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Restaurant Profit Margin


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The current Washingtonian (can't find a link online) has a little sidebar in which Cathal Armstrong breaks down the price and cost of an average dinner for two in the tasting room.

Average bill: $250.

Average profit: $13.

Wow! I'm no accountant, but I'm pretty shocked that the numbers come out that way. (Or, at least, can be made to come out that way.) The sidebar itself itemizes the costs specifically, and is good for a quick read next time you pass a newsstand.

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The current Washingtonian (can't find a link online) has a little sidebar in which Cathal Armstrong breaks down the price and cost of an average dinner for two in the tasting room.

Average bill: $250.

Average profit: $13.

Wow!  I'm no accountant, but I'm pretty shocked that the numbers come out that way.  (Or, at least, can be made to come out that way.)  The sidebar itself itemizes the costs specifically, and is good for a quick read next time you pass a newsstand.

I'd love to hear a restaurant manager weigh in on that one. I don't know how they'd stay open.

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I'd love to hear a restaurant manager weigh in on that one.  I don't know how they'd stay open.

Ummmm. They're making a profit? :lol:

That margin seems pretty normal to me for a well-run restaurant. Hell, there are all kinds of businesses that would love a 5 % profit margin.

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The current Washingtonian (can't find a link online) has a little sidebar in which Cathal Armstrong breaks down the price and cost of an average dinner for two in the tasting room.

Average bill: $250.

Average profit: $13.

Wow!  I'm no accountant, but I'm pretty shocked that the numbers come out that way.  (Or, at least, can be made to come out that way.)  The sidebar itself itemizes the costs specifically, and is good for a quick read next time you pass a newsstand.

A Night at Restaurant Eve

What are you paying for, exactly, when you foot the bill for a really nice dinner at a really nice restaurant? We asked Cathal Armstrong, chef/owner of Restaurant Eve--where dinner for two in the Tasting Room averages $250--to open his books and break down the check for a typical night at the restaurant.

Food cost: $52.35

Wine cost: $20.40

Labor cost: $81.50

Payroll tax: $7.50

Employee benefits: $13

Rent and Real Estate Tax: $16.75

Utilities: $4.25

Repairs and maintenance: $6

Promotions and discounts: $4.25

Advertising: $3.25

General supplies: $2

Credit-card fees: $7

Decorations: $1

Linens and uniforms: $4.25

Tableware: $1.25

Equipment: $1

Menus and licenses: $2.75

Accounting: $2

Liability insurance: $2.25

Bank-loan interest: $4

Total: $236.75

Restaurant's net profit: $13.25

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obviously the above is broken down in more detail, but here is how Cathal broke it down during the DR chat.

Labor cost is about 30% of gross, cost of goods is about 30% of gross, rent is about 5% of gross. So of the 35% that's left we pay china, glass, silver, linen, gas, electricity, water, trash removal, linen, insurance, public relations/advertising, repairs and maintenance, payroll taxes, credit card processing fees, flowers, interest on our bank loan, permits and licences etc., etc., etc.

If we try really hard and don't have any surprises, like the toilet overflowing on Friday night causing us to call an emergency plumber at $1500, we might hit around 5 or 6% net. Bear that in mind, when your bill is $600 for 4 people usually a restaurant of our calibre will net $30.00-$40.00.

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As with any business, various enterprises operate at different profit margins. Net Profit for a well-run restaurant like Olive Garden or TGI Fridays might be as high as 15-18%.

Fine dining restaurants generally have the lowest net profit within all restaurant industry sub-sets. I haven't been in the biz for a while, but the national average used to hover about 4.5-5%. Quite literally, if a busboy drops a trayful of chargers on a average Thursday night, the restaurant might has well have not opened.

Poor labor management and rent are generally the big industry killers, not food or liquor costs. Regarding the bar profits, yes they are on a percentage basis quite profitable. But that fully stocked bar and broad winelist also tie up a significant amount of cashflow, another restaurant killer.

* I don't particularly admire Olive Garden or TGI Fridays, merely meant if an average one was managed properly.

Edited by B.A.R.
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My sister and her husband worked in fine dining up in Pennsylvania for about 15 years, as catering manager and executive chef, respectively. She told me about the same figures for profit margin in fine dining.

To those of us paying the check, it seems surprisingly low, but seeing Cathal's detailed breakdown of costs is a real eye-opener.

When my sister and her husband left fine dining (not their own idea, but management wanted a younger, cheaper chef) and opened a tavern, she told me about some of their startup costs and told me what their monthly electric bill was. I don't remember exact figures, but the amount was absolutely stunning. I think the electric was a few digits into four figures, per month. :lol:

In my sister's case, the financial backer thought it would be "cool" to own a restaurant, and probably thought he would make money by the wheelbarrowful out of the starting gate. Their tavern was packing in the diners and the end was in sight for paying off the startup loans when the backer bailed on them and they were closed down in a day. It's a tough business!

Think I'll keep my day job. :P

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Total Revenue: $236.75

Cost of Food: $52.35

Cost of Wine: $20.40

Total Cost of Goods Sold: $72.75

Gross Margin: $164 or 69.2%

Restaurant's net profit: $13.25 or 5.6%

Folks, 69% gross margin is amazing. A net margin of over 5% is not bad at all.

Isn't that the same kind of accounting that caused the Internet Bubble :lol: ?

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Isn't that the same kind of accounting that caused the Internet Bubble :lol: ?

If your valuation metric is revenue before expenses, the gross margin is 100% But in the Internet bubble era, there were no revenues so they counted growth in website hits as evidence of profitability. It would be the same as if Eve could convince its investors that they were successful because all of the people who walked by the restaurant looked at their sign, even though none of them came inside to dine.

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If your valuation metric is revenue before expenses, the gross margin is 100%  But in the Internet bubble era, there were no revenues so they counted  growth in website hits as evidence of profitability.  It would be the same as if Eve could convince its investors that they were successful because all of the people who walked by the restaurant looked at their sign, even though none of them came inside to dine.

I was thinking of the great EBITDA scam: "sure, we have a two million dollars of debt service a month, but we had an operating profit of 40%! (on revenues of $1200)."

Edited by Waitman
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A Night at Restaurant Eve

What are you paying for, exactly, when you foot the bill for a really nice dinner at a really nice restaurant?  We asked Cathal Armstrong, chef/owner of Restaurant Eve--where dinner for two in the Tasting Room averages $250--to open his books and break down the check for a typical night at the restaurant.

Labor cost: $81.50

Employee benefits: $13

I think the fact that nearly 40% of the check goes to labor and employee benefits speaks highly of how Cathal treats his people. I'd bet good money that there are many restaurants who take their profits out of this area.

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There are probably about as many people working behind the kitchen door as there are in front of it at Eve.

I think the greatest number of people at Eve work somewhere behind the "fire door" at the bar. Staff are always coming in and out there, and the door makes quite a sound when it slams shut every minute or so as you're trying to enjoy your lunch or dinner. I just wonder where they all go when they reach the other side...

To stay on-topic -- As a layman with absolutley no economic education, in fact having weaseled out of taking Econ 101 in college, I would think 5% net profit for an upscale restaurant ain't that bad. Obviously everyone (including, I presume, Chef Armstrong himself) is getting a check and the place is in the black -- that's quite an accomplishment after a few years for a small place with independent backing. For the investors, they can't expect much higher returns (or simply don't know better), otherwise they'd put their money into Outback. I assume for some of them its something of a vanity investment, like, ahem, certain magazines. They have other investments that pay back in double-digit profits, so they can afford to put their money behind such a worthy venture as Eve without the same kind of return.

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"Poor labor management and rent are generally the big industry killers, not food or liquor costs."

While not "killers", food and liqour costs are the most immediately manageable costs in running an operation. Being careful with product and utilizing every piece of a raw product i.e. duck(breast, leg confit, liver mousse, confit gizzard, sauce/consomme/stock from bones) can dramaticallly alter a restaurant's bottom line and help keep it in business during the lean months. Wastrel chefs(and Cathal is most definitely not one, actually having a reputation as being incredibly adroit at utilizing everything, as well as being a wicked talent) can ruin a restaurant as fast or faster than a poor real estate negotiation.

Anyone want to get in the business now? I think if CIA were to share this knowlege with its prospective students, they'd be out of business as well.

Edited by brendanc
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Wastrel chefs(and Cathal is most definitely not one, actually having a reputation as being incredibly adroit at utilizing everything, as well as being a wicked talent) can ruin a restaurant as fast or faster than a poor real estate negotiation.

Anyone want to get in the business now? I think if CIA were to share this knowlege with its prospective students, they'd be out of business as well.

But I thought all you chefs were just a bunch of cuddly, fuzzy things that got up at dawn to hunt mushrooms and gather herbs. :lol:

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But I thought all you chefs were just a bunch of cuddly, fuzzy things that got up at dawn to hunt mushrooms and gather herbs.  :lol:

Might be funnier if i wasn't finishing inventory this afternoon.

Unfortunately the cost of the mycological foraging license of 13,00.00 has to be passed on to the consumer.

Dawn is for fishing and kids with colds, if the dog can wait till after breakfast, so can the herbs.

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Two Words: Tax Shelter

Ah ha, at last something I know at least a little something about. How, pray tell, is an investment in a restaurant a tax shelter. Tax shelters typically play on either conversion of ordinary income to long term capital gains (taxed at a lower rate), deferral of income from one year to another, or acceleration of deduction from a later year to the current year, or some combination of the above. If a restaurant operates at a loss how does that acheive any of the above goals. A $1 loss, assuming it is ordinary and not capital, will result in a $1 deduction saving the tax at the marginal rate (assume 35%). You still are out of pocket 65 cents.

Now if the investors use a pass-through entity to own the business (think partnership or sub-S corporation) then the items of income, deduction gain or loss associated with the business will flow through to the owners. Depreciation deductions associated with the building and equipment will flow through to the owners but will be offset by the income. However, unless the inverstors are considered actively engaged in the conduct of a trade or business, their participation will be considered passive and their losses could be limited to the income.

Edited by Jacques Gastreaux
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However, unless the inverstors are considered actively engaged in the conduct of a trade or business, their participation will be considered passive and their losses could be limited to the income.

Have you ever walked into a high-dollar restaurant and seen an inexplicably arrogant, oleaginous guy sitting at the bar with a combover, polyester tie and two hot women hanging all over him?

That's the investor.

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Wastrel chefs... can ruin a restaurant as fast or faster than a poor real estate negotiation.

Anyone want to get in the business now? I think if CIA were to share this knowlege with its prospective students, they'd be out of business as well.

I thought CIA does cover this in The Professional Chef...isn't an overview of basic restaurant economics and wastage right up there in the first chapter or two?

In any case, it's worth reminding us laymen that the net profit represents the surplus to the business as a whole, and while "[they] might as well not have opened" might be true for the owner's books, it certainly isn't true for the staff who earned another day's wages.

Dave, who lacks skills but loves browsing books

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Ah ha, at last something I know at least a little something about.  How, pray tell, is an investment in a restaurant a tax shelter.  Tax shelters typically play on either conversion of ordinary income to long term capital gains (taxed at a lower rate), deferral of income from one year to another, or acceleration of deduction from a later year to the current year, or some combination of the above.  If a restaurant operates at a loss how does that acheive any of the above goals.  A $1 loss, assuming it is ordinary and not capital, will result in a $1 deduction saving the tax at the marginal rate (assume 35%).  You still are out of pocket 65 cents.

Now if the investors use a pass-through entity to own the business (think partnership or sub-S corporation)  then the items of income, deduction gain or loss associated with the business will flow through to the owners.  Depreciation deductions associated with the building and equipment will flow  through to the owners but will be offset by the income.  However, unless the inverstors are considered actively engaged in the conduct of a trade or business, their participation will be considered passive and their losses could be limited to the income.

not having your proclivity for the nuances of tax code I will be brief. I believe that a combination of showing loss on a monthly filing schedule coupled with a deferrment of interest payments in exchange for a future piece of a sale(capital gains?) would make the investment sound in terms of savings. Also, could an investor put in just enough to reduce their tax burden come April by showing a net loss in their income statements?

However the most common use is to defer income to another year. When an individual receives a bonus, buyout or financial windfall in one year that is not an expected income base for future years, they could put part of said income into a restaurant to defer the tax penalties for that one year, buying time to be creative when the money comes out.

The other thing to remember is that this is not for huge corporate entities , this is more of a friends and family practice.

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I think the greatest number of people at Eve work somewhere behind the "fire door" at the bar.  Staff are always coming in and out there, and the door makes quite a sound when it slams shut every minute or so as you're trying to enjoy your lunch or dinner.  I just wonder where they all go when they reach the other side...

To get back off topic, the "firedoor" leads to a stairway which leads to additiional storage. Keep in mind that Eve is located in a fairly small historic building with limited space on the ground level. When the kitchen needs something, some has to go through the bar, through the firedoor and up the stairs to get it.

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I thought CIA does cover this in The Professional Chef...isn't an overview of basic restaurant economics and wastage right up there in the first chapter or two?

In any case, it's worth reminding us laymen that the net profit represents the surplus to the business as a whole, and while "[they] might as well not have opened" might be true for the owner's books, it certainly isn't true for the staff who earned another day's wages.

Dave, who lacks skills but loves browsing books

That surplus is used for among other things, business improvements, expansion of health and medical coverage for the staff, raises, bonuses, extended vacations, improvement in working conditions and possibly expansion, thus opening another venue for the staff to grow both in responsibility and financially. It is not just for the ownership, at least not in my model for a business. That small margin should mean as much to every person in the restaurant as it does to the management.

A breakdown of the responsibilities of the chef is located in chapter 2, however as in most texts it deals with the abstract of not throwing shit out and calculating food cost. I was referencing the infinitely more difficult job of opening and running a restaurant and the narrow profit margins involved.

Edited by brendanc
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I also assume that Chef Armstrong pays himself (and his wife) a salary, which would be accounted for in the labor costs.  Thus, the $13 "left over" at the end is not likely the amount on which the Armstrongs must rely in order to feed and clothe themselves.

You shouldn't assume that the owner-operator is included in that labor cost.

Small business owners often pay themselves only after paying their staffs - restaurateurs are no exception.

The real "bottom line?" To be a successful restaurant owner - one will be around for years to take care of his/her guests - you must first be a good businessperson.

After all, why would so many mediocre restaurants and chains thrive, while restaurants with excellent food and wine fail....?

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You shouldn't  assume that the owner-operator is included in that labor cost. 

Small business owners often pay themselves only after paying their staffs - restaurateurs are no exception.

The real "bottom line?"  To be a successful restaurant owner - one will be around for years to take care of his/her guests - you must first be a good businessperson.

After all, why would so many mediocre restaurants and chains thrive, while restaurants with excellent food and wine fail....?

Ding, ding, ding! Edited by B.A.R.
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The fact of the matter is,I feel I can say this as a resturant professional,almost no one goes into the buisiness for the money.Very few independently owed resturants make thier owners rich.Most of the owners I've worked for had a passion for food and wine(fine dinning being most of my experiance).If you really wanted to make a ton of cash there are better ways to do it.Now, if your goal was to do something you are passionate about.......

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a few thoughts regarding this matter...

practically speaking, an investor is able to use a restaurant as a tax shelter because of the benefits that they gain from the relationship. if they use the restaurant for entertaining and the restaurant comps their meals and beverages, they have been paid for with pretax dollars. similarly, if routine expenses like dry cleaning, supplying a wine cellar at wholesale, a lease on a brand new mercedes e55 (you know who you are) are paid for by the business as expenses then they are also in effect paid for with pretax dollars.

as has been previously mentioned, good restaurants and good restaurateurs are not in this business for the money. surely, no one has a burning desire to lose money, but great restaurants are created from a desire to create something great. forget about the extremely narrow profit margins, who would willing undertake an enterprise that requires an insanely high time commitment. the average week for a chef/general manager/hands-on restaurateur is in the 80+ hour range. maybe i am just projecting about my own workaholic tendencies but i don't know any slackasses that are good at this business.

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The growth of the Ducasse, Vongerichten, Andres, Powers, Landrum (someday, maybe :lol: ) etc. empires would suggest that more than a couple of good chefs are indeed eager to make a few few bucks at their trade.  Which  is fine with me.

while everyone hopes to be able to make decent money doing this, i personally do not beleive that money is the initial impetus or even the dring force. but the sky is purple in my world, i could be speaking only from a romanticized and overly idealistic notion of my choosen profession.

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while everyone hopes to be able to make decent money doing this, i personally do not beleive that money is the initial impetus or even the dring force.  but the sky is purple in my world, i could be speaking only from a romanticized and overly idealistic notion of my choosen profession.

I think if you're doing what you love the rest often - not always, but often - takes care of itself.

I believe many people idealize restaurant life; personally, I do experience the occasional cynical streak when dealing with a paticularly tough/rude guest or when I see thousands in credit card fees sucked out of my operating account each month....

But those moments are quickly forgotten when the restaurant is busy, the lighting is warm and perfect, the music fits the moment, and I look down a row of tables to see dozens of candlelit faces enjoying each other's company, forgetting the restaurant and staff that makes that moment possible....

(...and thanks for the welcomes!)

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Clearly profit margins are very small. Since I go in many different locations every day I get to see things from a different perspective. I have been amazed by restaurateurs and chefs that price out menus and specials based on other places and what they think a price should be. I'm not talking about the corner deli, but white tablecloth places. When I ask a chef what his food cost is for a particular menu item and the response back is "33%"(what is thought of as the industry standard) I pretty much know the chef has no idea what it costs to get something on a plate. It's amazing that a place that has spent so much on decor, build out, table top, back of the house equipment etc. can forget to do the math and get the cost right on the plate. It's a sensitive issue with me because when food costs are out of wack, the guy who sells the food gets the first phone call. There is not usually thought given to portion size, waste, theft in the back of the house etc. Just my opinion.

George

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It seems to me that the restaurant industry is not unlike the arts, and a chef is not unlike an artist. While a few will hit the jackpot (thus, becoming Bobby Flay or Andy Warhol), most toil relatively anonymously for scant rewards.

The chance of hitting the jackpot is sufficiently small that it is not the primary motivation for any rational person's decision to enter either field. At the same time, however, most people in either field would not turn down the jackpot, if presented.

Me, I hate risk. That's why I'm a lawyer! (And that's why I'm jealous of all those who decided to accept risk for the sake of passion.)

P.S. -- Has anyone seen Spanglish? Adam Sandler plays a chef who, during the course of the movie, is described by the (New York?) Times as the best chef in the country. Even prior to that designation, he had really struck it rich. You know: huge house, nice cars, housekeepers. It looks so easy!

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P.S. -- Has anyone seen Spanglish?  Adam Sandler plays a chef who, during the course of the movie, is described by the (New York?) Times as the best chef in the country.  Even prior to that designation, he had really struck it rich.  You know: huge house, nice cars, housekeepers.  It looks so easy!

The professional aspects of that character are based almost exclusively on Thomas Keller. You know, the guy who gets paid 50 grand to cook in your private home.

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I don't think being passionate about your craft and wanting a little money and recognition for doing it well are mutually exclusive. I think they're probably two sides of the same coin -- except for the occasional saint or Peace Corps volunteer -- and that's a good. Hell, everyone has bills; everyone has an ego.

I think Elias nailed it, though. If you do what you love, good things will follow. A lot of my friends and I fell into politics as young ideologues, without clue how we might make a living at it and now, many years later, we somehow are, or are enjoying ourselves in related fields.

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As one who would like to get to a profit margin, I can assure you of the truth of the saying if you want to make a small fortune in the restaurant business, start with a large one. I am doing this because I don't have a job any more. The most stressful day here at Dino is more fun than my last 6 years at Whole Foods. And hell, I don't have to worry about my investments any more! :lol:

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According to the web site of Econ4U.org, April was the month for an ad campaign that posed the question that appears as the title of this topic.

The answer provided is $5 and is supplemented by the claim that servers earn roughly $15-$20 per $100 taken in on the meals at their tables.

Have you seen the coasters, ads on Metro, etc.?

Reactions?

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