Key Restaurant Profitability Numbers

In my experience, profitable restaurants have a gross profit of 40% of sales or higher and an occupancy cost of 10% of sales or lower.  It's important to track gross profit and occupancy costs consistently.

Many operators spend great time and expense analyzing a number of items with a relatively minor impact on gross profit including:

Employee meals;
Allocation of lemons, cooking wine and olives between the kitchen and bar;
Complimentary food items;
Credit card fees;
Returns due to customer complaints.

Your gross profit calculation involves net sales, cost of sales and direct labor costs. 

Whether you prefer to allocate employee meals to direct labor or cost of sales, these expenses will impact gross profit.  The lemons, cooking wine and olives will show up in cost of sales regardless of the department bearing the charge.  Complimentary food served to patrons without a charge on their bill will be included in cost of sales.

It may be helpful to begin subtracting credit card fees from gross sales before calculating your cost of sales percentage.  The goal is a better bottom line profit.  If you net the credit card fees in the sales number used in calculations, you will build in a safety cushion.  This simple change will force you to operate more efficiently. 

Food returned to the kitchen due to customer complaints is a serious issue.  Any restaurant with enough returns to have a big impact on cost of sales is in dangerous territory.  You are in the business of providing your customers a superior meal.  These returns demonstrate the dissatisfaction of your audience.

When you find yourself in financial difficulty despite a 40% gross profit (using the conservative approach of netting credit card fees from sales), you will often see your occupancy cost above 10%. 

Since your occupancy cost is often fixed, a high number puts tremendous stress on management.  I have seen operators with restaurants packed nightly in constant danger of not breaking even.  Usually, they are sloppy with low gross margins or they just don't have enough sales to justify their occupancy cost. 

Frequently, we see famous restaurants closing due to a pending lease renewal.  These operators understand the risk of trying to operate with an unacceptable occupancy cost.

Restaurant Accounting Equations

My reader, Casey Paul of EZCater, notified me of an interesting infographic  Restaurant Accounting Equations.  The first equation is my favorite - break even point.

Beat Your Food Cost Budget

One of the best ways for most food service operators to lower their cost of goods sold is to develop and promote fantastic side dishes.
For years, many restaurant patrons praised the french fries at McDonald's. McDonald's bundled the popular fries and high profit fountain drinks into value meals. These value meals help McDonald's increase revenue and profit with 2 relatively low cost items.
The person who originally recommended Outback Steakhouse to me years ago made sure I knew to order the Bloomin Onion. The delicious onion dish is very profitable. At the time, this person stopped going to other steak house restaurants just to order the onion dish.
Many independent restaurants have a low cost item ordered by most of the patrons. Focusing on root vegetables and other ingredients available year round is a good strategy.
Baked goods are also very good for your gross profit. This is true whether you charge extra or offer complimentary baked goods. Excellent baked goods (bread, rolls, nan, pita, tortillas, etc.) often attract customers to a specific brand in crowded markets. Often the baked goods and salad bar are considered when patrons choose a casual dining destination. While the salad bar cost varies widely by season, baked goods are not subject to wide cost variances.
Taking a closer look at salad bars, there are plenty of ways to lower your costs. Salads may use starchy items including potatoes, rice, pasta and couscous. Create a "to die for" salad using these cost effective items. Mediterranean foods are very popular and there are many great salad ideas to choose from including those found in a great tapas cookbook.

Finding Your Ideal Food Cost Number

I find attempts to benchmark food cost overly simplistic.  My favorite factors in determining food cost benchmarks are annual sales, competition and monthly occupancy cost.  These factors vary widely by market segment and geographic zone.

There are times when a higher food cost percentage is desirable.  Operators suffering from minimum wage laws and mandatory employee health care costs may improve their operating profit by purchasing prepped food items.

A fresh vegetable prep team with three full time workers can cost well over $100,000 in cities and states with $15 minimum wage laws.  Qualified butchers are only justified in a small number of restaurants.  Multi-unit operators may create commissaries to butcher and prep items for their entire chain.

Commissary operators need delivery vehicles and personnel.  In addition, they need tight controls over commissary transfers.  Auto insurance rates are higher in urban and suburban areas.

A savvy operator will create a profit and loss statement designed to show a subtotal used to net sales, cost of sales, direct labor and occupancy costs.  This number should be at least 30% of sales.

There are plenty of ways to get the 30% net.  Restaurant managers in urban areas with high rents need to offset their high occupancy costs with higher sales and lower percentages for cost of sales and labor.

If you are in a city with high rents, $15 minimum wage laws, and have recently offered your entire staff health care insurance, you most likely need a low food cost %. Some of you may face a 15% occupancy cost.  If you can manage to hit a 25% cost of sales and a 30% labor cost, you can deliver a 30% profit before your other operating expenses.

You may operate over an hour from the nearest city in a mortgage free restaurant.  The local minimum wage laws may allow you to pay a premium wage in the $12/hour range.  A large kitchen with adequate storage capacity could allow you to purchase farm delivered produce and large cuts of meat and fish.

The best strategy for the operator with low occupancy expenses is to always price menu items below the competition.  You can make it impossible for competitors to attack using borrowed capital.

New Book Coming Soon - Growing Medical Tourism Industry

Dr. Frederick DeMicco's new book is due in January 2017. The book explores a relatively new segment which crosses the health care and hospitality fields - Medical Tourism and Wellness - using mini case studies and discussions of current trends.