Restaurants: a bad business?

[baruch]

silly me, i thought this was supposed to be a thoughtful discussion section, wrong again on egullet. unequal rules unevenly applied

[malachi]

While I don't want to simply dismiss your anger (I'm sure many restaurant patrons would agree with you) I'm afraid that your points are based on a fair amount of ignorance when it comes to the realities (economic and otherwise) of food service businesses. If this is a topic that you care about (which seems to be true for the level of venom in your post) then it would probably be worth your while to gather more information about the business.

For some quick examples:

food costs are ridiculously low: a potato "costs" $.10 & nyc restaurants charge $6!!!!

If, in fact, a restaurant were to serve you a generic cheap raw and unadorned potato for $6 then you would be right in being upset. But the reality is that you're comparing apples to tarte tatin. You need to incorporate the cost of the other ingredients, waste and utilities.

labor?? when is the last time one looked into a kitchen, including hi-end. if all had to return to their respective 3rd world countries.... their labor costs are less than Nike's!!!

To be honest, the per-employee, per-hour labour costs are (while obviously much higher than Nike's) quite reasonable. The trouble is that even at these low base costs, the total grows rapidly when you look at the actual headcount of a restaurant. And once you start to calculate the actual headcount costs (including such lovelies as workers comp) it balloons in a sudden and frightening way.

left with the chefs: ummm, i keep hearing how LOW the wages are, sooooooooo, how much ARE these labor costs????

Given that some of those posting here are back of the house professionals, you should be aware that this is an emotional and sensitive issue. It is why I left the business. In my last job in a restaurant I was the Chef de Cuisine in an award-winning and busy restaurant. I was salaried. One day I did the math to figure out how much I was making per-hour. Turned out the dishwasher had a better base than I did. I almost doubled my income while halving my hours worked in the first year out of the biz.

overhead costs: like running anything, "it is what it is" quit griping!!! i wish i didn't have to pay for MY refrig costs when i am not using.

Actually, I'm afraid it is not like "running anything."

This is where you lack of exposure to the business is skewing your viewpoint the most.

The overhead of running a restaurant is not like the overhead of running a music store which is not like the overhead of running a dry cleaner which is not like the overhead of running a waste disposal company which is not like the overhead of running a pipe fitting manufacturing company. While it may seem like there is little if anything to the restaurant business when it comes to overhead - this is an illusion.

The reality is that an excellent businessman running a very tight ship in the restaurant world and maximizing their margins with a popular and expensive restaurant is unlikely to ever get past 12% margins. In fact, getting to 10% qualifies you as a superstar in this business.

IF U DO WANT TO OPEN A RESTAURANT, 1st work 50-75 hrs/wk for some jerk who treats u like crap for very little salary

If you throw in "while being screamed at in 125 degree heat and surrounded on all sides by objects which can maim you" then you've got a perfect description of what everyone who cooks for a living goes through.

i'm tired of hearing all the whining, i'm tired of overpaying for mediocre food & worse service, i'm tired of being overcharged for crappy wines, i'm tired of hearing about unsophisticated clienteles.  i'm tired of all the criticisms of restaurant people, being just that, usually restaurant people. if more restaurants disappear, maybe, just maybe, the industry will wake up & provide a service that = the price!!!

There are thousands of restaurants out there that cater to someone with your perspective - that deliver on the promise of providing food at low costs. Is it great food? Of course not. You get what you pay for.

As a friend said to me one, "yeah - and I'm all bent out of shape about the lack of $15k Ferraris on the market."

[baruch]

thank u for responding in such a detailed manner. as a pt of reference i have invested in a # of businesses covering a fairly large variety of endeavors. ALL BUSINESS HAS COMMON THREADS REGARDLESS OF THE PRODUCT.

[Andrew Fenton]

In my last job in a restaurant I was the Chef de Cuisine in an award-winning and busy restaurant. I was salaried. One day I did the math to figure out how much I was making per-hour.

A mistake, in almost any profession. It's always a fun exercise for junior associates at big law firms to calculate what their hourly wage would be...

[baruch]

thank u for responding in such a detailed manner. as a pt of reference i have invested in a # of businesses covering a fairly large variety of endeavors. ALL BUSINESS HAS COMMON THREADS REGARDLESS OF THE PRODUCT. & why is it someone always has to be described, as malachi states, as angry????? is it not possible to discuss issues without being thought of as angry? does this imply a vested interest or simply a lack of understanding of the intent or imply an attitude that does not allow dissent? & why is it always this "us vs. them" attitude? sorry, but its a little too obvious, u come from the restaurant side. its also obvious that it tis u that seems to have a problem with the economics of a restaurant.

venom?? i'm confused? when 1 describes what so many others think, or believe, or question; that's venom?? instead of suggesting i collect more info about the restaurant biz, i suggest u take a business course in economics, marketing, management, & financing.

fact: food costs ARE low. so, 1st of all one is starting with a very low commodity price. to that, one would add cost of additional items + labor, etc... to arrive at a total cost of that particular item. in fact, which it appears u're not as familar as u would like to believe, no business generally goes down to that level. u may ask why? - pls do - because, in addition to other costs, one would need a full-time cost consultant to monitor. which u acknowledge, one is trying to cut costs - does this, so far, sound angry or venomous or upset??? i choose the little higher road - why don't u walk us through how a unadorned simple generic cheap raw potato becomes french fries with, alas!!! garlic, herbs & spices with the appropiate costs. now KIM u start with a $.10 item & charge $6. curious as to YOUR math.

labor: are u agreeing or disagreeing with my angry, venemous statements??? sounds as if u have no arguement?? generally, low wages * lo hrly wages = relatively lo labor costs. other companies i have purchased would love to have those labor costs. am i still angry??

the back-of-the-hse pros - sensitive issues - sounds, again, like u are agreeing. ummm, am i still as angry & venomous as u imply or are u starting to see the lite?

oh my God!!! its not like running anything else? u must be kidding? u're NOT suggesting the restaurant business is so different & so unique, its not like running anything else?? pls don't say that to someone who went to a bona fide graduate business school, particularly those that specialize in case studies. let's see, the past 100 yrs have seen many new businesses that seem to allow executives to move from different industry -to-different industry with skills that are transferable. but U suggest that a business involved in food service & has a much longer history is so different that doesn't allow one outside to understand. the fact is, it is people like yourself that stick to outmoded models or use some insular circuitous reasoning to justify a lack of business sense. what is your mystery?? real estate savvy allow one to buy or lease a "space", business sense allows one to put together a business plan, not some seat-of-the-pants plan like u seem to adhere to, etc.......

again, it appears u agree re: being prepared to accept the difficulties of the food business if that is what u what; however, it doesn't guarantee u a profit as u seem to think u're "entitled" to.

am i still angry??? sounds more like level-headedness vs your attempt @ justifying an untenable position.

my perspective? u have no idea of my perspective. u sound like u are, in fact, the bitter one.

are their really thousands of restaurants out there to my perspective? i don't think so. u unfortunately miss the subtleness of the point, but that's ok, i didn't really think u would comprehend the forum.

as i pointed out, great food restaurants can & do make money. can find the clientele to support their dreams & endeavors WHEN THAT RESTAURANTS DELIVERS ALL THAT I HAVE MENTIONED ABOVE.

[malachi]

Given what you've said, it sounds like you might be an excellent candidate for restaurant ownership. The proof, as they say, is in the pudding - no?

[baruch]

in this particular pudding, there is always that possibility

[Basildog]

I'm sorry that my post was not serious enough

[snoop]

Baruch, wow, what can I say. Oh I know, get your head out of your ass and your foot out of your mouth. You are completely wrong in a lot of your statements. To the people in this business you are coming of as completely clueless and just embarrasing yourself. Let's take your so called $ .10 potato. You want to make mashed potatoes? Well, put the potatoes in the expensive pot and fill it with water that obviously needs to be paid for. Throw in some salt that you purchased. Put it on the flame that is run by gas ontop of the enormously expensive range and let it simmer. You did pay the gas bill right? Drain them in the 5th colander that you just bought because those things just have a way of breaking, don't they? Oh, you wanted cream and butter in the potatoes? Well go into the massive walk in refrigerator that runs constantly and pick some up. Mix it all together in a bowl with a spatula (why do all those spatulas keep getting lost? guess I'll have to buy some more) and your done right? Oh yeah, you'll probably want to serve them to someone in an air conditioned dining room sitting on expensive seats, served on a plate of some kind. And a fork might be nice, too. You did purchase these thing right? Oh, I forgot, robots aren't ordering the food, putting it away, cooking it and serving it. You mean these people cost more money than you might think?! You mean I can't pay them as shitty as you assume because then all my good cooks will go to another well run 3 star kitchen and learn just as much for more money?! I can't believe it. Oh , I hope the weather isn't shitty and we aren't slow tonight, because then all those potatoes will have been wasted. That's a lot for a cheap potato. What about the porterhouse steak that didn't sell?

[T. Brooks]

As an angel investor, you are right. Its a crazy business. Capital intensive, labour intensive, top-end limited, and worst of all fickle. You are only as good as your last meal (or last review). It also takes time to establish and get into the guides.

Very roughly:

Food and drink costs 30%

Overheads (heat, light, power, insurance, linen, flowers, breakages etc) 30%

Staff costs: 30%

Leaving 10% for profit, tax,(VAT/sales tax at 17.5%) and payment on the capital.

Not much need go wrong to eat into that 10%. A few bad nights, someone dropping an expensive bottle, two slices instead on one on the plate...

Bear in mind it can cost up to a million to start a new upmarket restaurant, its a wonder anyone does.

Few restaurants can consistently clear six figures per annum - thats roughly needing 500 per session, or 10 per cover  in clear profit just to pay the interest - whatever currency you choose. Not surprising that restaurants need to charge 100+ per cover. For many the sums only work because the capital has been sunk in previous generations, and the family work for a pittance.

Most of the money is made from spin-offs, like the books or the TV appearances, or the increase in property value rather than serving meals in the restaurant. It might be full on Saturday night, but the problem is geting bums on seats at slack times, when you still have to pay fixed costs, even if you wind down the staff to a bear minimum.

Are you joking?

Prime Cost is supposed to be around 70% before all the fixed costs are factored in. You can cut food costs or alternate costs if you want more skilled food handlers and waitstaff in your restaurant, but between food beverage and labor costs, it's around 70%. Should be. Ideally.

Taxes, insurance, heat, utilities, kitchen fuel, etc. All of those are factored into the fixed cost, and FC+VC +/-Profit or loss gives you 100% of your total business revenue.

You don't set up a business plan with room for profit. That's worked into the equation later. Not only that, but it costs quite a bit to market a small end restaurant in a competitive area, regardless of what quality you want the food to be. New or auctioned equipment, hopefully not condemned, huge bank loans, contracts, etc.

If you are the sole proprietor of a business, you are legally not salaried. You do get paid, but from a different means. Most people who start restaurants aren't qualified. They've got some business sense, but it's all front of the house. They want to be the smiling owner at the door who chats with everyone as they come in, BUT, they want to cut as many corners as possible to maximize profit, profit which they won't find if they don't allocate resources to their appropriate outlets.

They'll cut food cost and tell their 7 dollar/hour burnout cooks to "make it happen", and eventually, they'll get pissed and leave, or they'll give you a fine how do you do with regards to what you're expecting out of them and give you exactly what you paid for, an inferior product. Less business means desperation for alot of folks who don't get the business, and a short term fix is to raise prices. You still have the same inferior food. Remember how the olives now come out of a can?

also, from baruch:

left with the chefs: ummm, i keep hearing how LOW the wages are, sooooooooo, how much ARE

these labor costs????

It's not that the wages are low, but for those working in high end restaurants, many positions are salaried. 40,000 a year sounds good, but for 90 to 100 hours of work, it's awful. People tend to take jobs thinking that it'll be a big push for their career, but what happens quite often is that they get taken advantage of by someone who exploits their labor. Some get off on just being on the line. When they go home, their joints cry and their muscles weep for a quick death. It's why burnout is so high for chefs, at least one reason. You know some of the others.

For all those in restaurants who are still paid hourly, there is overtime. The big fact is that people have to get paid, but more important than that, food must be purchased first and foremost.

Where does it say in the "Xerox copiers Employee Manual" that it's going to be expected and accepted for bills to be paid late or never? In this retail business, so many factors, more than that of cubicle-businesses, are volatile beyond belief. Cooks on edge, food storage and spoilage, fickle diners, clumsy drunk patrons who drop three Crystal glasses a night. It's different than an outsider might think.

[Basildog]

Put it on the flame that is run by gas ontop of the enormously expensive range and let it simmer.

I have just spent a weeks takings on a new range.....

[Tonyfinch]

I can't talk about the business as I'm just a restaurant customer but to pick up on one of Baruch's points. If the work is so hard and the profit margins so low why is there such incredible competition? I mean I know everybody has to eat but everybody needs their clothes cleaned. Why, in London, are there twenty restaurants for every one dry cleaner?

Why open a restaurant when everybody's crying out for decent car mechanics, or plumbers or electricians?

Or is it that restaraunt owners have an initial sexy vision of their work and then become disillusioned and whine when it turns out to be just as hard and as mundane as plumbing?

[malachi]

Or is it that restaraunt owners have an initial sexy vision of their work and then become disillusioned and whine when it turns out to be just as hard and as mundane as plumbing?

The only way I could put it better would be to describe it more like "harder than, as mundane as and more unpleasant than plumbing."

[Jonathan Day]

I think there's broad agreement that it's very hard to make money running a restaurant. There probably isn't one single reason for this, but rather a combination of causes:

(1) Difficulty of creating a truly distinctive customer proposition, something that keeps the reservation book full and customers willing to travel long distances and pay high prices.

(2) Relative ease of setting up a restaurant ("all it takes is money").

(3) A very small number chef/owners who make it to the big time and earn fame and money -- note that this is not true for occupations like plumbing. Very few restaurateurs or chefs become famous, but the ones who do become household names and can earn money in the millions. Cheffing is more like acting than plumbing: lots of people seem to want to do it, and a few win big.

(4) A romantic belief on the part of many entrants that running a restaurant will be fun, the work won't be hard, and that they can make it to the big time.

(5) As a result of 2,3, 4, a preponderance of (economically) irrational competitors who effectively sell restaurant meals for less than it costs them to make them. By "what it costs" I mean the full and fair market value of labour, materials, capital and the like, including the owner's labour contribution.

(6) A large number of consumers who are less than discriminating about quality, and in many localities (e.g. tourist destinations where many customers are visiting for a first and last time) an absence of any effective market system for rewarding good quality and punishing poorer quality.

All this is not to say that chef/owners are in any way stupid: as Basildog has demonstrated, a lot of personal and psychological satisfaction can be derived from running a quality restaurant, even if the takings only just covers the direct costs. I know a lot of lawyers, for example, who make very good money but don't seem to enjoy their work very much.

Edit: added "economically" before "irrational" in paragraph (5) above. To an economist, anyone who sells something for less than it costs is irrational. Fortunately, economists represent a tiny minority of the world population, and very few of those economists actually behave in line with economic theory.

Edited June 1, 2003 by Jonathan Day (log)

[John Whiting]

There's a relevant scrap of dialog from a Woodie Allen movie:

"I've got a new job -- I'm the dresser in a burlesque house."

"Wow! What's the pay?"

"A hundred a week."

"That's not much."

"Yeah, I know, but it's all I can afford."

[baruch]

Baruch, wow, what can I say. Oh I know, get your head out of your ass and your foot out of your mouth. You are completely wrong in a lot of your statements. To the people in this business you are coming of as completely clueless and just embarrasing yourself. Let's take your so called $ .10 potato.

btw, that would certainly be a good trick. i can certainly take the heat, particularly considering the source, although, even i, have to observe that apparently one action was NOT enough for u .

so, now that u have vented, & shown your immaturity, lets see your math, instead of ridiculous statements & rantings, as to how u go from $.10 - to - $6.00, cent-by-cent - embarress me, i challenge u!! let's see u quantify - instead of your myopic & childish response - all those things from potato purchase - to - placing on a table. lets see U tell us how really expensive it is, & so hard to do! should be easy for u to justify!!! ummm, does that also include a hard or mushy potato? or crappy, arrogant service, or a cold potato, or extreme overbooking to "coax" patrons to the overpriced bar? n'est-ce pas??

assuming u will miscontrue so as to would lead one to think $6 is a bargain

potato cost $ .10 + water, salt, gas range, gas bill/colander/creme/butter/bowls/spatula/server/dining room/tableware/etc... have i left out anything snoop? = ~ $10,000; therefore, eureka - $6 is a bargain - hell, i'll take 2!!!

HAVE U EVER HEARD OF THE WORDS "PRO RATA" ON EVERYTHING??????????????????????? i didn't think so

its the same crap one gets all the time, u can't justify your/their lack of management control, so everyone is either unknowledgeable or clueless, except yourself of course. i love little-minded people like u, it makes it easy to bypass wherever place u are working knowing it is not well run & offers little.

btw, how much do those spatulas cost??????

Edited June 2, 2003 by baruch (log)

[snoop]

assuming u will miscontrue so as to would lead one to think $6 is a bargain

I don't think anyone said it was a bargain. The restaurant is entitled to a profit, it's just not as large as you might think. And I don't run a restaurant. I'm the cook making the potato. And I'm not going to do your math for you either. But I work in one of the most highly rated restaurants in the city believe me, we don't make as much as think. The owner of the cheap place with the shitty food down the sreet makes more than our owner. He makes money from outside ventures that he can put into the restaurant. P.S. your a little sensitive about restaurants for someone who doesn't work in them aren't you?

[Jonathan Day]

No more personal invective on this thread, please. Disagree with other posters all you want, but personal remarks about them are out of order here. Thanks.

[malachi]

As I warned... it's a sensitive issue.

[FoodZealot]

I know this thread is a bit cold, but I'm new around here, so I'm reading lots of threads for the first time.

I find this thread fascinating as my college training was in economics, I am currently a musician whose day job is working in the music industry, and I am a home cook who has done some small scale catering. I humbly offer my thoughts:

I do agree with the comments that there are many non pecuniary aspects to the food business, which are more in play than in other industries. i.e. there are strong motivators other than profit. These may include desire to make people happy, to create or extend a legacy, having pride in providing a service, belonging to the subculture of foodservice workers, and the romance of being a restaurant owner, the ego stroke of having people like your food, being the best at something, etc.

And, now that apparently it's possible to also become a celebrity by being a chef, people will be lining up like actors to an audition - oh, wait.... Fame/immortality is an powerful motivation. People subject themselved to incredible abuse for the miniscule chance at being known to millions, whether as a rock star, an American Idol, or the next Brad Pitt or Jennifer Anniston.

Plainly, not everyone has the right combination of ruthless ambition/looks/creativity/abilities/Q rating/sex appeal/self-esteem/tenacity/luck to get to adoration level. Almost everyone that thinks they can cook a good meal, also thinks that they can cook in a restaurant - the same way that a local karaoke star thinks they can be Whitney Houston. And admittedly, I'm closer to the karaoke singer than an unknown but skilled and experienced professional.

I'm just leading to the idea that between the common desire to open a restaurant and "all it takes is money" the result is lots of competition. Competition tends to drive profits down. There's an economic model called Perfect Competition, wherein there are low barriers to entry and exit, there is little differentiation, there are many, many suppliers (in this case, restaurants), and profits are economically zero. Not that no one is making any money, just that anyone who can make more money in some other endeavor leaves to do that. Of course there are complexities and exceptions, but I think it speaks to why profits tend to be low and also why restaurants open and close so quickly.

Among other things, economic success is possible through differentiation. Yes, a close eye on the numbers is key, but some inefficiency can be traded off for differentiating yourself from other competitors, on the basis of quality, service, price, uniqueness, location, etc. The more you can set yourself apart, the better the premium to be charged.

To paraphrase a movie, "this is not restaurant friends, this is (the) restaurant business."

Thanks.

~Tad