The Fragility of the Restaurant Business
Much has been written about how COVID-19 is about to kill restaurants by the thousands. It has put all restaurants through a pressure test. When it’s over, your favourite eatery may not be around. The Heart of Orléans BIA has a number of small restaurateurs who own independently owned and operated establishments. Not all fit into the same business model. Some are dining, while many are take-out. All face a similar challenge moving forward but it is important to understand the business fragility.
To understand how restaurants got to such a fragile point, a little background is in order.
Over the last 15-20 years, margins in the restaurant industry have diminished substantially. To compare, according to Forbes and the NYU Stern School of Business, margins for professional services range from 15%-25%, restaurants are 3–9%. These margins leave restaurants with no reserve capacity. When a crisis hits, such as this one, many will be challenged to come out of the other end.
How did the margins and profitability get to this point? The industry in Canada began competing on price. Net margins used to be double and triple what they are today. For the last 20 years with the influx of conglomerate owned chain restaurants and the industry’s rapid expansion, it responded by increasing gross revenues with price wars. The chains led those price wars and have skewed our perception of what food should actually cost. Now the consumer does not know what they should be paying for food if they continue to expect someone to buy, prepare, cook and serve the food and then clean up after them in a heated and air conditioned restaurant. The consumer needs to know how restaurant margins work so they can determine the value proposition of the service they are paying for.
The net profit margin is what’s left of sales revenue after subtracting all operating expenses. This includes the cost of goods, labour, and all the overhead needed to provide the service. There are a lot of costs that you might not consider when you sit down and have that meal.
If we looked at the expenses incurred based on a $100.00 sample sale would read like this.
Cost of Goods Sold
Food Expense, Food Waste, Beer Expense, Wine Expense, Liquor Expense, Linens & Uniforms, Cleaning Supplies, Paper Supplies, Smallwares, Menus, POS System and all waste.
This totals 36.9% of the $100.00 or $36.90
Payroll Expenses
Wages, EI, CPP, WSIB, EHT
This totals 40.8% of the $100.00 or $40.80
General & Administrative Expenses (amount is for every $100.00/sales)
Licenses ($0.04), Accounting/Legal ($0.82), Professional Fees ($0.50) Advertising ($0.64), Business Fees ($0.10), Postage ($0.03), Credit Card Charges ($2.18), Insurance ($0.84), Bank Charges ($0.36), Office ($0.23), Rent ($8.00), Maintenance ($1.64), Telephone ($0.46), Travel ($0.02), Internet ($0.04), Utilities ($2.35).
Also included: window washing ($50.00/month), linens ($147/month), the dishwasher service contract ($150/ month), grease trap cleaning ($85/ month), hood cleaning service and fire system maintenance ($75.00/month), alarm ($50/ month). All these things have to be paid for in order for you to come into the restaurant and sit down to enjoy a meal.
This totals 18.25% of the $100.00 or $18.25.
The total for the $100 in sales is $95.95. This results in under a 5% net profit.
The restaurant operator tries to lower all costs. Restaurateurs can’t lower the quality of food they buy, stop repairs or cancel their insurance. Wage increases in Ontario brought the entire pay scale up resulting in about a 15% increase in labour cost for the business. Menu pricing changed minimally to cover this increase in costs. Owners deal with the excess labour by working longer hours so they don’t have to pay staff.
The restaurant’s successful future is going to have to be the consumer paying for what they want. To compare, if we paid $112.00 for the same product, the net profit would be closer to 15% of sales and allow the business some form of reserve capacity. We may even have to make it greater as this crisis is identifying the real value of these hard working people in the restaurant industry.
What does this mean to the consumer? Beer would be $8.50 instead of $7.50; pizza would be $19.00 instead of $17.00. It’s not a huge price to pay for your favourite pastime and service.
Hopefully we learn something as we come out of the COVID-19 pandemic. Hopefully we learn the value of things we eat and the value of our friends and business neighbours.