Cost vs Profit

In a previous post about why restaurants charge for different extras, I discussed the difference between the guest’s perception of profits and reality.  It is not uncommon to hear a guest say, “I can buy this for half as much at the grocery store.”  The problem is that food in a restaurant carries far more costs than the price of the food on a plate.  I thought of a number of different ways to address this.  The easiest way to explain a complex topic is in relatable terms.  For this reason I have decided to look at the topic by addressing the most common item on restaurant menus: The Cheeseburger.

A friend in the business was able to supply me with the actual numbers from a Midwestern restaurant that is part of a far larger national chain.  These are the actual costs broken down to their individual components on a hamburger.  I won’t name the chain for obvious reasons, but it is fair to say that their volume allows them to buy these items for less than their independent counterparts.  Here is how the actual cost of a half-pound cheeseburger and fries break down.

The Cost of a Burger

This cheeseburger sells on the menu for $7.99.  This means that the food cost on this item is 22% of what it sells for.  Keep in mind that a cheeseburger is often one of the most profitable meals on a restaurant menu.  Higher end steaks or seafood are often sold with much lower margins.  At first glance it may seem that this means the restaurant is making 78% profit on this burger.  In reality they would be happy making 10% of that.  While the cost of the food is the largest single expense, it is actually just one of many costs.

Here is the breakdown of overall costs from the same restaurant:

restaurant cost burger

A breakdown of actual restaurant costs

Cost of Food (22%): This is usually the most expensive part of any meal.  Depending on the type of food served at a restaurant, food costs are usually targeted for between 25-30%.  This is a huge portion of the cost and includes only the food used.  Waste, spoilage, mistakes, and items a guest doesn’t like all raise this overall number considerably on the balance sheet.

Hourly Labor (17%): This covers the person who cut the tomatoes, seats the guest, makes the drink, takes the order, cooks the burger, brings it to the table, cleans the table after, and washes the dishes.  By that list, 8 hourly employees contributed to the burger.  In this particular break down 4 of the 8 are making less than minimum wage due to tip credits.  This also includes the labor for people who are in the restaurant hours before it opens preparing for the day and the people who clean it up afterwards.

Salaried Labor (10%): This pays the person who ordered all the components of the burger, the person who scheduled all the people above, supervises them, and keeps track of all of these numbers.  The many hats of a restaurant manager cover far more ground than just fielding guest complaints.

Supplies (5%): This includes plates, glasses, silverware, ramekins, saltshakers, sugar caddies, cleaning supplies, and the countless other things that are brought to a table.  This is not the cost of originally purchasing these items to open a restaurant, but only the cost of replacing what gets lost or broken.  Packaging for carryout, napkins, paper towels in the restroom, and all other non-food items consumed by a guest are accounted for in this column.

Utilities (6%): That big neon sign out front is expensive.  Running ovens, stoves, and fryers for 15 hours a day can drive a gas bill through the roof.  The air conditioner must not only counteract all of that heat, but also compensate for the hundreds of guests that keep opening the door.  The cost of hundreds of glasses of water is actually pretty minimal compared to the price of a couple thousand cycles of the dishwasher.

Marketing (4%): Getting guests in the door is not cheap.  This includes television, radio, newspapers, direct mail, etc.  This would also include sponsoring a little league team, donating to a charity auction, participating in community events, and the myriad of other expenditures it takes to build a customer base.

Fees and Licenses (3%): Restaurants pay taxes.  Municipal, county, state, and federal taxes all must be paid.  Liquor licenses, business licenses, food handling permits, fire inspections, and countless other requirements all must be paid.  Restaurants often frame these licenses and post them conspicuously as tribute to the most expensive pieces of décor in the restaurant.

Maintenance (4%): This is the line item that keeps restaurant owners up at night.  Many pieces of equipment are required to keep a restaurant up and running.  When anything from a fryer, to an air conditioner, to a toilet breaks it goes to this line item.  Failing to keep this under control can lead to it skyrocketing into the double digits and wiping out any hopes of profitability for the period.

Other (3%): This is the catchall category.  Everything from free uniforms to office supplies can fall into this budget line.

All of the expenses listed are considered “above the line.”  This means that they are directly controllable by a restaurant manager in theory.  These percents serve as targets that a restaurant manager is expected to meet.  These are incredibly aggressive goals and can often be made unattainable by unexpected expenses.  The two that are most often seen as places to make up lost ground are in hourly labor and supplies.  This means operating with fewer cooks and servers in slow periods or holding off on ordering supplies that make the service run smoother.

Fixed Costs (21%): These are items that are out of the control of a restaurant manager.  They include some significant expenses.  Rent, insurance, corporate salaries, and debt service form most of this category.  Restaurants located in prime shopping districts often pay as much as 10% of revenue to a landlord.  A variety of insurance policies covering everything from injured workers to sexual harassment to food borne illness are required to run a restaurant.  The people working in the corporate office actually paying these bills and designing these budgets also have to be paid.  One of the most significant costs is the expense of opening the restaurant.  So far we have accounted for replacing the broken plate, but not buying the hundreds of original plates needed to open the restaurant.  Every piece of furniture, plate ware, décor, and glass has to be originally purchased.  This is usually done with a loan requiring repayment with interest.

Profit (5%): This is what is left over for the owner at the end of the day.  Even this paltry amount is based upon everything listed above going correctly.  This also means that if a guest does not like their burger and does not pay, the next 5 burgers sold are just to break even.  With these numbers serving as a best-case scenario, it is no wonder that so many restaurants go out of business.

When looking at a restaurant through the eyes of a restaurant owner it becomes far more obvious why they insist on charging for the extras.  Profit margins are razor thin and the price of starting a restaurant leaves a significant debt burden.  For those that take the risk, the rewards are often not seen for several years.  Restaurants have significant costs that extend far beyond the simple cost of food.   All of the sudden that burger is looking like a much better value.

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About David Hayden

David Hayden is a restaurant marketing and training consultant based in Kansas City, MO. He writes a series of 9 blogs collectively known as The Hospitality Formula Network and is the author of "Tips2: Tips For Improving Your Tips" and "Building Your Brand With Facebook"

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