Food Costs - Why it really matters?

Posted by fshsfhsfh on Saturday, March 26, 2011

I believe that the key to success in this business is to figure out a way to get your customers to pay as much as possible for food that does not cost much to produce. To put this theory into perspective, the most successful and fast growing food businesses in India are Coffee Day (800+ locations) and the Pizza chains (Dominos alone has 300+ locations in India). Dominos had a food cost of 26% in FY 2009-10, and Coffee Day probably has a food cost of under 20%. Most other restaurants which offer a wide range of food options have struggled to keep food costs in check over the last year or so because of the inflated costs. This has hit their profitability

Let's take an example of an Indian restaurant - let's say they have an item "Paneer Butter Masala" on their menu. Let's say the cost of all the ingredients works out to about Rs. 40. The dish is priced at Rs. 120 (33% food cost). Now if the cost of Paneer and some of the other ingredients goes up by 20%, it may result in a small 10-15% increase in the cost of the dish (so the cost is now Rs. 46). To keep the food cost at 33%, the price of the dish now has to be Rs. 138 (a price you won't be able to charge your customer). In the last 2/3 years, inflation has taken a huge toll on the prices of ingredients, pushing costs up. This has made it very challenging for restaurant business owners (especially the budget restaurants) to maintain their profitability.

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