Thursday, August 14, 2008

Running It Profitably

With a slowing economy, the restaurant business is facing additional pressures these days. Even in good economic times, the challenge of running a restaurant in the black can be daunting. I recall reading a San Francisco Chronicle article from a few years ago, which reported:

. . . if you consider the grim realities of running a restaurant, you may run screaming for the exit. Food prices are volatile. Profit margins are razor thin. Restaurants are among the most labor-intensive of businesses.

A quarter of all new restaurants in the United States flop in the first year, according to a study by Cornell University and Michigan State. That rises to 50 percent after three years, and 70 percent after 10 years.

. . . Of every dollar a full-service restaurant brings in, it spends roughly a third on food and alcohol; another third on salaries, wages and benefits; up to 10 cents on rent; and up to 20 cents on other costs such as marketing, according to studies by restaurant associations. That leaves about 4 cents of pretax profit.
Why do restaurants mark up alcoholic beverages so much? Because, as Willie Sutton might have said, that's where the profit is. As the S.F. Chronicle article noted:

As with all restaurants, alcohol is far more profitable than food. "We pay $25 for a bottle of booze and sell it for $100," [one restauranteur] said. (Beer and wine have slightly lower markups.) "Many people who start out in the restaurant business end up owning bars or in real estate."

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