Food Cost
The difference between the profit margins of food and room sales is at the heart of why room sales are so important. As we know, to determine profit margin, one must first determine the costs incurred in providing the item.
Food cost is defined as the cost of a particular food item in relation to the price for which it is sold. This cost is often measured as a percentage. The simplest way of understanding this is that the food cost percentage is the percentage of the profit taken up by the actual cost of the item. Simply, divide the purchase price of an item by the menu price and you have the food cost percentage. The following equation is what you use to determine the cost:
Food Cost = Purchase Price/Menu Price
For example:
| Item | Purchase Price (cost of meal) | Menu Price | Food Cost |
|---|---|---|---|
| Steak | $6.99/ea. | $25.00 | 27.90% |
| Chicken | $4.30/ea. | $18.00 | 23.80% |
| Caesar Salad | $3.99/ea. | $11.00 | 36.20% |
(The prices and costs shown here are strictly for demonstration. These prices include labor, overhead, and other fixed costs. They also include the total cost of the meal including starch, vegetable, and beverage if applicable. The respective food costs reflected the hotel’s cost in relation to the menu price.)Hotel food and beverage operations are measured often in how well their food costs are controlled in relation to profits. A high food cost could be the result of a hotel not charging enough money for the menu items. Other reasons for high food costs include waste, large meal portions, spoilage, and pilferage.
A very low food cost could mean that the hotel is overcharging for the menu items in question. The actual measurement of too low or too high depends in large part on the management philosophy of the property and the market in which it is competing. For example, some hotels offer free breakfasts to all guests. This would result in very high food cost because no profit is being made on this service. However, these same hotels view this service as a valuable amenity to attract guests, so the high food cost would be acceptable. For the sake of analysis, food cost percentages in lodging operations between 30% and 50% are fairly common.
At first glance, one might assume that the percentages of cost between food and rooms are fairly similar, which they are. Compare these figures with the average room rates in the country and you will see that the sleeping room has a much higher profit margin than does food. In the analysis of percentages of cost, the amount not taken up by the cost of the item equals the profit.
Some in the industry prefer to view profit margin differently. The contribution margin of a sale item (food, sleeping room, etc.) would not include fixed costs (such as heat/light/power, labor, etc.) in the calculation of profit. Therefore, the contribution of the item for sale should be factored in before pure profit can be calculated. However, most disregard the contribution margin analysis in lieu of profit margin. If fixed costs are considered up front, as they are in the profit margin, it would save the extra step of analyzing them after determining contribution margin.
If, as in our examples, the amount of the cost of a room or food is 20% to 40%, then the profit is the remainder, which is 80% to 60%. Let’s look at a comparison of profit margins:
| Item | Purchase Price | Menu Price | Profit Margin |
|---|---|---|---|
| Steak | $6.99/ea. | $25.00 | $18.01 |
| Chicken | $4.30/ea. | $18.00 | $13.70 |
| Caesar Salad | $3.99/ea. | $11.00 | $7.01 |
Sleeping Room $40.00 (Room Cost) $160.00 (Room Rate) $130.00 (Profit Margin)
Extending this analysis further, assume that this hotel has 450 sleeping rooms. If each room generates a profit margin of $130.00, the total sleeping room profit on any given sold out night will be $58,500.00. The food/beverage outlets would have to sell 3,249 steak dinners or 8,346 Caesar salads to make up the profit margin difference. This illustrates how room revenue can be more profitable than food and beverage revenue.