Setting the Record Straight About Restaurant Profitability

Setting the Record Straight About Restaurant Profitability

I am on a mission today to set the record straight. There is a terrible misconception on the part of the media, restaurant customers and even many restaurant employees that food establishments make gobs of profit. “I can purchase those ingredients at 1/5 the cost and make that dish at home”! Yea, you probably could assuming you have access to the same ingredients and know how to cook, but this does not take into account why you go out to restaurants. The modern restaurant serves many roles from the reward system for patrons to a source of entertainment and knowledge. But for decades the primary reason why people go out to dinner is so that they don’t have to cook or clean up. This is reminiscent of the old advertising adage used by public transportation in Buffalo while I was growing up: “take a bus and leave the driving to us”. Now the cost of operating those restaurants, like the cost of operating any business go way beyond the obvious cost of the primary raw materials. So, in an effort to clarify what many do not realize, here is the reality of restaurant profitability.

1. On average, if the restaurant does everything right they can realize a net profit of about 5% before taxes. That means that of that $50 tab for your dinner at a favorite steak house, the restaurant MIGHT realize a net before taxes of $2.50. That assumes they do everything right and do not have any waste, spoilage or theft (external or internal). This assumes they have the time to check prices from their vendors every day and always buy right. This assumes that their employees are always diligent when it comes to portioning, utilizing all ingredients, and properly preparing dishes according to the recipes developed.
2. What can go wrong? That dining room ambience that you love costs lots of money to maintain. Think about the cost of those fresh cut flowers, the price of china, glassware and silverware. Understand that each cloth and napkin placed on a table cost money to rent (yes, rent – most restaurants do not own their linen nor do they launder them). That nice stemware from Riedel that you like to drink your French Pinot Noir from probably cost $15 and guess how many break on a daily basis. The Italian bone china that the chef loves to use to highlight his/her cuisine may be $15-20 per plate, and you guessed it – they also break frequently.
3. Music is another issue that escapes most people who dine or even work in restaurants. Even if we play CD’s in a restaurant there is a fee that goes to BMI and ASCAP. Even more so if you have live music (not including what you pay the musicians).
4. Maintenance can be a real drain on restaurant operations. The cleaning chemicals used to wash dishes, clean floors, sanitize surfaces is substantial.
5. How about restaurant build out? The cost per square foot of building a kitchen including equipment can be in the neighborhood of $400 per square foot. A relatively small 600 square foot kitchen would thus cost approximately $240,000 to build. Dining room space is cheaper, but typically much larger in square footage. That restaurant that you love to go to is a multi-million dollar project. This needs to be paid back over time and guess what – the bank is not patient when it comes to payment due dates.
6. Bar inventories are important to a restaurant’s health and the selection demands of the public. The nature of state liquor authorities is to require payment cycles from restaurants that range from cash on receipt to 14 days or so. If you miss a cycle payment the vendors will not and cannot deliver to you or will require COD. So, that restaurant wine cellar with a list of 200 wines by the bottle and a selection by the glass may have a value in the hundreds of thousands of dollars, or more.
7. Food is highly perishable, especially proteins and produce. In some cases shelf life is measured in a couple days. It must be used in that period of time or it becomes costly waste. Since in a ‘la carte restaurants we never really know what you are going to order, managing ordering and inventories is very important. Any waste will eat away at that 5% net.
8. Let’s talk about waste: it costs lots of money to have that restaurant waste and recyclables taken away.
9. Uniforms: we want our staff to look good, crisp and fresh and since they are working around food, their clothing needs to be sanitary. Thus, most restaurants rent uniforms, aprons and side towels. This can account for thousands of dollars of cost each month.
10. Insurance is of course an issue with any business but in restaurants we also need something called third party liability insurance to protect the operation and its employees from an intoxicated guest who causes harm to a third party who in turn chooses to sue the restaurant. Yes, if a customer drinks too much it is the fault of the restaurant.
11. Marketing and advertising is a shotgun effort in most cases. We place ads in the newspaper, magazines, radio and television to try and stimulate traffic. We never really know how well this works but find ourselves in a position that failure to continue advertising might negatively impact business; so we continue to spend thousands and cross our fingers (social media is helping a great deal with driving down marketing costs).
12. Turnover and training is an on-going issue in restaurants. Since rates of pay are fairly low, the work hours are long and stress runs high, employees come and go way too frequently. Although we should spend more on training, typically by the time we finish training a staff we need to start over with new ones.
13. Staffing is expensive in restaurants because it is a labor-intensive environment. Lots of preparation and support work that can require a restaurant to have dozens of staff to support those 100 dinner guests tonight.
14. Note that I have not even touched on mortgage or lease, utility costs, equipment repairs or property taxes.

Now, this may seem like I am complaining; I am not. It is however important to counteract the misconceptions that people have about this fantastic business that services the public in so many ways. We are the first businesses that charities go to for assistance, the first businesses that provide employment for young people just starting out and the first business that guests turn to when they have had a rough day and need to be pampered. This is what we do and we love it (for the most part).

Many restaurants that have continued for quite some time do so simply because they are able to maintain a positive cash flow, not because they make gobs of profit. Those who find it hard to control those sensitive costs are unable to create a steady flow of cash or are unable to meet the needs of a fickle customer base, become part of that 66% failure rate.

A simple request would be to acknowledge that restaurants provide a service, one that is costly to provide and that although your steak might seem pricey, you understand that a great deal goes into bringing it from steer to plate. Fortunately, there are restaurants out there for every socio-economic level, 965,000 of them in the U.S. as of last count.

http://www.harvestamericaventures.com

  1 comment for “Setting the Record Straight About Restaurant Profitability

  1. Sue Seoane Blair
    December 15, 2013 at 1:52 am

    I feel this article is VERY informativ to most that are not involved in the industry.

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