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The only thing I found more interesting than all-you-can-eat buffets actually turning a profit is that there are business people who are apparently content runn

The only thing I found more interesting than all-you-can-eat buffets actually turning a profit is that there are business people who are apparently content running a business with such slim margins. This article quotes a 5% margin. I know food industry margins are low in the first place, but as a business owner in a different field I'm left wondering why anyone would even bother. The same business prowess and attention to detail you need to make a buffett run profitably could get you very far in another industry.

generalpass 7y ago
> The only thing I found more interesting than all-you-can-eat buffets actually turning a profit is that there are business people who are apparently content running a business with such slim margins. > This article quotes a 5% margin. I know food industry margins are low in the first place, but as a business owner in a different field I'm left wondering why anyone would even bother. The same business prowess and attention to detail you need to make a buffett run profitably could get you very far in another industry. This is because you are assuming entrepreneurs act only for the purpose of profit. Entrepreneurs act for the same reason all people act: to achieve their desired ends. These ends are established based on emotional desires, which do not necessarily correlate with things like maximum ROI.
kgwgk 7y ago
Most industries have low margins. You can see net margins for US public companies here: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... The average is 7.7%
chrisseaton 7y ago
> there are business people who are apparently content running a business with such slim margins ... I'm left wondering why anyone would even bother A percentage margin is expressed relative to the value of the sales. Low margin on high value sales is as good as high margin on low value sales, in terms of how much money you make. Low margin is only a problem in low value sales. Why shouldn’t people running a business with extremely high value sales, due to low margins? I can’t see what you’d find that a bizarre thing to do? I’d be happy making 5% if I was selling a jumbo jet a day, for example. You can’t criticise just the margin in isolation like you’ve done.
- graeme 7y ago
  My expectation would be that if you’re used to operating in a high margin business you have ample room for error or fluctuation in conditions. In a low margin business, you don’t have such room for error, and you actually have to fluctuate with conditions. This isn’t a deal breaker: most business operate this way! But it’s scary for someone looking in from a high margin business.
  - ClumsyPilot 7y ago
    Some businesses are inherently more controllable: for example, you cant expect 5% accuracy on NASA building a telescope that has never been done before but you can expect +% accuracy on the price of commodity product
  - mcguire 7y ago
    You might think that, but errors and fluctuations tend to routinely cause high margin businesses such as software to collapse in large numbers. Think of the dotcom bust. I suspect part of the problem is these businesses flourish when the conditions are easy, but many don't have the experience or exceptional margins to survive long enough to adapt when conditions change.
    - lonelappde 7y ago
      The dot com bust was negative margin businesses.
      - imtringued 7y ago
        When I look at Uber I don't think anything has changed.
    - dragonwriter 7y ago
      Perceived high-potential-margin businesses with lead time lead to speculative investment in low- (or negative-) margin businesses in the same field with perceived potential, which is sensitive to fluctuations in the broader investment climate (e.g., payoff timelines) or reassessment of profitability potential. That’s what the dotcom boom and bust were about. The actual high-margin businesses wouldn't be taken out in the bust unless they were high margin only because they were selling into the boom.
lotsofpulp 7y ago
>but as a business owner in a different field I'm left wondering why anyone would even bother. Because they don't have a choice.
- dylan604 7y ago
  Or that they have specifically chosen that particular field. If your heart and skill set is being a chef, then the running a restaurant is going to be your path.
- ben509 7y ago
  They have a choice. An economic profit is defined as making enough profit (and intangible benefit) to not want to do something else. For a small business owner it's "am I better off selling it off and getting a regular job?" For a larger chain, it's "is there a more profitable line of business?"
  - Swizec 7y ago
    > For a small business owner it's "am I better off selling it off and getting a regular job?" There is a lot of ego in a decision like that. Easy economically, very very hard emotionally.
  - throwaway2048 7y ago
    This makes the assumption there is some kind of high margin business they can readily enter, but just don't for some reason.
    - ben509 7y ago
      I'm pretty safe in assuming they either enter a new business or don't for some reason. The some reason would be that they aren't able to actually do it. No one just goes out of business; read a story about a failing business and there will invariably be a series of attempts they made to rethink their operation, failed acquisitions, etc. So there we have to go back to the original argument: do they have a choice? I'm claiming their choice is the strategy they employ, they don't have control over the outcome, obviously. The only case where you don't have a choice is when there's a sudden shock to your business; new laws put in place or something like mesothelioma crushing Lloyds. I don't think this applies because the changes we're talking about here are not sudden at all. It's also not an all or nothing affair: you don't have to completely shut down one operation to start doing something else. But other corporations can gradually enter and exit different lines of business, and this happens all the time. Restaurant chains are a confusing example since they're really a mess of franchises. Even there, the parent corporation can create new branding and restauarant layout and effectively move into a new line of business.
CPLX 7y ago
This may come as a shock but software is the exception. The vast majority of the business world operates this way. The fun part comes when you realize that absent monopoly conditions this is the natural stable state of a mature market, and think about what the future of software might look like, and what the current public policy fights are about.
- asdfasgasdgasdg 7y ago
  https://www.investopedia.com/ask/answers/052515/what-average-profit-margin-company-banking-sector.asp https://www.investopedia.com/ask/answers/052515/what-average... This article claims that banks make 24%, and they are hardly a monopoly. It also claims the overall average is 8.5%.
  - brownbat 7y ago
    I can't figure out where that article gets its numbers from or which banks it's referring to. The industry standard measure for bank profitability is something called ROA, return on assets, and it's an extensively studied academic topic, with the general consensus that an ROA greater than 1% is pretty good. https://greyhouse.weissratings.com/ROA-ROE-and-What-These-Key-Measures-Mean-for-YOUR-Bank https://greyhouse.weissratings.com/ROA-ROE-and-What-These-Ke... https://www.fdic.gov/regulations/resources/cbi/report/cbi-roa.pdf https://www.fdic.gov/regulations/resources/cbi/report/cbi-ro... I'm sure there are some large institutional players that do consistently better than 1%, maybe up around 5 or 7. But a longstanding industry with a sustained 24% returns would... sustained compounding 24% a year seems like it would lead to weird results. Like if a bank had survived fifty years and had a few hundred million in assets it would now be responsible for the entirety of US GDP. EDIT: I looked at BOA as a random test case - 2.1T in assets, 22B in income, seems to match the ~1% rule: https://ycharts.com/financials/BAC/income_statement/quarterly https://ycharts.com/financials/BAC/income_statement/quarterl...
    - milesskorpen 7y ago
      Assets aren’t revenue though; I don’t think profit margin and ROA are comparable.
mxcrossb 7y ago
I think the average margin might be misleading. After all, most restaurants fail pretty quickly. That number could be skewed by the unsuccessful businesses. But I think it’s an interesting point. Why fight all day long for a 5% margin when you could put your money in index funds?
- lowkeyokay 7y ago
  They might not have enough money to just put it in index funds and live off the dividends. So they have to work, and the business pays their wages
- learc83 7y ago
  Because a 5% margin doesn't translate to a 5% annual return on investment. Also at many small restaurants the owner and the owner's family is also working full time, and that 5% margin doesn't include their salaries.
  - danans 7y ago
    > that 5% margin doesn't include their salaries. This is something that often seems lost in this discussion. The profit margin is usually after the owners themselves have taken a salary. If they are paying for themselves appropriately, and the margin is 0%, this is often described as "making no money". What's making no money here is the business as an entity, not the owner, despite the frequent rhetorical conflation of the two. Payout of positive margins, if they exist, are often classified as "profit sharing" in the simplest of businesses, like sole proprietorships. In more complex large businesses, they become dividends or employee bonuses. Most people can't afford to pay themselves nothing while running a business.
    - csomar 7y ago
      They might also be optimizing for taxes by heavily re-investing, charging personal stuff on the expense account (like car/gas/travel)... That makes it look like they are doing badly while they are doing okay.
astura 7y ago
I've seen some of my "cost plus fee" government contracts I've worked on in the past; the fee (profit) was only around ~3.5%. Not saying this is a typical fee on government contracts, but the company I was working for (big dollar government contractor) was happy with that.
- cozzyd 7y ago
  Sure but in that case the risk is small and the base is large.
goatherders 7y ago
If I recall correctly Walmart operates with low single digit margins for most goods. They make up for it with favorable vendor terms; I read that a can of green beans sold by WM will turn over 6 times before they have to pay the vendor for the first can.
- retsibsi 7y ago
  > I read that a can of green beans sold by WM will turn over 6 times before they have to pay the vendor for the first can. I can't parse this but am curious what it means; can someone explain?
  - MegaDeKay 7y ago
    I believe he is talking about payment terms like "net 30 days". A made up example: Walmart buys a can of beans and promised to pay the seller 30 days later. During those thirty days, they buy five or six more order of beans to make up for that first sale and the other ongoing sales, each payment being thirty days later. During each of those 30 day periods, that cash is sitting in Walmart's pocket for them to invest etc.
    - retsibsi 7y ago
      Thanks!
arkitaip 7y ago
> The same business prowess and attention to detail you need to make a buffett run profitably could get you very far in another industry. If you have the industry know-how, money and time to change industry, sure. In reality...
Mikeb85 7y ago
Someone posted that the average margin for a public company in the US is 7.7%. There's an economic 'law' that basically states that the return on investment of a business in a mature market (read perfectly competitive) will always trend towards the interest rate (plus the cost of whatever sort of barriers to entry are in place) because of the arbitrage principle. If a business makes higher margins, everyone will pile in and undercut the incumbents until the margins are reduced to the cost of entering the business. For most sectors of the food industry, there's very little product differentiation. Some restaurants do make higher margins, but they're typically small and highly differentiated.
- ska 7y ago
  Restaurants, outside of fast food and other large chain operation, probably average below this for various reasons (churn being a big one). I've heard that 5% is a good target. In fact I suspect you can reasonably look at large chain operations as figuring out a way to reduce the factors that keep the average return lower than it "ought" to be...
  - Mikeb85 7y ago
    Nah 5% is shit (but also the average). I've been lucky to have been involved in some very profitable restaurants with margins more like 20%... When you set out to do a business plan, you should be looking at differentiation. Not producing a commodity with slim margins...
    - ska 7y ago
      Nah 5% is shit (but also the average) It can't really be both of those things. I'm sure there are outliers just like you describe, but not that many. 20% is pretty high margin in general for business.
ozim 7y ago
You underestimate how hard it is to switch a field. If it takes $50k to switch I will get better margins but first I have to have $50k. Then how do I know that new thing I will do will bring that profit in first year? That is already $50k and lost profits for figuring out new market. If you look at risks involved and potential loss of money instead of only looking at higher margins, it is easy to see why people would rather earn their 5%.
yibg 7y ago
Depends on 5% of what. I’d be perfectly happy making 5% margin on say 10 million annual revenue.
imtringued 7y ago
The higher the margin the more inefficient the market.

generalpass 7y ago

> The only thing I found more interesting than all-you-can-eat buffets actually turning a profit is that there are business people who are apparently content running a business with such slim margins. > This article quotes a 5% margin. I know food industry margins are low in the first place, but as a business owner in a different field I'm left wondering why anyone would even bother. The same business prowess and attention to detail you need to make a buffett run profitably could get you very far in another industry. This is because you are assuming entrepreneurs act only for the purpose of profit. Entrepreneurs act for the same reason all people act: to achieve their desired ends. These ends are established based on emotional desires, which do not necessarily correlate with things like maximum ROI.

kgwgk 7y ago

Most industries have low margins. You can see net margins for US public companies here: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... The average is 7.7%

chrisseaton 7y ago

> there are business people who are apparently content running a business with such slim margins ... I'm left wondering why anyone would even bother A percentage margin is expressed relative to the value of the sales. Low margin on high value sales is as good as high margin on low value sales, in terms of how much money you make. Low margin is only a problem in low value sales. Why shouldn’t people running a business with extremely high value sales, due to low margins? I can’t see what you’d find that a bizarre thing to do? I’d be happy making 5% if I was selling a jumbo jet a day, for example. You can’t criticise just the margin in isolation like you’ve done.

graeme 7y ago
My expectation would be that if you’re used to operating in a high margin business you have ample room for error or fluctuation in conditions. In a low margin business, you don’t have such room for error, and you actually have to fluctuate with conditions. This isn’t a deal breaker: most business operate this way! But it’s scary for someone looking in from a high margin business.
- ClumsyPilot 7y ago
  Some businesses are inherently more controllable: for example, you cant expect 5% accuracy on NASA building a telescope that has never been done before but you can expect +% accuracy on the price of commodity product
- mcguire 7y ago
  You might think that, but errors and fluctuations tend to routinely cause high margin businesses such as software to collapse in large numbers. Think of the dotcom bust. I suspect part of the problem is these businesses flourish when the conditions are easy, but many don't have the experience or exceptional margins to survive long enough to adapt when conditions change.
  - lonelappde 7y ago
    The dot com bust was negative margin businesses.
    - imtringued 7y ago
      When I look at Uber I don't think anything has changed.
  - dragonwriter 7y ago
    Perceived high-potential-margin businesses with lead time lead to speculative investment in low- (or negative-) margin businesses in the same field with perceived potential, which is sensitive to fluctuations in the broader investment climate (e.g., payoff timelines) or reassessment of profitability potential. That’s what the dotcom boom and bust were about. The actual high-margin businesses wouldn't be taken out in the bust unless they were high margin only because they were selling into the boom.

lotsofpulp 7y ago

>but as a business owner in a different field I'm left wondering why anyone would even bother. Because they don't have a choice.

dylan604 7y ago
Or that they have specifically chosen that particular field. If your heart and skill set is being a chef, then the running a restaurant is going to be your path.
ben509 7y ago
They have a choice. An economic profit is defined as making enough profit (and intangible benefit) to not want to do something else. For a small business owner it's "am I better off selling it off and getting a regular job?" For a larger chain, it's "is there a more profitable line of business?"
- Swizec 7y ago
  > For a small business owner it's "am I better off selling it off and getting a regular job?" There is a lot of ego in a decision like that. Easy economically, very very hard emotionally.
- throwaway2048 7y ago
  This makes the assumption there is some kind of high margin business they can readily enter, but just don't for some reason.
  - ben509 7y ago
    I'm pretty safe in assuming they either enter a new business or don't for some reason. The some reason would be that they aren't able to actually do it. No one just goes out of business; read a story about a failing business and there will invariably be a series of attempts they made to rethink their operation, failed acquisitions, etc. So there we have to go back to the original argument: do they have a choice? I'm claiming their choice is the strategy they employ, they don't have control over the outcome, obviously. The only case where you don't have a choice is when there's a sudden shock to your business; new laws put in place or something like mesothelioma crushing Lloyds. I don't think this applies because the changes we're talking about here are not sudden at all. It's also not an all or nothing affair: you don't have to completely shut down one operation to start doing something else. But other corporations can gradually enter and exit different lines of business, and this happens all the time. Restaurant chains are a confusing example since they're really a mess of franchises. Even there, the parent corporation can create new branding and restauarant layout and effectively move into a new line of business.

CPLX 7y ago

This may come as a shock but software is the exception. The vast majority of the business world operates this way. The fun part comes when you realize that absent monopoly conditions this is the natural stable state of a mature market, and think about what the future of software might look like, and what the current public policy fights are about.

asdfasgasdgasdg 7y ago
https://www.investopedia.com/ask/answers/052515/what-average-profit-margin-company-banking-sector.asp https://www.investopedia.com/ask/answers/052515/what-average... This article claims that banks make 24%, and they are hardly a monopoly. It also claims the overall average is 8.5%.
- brownbat 7y ago
  I can't figure out where that article gets its numbers from or which banks it's referring to. The industry standard measure for bank profitability is something called ROA, return on assets, and it's an extensively studied academic topic, with the general consensus that an ROA greater than 1% is pretty good. https://greyhouse.weissratings.com/ROA-ROE-and-What-These-Key-Measures-Mean-for-YOUR-Bank https://greyhouse.weissratings.com/ROA-ROE-and-What-These-Ke... https://www.fdic.gov/regulations/resources/cbi/report/cbi-roa.pdf https://www.fdic.gov/regulations/resources/cbi/report/cbi-ro... I'm sure there are some large institutional players that do consistently better than 1%, maybe up around 5 or 7. But a longstanding industry with a sustained 24% returns would... sustained compounding 24% a year seems like it would lead to weird results. Like if a bank had survived fifty years and had a few hundred million in assets it would now be responsible for the entirety of US GDP. EDIT: I looked at BOA as a random test case - 2.1T in assets, 22B in income, seems to match the ~1% rule: https://ycharts.com/financials/BAC/income_statement/quarterly https://ycharts.com/financials/BAC/income_statement/quarterl...
  - milesskorpen 7y ago
    Assets aren’t revenue though; I don’t think profit margin and ROA are comparable.

mxcrossb 7y ago

I think the average margin might be misleading. After all, most restaurants fail pretty quickly. That number could be skewed by the unsuccessful businesses. But I think it’s an interesting point. Why fight all day long for a 5% margin when you could put your money in index funds?

lowkeyokay 7y ago
They might not have enough money to just put it in index funds and live off the dividends. So they have to work, and the business pays their wages
learc83 7y ago
Because a 5% margin doesn't translate to a 5% annual return on investment. Also at many small restaurants the owner and the owner's family is also working full time, and that 5% margin doesn't include their salaries.
- danans 7y ago
  > that 5% margin doesn't include their salaries. This is something that often seems lost in this discussion. The profit margin is usually after the owners themselves have taken a salary. If they are paying for themselves appropriately, and the margin is 0%, this is often described as "making no money". What's making no money here is the business as an entity, not the owner, despite the frequent rhetorical conflation of the two. Payout of positive margins, if they exist, are often classified as "profit sharing" in the simplest of businesses, like sole proprietorships. In more complex large businesses, they become dividends or employee bonuses. Most people can't afford to pay themselves nothing while running a business.
  - csomar 7y ago
    They might also be optimizing for taxes by heavily re-investing, charging personal stuff on the expense account (like car/gas/travel)... That makes it look like they are doing badly while they are doing okay.

astura 7y ago

I've seen some of my "cost plus fee" government contracts I've worked on in the past; the fee (profit) was only around ~3.5%. Not saying this is a typical fee on government contracts, but the company I was working for (big dollar government contractor) was happy with that.

cozzyd 7y ago
Sure but in that case the risk is small and the base is large.

goatherders 7y ago

If I recall correctly Walmart operates with low single digit margins for most goods. They make up for it with favorable vendor terms; I read that a can of green beans sold by WM will turn over 6 times before they have to pay the vendor for the first can.

retsibsi 7y ago
> I read that a can of green beans sold by WM will turn over 6 times before they have to pay the vendor for the first can. I can't parse this but am curious what it means; can someone explain?
- MegaDeKay 7y ago
  I believe he is talking about payment terms like "net 30 days". A made up example: Walmart buys a can of beans and promised to pay the seller 30 days later. During those thirty days, they buy five or six more order of beans to make up for that first sale and the other ongoing sales, each payment being thirty days later. During each of those 30 day periods, that cash is sitting in Walmart's pocket for them to invest etc.
  - retsibsi 7y ago
    Thanks!

arkitaip 7y ago

> The same business prowess and attention to detail you need to make a buffett run profitably could get you very far in another industry. If you have the industry know-how, money and time to change industry, sure. In reality...

Mikeb85 7y ago

Someone posted that the average margin for a public company in the US is 7.7%. There's an economic 'law' that basically states that the return on investment of a business in a mature market (read perfectly competitive) will always trend towards the interest rate (plus the cost of whatever sort of barriers to entry are in place) because of the arbitrage principle. If a business makes higher margins, everyone will pile in and undercut the incumbents until the margins are reduced to the cost of entering the business. For most sectors of the food industry, there's very little product differentiation. Some restaurants do make higher margins, but they're typically small and highly differentiated.

ska 7y ago
Restaurants, outside of fast food and other large chain operation, probably average below this for various reasons (churn being a big one). I've heard that 5% is a good target. In fact I suspect you can reasonably look at large chain operations as figuring out a way to reduce the factors that keep the average return lower than it "ought" to be...
- Mikeb85 7y ago
  Nah 5% is shit (but also the average). I've been lucky to have been involved in some very profitable restaurants with margins more like 20%... When you set out to do a business plan, you should be looking at differentiation. Not producing a commodity with slim margins...
  - ska 7y ago
    Nah 5% is shit (but also the average) It can't really be both of those things. I'm sure there are outliers just like you describe, but not that many. 20% is pretty high margin in general for business.

ozim 7y ago

You underestimate how hard it is to switch a field. If it takes $50k to switch I will get better margins but first I have to have $50k. Then how do I know that new thing I will do will bring that profit in first year? That is already $50k and lost profits for figuring out new market. If you look at risks involved and potential loss of money instead of only looking at higher margins, it is easy to see why people would rather earn their 5%.

yibg 7y ago

Depends on 5% of what. I’d be perfectly happy making 5% margin on say 10 million annual revenue.

imtringued 7y ago

The higher the margin the more inefficient the market.