How Do The Finances Of A Restaurant Really Work?
The food industry is a crazy tough business world, its brutal. It’s fuelled by passion but totally suffocated by tiny margins and in a world that refuses to acknowledge the true value of what it produces. Chefs are overworked, their skills are undervalued and underpaid as its one of the only ways to make a food business work but we don’t mind, its what we love to do and it’s a way of life, not a job!
Most people from a various walks of life seem to acknowledge how hard the industry is, how long the hours are, how thankless the work is and yet I still hear people often talk about the prices of food in a negative way how they think the restaurant can ‘get away’ with charging what they do. Disregarding the value of the skills to make the food. And I am not talking about the awarded restaurants sending food out for £££££££’s but regular town restaurants, especially independently owned and run places.
There’s this undertone that restaurant owners are trying to rip customers off, largely because they can’t compete on value with the large high street chains - hopefully what I lay out below helps explain where this sits and why any independent restaurant is far from trying to rip anyone off but more importantly on survival mode from the moment they get the keys, before they even open the doors and why they need your constant support!
Almost any business operates by attempting to offer value for money or what they perceive as value for money. Otherwise you would be doing really well to be getting any repeat custom - something every restaurant relies on! It is obviously something completely subjective and will vary customer to customer as its basically just an opinion.
But an opinion guided by what other businesses offer - including the large chains, can totally disrupt the perception of value for money. Why do you need to go and buy a £4 handmade sausage roll, made with high welfare meat, homemade pastry and lovingly built with love, care, attention and actual skill; when you can get a Greggs for a quid.
So when I say this is a general overview, this is a VERY general overview of restaurant economics. Every business is different - every single one works differently and has to adapt to its local economy, location and all sorts other nonsense. This is the basic blueprint you are given when you start to run a restaurant - its mostly as a wake up call more than anything!
This is set for a restaurant that is largely making food fresh and in house - we will talk about that a little later
The dreaded VAT and tax always adds some complications to this so its easier to break it down in real numbers, actual monetary value - so here’s a breakdown of when someone spends £1.00 in a restaurant or £1.20 when you take into account the bank statement crippling VAT restaurants have to pay.
(please ignore the % on the labels - my skills with spreadsheets departed along with Excel 97!)
So as a little countdown of the pennies in a table form, it looks like this………
So a long story short, most restaurants that make fresh food work on around 3% net profit margin.
And that’s a similar figure to the ones with those magical stars or rosettes on the wall. Their overheads in terms of labour, food cost and maintenance are so far above high street restaurant costs, that’s why they have to charge so much! The margins are really similar!
Have you ever wondered why most big named London restaurants are within large hotels? Because they can absorb the tiny restaurant margins by enticing people to stay in the much more lucrative hotel business and have a meal at the same time - fine dining restaurants often need an upsell or another outlet to support the survival of a business involving cooking food! There is some crazy stat about the average life span of an independent, fresh food restaurant is around 2 years.
Another point to make - this model is for an operating restaurant - not a newly opened one. So on top of making around a 3% margin, you’ve likely got £10,000’s of debts to pay for renovations, new equipment, staff workwear - the list goes on and on! When I was running a branch of a global food business (at a great loss every month - miraculously an expected loss) in London, I got given an article to read about new restaurants - this was a few years ago so it might be even worse now, but the average restaurant took 5 years to make a clear profit…..that takes some investment power to get over the line!
The 2 big players in all of this are Labour and Food Cost - so if you want to improve your margins, this is where you have to be super tight. Food waste has a massive impact on your food cost and so therefore a busy restaurant helps keep your % down - if you are full every service, you know how much to order, how much to prep, how much to cook etc.
When was the last time you didn’t turn up to a table you booked at a restaurant without calling ahead and letting them know? How many busy, packed out restaurants do you see these days? Its a terrible state of affairs but if you own a restaurant you have to be prepped and ready for customers - customers don’t turn up - the food and your margin ends up in the bin!
You’d be tempted to think that with low margins, lets go with higher volume and sales, get more bums on seats - that’s a good plan but to enable that, you need more staff to provide the same service, a larger premises, so rent goes up, there will be more maintenance needed - you move one factor, it all changes.
The other option is where high street chains destroy the independent market - they buy food in, defrost and reheat to order. Buying in prepped food from 3rd party manufacturers and wholesalers means you reduce the labour cost from the kitchen and potentially from the front of house staff and especially with frozen produce, you help to eliminate for waste as you can defrost as and when you need it.
A fresh food business simply can’t compete with this - regardless of how well the food is cooked (that’s a totally different thing all together). With spiralling overheads and the value of food always lagging behind in people’s priorities this is starting to squeeze every single food business in the country.
So next time you’re out and you gasp at the £18 price tag for ‘just some scallops’ look around at your surroundings, appreciate the overheads that go into making ‘just some scallops’, note the people serving you, try to gauge the passion and effort people are putting in - because that’s where the value is!
Go and support your local restaurants!
