Friday, September 07, 2007

Marginal Profits

Let's all agree on some basic tenets:

1. Capitalism is the primary socioeconimic system of the United States of America.

2. In capitalism, the means of production are held by private individuals either individually or collectively in corporations.

3. These means of production are operated for a profit and those profits are based upon how that means of production (business) functions within the greater market economy around it.

4. Most restaurants are businesses, not charities or state-run food banks.

Do we agree? Yes? Good.

Moving on.

People don't like to feel ripped off. This is understandable. However, if the douche-baggery that occurs on Yelp! is any indication, most people (or at least most people who post on restaurant review websites) don't have much of a sense of how restaurants operate financially and what you're really paying for when you go out to eat. The most common complaint (after "the service was bad") is "the food was overpriced."

Let me explain.

First, a restaurant's expenses and how they affect prices:

1. Food Cost. This is what it sounds like. How much does the food that is served cost the restaurant. Included in this is how much food is wasted. For instance, any restaurant of any calibre and esteem doesn't keep ingredients for very long. Food has to be staffed and/or thrown away after a certain number of days. Another factor: sure a whole salmon might cost X dollars per pound, but how much usable meat comes from a whole salmon and how does that effect the real cost? Just like the Indians were purported to do, restaurants do what they can to use every part of the ingredients that they are sourcing.

Often a restaurant has little flexibility on food cost. In the hyper-competitive California Cuisine world, ingredient source and quality is all. As a result, the top farms have more business and there is more competition--and with the rise in the popularity and availability of farmers' markets, that competition comes from the end consumer as well, not just other restaurants--therefore they're able to raise their prices. And as their prices go up, so do the prices at other farms. Additionally, restaurants with massive purchasing power like the French Laundry and Chez Panisse can push their resources around and snap up the top product when they want or need it because they can pay virtually any price. Think of these places like oil-rich Arab sheikhs. For instance, a couple months ago no other restaurant in the Bay Area could get any fresh organic black-eyed peas because Chez Panisse had bought up everything available for that week.

Food cost at a Bay Area fine-dining restaurant makes up anywhere from 5%-50% of the menu price. Restaurants try to make their food cost average out at about 20-25%. If a menu item gets close to 50% food cost then most restaurants, depending on their overhead, are actually taking a loss on the sale of that item.

2. Labor. It takes a lot of people to run a restaurant.

Let's look at a basic Friday night dinner for a medium sized (120 seat) restaurant. This is an eight-hour shift (3-11PM) for most kitchen staffs. This is a bit shorter for the front-of-house staff, but not by much. You have one chef. He's making anywhere from $3K-$10K a month. Let's throw him in the equation at $40/hour. And then at least one sous-chef at $22/hour. You'll have one "advanced" line cook or supervisor level line cook at $15/hour. And then throw in two line cooks making $10/hour. Can't forget the dishwasher making $8/hour. So you have a total kitchen wage of $105/hour. That's a skeleton crew for a busy Friday night. And that's on the lower-end of average for wages.

Other staff. You have six waiters/bartenders, two bussers, a barback, and a food runner all making around $7 hour. You probably have your GM making the equivalent of $25/hour and then a host/floor manager/wine director making $15/hour. So there's another $110/hour in wages for your front-of-house.

Total payroll, $215/hour. Total payroll for an eight-hour night: $1720 (give or take a couple hundred). Divide that by 250 covers (about what a restaurant of this size will do on its busiest Friday) and roughly $6-$7 of each diner's meal goes toward paying the staff.

Yikes. No wonder restaurants push wine and cocktails so heavily.

And remember, this is basic bare-bones staffing for a busy fine-dining restaurant.

3. Non-labor overhead. Here's the catch-all for everything else related to restaurant operations. First there's rent, which varies heavily from location to location. Running a restaurant in Nob Hill is a helluva lot more expensive then running one in Antioch. Some (very few) restaurants own their own space. Others have cut sweetheart deals with their landlords because the property owners want a restaurant in the space or the landlord gets a share of the profits in exchange for a break on the rent. Regardless, all restaurants are paying a rent or mortgage of some kind.

And then you have utilities. Restaurants use a lot of energy. Most of a restaurant's operations involve either cooling or heating things, whether that's food, wine, coffee, or surly customers who are inevitably too hot or too cold. A commercial kitchen has some serious energy-using equipment running, in many cases, 24 hours a day.

Don't forget cleaning! Those designer banquette cushions don't clean flabby Berkeley ass germs off themselves. Most cleaning in restaurants is sub-contracted to linen companies, kitchen equipment cleaners, and janitorial contractors. $$$.

What else.... Oh yeah, breaking shit. Restaurants break shit all the time. Most of the time that shit is just a wine glass or two. Doesn't sound like much, but breaking $20-$30 in glassware a night adds up fast. Silverware also disappears into trash cans, dishwashers, and customers' pockets. Sometimes the shit that's broken gets bigger. An entire rack of glasses gets dropped. A couple decanters crack. A $200 Burgundy shatters. Or--look out--something in the kitchen breaks.

And then there's promotion, advertising, accounting, management, insurance, outreach, property depreciation, inventory control....

Unfortunately I don't have hard numbers for any of this stuff so there goes my chance of this article being published in The Economist.

But, this is starting to sound like a business no?

Jeremiah Tower's SF restaurant Stars, with famously high prices, also had famously insane overhead, and even $40 steaks couldn't keep it open. What's in its place now? Trader Vic's, a "fun" restaurant with godawful starch-heavy food and wicked expensive syrupy sweet drinks.

4. Profit. Not much left to go back to the owners at this point. Especially after the owners pay off their investors and the Mob. Presumably the owners are reinvesting a significant portion of their profits back into the restaurant for capital improvement and expansion, so how much money do the owners take home each year?

In most cases, nothing. Hopefully the restaurant makes enough to pay the owners a modest salary and then the rest of the profits pay off investors and fix the toilets.

To quote En Vogue: and now it's time for the breakdown:

In a typical restaurant with $25 entrees, $10 appetizers, $5-$7 desserts, and a full bar, the per-head sales average on a busy Friday will hover somewhere around $45, especially in Berkeley where it seems people are much more shy about purchasing drinks or multiple courses of food than in San Francisco. So how does that shake out?

Food cost: $10
Labor: $7
Non-labor overhead: $20 (this is merely an educated guess)
Profit (before dividends and reinvestment): $8

That's a profit margin hovering at 15-20%. Most comparable small retailers (clothing boutiques, antique stores, resale shops, skin and body care products) operate at a close to 50% profit margin. Bars operate at a 70+% profit margin.

Combine those limited profits with significant startup costs and it takes a goddamn long freakin' time before it starts making money. And as with any business model with marginal profits, you need to replicate replicate replicate before you can start seeing significant dollah dollah billz y'all.

So what do restaurants do to maximize profits? In many cases food becomes the loss-leader for wine, cocktails, and the experience. Restaurants depend on beverage sales (even coffee), where the profit margins are much much higher to make up for the losses in food cost and overhead. Restaurants try to operate with the minimum staff possible, which on inordinately busy nights can result in overtaxed waiters and a slower kitchen--though the limitation for a kitchen's speed is usually just as much about space as it is about personnel (you can only fit so many potatoes in the fryer and steaks on the grill).

Why are some restaurants cheaper than others? Often it comes down to ingredient quality and quantity. Frozen beef is perfectly fine (and cheap) for a sauce and rice-heavy stir fry, but it won't do for someone wanting a quality steak. Frozen pre-processed vegetables and canned soup stocks might work for certain places and certain times, but not for California fine-dining right now. Rice, pasta, beans, tortillas, bread, etc add low-cost bulk to dinners and can deceive diners into satiety. Some restaurants save money on payroll--if it's a family-owned operation everyone can share profits (and be exempt from many costly labor laws) without having to have a real payroll. These savings on overhead can also be procured by running your business from a taco truck instead of a pricey downtown storefront. Other restaurants might simply be operating as a no-profit front for illegal imports, drug dealing, and human trafficking.

So what does this all mean? It means that a restaurant is a business out there to provide goods and services in exchange for money. It also means that you're probably more likely to get "ripped off" (in terms of percentage of income going to the ownership) at a mediocre Indian chaat house than you are at an expensive restaurant. Especially when you factor in the profits the owners make off their sex slaves.

In conclusion.

If you don't want to participate in the dining-for-profit system, that's fine. But don't bitch about it. You're probably wrong. If every restaurant that people on Yelp! bitched about being "overpriced" was in fact overpriced, none of those restaurants would still be open because nobody would go to them, you flaming retards. Think about it just for a moment. Restaurants aren't a cartel and there are plenty of quality dining options across the price spectrum that are available. If people really thought they were being gouged by a restaurant, they wouldn't go there after a while. It happens all the time.

So keep being smugly happy with your contempt for nice things and keep enjoying your taco truck dinners.

And your diarrhea.


Zack said...

(1) Your blog is kind of awkward accessed through the mobile version of Google Reader, I think because of the left side nav bar.

(2) While the antipopulist Yelp-hate still rubs me the wrong way, I appreciate the breakdown of cruel restaurant realities.

(3) Bitching about shit in a way that depresses demand is fair game in the free market. The problem is that the difference between fresh and frozen produce is not as clear cut as the difference between a fat wallet and a slim one.

David J.D. said...
This comment has been removed by the author.
David J.D. said...

1. Working on it. Slowly.

2. Glad you do. I only hate Yelp! because it sucks. If it didn't suck I wouldn't hate it. See what you can do.=^)

3. Agreed. And restaurants that fuck up close all the time. I'm a firm believer that any business run correctly with a good product will succeed. If you're going to bitch about something that depresses demand, make sure you know what it is you're bitching about, instead of just a visceral "it's overpriced." Maybe they restaurant's just selling a too expensive product instead of maliciously gouging customers. Maybe.

Zack said...

Don't criticize user generated content sites on your blog. That's just what old media wants. Web 2.0 solidarity! Everything on wikipedia is right, every 1 star review on Yelp is deserved. LOLcat for president (mah bucket for veep).

I'm a firm believer that any business run correctly with a good product will succeed.
Assuming some luck, of course.

Maybe they restaurant's just selling a too expensive product instead of maliciously gouging customers. Maybe.
Does it really matter? The character of the owner is not on trial; the prices are.

Also: a "too expensive" product is not a good one.

LOLcat/mahbucket '08