4 ms·

I'm not in the restaurant business, so take what I say with a grain of salt (heh), but from the people I know in that business there's a wide variance in the ac

I'm not in the restaurant business, so take what I say with a grain of salt (heh), but from the people I know in that business there's a wide variance in the actual business knowledge they possess. You need enough capital to actually open the doors - that means not leasing the space with knob and tube wiring, residential drainage and a leaky roof. If that's all that's out there, you could simply not open yet and keep looking. In the OP, it sounded like that money was burning a hole in the owner's pocket and he had to open now. Patience. Then once the doors are open, you need detailed, ongoing knowledge of your costs. There is no $29 chicken if it costs out to $31. If no one is going to pay $35 so that you can make a profit, it doesn't go on the menu. But you don't, as the author put it, sell $40 in cost for $29 simply because no one would pay $40. Then you get into ordering and spoilage, where even me as a total outsider, could tell you there's often money rotting in the walk-in. Point is, you must know your real operating costs before you ever even stand a chance. Then you have to go out there and not suck. For a chef opening a restaurant, this is probably the part they're focused on. Problem is, you could be sunk before you even get to this stage. The guys that are successful and worked under successful people for a long time probably learned quite a bit about running the business, and is why they have better odds. tl;dr - Under-capitalization is a leading cause of failure for many businesses. You can't make up your operating losses in volume. Don't open any business if you aren't prepared to live and breathe the minutiae of your costs.

crispyambulance 9y ago
Well, there are good reason for selling stuff under-cost if the loss can be more than made-up for in other charges. Doing this is as old as retail itself-- a "sale" in the retail world. In the restaurant business under-cost prices for a particular item can get more people in the door who then buy drinks, appetizers and other menu items while enjoying the great deal of a $20 chicken. That's easier said than done, of course.
- rtkwe 9y ago
  Selling for a loss in a retail as a lot of benefits that don't really translate well to restaurants though. One of the biggest I'd think is the 'shelf life' of products. In retail items move in and out throughout the year but an item in stock doesn't really go bad so the main reasons to sell at a loss are just to clear out space for other newer items that might sell better. (Also even fairly deep sales aren't even necessarily actually losses for the business because wholesale prices are much cheaper) In the restaurant business there's not really a good analogue on a regular menu, a loss leader isn't clearing out any stock because the items are constantly just degrading naturally so you'd be better off just pulling the item if it costs more to make and not constantly making it. It'd be like if JiT manufacturing was a thing and stores made shirts for a loss in the store from raw materials, it just doesn't make sense unless that item has consistent accessories (your drinks and apps) that sell for much larger margins. It's a dangerous game because you're counting a lot on consistent consumer behavior.
  - munificent 9y ago
    > a loss leader isn't clearing out any stock People need something to chew on while drinking the wine that has a very large markup on it. Consumer expectation is a big part of pricing. For whatever reason, people are OK shelling out cash for wine and beer at a restaurant, so those get a big markup. That gives you wiggle room to sell some entrees at cost or a loss, which you need because consumers aren't as comfortable with a big markup on chicken since "I could cook this at home" (even though, like the article states, their home-cooked chicken probably hasn't been marinating in duck confit for the past 48 hours...). Restaurants also need to have a certain amount of variety on the menu to deal with the one picky eater in a party. That's why every seafood restaurant still has one token chicken dish, every steakhouse has a vegetarian dish, etc.
    - rtkwe 9y ago
      True but then you have to make absolutely sure that the customers you attract are going to order those make ups consistently and that's really hard to do. As for picky eaters usually those will be one of a handful of cheap easy to make meals where the restaurant just aims to have something reasonably acceptable for those. There's no reason to make those dishes loss leaders.
    - crispyambulance 9y ago
      FWIW, the universal mark-up for wine in US restaurants is about 4x-6x. That is, the PRICE of one glass of wine is roughly equal to the COST of one bottle of the same wine. Restaurants, of course, source their wine through commercial distributors. They get price breaks in volume that consumers can't typically get.
- KekDemaga 9y ago
  Cheap people aren't the type of client you should try to attract to a restaurant, once the deal goes away they will move on to the next sucker. I worked at a place that sold dollar cheese steaks as a way to get people in the door, the dining room was full but a party of 4 would order something like 4 cheese steaks with 4 waters and leave a 50 cent tip. They changed the price to two dollars and the cheapos revolted, left bad yelp reviews and everything.
  - marak830 9y ago
    Hmm I have seen many places try and do loss leaders as an enticement, I haven't seen it work yet though.
- marak830 9y ago
  It depends on how you define loss leader. Free breadsticks?(okay if you produce them in house or have a massive amount of locations), $15 worth of produce sold for $14? Hell no. 25% - that's the sales price you can put towards food costings, this should give you a rough idea of the unforseen costs. If your kitchen isn't running at better than 25% food costings, your kitchen isn't profitable. Some places you can take a cut from this if you are working with another industry(such as gambling), but for a pure restaurant/cafe, don't even think about not hitting that point.
  - jaggederest 9y ago
    I find it interesting how you can narrow profitability analysis down to individual areas within a business. As an example: Look at the walk in fridge as a business that 'buys' food from grocers and 'sells' food to the chefs when they need it, 'losing' money when food is wasted. Similarly front of house 'buys' food from the kitchen.
    - marak830 9y ago
      Hospitality is all about tracking minor costs. You're argument would be akin to the keyboard buying from the user to write code. I think I realise what you are leaning towards, and it is like that. Any piece of equipment has a direct relation to the ROI, honestly it's not pleasant to think of staff that way, but when the margins are that tight, it has to be done. (that's one of the reasons I left hospitality.) It's not like advertising where you can charge someone 20k for a dm campaign, people will only pay so much for food, and the 'whales' arnt really there (at least not enough to keep an entire restaurant running at a loss). When you're profit margin is less than 25%, and you can't guarantee the number of users per day, let alone per week, then you're damn eight everything is calculated as a cost down to the cent.
      - notyourday 9y ago
        > When you're profit margin is less than 25%, and you can't guarantee the number of users per day, let alone per week, then you're damn eight everything is calculated as a cost down to the cent. If you cannot project within your margin of error the number of covers you would turn per day or per week then you do not have a restaurant business, you have a hobby.
- SmellTheGlove 9y ago
  I responded downthread to someone else making the same point. I'm sure there are some restaurant models that support that idea. My only exposure is to mid- and fine-dining where at least these particular owners weren't putting loss leaders out there. Some items had higher margins than others, but nothing on the menu had a negative margin. There are some exceptions like "holy shit I need more avocados and they're $100 a case all of a sudden" but that situation wouldn't last long. Bargain hunters, I'm told, are bad customers for restaurants. The person coming in for a great deal on $20 chicken is also squeezing a bowl of lemons into a glass and asking for more sugar packets. That's what they tell me, anyway! However, my overarching point would be that a restaurateur needs to understand operating costs in great detail. If a loss leader is going on the menu, you need to be engaged enough to know it's a loser, by what margin, and also the benefits of keeping it around. The article in the OP suggested no such CBA was really occurring.
  - marak830 9y ago
    Building a restaurant around bargin hunters, oh the stories I could tell about that. It never works as well as the owners think it would, infact I have seen it work opposite(early bird special, 5 pm dinner for seniors, who ended up not leaving and taking up higher margin table space for 3-4 hours).
matt-attack 9y ago
My father-in-law has been a restaurant owner for his whole career. He has told me that it's quite common to have dished on the menu that are simply a loss (he is in a very price-sensitive market). They're countered by other dishes that have substantial profitability. In short, I agree with most of what you wrote, but each dish doesn't have to have the same profit margin on its own.
- SmellTheGlove 9y ago
  That's a fair point, and I'm a bit ignorant there. My exposure is mostly mid- to fine-dining, mostly family friends who were owners. Food costs tended to be higher for them, as did labor - they weren't the kinds of places that people would work at just to stamp their resume, but needed good FOH and BOH talent. It seemed to me they wanted no part of bargain shoppers - they understood their fully burdened costs and priced accordingly. Some items had thinner margins than others, but they didn't put loss leaders out there.
- dkrich 9y ago
  I once read that McDonalds for many years sold burgers and shakes basically at cost and made almost all of its profits on french fries. This seems to be a fairly common practice on high volume stores. I know that bars typically make next to nothing on food in hopes of making it up on alcohol sales.
marak830 9y ago
I was in the restaurant business for a long time. You are definitely on the money. So many businesses I went to, were not able to understand the basics. Hospitality, while it can be profitable, is a game of small numbers. The smallest overlooked number can be your downfall. The margins are slight, but with the right team they can pay out well. What I mean is: take for example a simple bistro style meal of beef steak, vegetables and salad. Let's use for example the following costings: Beef: $3.00 Salad: $0.50 Vegetables: $0.40 So that gives you a base plate cost of $3.90, the standard practice is (at the lowest level) $15.60. (this - on a well run bistro will just cover your bills including staffing costs). What a lot of first time restaurant owners don't realise is the side costs. I'm not talking staffing, rent or anything like that(which is a whole nother issue to keep an eye on), I'm talking the incendentals - broken objects, garnish, facility repairs and upkeep. These are just a few of the things that I have seen (many times) not accounted for. Add on top of that a few weeks of unexpected less covers (clients basically), and you have a recipe for disaster. While hospitality seems like an easy business to purchase (I have rescued/helped sell a lot of business whose owners thought it was), it is actually a massive investment in micromanagement. If you don't micromanage, it will fail. If you overdo it (re pushing staff too much) you will lose your best staff, and fail. As you stated, if you arnt willing to live and breathe your restaurant, don't do it. Which is why I left the industry, why would I lose out on my time with my family, just to make less money than I could doing anything else?
- tixocloud 9y ago
  I've always wondered this and hoping you can answer - what's the biggest cost driver on restaurants and can the lease rates play a significant impact? I wonder how much high lease rates are killing our local establishments and replacing them with giant franchises.
  - marak830 9y ago
    As always there is a big differential as to location and rent. That aside though : Yes rent can be a killer, the lease can have a lot of effect on a restaurant, I'd say more so than any other business. As for the biggest cost? Assuming the owner doesn't try to rent a bad location(eg high competition with long term customer base), I would say it is staffing. But that is a double edged blade. Hiring top quality may be necessary where you are located, or may break the businesses back, if in a different location. Hospitality is such a locale based business there isn't a specific rule that can cover everything. A lot of people will look at their food costs as the biggest cost, (and it can be if not managed properly), but I have seen more businesses fail from bad staff management than anything else. This isn't to say it's an easy thing to control though, you are talking about an industry where you won't actually know the number of covers within a large percentile from day to day. (yes you can estimate, but a table of 30 walk-ins without reservation isn't as rare as you would think).

crispyambulance 9y ago

Well, there are good reason for selling stuff under-cost if the loss can be more than made-up for in other charges. Doing this is as old as retail itself-- a "sale" in the retail world. In the restaurant business under-cost prices for a particular item can get more people in the door who then buy drinks, appetizers and other menu items while enjoying the great deal of a $20 chicken. That's easier said than done, of course.

rtkwe 9y ago
Selling for a loss in a retail as a lot of benefits that don't really translate well to restaurants though. One of the biggest I'd think is the 'shelf life' of products. In retail items move in and out throughout the year but an item in stock doesn't really go bad so the main reasons to sell at a loss are just to clear out space for other newer items that might sell better. (Also even fairly deep sales aren't even necessarily actually losses for the business because wholesale prices are much cheaper) In the restaurant business there's not really a good analogue on a regular menu, a loss leader isn't clearing out any stock because the items are constantly just degrading naturally so you'd be better off just pulling the item if it costs more to make and not constantly making it. It'd be like if JiT manufacturing was a thing and stores made shirts for a loss in the store from raw materials, it just doesn't make sense unless that item has consistent accessories (your drinks and apps) that sell for much larger margins. It's a dangerous game because you're counting a lot on consistent consumer behavior.
- munificent 9y ago
  > a loss leader isn't clearing out any stock People need something to chew on while drinking the wine that has a very large markup on it. Consumer expectation is a big part of pricing. For whatever reason, people are OK shelling out cash for wine and beer at a restaurant, so those get a big markup. That gives you wiggle room to sell some entrees at cost or a loss, which you need because consumers aren't as comfortable with a big markup on chicken since "I could cook this at home" (even though, like the article states, their home-cooked chicken probably hasn't been marinating in duck confit for the past 48 hours...). Restaurants also need to have a certain amount of variety on the menu to deal with the one picky eater in a party. That's why every seafood restaurant still has one token chicken dish, every steakhouse has a vegetarian dish, etc.
  - rtkwe 9y ago
    True but then you have to make absolutely sure that the customers you attract are going to order those make ups consistently and that's really hard to do. As for picky eaters usually those will be one of a handful of cheap easy to make meals where the restaurant just aims to have something reasonably acceptable for those. There's no reason to make those dishes loss leaders.
  - crispyambulance 9y ago
    FWIW, the universal mark-up for wine in US restaurants is about 4x-6x. That is, the PRICE of one glass of wine is roughly equal to the COST of one bottle of the same wine. Restaurants, of course, source their wine through commercial distributors. They get price breaks in volume that consumers can't typically get.
KekDemaga 9y ago
Cheap people aren't the type of client you should try to attract to a restaurant, once the deal goes away they will move on to the next sucker. I worked at a place that sold dollar cheese steaks as a way to get people in the door, the dining room was full but a party of 4 would order something like 4 cheese steaks with 4 waters and leave a 50 cent tip. They changed the price to two dollars and the cheapos revolted, left bad yelp reviews and everything.
- marak830 9y ago
  Hmm I have seen many places try and do loss leaders as an enticement, I haven't seen it work yet though.
marak830 9y ago
It depends on how you define loss leader. Free breadsticks?(okay if you produce them in house or have a massive amount of locations), $15 worth of produce sold for $14? Hell no. 25% - that's the sales price you can put towards food costings, this should give you a rough idea of the unforseen costs. If your kitchen isn't running at better than 25% food costings, your kitchen isn't profitable. Some places you can take a cut from this if you are working with another industry(such as gambling), but for a pure restaurant/cafe, don't even think about not hitting that point.
- jaggederest 9y ago
  I find it interesting how you can narrow profitability analysis down to individual areas within a business. As an example: Look at the walk in fridge as a business that 'buys' food from grocers and 'sells' food to the chefs when they need it, 'losing' money when food is wasted. Similarly front of house 'buys' food from the kitchen.
  - marak830 9y ago
    Hospitality is all about tracking minor costs. You're argument would be akin to the keyboard buying from the user to write code. I think I realise what you are leaning towards, and it is like that. Any piece of equipment has a direct relation to the ROI, honestly it's not pleasant to think of staff that way, but when the margins are that tight, it has to be done. (that's one of the reasons I left hospitality.) It's not like advertising where you can charge someone 20k for a dm campaign, people will only pay so much for food, and the 'whales' arnt really there (at least not enough to keep an entire restaurant running at a loss). When you're profit margin is less than 25%, and you can't guarantee the number of users per day, let alone per week, then you're damn eight everything is calculated as a cost down to the cent.
    - notyourday 9y ago
      > When you're profit margin is less than 25%, and you can't guarantee the number of users per day, let alone per week, then you're damn eight everything is calculated as a cost down to the cent. If you cannot project within your margin of error the number of covers you would turn per day or per week then you do not have a restaurant business, you have a hobby.
SmellTheGlove 9y ago
I responded downthread to someone else making the same point. I'm sure there are some restaurant models that support that idea. My only exposure is to mid- and fine-dining where at least these particular owners weren't putting loss leaders out there. Some items had higher margins than others, but nothing on the menu had a negative margin. There are some exceptions like "holy shit I need more avocados and they're $100 a case all of a sudden" but that situation wouldn't last long. Bargain hunters, I'm told, are bad customers for restaurants. The person coming in for a great deal on $20 chicken is also squeezing a bowl of lemons into a glass and asking for more sugar packets. That's what they tell me, anyway! However, my overarching point would be that a restaurateur needs to understand operating costs in great detail. If a loss leader is going on the menu, you need to be engaged enough to know it's a loser, by what margin, and also the benefits of keeping it around. The article in the OP suggested no such CBA was really occurring.
- marak830 9y ago
  Building a restaurant around bargin hunters, oh the stories I could tell about that. It never works as well as the owners think it would, infact I have seen it work opposite(early bird special, 5 pm dinner for seniors, who ended up not leaving and taking up higher margin table space for 3-4 hours).

matt-attack 9y ago

My father-in-law has been a restaurant owner for his whole career. He has told me that it's quite common to have dished on the menu that are simply a loss (he is in a very price-sensitive market). They're countered by other dishes that have substantial profitability. In short, I agree with most of what you wrote, but each dish doesn't have to have the same profit margin on its own.

SmellTheGlove 9y ago
That's a fair point, and I'm a bit ignorant there. My exposure is mostly mid- to fine-dining, mostly family friends who were owners. Food costs tended to be higher for them, as did labor - they weren't the kinds of places that people would work at just to stamp their resume, but needed good FOH and BOH talent. It seemed to me they wanted no part of bargain shoppers - they understood their fully burdened costs and priced accordingly. Some items had thinner margins than others, but they didn't put loss leaders out there.
dkrich 9y ago
I once read that McDonalds for many years sold burgers and shakes basically at cost and made almost all of its profits on french fries. This seems to be a fairly common practice on high volume stores. I know that bars typically make next to nothing on food in hopes of making it up on alcohol sales.

marak830 9y ago

I was in the restaurant business for a long time. You are definitely on the money. So many businesses I went to, were not able to understand the basics. Hospitality, while it can be profitable, is a game of small numbers. The smallest overlooked number can be your downfall. The margins are slight, but with the right team they can pay out well. What I mean is: take for example a simple bistro style meal of beef steak, vegetables and salad. Let's use for example the following costings: Beef: $3.00 Salad: $0.50 Vegetables: $0.40 So that gives you a base plate cost of $3.90, the standard practice is (at the lowest level) $15.60. (this - on a well run bistro will just cover your bills including staffing costs). What a lot of first time restaurant owners don't realise is the side costs. I'm not talking staffing, rent or anything like that(which is a whole nother issue to keep an eye on), I'm talking the incendentals - broken objects, garnish, facility repairs and upkeep. These are just a few of the things that I have seen (many times) not accounted for. Add on top of that a few weeks of unexpected less covers (clients basically), and you have a recipe for disaster. While hospitality seems like an easy business to purchase (I have rescued/helped sell a lot of business whose owners thought it was), it is actually a massive investment in micromanagement. If you don't micromanage, it will fail. If you overdo it (re pushing staff too much) you will lose your best staff, and fail. As you stated, if you arnt willing to live and breathe your restaurant, don't do it. Which is why I left the industry, why would I lose out on my time with my family, just to make less money than I could doing anything else?

tixocloud 9y ago
I've always wondered this and hoping you can answer - what's the biggest cost driver on restaurants and can the lease rates play a significant impact? I wonder how much high lease rates are killing our local establishments and replacing them with giant franchises.
- marak830 9y ago
  As always there is a big differential as to location and rent. That aside though : Yes rent can be a killer, the lease can have a lot of effect on a restaurant, I'd say more so than any other business. As for the biggest cost? Assuming the owner doesn't try to rent a bad location(eg high competition with long term customer base), I would say it is staffing. But that is a double edged blade. Hiring top quality may be necessary where you are located, or may break the businesses back, if in a different location. Hospitality is such a locale based business there isn't a specific rule that can cover everything. A lot of people will look at their food costs as the biggest cost, (and it can be if not managed properly), but I have seen more businesses fail from bad staff management than anything else. This isn't to say it's an easy thing to control though, you are talking about an industry where you won't actually know the number of covers within a large percentile from day to day. (yes you can estimate, but a table of 30 walk-ins without reservation isn't as rare as you would think).