Restaurant Profit Margin

[MBK]

Anyone have any go-to resources (books, journals, articles) on the economics of the food (not restaurant) industry? Bonus points if it's got any discussion of the law regarding competition in the food industry ... and more bonus points if it is accessible to someone who gets econ, but is not a PhD economist.

Random question, I know, but figured this was worth a shot.

[slarochelle]

I'd check out books by, or try to get in touch with, Marion Nestle. Her contact info can be found is on this site.

http://whattoeatbook.com/

I've read a few of her books....I'm sure she can point you in the right direction if exactly what you are looking for.

Steve

[MBK]

I'd check out books by, or try to get in touch with, Marion Nestle. Her contact info can be found is on this site.

http://whattoeatbook.com/

I've read a few of her books....I'm sure she can point you in the right direction if exactly what you are looking for.

Steve

What a great suggestion, thanks.

[jpschust]

I'd guess datamonitor has that stuff. PM me if you need some info.

[lekkerwijn]

Your go to source should be the Economic Research Service at the USDA. One of their researchers, Ephraim Leibtag, is one of the leading experts nationally on the recent increases in food and commodity prices. Some examples of their recent publications that might help you.

Consolidated Markets, Brand Competition, and Orange Juice Prices

http://www.ers.usda.gov/publications/aib747/aib74706.pdf

Twenty Years of Competition Reshape the U.S. Food Marketing System

http://www.ers.usda.gov/AmberWaves/April08...odMarketing.htm

Corn Prices Near Record High, But What About Food Costs?

http://www.ers.usda.gov/AmberWaves/Februar.../CornPrices.pdf

You should also do a search of the Journal of Agricultural Economics. That will be more technical than the ERS publications.

If you need any other suggestions feel free to PM me. I work in food economics.

[Pots & Pam's]

Yes, it has been a long time since this topic came up, but I need some help. I am in a contest to win my very own restaurant. Good deal huh? Problem is I haven't ever owned my own restaurant. I am writing a pro forma and and have done tons of research. I have seen that average cogs is 33% and a restaurant would be happy to see about 10% net profit. Besides the obvious (rent, utilities, payroll salaries and taxes, licensing, insurance, entertainment) what else is an expense that I am overlooking? With this restaurant I will receive 10k in start up, 15k food, 10k small wares and all marketing/advertising for a year, plus free rent for three months. I have estimated my payroll as 30% of total sales. What else would I need to put on my pro forma p/l? I am up against two other people who have industry experience. I have owned my own personal chef business, but haven't worked in a commercial kitchen. Would love any advice or help you can give!

[Michael Landrum]

Yes, it has been a long time since this topic came up, but I need some help. I am in a contest to win my very own restaurant. Good deal huh? Problem is I haven't ever owned my own restaurant. I am writing a pro forma and and have done tons of research. I have seen that average cogs is 33% and a restaurant would be happy to see about 10% net profit. Besides the obvious (rent, utilities, payroll salaries and taxes, licensing, insurance, entertainment) what else is an expense that I am overlooking? With this restaurant I will receive 10k in start up, 15k food, 10k small wares and all marketing/advertising for a year, plus free rent for three months. I have estimated my payroll as 30% of total sales. What else would I need to put on my pro forma p/l? I am up against two other people who have industry experience. I have owned my own personal chef business, but haven't worked in a commercial kitchen. Would love any advice or help you can give!

Sounds like you could have a great opportunity here, since the biggest factor in restaurant failure is blindness to the unforeseen "real" cost of capital and borrowing. (Conversely, sadly (as I will touch on below), the only ones "making" money in the restaurant business today are the ones who generate "income" BY borrowing money).

As to your research, 33% COGS is a dream number; 10% GROSS is in a perfect world--3% to 5% NET and you are scoring well above average; if your labor costs are 30% you are dead in the water (25% is the maximum that allows for any type of profit--and this is the one area where costs can skyrocket out of control--and the effect of labor cost has a massively disproportionate impact on your bottom line)--also, don't forget that the actual cost of employing someone is 10% higher or more than the actual wages paid, with payroll services themselves being mind-numbingly expensive; and finally, unless you yourself are performing an active operational role which replaces the need to pay someone else to do the same work, forget about making money for the first 3-5 years at least--and I don't mean sitting in the office doing schedules and paying bills. (Meaning, you will be chained to the stoves, or the floor, for 3-5 years before your sweat equity is converted to real equity).

To be honest, except in rare cases today, where opening capital was either self-funded or readily available at little-to-no cost, the only money being made in the business today is from either selling worthless franchises, or by selling investors on promised pie-in-the-sky expansion plans--a Ponzu Scheme, if you will.

Not to be overly cautionary, if you are receiving a built-out space together with the other conditions you described above, and thus avoiding the cost of capital, and you can run the kitchen or the floor without paying someone else, you could have a real chance of making it worthwhile.

PM me if you would like my number and I would be happy to discuss it further in private.

By the way, while not being privy to actual facts, my guess is that Komi and Proof, not surprisingly given their relentless excellence and their patient, organic, growth, are the two stand-out (but not sole) examples of the exceptions I described above.

[Michael Landrum]

One further point to add: When a restaurant is losing money, it does so catastrophically. When it is making money, it does so incrementally at best. Regardless, there is no in-between.

[DonRocks]

or by selling investors on promised pie-in-the-sky expansion plans--a Ponzu Scheme, if you will.

Oh, Ed. <disappointed face>

[thistle]

I also want to know how some restaurants stay profitable at the beginning, how is the financing set up so they can make it throughout the next few months? I know how dire the predictions are, so even if I won the Megamillions, don't think I would invest in a restaurant...as much as I want to pull for the restaurants....l

[dcs]

Restaurant math by Joe Bastianch from his book Restaurant Man (page 1):

Thirty percent of your monthly take is going to be your food and wine cost. Thirty percent is going to be labor, 20 perent is miscellaneous, including the rent, and 20 percent is your profit. Your rent per month should be your gross take on your slowest day.

[DonRocks]

Thirty percent of your monthly take is going to be your food and wine cost. Thirty percent is going to be labor, 20 perent is miscellaneous, including the rent, and 20 percent is your profit.

Just doing the math here:

Assuming a restaurant is open 6 days a week, serving lunch and dinner all 6 days,

That works out to 625 meals a year. For every $1 million in sales, you have to average $1,600 for every meal, lunch and dinner.

Averaging $50 per cover, that's 32 covers per meal (obviously lunch and dinner will be different, both in terms of covers and revenues).

For every $1,600 you take in:

$480 Food and Wine Cost

$480 Labor Cost

$320 Miscellaneous (Rent, etc.)

$320 Profit

Hands-on owners will (theoretically) have their salary covered in the labor costs, so the $320 profit is in addition to their salary.

In this scenario, an owner will make $200,000 plus their salary.

Needless to say, things don't always work out this cleanly.

Your rent per month should be your gross take on your slowest day.

This statement about rent seems low to me. The average daily gross in the above scenario is $3,200 (and that's an average day, not the slowest day - the slowest day would certainly be 50% of that, and I can't imagine paying $1,600 a month to rent space for a $1 million restaurant).

[dcs]

Needless to say, things don't always work out this cleanly.

You can read the first chapter on Amazon. He admits that the 20% profit margin is the ideal, and most fine dining restaurants in New York hover between 10% and 20%. His obsession is on cost control. Every cost that that exceeds the model eats into the profit margin, and those costs seem excessively hard to control. One of the mantras he repeats over and over again in this book is "nobody eats for free." The model also seems to require that the restaurant is busy most, if not all, of the time, which may not be achievable by all establishments.

[thistle]

The 'nobody eats for free' dictum seems opposed to the average diner (I am generalizing here, & this probably applies to more Yelpers, than DR folk), who seems to expect that if any dish they taste is not to their liking, it should be comped. Smear on your glass? Comp my drink...bug flew past my nose, comp my app...I don't understand this at all. I had a soup in a restaurant last week that I didn't care for at all, & I was surprised when the waitress asked if she should take it off my ticket- I said no, just because I don't like it, after I ordered it, didn't mean I wasn't going to pay for it- you win some, you lose some...

[jayandstacey]

The 'nobody eats for free' dictum seems opposed to the average diner (I am generalizing here, & this probably applies to more Yelpers, than DR folk), who seems to expect that if any dish they taste is not to their liking, it should be comped. Smear on your glass? Comp my drink...bug flew past my nose, comp my app...I don't understand this at all. I had a soup in a restaurant last week that I didn't care for at all, & I was surprised when the waitress asked if she should take it off my ticket- I said no, just because I don't like it, after I ordered it, didn't mean I wasn't going to pay for it- you win some, you lose some...

I agree.

I really enjoyed (somewhat ironically) the free sample of the book provided at amazon. Very straightforward.

I suspect, however, that he wasn't talking about comps for customer sat issues, though to your point that can get out of hand. Instead, my guess is he was talking about comping buddies, neighbors, family. I could see the temptation to want to do this... I'd be guilty. I think he's saying that no one gets a free pass just because of who they are.

[SeanMike]

I suspect, however, that he wasn't talking about comps for customer sat issues, though to your point that can get out of hand. Instead, my guess is he was talking about comping buddies, neighbors, family. I could see the temptation to want to do this... I'd be guilty. I think he's saying that no one gets a free pass just because of who they are.

That's one of the huge things I've heard repeatedly. A non-industry investor puts money into a restaurant, then expects that he (and his friends, family, etc.) all eat/drink free forever.

Through friends in the industry we've hashed the numbers on probably an annual basis. They're never good, but the hard part is that base temptation. "I spent $X,000+ on this place, I shouldn't be dropping $100 for dinner tonight..." or "I want to show off..."