglected by operators: ingredient repurposing.

Ingredient repurposing is a useful, cost-saving strategy that ticks the sustainability boxes and encourages resourcefulness in the kitchen. It’s not so easy to implement though. Ingredients and their usage need to be tracked, information about current stock levels needs to be accurate and expiry monitoring needs to be in place.

The only way to carry out such a strategy is to deploy a next-gen platform that also keeps tabs on expiry dates, and which alerts staff when items are approaching their maximum shelf life. This of course requires a fully-integrated system that monitors inventory levels right down to ingredient level.

Fortunately, there are plenty out there, specifically ‘all in one’ systems that go beyond basic stock counts, connecting purchasing, menu engineering, sales data, and real-time inventory in a single ecosystem.

Explain the benefits

• Shelf Life Monitoring Avoids Spoilage
• Alerts Staff to Ingredients Approaching Maximum Shelf Life
• Ensures Inventory Data Integrity

Menu Management

Menu mismanagement is another, often overlooked driver of high COGs in restaurants. If your menu isn’t honed and streamlined, your ingredients quite often balloon and margins decline. For example, large, over-complicated menus require more ingredients which aren’t always used efficiently. Excess stock, unused perishables and spoilage are often the result.

It’s also the case, regardless of menu size, that low-margin dishes often go unchecked. These dishes eat up ingredients without returning enough profit. What’s more, if the actual dishes aren’t costed properly, you run the risk of under-pricing them. So even the most popular items might be sold at a loss.

Many restaurants keep dishes on the menu that barely break even, either because they don’t have the time or the means to conduct a proper cost analysis. Now, although restaurant cogs software and tech can certainly help in this area, many platforms rely on third-party, bolt-on inventory modules that fall short. In some cases, these systems don’t connect usage to actual sales which means that COGS tracking may be unreliable.

All-in-one, end-to-end systems are by far your best option in this area because they can track ingredient usage over time. For the most sophisticated systems, this data provides the backbone for tools such as ABC/XYZ analysis.

Simply put, ABC/XYZ analysis is a value-based categorisation system that groups ingredients according to how much they contribute to your total spend and usage. Ultimately, this provides critical information about which menu items are profitable, which items are volatile and which items need to be re-worked or removed from you menu.

This model can really help you to streamline your menu around cost-effective ingredients that are consistently used and easier to forecast. In the long-run, over-ordering is reduced, spoilage is minimised and your profit margins better protected.

How Tech Helps

• Accurately Monitor Ingredient Usage
• Advanced Tools Ensures Menu Profitability
• Identifies High Performing Dishes
• Streamlines and Optimises Menu for Better Margins

Supplier Management

The current climate of fluctuating prices and rising food costs, demands sound supplier management, both in-house and externally. But it’s a challenge.

Ad-hoc ordering and rogue purchases continue to be costly practices throughout the industry because they bypass standard operating procedures (SOPs) and disrupt purchasing controls.

Often times, staff will buy items without checking existing stock levels and/or ignoring pricing agreements. As a consequence, overstocking starts to become a problem leading to waste and spoilage. Your COGS then rise without a clear indication as to why.

Externally, without negotiated agreements in place, suppliers will sometimes charge different prices for the same items. Because of this, operators may be paying more for core ingredients as is necessary. Invoicing errors and unexpected ingredient substitutions can also conspire to erode profit margins.

Standardised, centralised supplier management is therefore a must. So too is a system for analysing and comparing suppliers and monitoring their performance levels. And digital is undoubtedly the way to go.

Across the food service sector, most operators are adopting technology to streamline procurement. Orders are placed directly through a restaurant management system, ingredient prices are logged according to supplier, operators alerted when price changes exceed predefined thresholds, and invoices checked against deliveries.

Events such as late deliveries or ingredient substitutions are also recorded. With this kind of data to hand, you can more easily analyse and compare supplier performance, thereby strengthening your bargaining position during negotiations.

Additionally, centralised, role-based permission control puts an end to unauthorised purchases or ad-hoc ordering - each team member is compelled to follow the correct purchasing procedure each time. Overpaying for ingredients, invoicing errors and overcharging are also reduced significantly.

How Tech Helps

• Logs Ingredient Price and Supplier Performance
• Allows for Supplier Analysis and Comparison
• Checks Invoices Against Deliveries
• Alerts When Price Thresholds are Exceeded
• Strengthens Position for Negotiating with Suppliers

Final Thoughts

To finish, it’s fair to suggest that restaurant tech has become the only viable path for reducing the costs of goods in restaurants. The pressures and difficulties facing operators are simply too great now - traditional strategies no longer suffice.

And yet, technology alone won’t be enough. Most of the tech solutions mentioned here are not plug and play. You can’t just set up the system and have done with it. To enjoy the full benefits, particularly in the area of inventory control, every single ingredient must be accurately recorded on the system.

Although this is a one-time task, many operators focus instead on the more visible features of their shiny new tech stack such as POS and table ordering. Inventory setup is often treated as a task that can wait. The long-term consequences can seriously undermine profitability.

If the goal is to reduce restaurant COGS in a meaningful and lasting way, then full implementation is non-negotiable.