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How to reduce cost of sale in your restaurant

If you’re currently assessing ways to best manage your restaurant cost of sales, pinpointing how might seem somewhat overwhelming. Providing a great experience at a valued price is the best way to keep your customers returning; it’s keeping prices fair when you’re facing rising overheads that might be keeping you awake at night. 

The cost of living crisis has hit Irish restaurants harder than most businesses. There has been a total of 612 closures alone since the VAT hike last September, and as people become more careful than ever about how they spend their money, it can be almost impossible to pass on those rising costs without losing customers.  

The answer, then, lies in reducing your cost of sales, but that can be easier said than done. At Access Hospitality Ireland, we’ve got some specialist insight into this subject. Working with over 2,000 hospitality customers across the UK and Ireland to help them streamline operations and improve efficiency using best in class software, we’ve picked up some key tips on how to reduce cost of sale in restaurants in order to maximise profits.  

In this article, we’ll share some of the best ways to cut costs and improve profitability in your restaurant.  We’ll look at ways to compare product prices for the best deals, negotiate more effectively with suppliers, and improve overall efficiency. 

Posted 19/09/2024

How To Reduce Cost Of Sale In Restaurants

What is cost of sale in restaurants?  

Cost of sale, or Cost of Goods Sold (COGS) are the direct costs incurred in providing goods or services. In the context of a restaurant, it’s the cost of producing the dishes you sell. 

You can do a simple calculation for cost of sale by adding together the costs of opening stock and purchased stock over a set period of time, and then subtracting the value of closing stock. Don’t forget, you’ll also need to factor in the shipping costs and labour costs of staff (alongside the 2024 rise in minimum wage) directly involved in preparing the food. And if you’re operating over multiple sites, the cost of transporting ingredients between venues will also need to be included.

COGS is usually calculated as a percentage of food sales - and average cost of sales for hotels, restaurants and pubs in Ireland is usually between 30% to 36.4%, depending on the type of menu you’re serving (a fine dining restaurant will usually have a higher COGS than a fast food establishment). 

Why is reducing cost of sale important to a restaurant’s profits? 

It seems like a fairly straightforward calculation; the lower your costs, the higher your profits. But this needs to be balanced against the need to maintain the right level of quality for your offering. Slashing spending on cost of sales at the expense of using quality ingredients or reliable suppliers could leave your customers feeling unhappy, and could cost you business. 

Rising operational costs, and the upcoming budget this October, are putting increased pressure on hospitality businesses. And, any price increases that you pass on to your customers need to be handled carefully and strategically if you don’t want to lose them, which is putting already thin restaurant profit margins under growing pressure. With so many restaurant closures, 35 in the last month alone, it’s clearly more important than ever for Irish hospitality business to find ways to reduce cost of sales without compromising the product. 

Tips for reducing cost of sale in a restaurant

We’ve established the importance of reducing your cost of sales, but how do you go about that in a practical and sustainable way? We’ve put together our top tips that you can hopefully implement straight away.

Make cost savings on food and beverage orders

Clearly, the first place to start is by looking at how much you’re spending on food and beverages. That means that reviewing your procurement processes is going to be key to reducing your COGS and maximising your profit margins.

When was the last time you carried out a price comparison exercise for the items you buy regularly? It can sometimes be quite surprising how much prices have crept up with your existing suppliers, and you may well find that there are major savings to be made elsewhere. 

If you want to negotiate better prices, you’ll need to have a solid overview of the current market, and strong relationships with your suppliers. Building and maintaining good relationships with multiple suppliers across your business can be a lot of work in itself, but strong communication and a collaborative partnership with your suppliers can save you a lot of money. 

Consider using hospitality procurement software to centralise supplier management. This will also help you to review and manage contracts from one central point of control, and find new suppliers if needed. 

How to negotiate better prices and terms

  1. Research vendors so that you know what your options are

  2. Research the market to understand current pricing and availability

  3. Leverage economies of scale by centralising your purchasing across sites

  4. Build good relationships with your suppliers, so that they want to work with you

  5. Propose terms that benefit everyone, like discounts for paying early

  6. Review contracts regularly, and keep open lines of communication with all of your suppliers

  7. Remember to include quality assurance and delivery schedules in your terms

Effective inventory management 

Decentralised purchasing can lead to a huge increase in your cost of sales. From over-ordering, to stock shortages resulting in popular dishes being removed from the menu at peak times, to wastage and maverick spending, a lot of potential issues can be addressed through effective inventory management. 

Regular inventory checks can help you to reduce unnecessary spending and avoid shortages which cost you sales. This can be challenging when you’re working across multiple sites, but a centralised and integrated stock control and inventory management system can make it not only possible, but simple.

Tracking and managing inventory effectively

  1. Carry out regular inventory checks.

  2. Enforce a strict ‘First In, First Out’ policy.

  3. Carry out regular staff training to update and refresh everyone’s knowledge on inventory management and their role in this.

  4. Establish accountability among your team by assigning responsibility for tasks.

  5. Use menu engineering to ensure your purchasing is as efficient as possible.

  6. Invest in an inventory management system that can integrate with your EPOS software for a fully centralised and streamlined process.

Menu engineering

If you want to fully optimise your procurement and inventory management, menu engineering could be a great solution. 

Menu engineering is a strategic way to control costs and improve margins through data driven decisions. It allows you to analyse your data to identify trends which in turn lets you forecast demand. Armed with a clear understanding of which dishes are most popular, and when, you can make better purchasing decisions and cut down on waste. It also lets you make choices about which dishes are costing you money and need to be removed for good.

Once you’ve identified your highest margin items, you’ll be able to build your menu around maximising your profits and reducing your average cost of sales.

If you want to read more on this subject, read our 20 tips on maximising profits through menu engineering.

Waste reduction

Food waste is quite literally an exercise in throwing potential profits in the bin. It’s estimated that the value of food waste for the Irish hospitality sector is over €300 million!!! While it’s impossible to eliminate waste in restaurants entirely, there are certainly steps you can take to minimise it. 

Strategies to reduce food waste in your restaurant

  1. Store food correctly, and implement the FIFO (First In First Out) method to rotate stock - especially fresh food items.

  2. Record and track waste so that you understand what it’s costing you, identify trends, and to measure the success of any initiatives you take to reduce food waste.

  3. Use demand forecasting to help you manage your ordering processes and cut down on over-ordering.

  4. Use menu engineering to identify less popular menu items that are contributing to waste, and make adjustments to your menu to eliminate these.

  5. Train your staff - from procurement, to storage, to taking orders front of house, there are a lot of opportunities for mistakes to contribute to lost profits.

  6. Check how much food is being left on the plate regularly. It’s been noted recently that ‘Portion Control in Ireland is insane’. If your portion sizes are too big, your profit margins won’t be!

  7. Get creative with unused stock. Repurpose unused ingredients by incorporating them into daily specials before they go bad.

  8. Consider implementing food waste management software to streamline the process and remove the need for arduous manual tasks. 

Energy and utility savings

While utility costs don’t fall under the category of cost of sales, it’s a massive outgoing. Ireland’s electricity prices for business is 60% higher than the EU average leaving many hospitality businesses close to financial collapse and therefore an important factor in achieving a healthy bottom line.  

Our guide on how to reduce energy bills in hospitality has some great guidance on this! 

The role of technology in reducing COGS

When your processes are fully streamlined and working efficiently, your cost of sales can be managed really effectively. But doing all of this manually is a full time job in itself. That’s why so many restaurants opt to invest in technology which can help them to do all of this more effectively. 

From inventory management, to managing supplier relationships, and menu engineering to waste reduction, there’s a huge range of software options for hospitality operators who are looking for ways to reduce their cost of sales. 

The best software options will allow you to centralise your processes and gather all the relevant information into one place so that you can manage everything easily and effectively. It’s worth considering integrated software options, so that everything syncs up and you don’t have to waste time entering information twice (or more!)

Through effective integration, you should have easy to understand analytics at your fingertips. These will help you to make informed decisions and identify areas where cost savings can be made. 

Dalata Hotel Group are a great example of how a hospitality group can use technology to reduce costs. This case study shows how technology transformed their business, giving them control over everything they do, from driving best prices, consolidating suppliers and easily tracking their costs. 

How can Access help with reducing cost of sale?

In this article, we’ve looked at the importance of managing your cost of sales, and the potential dangers of making cuts to spending without balancing this with the customer experience. We’ve shared advice on areas to focus on when it comes to reducing costs in your restaurant, and covered how and why technology is often an important investment for restaurants looking for ways to increase their profit margins. 

If you’re ready to start making savings in your business, the first step is to honestly and objectively assess your current processes. Ask yourself the following questions:

  • How often do I review contracts and compare prices across the market? 

  • How highly do I prioritise my supplier relationships? 

  • How much money am I throwing in the bin in the form of food waste? 

  • How effective is my procurement process?

  • When did I last carry out a demand forecasting exercise?

  • Am I certain that my menu doesn’t have items that are losing me money?

Once you’ve identified key areas for improvement, it’s time to look for tools to help you with this. With over 2500 suppliers, ProcureWizard from Access allows you to centralise your purchasing, standardise your procurement processes, and compare prices between suppliers to get the best deals. You can also add additional bolt-on modules to help with food waste and menu engineering, so that you can get your cost of sales fully under control using one easy solution.

If you’d like to further explore ideas to reduce costs watch our demo video.