While the food industry covers agriculture, food processors, retail stores and restaurants, the calculation for gross profit margin remains the same -- revenues minus cost of goods sold. Cost of goods sold is the beginning inventory plus purchases minus ending inventory. For example, the company has $50,000 of beginning inventory, purchased $100,000 and has an ending inventory of $25,000. Cost of goods sold is $125,000. If sales were $325,000 for that same period, the gross margin would be $200,000 or 61 percent.


The food industry begins at the farm, where the gross margin is around 56 percent. If farms have a bumper crop one year, the supply may be greater than demand. In that event, the price could drop and so would the gross margin. Crop failures, on the other hand, drive the price up. These changes in prices spiral through to the final consumer, whether buying groceries or having lunch at a fast food restaurant.


Raw products are sold directly to the manufacturers or to wholesalers. For example, a ketchup processor may buy the tomatoes directly from several farms or from a wholesaler, then adds other ingredients such as vinegar and spices. Suppose it costs 63 cents to produce and distribute a bottle of ketchup. A grocery store buys the ketchup for $1 per bottle and sells it at around $1.35 per bottle. Food manufacturers have an average gross margin of 37 percent and beverage manufacturers 57 percent.

Retail Stores

Retail grocery stores have a gross margin of between 20 to 28 percent. These stores also offer loss leaders -- low-priced deals designed to get customers in the door, where they'll presumably buy other products as well. Product sales are not the only revenue stream for a grocery store. Manufacturers pay stocking fees for new products to get them on the shelves, in order to mitigate the store's risk. Retail space is precious. If a new product doesn't sell, the grocery store loses the sales that would have been generated by products with a proven track record. The slotting fee is categorized as a cost of sales for the manufacturer, decreasing the gross margin. The slotting fee may be accounted for separately by the grocery store or simply netted against the cost of goods sold, which increases gross margin.


Restaurant owners look at both the cost of food and the cost of beverages when setting goals for gross margin. Beverages receive more markup than food. For example, a glass of ice tea even with refills costs around 25 cents but sells for $1 to $2. The combined average gross margin for both food and beverage runs between 59 to 62 percent. Food has an average cost of about 30 percent which results in a gross margin of 70 percent. Beverage has a cost of 20 to 25 percent which results in a gross margin of 75 to 80 percent. In addition to the overall cost of food and beverage, restaurant owners calculate the cost of each dish. That way, the owner knows what menu items are making money and what items may have to have a price increase, an adjustment in ingredients or be taken off the menu.