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Restaurants & Profits

Is this the world’s toughest business to make a profit in?

From the outside, owning your own restaurant might look like the ultimate in the good life. But here’s the reality check – if you’re looking to get rich, the restaurant business could possibly be the hardest place in which to make a profit.

Profit margins in the restaurant game are an interesting numbers exercise, where healthy gross profit translates into razor-thin net profit margins.

To a diner, comparing restaurant menu prices to what they pay for a steak at their local butchery or wine direct from the cellar, it might look like the restaurant owner is coining it at their expense – but once you factor in all the overheads that go into putting that plate of food on the table, it’s a different story.

Gross profit, the difference between the wholesale cost of the“raw materials” of food ingredients and drinks and their menu selling price, might look great on paper – especially when you calculate the typical restaurant mark-up percentages of at least 300% on food and anything from 300% to 700% or more on drinks.

In reality, food costs are often the smallest percentage of the costs embedded in the menu prices. Since that’s all the restaurant owner can sell to recover not only the food and drink input costs, but all the other overheads as well, even the best upselling tactics and additional income streams, like cooking classes or catering services, will land net profits of around 2% to 6% – maybe up to 10% if you’re super-efficient and work smart.

Let’s look at the numbers another way – see how a $100 plate of food on the menu becomes $10 in the restaurant owner’s bank account (and some of that still has to go to the taxman):

 

Sales $  100.00 
-Food cost (30%) $   -30.00
Gross Profit $    70.00 
-Payroll (30%) $   -30.00
-Rent (10%) $   -10.00
-Gas, electricity, phone, wifi (6%) $     -6.00
-Credit card machine, bank charges (3%) $     -3.00
-Capex/loan repayments on equipment etc (5%) $     -5.00
-Miscellaneous – packaging, security, cleaning, insurance etc (6%) $     -6.00
Net Profit $    10.00 

 

This is just the basics – before factoring in taxes, marketing costs, added extras that help create the ambience, like live music or high-quality crockery, silverware and glassware, nor breakages, shrinkage or the occasional freebie.

Celebrity chefs with restaurant empires, TV shows, cook books and endorsements are a different story, and they’re in the minority – here we’re talking about the majority of restaurants you see every day, from top fine dining outfits through to the neighbourhood bistro.

And this takes us back to the reason why most chefs remain in this crazy, tough business day in and day out. Foregoing the holidays abroad, the nicer house, car upgrade – it’s about the passion for this business of offering hospitality, perfecting your craft, making wonderful food that makes people happy.

It might be the hardest way invented to make money – but we do love it.

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