How do high-end restaurants make money?

[Felonius]

The recent closures of The Russian Tea Room and Cello mentioned on this board got me thinking on this topic. Several posters on the Cello thread have noted that the alleged $5 million investment in facilities made any chance of ever turning a profit at Cello impossible. I agree. I remember reading somewhere that Les Celebrites, where ADNY is now located, also spent something like $5 million for a similar number of seats (50-60). Of course they are no longer with us either.

I grew up in the hotel/restaurant business, and it never ceases to amaze me what high-end restaurants spend on renovations. I just can't understand how places such as Cello, ADNY, or Lespinasse could consistently turn a profit.

If one pulls out a pen and pencil and does a back of the envelope calculation factoring in the initial investment in facilities (several million $), food cost (at least 50% in most high end places), taxes and lease payments (a half decent retail space of similar size in Midtown rents for $80-100 thousand per month), plus utilitity and labor costs, how can any of these places make money given the limited volume of diners per day? The only way to get there is to increase the seating/volume/turnover to better cover the fixed costs, which in my opinion inevitably leads to consistency problems with the food if you're trying to pull off a truly world-class dining experience.

My father made his career managing high end resorts, and in most cases the restaurant on premises lost money or at best broke even, usually only with the help of substantial revenues from the bar. For example, over half the labor and other costs at a typical 4 star resort were attributed to the restaurant/kitchen, but 80 percent of the revenues came from the hotel rooms. Think about it, one minimum wage cleaning person can service many $400 hotel rooms in a day, but that table in the restaurant requires a small army of cooks, waitstaff, etc., not to mention the food costs and wastage of food that must be thrown out every day. From a profit contribution standpoint, the restaurant usually made no sense. Its only reason for existence was that guests at a top resort expected to have first rate dining on premises, especially if the resort was in a remote location with limited access to other restaurants.

I often wonder if places like Lespinasse, Jean-Georges and ADNY are only kept in business by subsidies from their hotel landlords. Perhaps these restaurants give extra cachet to the hotel and the option of high-end room service is viewed as a enough of a draw to justify a "loss-leader" equation for a top restaurant on premises.

I'd be curious to hear from other with more knowledge in this area. Also, what do you think top chefs are paid these days in NYC? Although other posters may have been surprised by the $250,000 salary for Cello's chef - I was surprised that this was considered exceptionally high. I seem to remember a chef at one of my father's businesses being paid about $100,000 back in the 1980's to run the restaurant at the resort. He was the highest paid member of the resort staff after the general manager, but that's what it took to bring in a highly competent French chef.

[Wilfrid]

Very interesting question. I remember an interview with the Waltucks a while back where they laid out the reasons a place like Chanterelle was only barely profitable. They said they opened Le Zinc so they could make some money and send their kids to college.

Wish I could remember where I read it.

[cabrales]

With respect to ADNY, I would imagine the Essex House gave Ducasse a fairly good deal on the lease to enhance the prestige of the hotel. Note I have no confirmed information on this. It's likely Ducasse has similarly favorable arrangements at his other hotel restaurants.

[jordyn]

I think I remember reading some time ago that Lespinasse lost a lot of money, but was subsidized by the St. Regis.

At top end places, wine probably goes a long way to explaining how they might make money. I'm not particularly serious about wine, but at most of the meals I've had at the very high end lately, my wine cost is significantly greater than the cost of food. People that order $1,000 or $10,000 bottles generate more revenue than a table (or even an entire restaurant!) worth of food orders.

[Edited to correct a grammatical error.]

[rich]

Three words: alcohol, alcohol, alcohol - almost as important as location, location, location.

[jaybee]

Felonius, read Leslie Brenner's book about Daniel Boulud's place. His prices apparently have enough margin to be profitable. He built a 380 cover per night restaurant so his gross would be large enough to make good money. He was told when he closed his first 64 seat four-star place that is was too small for him to make enough money to maintain it.

[Felonius]

Jaybee, thanks for the reference. I knew that Restaurant Daniel was big, but didn't realize it was that big! (does this include the bar area and special event dining rooms?) This gets to my point, that the only way to cover the hefty fixed costs in a high end restuarant is to increase volume to fairly large numbers. In my mind, anything beyond 120 seats or so is large for a truly high end establishment. I'd say the majority of life-altering meals I've had in my life have been in dining rooms with less than 70 seats and/or limited turns per night (i.e. two fixed seating times per night). Maybe that's one reason why I find the food at Cafe Boulud consistently more satisfying than at Daniel as I'm guessing it's 1/3 the size. Even Cafe Boulud's food can suffer on Friday and Saturday night when the kitchen comes under heavy fire.

The fact that Daniel Boulud can turn out the level of food he does on such a scale is a real testament to his genius as a managing chef. There aren't many in the world who could pull that off consistently.

[Bux]

Particularly in reference to Daniel and Cafe Boulud, there are some questions here that members might want to ask of Leslie Brenner (author of The Fourth Star: Dispatches From Inside Daniel Boulud's Celebrated New York Restaurant) while she's still answering questions about the book and the restaurant. The eGullet Q&A session was supposed to end today, but as last minute questions are getting interesting, Leslie's agreed to stay on for a few days and maybe this thread should continue there for a behind the scenes opinion.

I think I posted elsewhere (maybe the Cello thread) that Daniel doesn't have 380 seats. I don't think there are 380 chairs including the bar and the room for private parties. 380 covers would represent turning tables at least once and maybe more often in a night. Offhand I don't remember the numbers. Maybe Leslie might.

I've personally experienced an event in the main dining room where some 130 people were served perfect scallop, risotto and rare lamb dishes and the meal was cooked while Daniel and the sous chefs were in the dining room eating as were many of the captains. The managment and discipline are superb. Still, a multitude of different orders over the course of a long night with tables turned once and maybe twice is going to put a strain on any facility. I think it would be naive to think otherwise. The question might not be whether Daniel Boulud could turn out better food in a restaurant half the size, but whehter another chef with a restaurant half that size is doing that. Then you'd have to ask if he's making a profit. No restaurant is going to serve great food for long without being able to serve it profitably.

It's interesting that Daniel took the restaurant that was too small to turn a profit and turned it one he thought could. He added a few more tables in the new layout for Cafe Boulud but also had the expense of a gut renovation. The food and service are a bit less formal however. I would never say I've found the food better ar Cafe Bouud, but I might say I've found it more satisfying at least from time to time.

[Billy D]

It is true that it is far more difficult and expensive and thus more risky to operate a fine dining restaurant vs. a quick serve or casual restaurant. As well, the % return might be less; a typical quick serve concept nets approx 20% a casual dining concept more like 12% and many fine dining concept as little as 6%. But at the same time, a great quick serve concept might gross $3M per year for a net of $600k where a high end fine dining concept might gross $15M for a net of $900k. At the end of the year I would rather put $900k in the bank, wouldn't you? Although there are much higher operating/pre-opening costs involved if you are going to compare two successful restraints of different concepts I would prefer to serve fewer people and make more money. A very successful NY restaurateur once told me that he would rather serve 10 people at $1000 per head than 1000 people at $10 per head; me too.

[jordyn]

Billy D: It seems clear to me that (possibly with rare exceptions), fine dining restauranteurs are not in it for the money. You're probably correct that a successful high end restaurant produces more total profit than a mass market place, but the investment is so much higher that the ROI on the cheap restaurant is almost certainly many times higher than it is for the expensive one. As far as business propositions go, ROI is generally a more important consideration than the actual magnitude of the profit.

[Billy D]

"It seems clear to me that (possibly with rare exceptions), fine dining restauranteurs are not in it for the money."

Jordyn -

Then why?

People like Drew N., Danny M., Phil S., Bob G., etc. are not spining thier wheels for nothing.

[jordyn]

Billy: I don't mean to suggest that they're not interested in making money, and the specific people you mention are good enough at their jobs that they may be able to make more money doing what they do than anything else.

As a general rule, though, a person with $5 million could probably make a lot more money spending it on something other than a fancy restaurant. They may want to make some sort of return, but making money is probably less of a motivation than an interest in owning a restaurant as a goal in and of itself. That's just a guess of mine, although it echoes some thoughts of Anthony Bourdain's in Kitchen Confidential.

[rich]

Maybe high-end restaurants aren't supposed to make money. The just exist to make sure we don't either.

[Rail Paul]

Billy:  I don't mean to suggest that they're not interested in making money, and the specific people you mention are good enough at their jobs that they may be able to make more money doing what they do than anything else.

As a general rule, though, a person with $5 million could probably make a lot more money spending it on something other than a fancy restaurant.  They may want to make some sort of return, but making money is probably less of a motivation than an interest in owning a restaurant as a goal in and of itself.  That's just a guess of mine, although it echoes some thoughts of Anthony Bourdain's in Kitchen Confidential.

The structure of the deal will also have some bearing on how a restaurant is financed. Investors will be drummed up, financial plans will be drafted, buzz artists engaged, etc.

I'd suspect that many NYC chef-owners are relatively modest owners overall, with the majority of the equity contribution coming from outside investors. The outside investors get some writeoffs, get some prestige, and have an outside chance of making some money. Sorta like a Broadway show, where you always get great seats to distribute to your friends...

[Andy Lynes]

I really don't buy this at all. The bottom line is that it's really bloody expensive to eat in somewhere like ADNY, Alain Ducasse is a rich man, other people involved in his restaurants are making money I am sure. Over heads, capital costs etc etc don't really impact on the ability of some people to make money from the operation. If it all goes tit's up at some point, then yes, some people are going to be left with egg on their faces, but until then, it's a gravy train (oh my god, how many more metaphors can I mix in this post).

[leviathan]

Along with the alcohol and subsidized rents, I'd also point out that sometimes, that these high end restaurants real value is the prestige and name and the brand which you can then spin off to more profitable ventures aimed at more mass market audience. In fashion, the haute coture lines don't make any profit from selling its line of dresses, even if the dresses cost a small fortune. Instead, the real money comes in from licensing the brand of the haute couture into products such as perfume. Most people can't afford a haute couture dress but they can afford to buy some perfume. I think you're increasingly seeing this phenomenon in high end cuisine, probably started by Wolfgang Puck. You've got a number of highly regarded chefs who are then spinning off restaurants and chains off their high acclaimed, prestigious restaurants- Jean George V., Tom Collichio, etc... For most people, they're not willing to spend the money to dine at Craft or Jean George. But, then they hear Tom C. has opened up some stores that are selling sandwiches, and they'll try those out sandwiches because those are more in their price range.

[Nathan]

well, yeah, that's true across many industries...not just fashion (where virtually anything besides clothing is licensed entirely out....and sometimes even clothing -- Donna Karan hasn't had anything to do with DKNY in years...but she made far more money selling that than she did off of any of her "real" lines....heck, Giorgio Armani probably makes more off his licensed Armani Exchange crap than any of his "real" lines).

but even when you keep it in-house, using your premium brand as a "loss leader" is common practice. for example, take photography. the professional DSLR market is almost exclusively cornered by Canon and Nikon (there are a couple more lens players...). its not clear that either of those companies make money at all (after R&D costs) on their top of the line DSLRs...but both those companies make plenty off of their consumer DSLRs (even those sell in the $500-$1500 range...compared to 8K for the Canon IDsMkII) (of course they make plenty of money off of pros on lenses..but that's a separate subject).

[oakapple]

For the long-running ones, I'm sure they do. Eric Ripert has no other restaurants in New York besides Le Bernardin. If he's not making money there, where would he?

Unlike Ripert, Jean-Georges Vongerichten and Daniel Boulud do have other restaurants besides their high-end flagships. But their price point is more-or-less comparable to Le Bernardin's. So if Le Bernardin makes money (as it must surely do, after 20 years in business), JG and Daniel probably do too.

There are many other examples. La Grenouille operates at the same price point as the four-star restaurants, and has done so since 1962. I don't think the owners of La Grenouille are using it as a loss leader for something else.

[Sneakeater]

You never know. Wasn't Rice to Riches accused last year of being a front for a gambling operation? Who knows what goes on the back rooms of Le Grenouille?

[jackal10]

None of the above replies mention the increase in the property price.

Most restaurants are, for the investors, disguised property speculation, with the restaurant keeping the place warm and increasing the reputation of the neighborhood. Thus expensive restorations make sense.

One place I know was let on what appeared to be an astronomical rate. It turned out that the mother company also owned the building so it was, effectively paying itself and taking our the profit from the restaurant tax free. Further, since it owned other nearby properties it set a precedent for their future rate reviews.

How places not on a long lease or freehold manage I don't know.

[CFO999]

Gentlemen,

All of the above named establishment are making their fare share of profitabilty.

Some better than others......if you call 7% a return

[larousse]

Felonius, read Leslie Brenner's book about Daniel Boulud's place.  His prices apparently have enough margin to be profitable. He built a 380 cover per night restaurant so his gross would be large enough to make good money.  He was told when he closed his first 64 seat four-star place that is was too small for him to make enough money to maintain it.

←

True but he also had an exceptionally low lease price at the 76th street location which he kept and continued to run a restaurant there with little rennovation (Cafe Boulud). Cafe is more profitable than Daniel is and its smaller and the food cost is no where near 50 percent. In fact I would say that the other restaurants he owns ALLOWS him the ability to have a restaurant like DANIEL.

[larousse]

Oh ya, Le Bernadin has a lot of microwaves in the kitchen. Maybe they save money on gas?

[Spike L]

Where are you getting the figure for food cost accounting for 50% of dish price? If we're talking really high end restaurants, remember that these places have wholesale arrangements with restaurant distributors, who can generally offer extremely high quality at prices probably in the same bracket as a supermarket. I've talked to people working in much lower-end restaurants (with lower end prices) and their food cost sometimes only just scrapes 10% of a dish; when you scale everything up I find it hard to believe that high end restaurants would let it go up to 50%, they'd simply raise the prices instead!

Secondly, as mentioned above - drinks. When you consider the price of a bottle of water at a high end restaurant, let alone alcohol... the markup on that is incredible. While many of us here may excercise restraint when ordering drinks due to the price, remember that high-end restaurants often have people with more money than sense who are more than happy to pay over the odds for the priveledge of drinking a wine that doesn't cost all that much per bottle at said restaurants. Add this to the fact that almost no-one will go for a meal without some sort of liquid, and you already have recouped a fair amount of per-cover cost from the second any drink is ordered

Thirdly, prestige - I don't know what the situation in NY is, but over here in London you can pretty much be guaranteed that if a restaurant is "rated" and/or a celebrity haunt, you won't be getting a reservation any time this month, or, for that matter, for a few months. Multiply that by the fact that most places run an early and a late cover, plus the fact that they often have an ajoining bar, and you have full house guaranteed until the restaurant falls out of favour. And that's just dinner. Lunch is also a moneyspinner, as many places run a lunch menu (often offering "cheaper" dishes, which would also reflect less ingredient cost) which will again pack the place out every day, again possibly for two sets of covers. Finally, some places run continuously from lunch through to dinner just to get additional covers throughout the day, which when you look at it all adds up to a staggering amount of money

So... honestly, I think that high end restaurants, if anything, are more likely to be making a lot of money, even more so than middle to lower end establishments. At the end of the day restaurants are businesses, so if they collapse then some really crappy management is going on. No-one really invests millions into something without expecting a return unless they're crazy or bizarrely altruistic

[townsend]

Spike,

The factors involved include food cost but also have to include labor cost and waste. Wholesalers are in business to make money as well, remember. The COG (cost of goods) can approach 40-45% when purchasing some items, most noteably prime beef cuts. Even if the chef portions the meat, it does not necessarily mean a great savings. Fish has its issues. To save cost, fish is often portioned by the restaurant. You have to add labor (skilled, at that, or yeild declines and any savings turns into further cost), and two to three days later, waste. Pristine, unique, line-caught fish is another matter. Not only are you paying the fisherman for line-caught, but better handling, and immediate delivery to market. Then you are paying for immediate delivery to the restaurant. Fedex is in business to make money, and you can pay today and get more shelf life out of your purchase, or buy through standard distribution channels and suffer the ill-handling and shortened shelf life. The guest is not going to pay a fine-dining restaurant a premium for farm-raised salmon the mom-and-pop shop is selling at half the price because of the china pattern! No, they would expect the chef is sourcing the very best in the world, and paying to have it delivered TODAY! Produce is something everyone sees in the street stalls and the supermarket. Many of those same products, in the cardboard case the street vendor is selling them from, go to the finest restaurants. But someone has to deliver them. Daily. Without excuses. Before 8:00 AM. And if it's not quality it goes back and an acceptable unit gets delivered. Before 10:00 AM. Without excuses. Unfortunately for the restaurant owner, the produce wholesaler is also trying to make money. What about the small farmer? Wakes up 7 days a week, farms for 14 hours, then trys to find someone to deliver specialty products to market (or to individual restaurants), or does it him/herself. Quality is outstanding, just as you would expect at a fine-dining restaurant. But it costs money. (Most small farmers aren't known for their extravagant lifestyles, either) In the US, try buying French goods, or Spanish hams, or Italian olive oils and not feel the weakness of the dollar abroad. Prices are indeed scaled up, but it's not on an equal percentage basis. General rule of thumb for restaurants; 30% for food (if you can swing it...), 30% for labor, 10% rent, and add debt service, accounting and book keeping, advertising, and a myriad of miscellaneous taxes and expenses. As far as management, you must watch everything if you want to turn or maximize profit, just like other businesses. But the stakes are higher with fine-dining restaurants. If your review is bad, or you fall out of favor with the glitteratti, you are left holding the papar on the debt. Or with a huge lease. Yes, some don't have to pay rent in high profile locations, but instead trade on the cachet they deliver to another business. But if they can't stay in business, the chef/owner will certainly not be getting another sweetheart deal anytime soon. Liquor is the profit center of restaurants, a similar cost (if they have a high wine sales percentage) to food, but labor is low. The one advantage is that people may buy a four hundred bottle of wine, but there is a ceiling to the amount of money one can charge per person for food. The amount of time it takes to recoup an investment far outstrips the opening buzz, or flash-in-the-pan restaurants. For the person who owns the property, appreciation of the property may be the only 'profit' they ever see. Lastly, most in the restaurant business think of crazy and altruistic as givens when discussing why anyone would risk millions in an industry where the success rate is so low....