A small potato chip business makes its money where the chips are hot. In the example below, a 5-ounce bag of kettle chips takes a pound and a quarter of potatoes, because three-quarters of a potato's weight is water that fries away, plus the oil, seasoning, bag and three minutes of slicing, frying and bagging: $2.80 sold direct at $5, a 44% margin. The same bag sold to a grocer at $3.50 earns 20%. Hot chips by the cup at a fair, $6 a cup, earn 74%. Over a summer month, four ways of selling bring $16,940 of sales and $9,050 of gross profit, three-quarters of it from the fair cups, and about $6,975 is left after the fixed costs. Below is a bag costed, why the potatoes shrink, the margins by channel, a month, and where the margin leaks.
The short version
- Cost a bag from the potatoes: about 4 pounds of potatoes make a pound of chips.
- Add the oil, seasoning, the bag and label, the minutes and the fees.
- Handmade bagged chips earn about 44% direct and 20% wholesale in the example.
- Hot chips at fairs and events earn the most, and carry the business.
- Big chip makers win on wholesale with machines; small makers win on freshness and events.
- The oil, the bags and the waste are where the margin leaks.
- TaroStack records each fry's yield and keeps the potatoes, oil and bags counted. More below.
A bag, costed
Spearfish Kettle Chip Co., a made-up kettle chip maker in Spearfish, South Dakota, I use in these examples, slices and fries chips in small kettle batches.
| A 5 oz bag, sold direct | Cost |
|---|---|
| Potatoes, 1.25 lb at $0.60, about 4 lb a pound of chips | $0.75 |
| Frying oil, the share absorbed and changed | $0.45 |
| Seasoning | $0.10 |
| Bag and label | $0.35 |
| Slicing, frying, seasoning and bagging, 3 minutes at $20 an hour | $1.00 |
| Card fees, 3% of $5 | $0.15 |
| Cost | $2.80 |
Why the potatoes shrink
A potato is about three-quarters water. Frying drives most of it out, so a pound of chips takes about four pounds of potatoes, and the chips soak up oil on the way. A slice cut thicker, a fryer running cool, or potatoes with more sugar change the yield and the color. Weigh the potatoes in and the chips out on a few batches; how a batch's yield turns into a cost is in batch yield formula.
Margins by channel
| Product | Sold where | Price | Cost | Gross profit | Margin | Markup |
|---|---|---|---|---|---|---|
| Kettle chips, 5 oz bag | Markets and online | $5.00 | $2.80 | $2.20 | 44.0% | 79% |
| Kettle chips, 5 oz bag | Grocers and delis | $3.50 | $2.80 | $0.70 | 20.0% | 25% |
| Hot chips by the cup | Fairs and events | $6.00 | $1.55 | $4.45 | 74.2% | 287% |
| Case of 12 bags, shipped | Online shop | $48.00 | $36.18 | $11.82 | 24.6% | 33% |
The grocer bag carries 15 cents of delivery and leaves 70 cents; handmade chips can't match a factory's price on a grocery shelf. A fair cup uses half a pound of potatoes, sells hot, needs no bag, and earns $4.45. The shipped case pays for a sturdy box and 6% to the online shop. What a stall costs is in cost to sell at a farmers market.
A summer month
| Product | A month | Sales | Gross profit |
|---|---|---|---|
| Bags, direct | 600 | $3,000 | $1,320 |
| Bags to grocers and delis | 1,000 | $3,500 | $700 |
| Hot chips by the cup | 1,500 | $9,000 | $6,675 |
| Shipped cases | 30 | $1,440 | $355 |
| Total | $16,940 | $9,050 |
Fixed costs are $2,075 a month: a shared commercial kitchen ($900), fair and event fees ($800), insurance ($90), the website ($40), ads ($150), fryer upkeep and oil disposal ($60) and software ($35). That leaves about $6,975 in a summer month, a 41% net margin, with every hour paid at $20. Winter, without fairs, looks different, so the plan needs the summer's cash to carry the cold months; how to plan around a season is in seasonal inventory.
What a good potato chip margin is
For a small maker, 40% or more on direct bags and 70% or more on fair cups, with labor counted. Wholesale under 25% only works at volumes a hand-fed kettle can't reach; take grocery accounts for the name, not the money. Margins in food in general are in good profit margin for a food product.
Where the margin leaks
Oil. Oil that's changed too late makes dark, bitter chips; changed too early, it costs more. Track how many batches a fill lasts.
Broken chips. The bottom of the bin is crumbs; sell them as seasoning or snack mix, or count them as waste.
Bags. Foil-lined printed bags in small runs cost almost half as much as the potatoes in them.
Rain. A rained-out fair is a day of fees with no cups; the summer plan should allow a few.
Get the calculator
Download the potato chip profit margin calculator. One line for each product and where it's sold: the price, the potatoes, oil and seasoning, packaging, labor and fees as a share of the price; the cost, gross profit, margin, markup and the price a target margin needs fill in. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
The sheet uses one yield and one oil price. Each fry gives a slightly different weight of chips, oil gets dearer, and bags come in runs of thousands that last months.
How TaroStack does it
TaroStack records each fry's yield and keeps the potatoes, oil and bags counted.
Each fry's yield. A fry is a batch that takes the potatoes, oil and seasoning off stock and records the chips made, good and rejected, so the yield and the real cost show, batch by batch.
Bags and oil counted. Potatoes by the pound, oil by the gallon and bags by the each come up on a reorder list in days of cover, with each supplier's lead time.
Margins by channel. Margins are reported by product and by customer, so the grocer bags and the fair cups show what each earns.
| The job | Spreadsheet | In TaroStack |
|---|---|---|
| Each fry's yield | Weighed, maybe written | Good and rejected on each batch |
| Oil and bags on hand | Look in the store room | Stock, with a reorder list |
| What a bag really cost | One yield, one price | Costed from what each fry used |
| What grocers earn | Worked out by hand | Margins by customer |
Recipes, batches, reorder lists and margins are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.