Strong sales can hide shrinking margins. So how do you know when your COGS needs attention, what’s driving the problem, and where to start fixing it? In this session, we’ll explore menu mix, margins and loss leaders through the warning signs you should be watching for: bestsellers contributing too little profit, ingredient costs creeping up without recipe margins keeping pace, and actual stock costs coming in higher than your recipes suggest. You’ll leave with a practical process to investigate the cause, choose the right action and check whether it’s working.
A low percentage doesn't mean everything is fine, and a higher one isn't automatically a problem. Ask what is driving your cost of goods and where you are making or losing money, then investigate from there.
Menu performance (what customers buy and which items bring in the most gross profit dollars), recipe performance (are recipes accurate and followed in venue) and stock performance (does your stocktake match what your recipes say it should be).
A high-selling, low-margin item is fine if you know why it's on the menu, for example because it drives add-ons. A $16 burger at 45% COGS only makes sense if your team reliably sells the fries and drinks that go with it. If nobody can say why it's there, that's your first problem.
Check recipes and stock first because they're the quickest to rule out. Then walk into the kitchen, grab a scale and weigh three or four portions. Most of the time it's not negligence, just a team member who was never told the weight.
Trying to fix all of your cost of goods at once usually means none of it gets fixed. Work out what changed, where, why, what to do, then go back and check. A change you never check is a guess.
Many operators are so busy that cost of goods gets little attention while revenue looks great. Tom's example is two restaurants each doing $100,000 a week. The restaurant with 6% higher cost of goods gives up a large amount over a month, enough to pay for a good duty manager or extra office support. But a COGS percentage on its own doesn't paint the whole picture, because it can sit alongside very high labour costs or other issues.
The framing that helps is to stop asking "what are my COGS?" or "what should my COGS be?" and start asking what is driving my COGS, and where am I making or losing money? Your COGS figure points you to where to start investigating. It is not the answer.
In Loaded these come together through your sales, your recipe costs and regular inwards goods, so recipes and stock on hand stay up to date and you can trust the data when you make decisions.
A chicken schnitzel selling 400 a month can bring in far more gross profit than a premium steak even though its COGS percentage is higher. Neither is right or wrong. The question is always why is it on the menu?
A good exercise is to sketch your top 10 or top 20 items on a whiteboard in four groups:
A high-sales, low-profit item can be perfectly valid if it's a volume play, it drives add-ons, or it takes almost no prep. A $16 burger at 45% cogs looks terrible in isolation. It's on the menu because the team pushes fries and a drink with it, which brings the combined margin down substantially.
This needs to be agreed with your whole team, not just set up in Loaded and linked to the POS. If you ask anyone on the floor why the item is there, they should be able to tell you, and they should be offering the add-ons every time it's ordered.
A loss leader becomes a problem when:
A 2% rise in salt won't register. But a small rise in an ingredient that sits in your loss leaders, or runs through many recipes, compounds quickly. This is why regular inwards goods matter: you want to change a price, supplier or promotion the moment a low-margin item blows out, not at the end of the month or quarter. Tom's advice from an old chef: look after the pennies and the pounds look after themselves.
If your COGS products report shows 30% for the period but your stocktake comes in at 36%, that's a flag to investigate, not the answer. Variances almost always come from one of three places: recipe, stock or operations. Start with recipe and stock because they are the quickest to eliminate. They also interlink: an incorrect recipe can really be a training problem.
In Tom's experience, people assume something has gone terribly wrong when it's usually staff training. A new team member is shown how big to make a patty, never told the weight, and makes it that size forever.
Tom used the same simple process in previous roles, and it works because you can follow it every time and measure the result.
In the stocktake, the venue opened with 20 kg of mince, received 30 kg and closed with a little over 9 kg. That means a bit over 40 kg left the venue, while the recipes say only 33 kg should have been used. The mince is used in only one dish, the wagyu burger, so it's easy to isolate.
The fastest way to find out why isn't to ask the chef. Walk into the kitchen, grab a scale and weigh three or four patties. You can do the same with fish portions or anything pre-portioned. You'll quickly see whether they're being made to recipe. Then fix the cause: a missing recipe card, no training, or something else. Often a short group training on portioning is all it takes. Stocktake the item every night for a week to see whether there's a pattern.
Bring your team along so they understand the engineering behind the menu. Front of house staff should know which items they're meant to push, not because it's their favourite dish but because pushing it makes the rest of the menu worthwhile.
If you're not sure where to start, begin with your top five selling food and beverage items by sales volume. For food, proteins and dairy (including seafood) usually carry most of the cost, so start there. Changing the paprika in your burger patty won't change the patty. The protein will.
On its own, not very much. COGS percentage and your COGS figure are a flag that tells you where to start investigating, not the answer. A high percentage on a high-volume item can still bring in more gross profit than a premium dish, and a low percentage can sit alongside very high labour costs. Ask what is driving your COGS and where you are making or losing money.
Menu performance (what customers buy and which items bring in the most gross profit dollars), recipe performance (whether recipes are accurate and followed in venue) and stock performance (whether your stocktake agrees with what your recipes say you should have used). Looking at all three tells you where to point your attention.
Variances almost always come from one of three places: recipe, stock or operations. Check recipes and stock first, because they're the quickest to rule out. Then weigh a few portions of the items in question. In most cases the cause is training, such as portions made to a size rather than a weight, rather than anyone doing anything wrong.
Not automatically. It's fine if you know why it's on the menu, for example it's a volume play, it drives add-ons like fries and drinks, or it needs almost no prep. It becomes a problem if it's no longer driving volume or extra spend, if costs have crept up without a price change, or if your whole top 10 is made up of loss leaders.
Pick your top five selling food and beverage items by sales volume and focus on those, rather than trying to fix everything at once. For food, proteins and dairy (including seafood) usually carry most of the cost. Use the COGS products report to ask what has changed on each item and whether that makes sense, choose a couple of actions for the week and check the result at the end of it.
Tom: Thank you everyone for joining us today. My name is Tom and I'm part of the success team here at Loaded. Today's session covers everything cost of goods related. Sophie is along with me and she's going to be manning the Q&A, so if you have any questions, drop them in the chat and we'll get to them at the end unless they're relevant as we go.
A little about my history: I've been in hospitality pretty much my whole life, starting out as a chef and then moving into ops and management roles within large groups. Hopefully today I can give you some practical tools to create action once you've identified that you have a problem with your COGS. We'll start with how to find issues, what they actually look like, which is not necessarily always a higher COGS percentage, and a framework for what to do next. We'll break COGS into three layers so you know where to point your attention, then drill down on what's actually causing the problem.
Then comes the part that, from my experience onboarding lots of people and working with operators before Loaded, is where things start to get confusing. It's a really basic five-step process I've used in previous roles, which you can apply to any red flag that comes up. And finally, the part most people skip: how to check that the actions you've taken to fix your cost of goods have had the effect you thought they would.
Tom: Strong sales don't always mean a healthy menu. This is very common. We often hear from people that they don't have time to spend on their cost of goods, usually because they're wall-to-wall jam-packed every single week. It's really good to have a high revenue number coming through. But if we've got restaurants A and B both doing $100K a week, and restaurant B has 6% higher cost of goods, that adds up to a really good duty manager or some really good support in your office over a month. You're all seasoned operators and experienced with the juggling act that is COGS and labour and everything else, so just looking at what our COGS percentage is doesn't paint the whole picture.
We want to change the framing. The question generally asked is what are my COGS, or something I get asked in onboarding with almost every customer: what should my COGS be? The question you need to be asking is what's driving my COGS, and where am I making or losing money? Your COGS percentage and COGS figure is the flag that directs you to somewhere to start investigating. It's not the answer. A low COGS percentage doesn't necessarily mean everything's hunky dory. It could be paired with incredibly high labour costs, which we'll look at in next week's labour webinar to bring the full circle together.
Tom: Typically you can break your COGS down into three layers. Menu performance is what your customers are actually buying and what's bringing in the most gross profit dollars, not just the most sales. These may be the same, and they may not be. Recipe performance is the accuracy of your recipes. If you want to drill down on your cost of goods, you need to make sure recipes are accurate and being followed in venue. That's probably the trickiest part for most people, and I can say this as a chef: chefs like to get a little creative with recipes, sometimes in the way we plate food. So making sure what we've costed a dish at is actually what's going out to the customer on the plate is key. The last is stock performance. It's all well and good to have a bunch of recipes that all sit well under 30%, but if that's not what your stocktake report is giving you, that's another red flag.
In Loaded we get to that profitability point by combining the data from your sales coming in, your recipe costs, and receiving inwards goods regularly so your recipes and stock on hand are updating. That way, when you look back at the data, you can be confident it's accurate and start making decisions from it.
Tom: Red flag number one: your best seller isn't necessarily your best earner. There are arguments for and against both, and neither is right or wrong, but it's definitely a discussion worth having with your team. If we look at our chicken schnitzel, we sell 400 a month and make $4,000 gross profit, quite a lot more than our premium steak. But our schnitzel's COGS are probably a lot higher because we're driving volume on that product. Again, it's not a right or wrong answer about what should be on your menu. It's about asking why it's there. A big thing with volume-driven items is that a low-margin, high-selling item is absolutely fine, but a low-margin item that's also incredibly prep heavy starts to raise the question of why it's on the menu.
You can break your whole menu down into something like this. A really good exercise is to do it on a whiteboard or blank piece of paper and jot down where your top 10, or even top 20, menu items sit. Stars don't need much of a description: you're selling a bunch of them and they have really low COGS, so ideally they sit in your top 10, and at the very least your top 20. Opportunities are high-profit items you're just not selling a lot of. The question is whether that's because it's an average dish and people don't want it, or because it's not being pushed by staff. Red flags are where you really want to pay attention: really high sales and low profit. There's nothing wrong with that, but you need to ask why the product is on your menu. And anything that is low profit and low sales should, unless there's an incredibly good reason to keep it, be cut from your menu.
Tom: High sales and low profit raises the question of why it's there. If the answer is that it's a volume play, or we have upselling items that sit next to it, or it takes no prep to get out onto the plate, those are all completely valid answers. It's not automatically a problem; we just need to decide why it's there. As a general rule, if you look at your top 10 food or beverage items and there's something sitting really high in your top 10 with a really high COGS or low margin, and you don't immediately know why it's there, that's your first problem.
So it's about having that discussion with your team. These items should be driving add-ons or related sales. A $16 burger at 45% COGS, looked at in isolation, is terrible and should be removed from the menu immediately. That's the stuff of nightmares. The reason we have it on there is that we push fry add-ons, and we want people to get a drink, which, as you can see from just those other two items, brings the margin down quite substantially, quite quickly.
The important bit about having strategic loss leaders on your menu is that this can't be done by you setting up a recipe in Loaded, linking it to your POS and off you go. It needs to be with your team. It's not just your venue manager and head chef; it's your wider team. If you ask anyone on your floor, they should be able to tell you exactly why that item is there, and the first thing they say when someone orders a burger is, "Can I get you a second drink? Can I get you fries? Would you like corn ribs?" or whatever product you want to upsell with it. If that's not happening every single time that item is ordered, that's your first problem to start fixing around those loss leaders.
When do they become a problem? If any of those reasons it was put on the menu stop existing. If it's not actually driving volume, if you're not getting the extra spend out of your customers, or if customers simply aren't buying the complementary products. You might have a 45% burger that comes with fries, with no real incentive to purchase anything else with it. Those first three are things you have a lot of control over, with clear actions you can take to start reducing your COGS. The next is cost increase, which brings back the importance of making sure inwards goods are being updated. If you have a low-margin item, you want to make changes immediately when it starts to blow out, not when you get to the end of the month or quarter and realise we should have put the price up, or removed it from the menu, or run some promotions around it. And the last is if your business relies too heavily on loss leaders. Having one or two loss leaders in your top 10 is completely fine when they're surrounded by really good, well-priced complementary items. It's not fine if your top 10 is all loss leaders, because that's not a loss leader, that's just a loss maker. We really want to understand why it's there and, if it's stopped working, what we can do to change it or replace it on the menu.
Tom: The big one, particularly around inwards goods, is slowly rising costs. I'm sure everyone has noticed over the last three years that everything just keeps increasing, day after day. That's somewhat fine for items that don't cost us a lot going into other ingredients. If our salt goes up 2%, we're not going to notice it on the bottom line. But if items that sit in some of those loss leaders increase even by a small percentage, it starts to throw out the metrics on why they exist on the menu at all. If the same ingredient goes through all of your recipes, that compounds over time.
A chef told me years ago: look after the pennies and the pounds look after themselves. Pay attention to those fine details when they come through and take action against them. Your bottom line is the result. Whether that's swapping that supplier for a different one, increasing prices, or driving other lower-COGS items into your top 10, being active in that space, particularly on items that are already quite volatile, is really important.
Tom: Going back to what we said at the start, having all our recipes sitting under 30% is awesome, but only if our recipes are actually being made to spec. If we look at our cost of goods and COGS products report over our week, month, fortnight, whatever our stocktake period is, and we're sitting at 30%, and then our stocktake tells us we're sitting at 36%, that's a flag for us to start looking at. It's not the answer to your question. It's saying there's a problem and we need to jump in and have a look at where it's coming from.
Variances almost always come from one of three places: recipe, stock or operations. Whenever you're drilling down into variances, recipe and stock are always the first place to start. They're the quickest to eliminate, and a lot of the time that's where your variance is coming from. They're interlinked, though: incorrect recipes can be linked to operations and training. When we're looking into stocktake variances, people genuinely assume something has gone terribly wrong, and in my experience it's almost always staff training. I started working here three months ago, I got shown how to make our burger patties, we make them about this big, no one ever told me a weight, so I just roll them this big and that's how big I've always made them. It's often not anyone being negligent. It's just a lack of knowledge about what they should be doing.
Tom: When we look into COGS problems, or COGS that come from variances, we kind of started this in a previous role and the running joke ended up being that it was incredibly corporate and quite stiff. Feel free to adopt this and make it whatever you like. We kept it for the running joke of it being pretty straight laced. But it's important that when you see problems with your cost of goods, you follow the same process each time, because that's how you can measure your results against it.
First, super obvious: what's changed? Have your cost of goods increased or decreased? Have well-costed items fallen out of your top 10? You want to work out what you want to focus on. The biggest piece of advice overarching everything we're talking about today is to pick 10, probably even five, items and drill down on them. Generally what we see is people have a problem with their cost of goods and try to fix all of it at once, which is overwhelming and not productive, and you generally don't end up fixing any of it because it's too big a task. Pick some high-volume, problematic items and drill down on them.
Second is isolating where the increase in cost of goods has happened. If we're looking at our stocktake, starting with categories is the best place to start, looking at where the biggest variance is, and then drilling down on which items in that category have caused the increase. Then diagnosing: if we have a beef mince product that has blown out our cost of goods, what does it get used in? That's our focus for acting, investigating the recipes that use that product and all the processes around it to see where something has come undone.
And the biggest and most important one is measure it. Actually go back and see whether the changes you've made have fixed your problems. A good saying here is that a change you never check is a guess. If you don't go back and measure it, in six or eight weeks you'll be back at the same product with the same problem, throwing something else at it.
Tom: Sticking with the example of beef mince, this is a stocktake that's come through in Loaded. We opened with 20 kilos of mince, we received 30 across our stocktake period, and we closed with a little over nine. So what we've physically used, what's been removed from our venue, is a bit over 40 kilos. Based on our recipes, we should have only used 33. This is the spot where we go, okay, this is a variance we should be concerned about, and then it's a matter of drilling down to why that problem exists. With this stock item it's really easy: it's only on our wagyu burger and it doesn't get used in anything else, so it's easy to isolate where the issue comes from.
When Tom started, he got shown how big the beef patty was and he's never actually weighed it. The best thing you can do when you get a variance like this in a stocktake is don't ask your chef. Walk into the kitchen, grab a scale and throw a patty on it. You can do that with a beef patty, a portion of fish, anything pre-portioned in your kitchen. Weigh three or four of them and you'll very quickly know whether they're being weighed out and following a recipe, or whether they're just being sliced and diced and thrown in the fridge. That raw data from your kitchen is the best way to find out what's going on. Then it's about jumping in and correcting whatever the problem is. Is it because they don't have a recipe card? Is it because they're not trained? Generally it's going to be training, and it's pretty easy to run a group training on how to portion a beef patty. Hopefully you can pass it on to your chef and they can push it through. Then get that on a regular stocktake. I would stocktake the mince every night at the end of shift for a week and you'll really start to see whether there's a theme running. It may be that every time Tom's at work, the beef is always out.
Tom: A big one with cost of goods: just increasing your price is not the answer to fixing your COGS. Promoting the items that sit around it, like we've been talking about with loss leaders, is probably your easiest and most effective lever for improving your overall COGS. There are heaps of ways to do it. Run staff incentives, run games with your staff. I was talking about this with someone just the other week: staff bingo, with eight of your better-COGS items on the card, run on a shift with a gift card, a bottle of wine or an extra staff meal at the end of the shift. It's remarkably effective at motivating staff and pushing some of those items into your top 10.
Reducing your product costs or usage is the next step: tendering out to suppliers to see if you can get something of equal quality at a better price. Reducing usage is probably quite a touchy one, given the last couple of years of shrinkflation, so be really targeted about when you reduce portion sizes and when you reinvent the whole offering. That might be removing it from the menu and replacing it with something else, or rethinking the way that plate or cocktail gets made.
Not everything needs the same margin. We've gone through this quite a few times, but it's really about bringing your staff along for the ride and having them understand the engineering behind your menu. Your front of house staff especially should know which items they should be pushing, and not because it's their favourite item on the menu. It's strategically there because certain items need to be pushed into our top 10 to make the other items worthwhile.
Tom: It's pretty easy to go through every week. A big thing with COGS is that it feels like a huge job that will take forever to review your menu. Like I said, pick a handful of items: your problem children, your high volume items, the ones that have big variances, anything that's raising more than one of those red flags. Focus on them over a week, two weeks or a month. That will bring your COGS down much quicker and more effectively than trying to manage everything at once.
You can do this quickly, using your COGS products report and a piece of paper. Right, here are three items: what's changed with them, and does it make sense that those changes have happened? What sold is something I'd put back on your venue managers and duty managers: bring me each week your top 10 items sold, and have targeted items that should be getting into that top 10. Part of that 15-minute check can and should be pushed out to the people on the ground. Then choose a couple of actions each week: between now and next Monday or Wednesday I'm going to do a training with the kitchen, or a how-to-pour-a-tap-beer training with the team out the front because too much is going down the drain, whatever it might be. Break it down into some clear actions for the week, then come back and review at the end of the week to make sure those actions have moved the needle.
Sophie: Just a quick question here, Tom. If you're just getting started with this process and you're a little bit lost about where to go first, do you have some advice on how to pick five items? Food and beverage?
Tom: I'd start by sales volume, picking my top five selling food and beverage items. Those are recipe items.
Sophie: Would you pick all of the stock items within those recipes, or certain items within the recipe?
Tom: Good question. From a category or item point of view, proteins and dairy for food are generally going to be your largest costs. Fruit and veg, dry store and the rest obviously contribute, but those two categories, and I'd include seafood in protein, carry most of the weight. That's definitely where I'd start, then work your way back from there. Changing the amount of paprika that goes into your burger patty is not going to change your burger patty. It's really the protein that goes with it.
Tom: Like we just went through, if you break down those COGS problems into five steps and repeat them the same way every time you spot a COGS problem, it becomes a muscle. Seeing a high-COGS item is not the problem. It's the flag for you to investigate. Spot the problem, work out exactly where it's coming from, why it's happening and how to fix it, and make sure you're measuring it. That becomes a second-nature workflow.
The main three things to take away: don't judge your menu performance on sales. You need to look under the hood at your gross profit and how it's all being pulled together. Variances, and high COGS on their own, are not the answer and not the cause of the problem, so it's about drilling down to find that cause. And follow up on the actions you take. That's the biggest piece from today. If you spot an issue, create an action from it and then measure how it's affected your business, and how you're going to measure the hopefully positive results that come out of it.
Tom: I'm going to flick through two screenshots showing how to access our new Academy page in Loaded. Through the portal, if you're logged in, you can click on the Loaded Academy page in the admin area and it takes you straight there, where you can see all the upcoming sessions we'll be running. They're a combination of really detailed how-to sessions in Loaded itself, where you can ask detailed questions about your venue and we click into things and show you exactly how to execute certain actions, and operations-focused sessions like today's, which run weekly as well. We'll let you know in Loaded when we've got new sessions scheduled, with links to register or the most recent recording from all of those sessions in our Academy. We'll be running quite a few in the next few months as we head into Christmas and New Year.
If you do have any questions, feel free to flick us an email at support@loadedhub.com and we can give you a buzz and go through anything we haven't covered off today. That's it, thanks a lot for your time. Sophie has popped up another little poll if you want to click through that on your way out. Appreciate your time and we'll see you next time. Thanks, team.
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