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May 21, 2009 05:51 AM

food costing/profit margins: are there a-few-fit-all general formulas?

So a friend and I were trying to figure out in lay terms how much restaurants make on dishes. Obviously there are kinds of variables, but are there general formulas?

Taking fast-food joints/chains off the table, let's posit an indie establishment with about 168 seats and a full bar, with prices at what I'd consider the mid-range—entrees in the mid-$20s.

Let's say one of those entrees is (I'm quoting from an actual menu here, but I could quote anything that fits the parameters) "crispy pressed duck wrapped with grilled prosciutto and stuffed with dried apricots, with port sauce and watercress salad" for $27.

Is there any ballpark way of estimating how much they'd make off that dish?

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  1. There is a product mix and it isn't an across the board formula. Not all items cost the same and some dishes you're going to make will cost more than on others. Some items are going to be loss leaders. In a restaurant like you're describing the average food cost is going to be around 40%. Liquor costs usually average around 30% and good volume in that area can be the difference between making a profit or not. There are other costs that are factored in like labor costs, fixed costs, variable costs, taxes, etc...

    Bottom line is a restaurant is considered successful if after all costs they can net a 10% profit.

    18 Replies
    1. re: monku

      Others costs include building rent/mortgage/utilities, staff wages, taxes, insurance, etc., etc., etc. It costs a TON to run a business and often customers don't see that.

      1. re: monku

        Hey, thanks! That's along the lines of what I remembered in the back of my head—although I'd have guessed even 10% was high.

        1. re: tatamagouche

          10% is successful. The average person would think that's pretty measly, but most restaurants will never hit that mark. The restaurant business is a recipe for financial disaster.

          The general public thinks they must be making a ton of money off that $27 duck entree. They also think they're getting ripped off when the $10 bottle of wine they buy at the store is priced at $30 on the restaurant wine list.

          1. re: monku

            Exactly. I manage a (non-restaurant) small business and customers think we are rolling in the dough when the reality is it's expensive to run a business.

            1. re: monku

              According to the National Restaurant Association the average profit margin is 4% - 6%.

              1. re: KTinNYC

                That's the average. 10% is to be successful.

                1. re: monku

                  Absolutely. There was an article in the NY Times about Daniel Boulud and his new restaurant and they tell of how a full forensic accounting is done when gross margins fall below 10%

                  "Alarms ring whenever gross margins drop below 10 percent. The chefs in each restaurant, all of whom Mr. Boulud has trained, have wide latitude when it comes to spending on ingredients, but if margins sag, forensic accounting will ensue."


                  1. re: KTinNYC

                    These are gross margins at that. A good rule of thumb is for every dollar spent on food, you need to make 5, so a free amuse, or half price happy hours etc.. need to be covered. When I got into the biz my dream was to own my own place. Now that I have spent some years as management, reading the monthly p + l reports I aspire to be a corporate chef or regional manager (or the real pipe dream is get in on the ground floor of a restaurant that wants to be a chain). Or the real trick is to be the "managing partner" i.e. the owner within a group of owners who takes direct responsibility, but gets a mangement fee (one of the restaurants I worked for in NYC was owned by a group of investors who owned 9 restaurants, the managing partner received a management fee of about $4000 a month per location. He wasn't even the largest investor but had the expertise needed to oversee everything.

              2. re: monku

                "The restaurant business is a recipe for financial disaster. "

                I disagree. There are millions of successful restaurants around the world. Someone must do it right. I am not saying its not a tough business... it is particularly when it involves people that don't have the financial ability to run it as a business... but in general it can be relatively lucrative.

                There are a number of studies out there on the Restaurant Biz you can buy for a couple of hundred bucks. A typical arms length investor in a mid level restaurant can expect to invest $200k of their own money & secure another $600k in Working Capital & CAPEX loans... achieve sales of about $1MM a year with a Net Operating Profit somewhere in the $50 to 100k range (depending on how well managed & the total payroll).

                So you can see that at 25 to 50% Return On Investment... the Restaurant business is one of the most lucrative things out there... particularly if you know what you are doing.

                Even investors who just own Franchises... usually take in 10 to 20% Returns on Investment. And that is not even considering all the fringe benefits like being able expense a vehicle, trips, meals, skimming the food & liquor inventory that everybody does etc., etc.,

                Try to consistently beat that in your 401k.

                1. re: Eat_Nopal

                  These days no one is going to lend that kind of money on a restaurant.
                  Anyone can show me numbers and projections and make sense. The bottom line is you have to keep those tables filled to make those numbers work. .

                  Even big name players like Gordon Ramsay are having their problems now.

                  1. re: monku

                    Of course... there has recently been a credit crunch. But its not as bad as it many make it out to seem. I am looking at an investment opportunity right now... and my potential partner just got a non-restaurant business running with the SBA financing 75% of Equipment, 50% of Leasehold Improvements, and $50k of working capital.

                    He started talking to them about a restaurant opportunity... they are so flushed with capital thanks to the Stimulus package that they are actually actively seeking business plans.

                    At a different level I just finished negotiating a $30MM loan package with a couple of the world's largest banks (no TARP money)... for our business which is in an industry that suppossedly no one wants to bank... yeah our pricing went up 150 basis points across the board... but we had several Banks competing to be part of the sindication.

                    Things are not as bad as everyone thinks... and they will get back to normal.

                    1. re: Eat_Nopal

                      My favorite analogy to the restaurant business is home birth. The vast majority of people in the U.S. shudder at the thought of a non-hospital birth. They have images of complications & infant mortality etc., Complete brainwashing... there more than 6 billion people on the planet... and I believe that an estimated 110 billion people have walked the earth throughout the history of our species... the vast majority born & successfully reproduced without modern medicine or conveniences.... it can't be that hard people.

                      Same thing with restaurants... there are millions & millions of successful restaurants all over the world... it can't be that hard people... its not putting people on Mars.

                      1. re: Eat_Nopal

                        Throw some of your investment money into restaurants and you'll find out how hard it is to make a buck.

                        1. re: monku

                          Its a tough business because its easy at the same time. The investment is low & many have the skills & drive to do it... what Ivy League MBAs might call Low Barriers to Entry.

                          There wouldn't be Millions of successfully operating restaurants in the world and if it were impossible to make a buck. Location, Product, Cash Flow, Prime Costs is what it comes down to it.... a failry straightforward formula. The problem is that so many 1st timers compromise / screw up on Location, Cash Flow & Prime Costs and only focus on Product.

                    2. re: monku

                      banks have wanted 3/1 assets/loan ratio for restaurant loans for years now-- want to borrow $100k, better have $300k of assets down. result= financial folk who have no clue about the restaurant business opening restaurants, and either going under in a few years or putting all the smaller indie places in their area under. but restaurant people can't go out on their own and open up a new place because they don't have the kind of assets and ready cash required. it's the independents that get hammered by the chains and the big-buck investor-restaurants, too.

                      1. re: soupkitten

                        I would happily work on a contingency to negotiate better terms than that for any restaurateur that wants to hire me.

                        1. re: Eat_Nopal

                          are you offering EN? that's really nice of you, if you are, but relocation/expansion was something we were looking at over the last 3 years and now unfortunately we're just trying to get our head up to where we were at this time last year. to be painfully honest, i'm not prepared to do *anything* until we can rehire the people we had to let go in february, or make sure they are okay :(

                          1. re: soupkitten

                            Sure... here is how it works... if I fail to negotiate agreed upon terms... you pay nothing (unless travel is required than I would like expenses covered) if I get you the desired terms... its $200 / hr + expenses (covers a business plan, RFP, conference calls, meetings etc.,).

            2. In a perfect world we expect food cost to average out around 30 gross maybe 34 net (waste, half price for employees, pre meal sampling etc. plus certain places have ketchup, mustard, sea salt on every table, fryer oil) Liquor should be around 22% and labor around 25%. So your prime costs are around 70% plus 10 to 25% for rent, insurance,linens, glassware, tp, heat, phone line. Hopefully you make about 10% (a good year would be 12% bonusus all around) so $2.75 on the duck when everything avergaes out.

              7 Replies
              1. re: uwebres

                Your right the perfect world also means the place is full a majority of the time to hit it on all cylinders.

                1. re: monku

                  I have worked in huge NYC places (4 mil in sales a year) and tiny one cook and a dishwasher spots. The prime costs (food, liquor and labor) are what makes or breaks you. Comp one drink, and while the beer for example only cost you $1.50 but not getting 8 bucks for it means you have to make it up somewhere else. Send out an app to a regular and you may gain something in loyalty, but that is $12 you have to make back. So if it is important to do a gross vs net cost analysis. One keg costs between $90 and 140. But samples and foam pour off and comps, plus a bartender sending 5 drinks over the bar and only charging for 4 etc... means you have to charge like you only get 70 servings per keg. The cost has to pay for the lemons for wheat beers, limes for corona etc.. and cover labor and overhead. The restaurant business gets buy on razor thin margins usually. Sadly the places that do best financially are cheesy club/bars that bang out $5 bottled beers and $10 well drinks with red bull to 20 somethings all night but get them for 70 centsa beer and $8 a bottle of vodka. based on volume

                  1. re: uwebres

                    Been there-
                    GM for some corporate restaurants in LA grossing $3-$5mil a year (this was 25 years ago). Got the weekly computer runs and had to answer to the owners. I priced menus and set up bars with them. Bartenders knew not to ask me if they could give a comp drink and if they were caught giving one they were out. I checked the trash to see what was wasted or what might be going out the door that shouldn't be. It's basically a nickel and dime business and they all add up. They owners consistently hit the 10% mark and I got good bonuses. I quit after 7 years, tired of baby sitting part time actors/actresses.

                    Had an assistant manager and he thought he could go out on his own and "copy" their formula.......he went through $500,000 in about a year and was out of business. Goes to show even if you have some experience there's no guarantee of success.

                    1. re: monku

                      Or even worse the person with no experience who opens a restaurant as an investor and proceeds to give his friends free drinks and food and get wasted at the bar every night! My poor friend has to deal with this guy having a 750 dollar comp tab when they have a 4,000 dollar weekend.

                      1. re: Missmoo

                        dang i think i worked for that guy ;-P

                        the only thing i have to add to the general discussion is that in independent higher-end restaurants the food costs can easily be more like 40% rather than 30% and the labor is closer to 30% than 25%. some places like sushi houses will have lower food costs but higher labor costs. in chain restaurants the food cost is much lower, but you make up for it in advertising costs. makes you wonder what the actual food cost of that 99 cent burger is, in total, ketchup packets and all--*shudder* but generally count on the restaurant's "take home" pay to be under 10% of your check-- the other 90%+, you get to feel good about stimulating the local economy.

                        also, rent can really be a killer, depending on where the restaurant is, and it seems to be a major driver of places going out of business, at least in my area. rent seems artificially high while the average price of menu items has remained the same or actually decreased in recent tough years. space-related overhead/rent hikes seem to be the thing that sinks the ship because the establishments generally can't do much about it. there are other business costs that chip away at the bottom line that didn't used to exist-- credit card swiping fees, website, computer systems being the biggies, as well as increases in local taxes and insurance premiums.

                      2. re: monku

                        Read my comment above.. while 10% doesn't sound like much... the highly leverage nature of the Restaurant business means the Return on Investment for the owners beats many of their alternatives... and hence why you were getting good bonuses.

                        Of course you always have that Lawyer that gives up the $200k job to follow a dream and ends up making much less (assuming it is profitable and not run into the ground) and working 120 hours a week to make it happen. Yes to that person its going to seem like its not a lucrative business.

                  2. re: uwebres

                    That's almost exactly what I would have guessed. Thanks, all you guys! I mean, "everyone" knows that it ain't the food that makes the money at a restaurant, but I think few know the full extent of it.

                  3. As everyone here knows, you can easily end up with a million dollars in the restaurant business ... if you start with two million.

                    1. I saw this post 36 hours after our quarterly p and l meeting (we are on an unusual time frame due to local ebbs and flows, our summers are tragically slow) so it is fresh in my mind. Sorry for all the disjointed posts, but I could talk about this stuff for hours.

                      5 Replies
                      1. re: uwebres

                        please feel free to discuss!

                        I once watched Jamie Oliver discuss food mark up on his restaurants using the formula: (total food cost x 1.65) as a general mark up. I also read in Michael Ruhlman's book before about the restaurant business model where, (i may be misquoting here) bulk restaurants like fast food would have a per food cost mark up of only 20 percent but makes up for volume whereas fancier sit-down restaurants go beyond the range of 50-60% but suffer on volume. I only learned about the 10% margin by reading this thread.

                        1. re: jecolicious

                          Food costs are one of the numbers you have to control.

                          An interesting article I read the other day about labor costs

                          1. re: jecolicious

                            There has got to be a transcription error somewhere. If my restaurant bought tenderloin at $10/lb cleaned it so it yielded 80% sellable product (not a typical yield, more like 70%), means we paid $.625 per oz., so for an 8 oz filet mignon we would charge $8.25 based on the 1.65 markup. Add mashed and asparagus and compound butter, and you get $12 a plate. Something is amiss here

                            1. re: uwebres

                              The menu is about product mix.
                              Not everything is marked up 1.65 across the board. Some menu items will have higher profit margins than others.

                              1. re: monku

                                Yeah, obviously you average things out, you have loss leaders like steaks coming in at a 40% cost, with apps and soups coming in around 20. I must be missing something but I read that 1.65 comment as pricing something that has a base food cost of $10 as $16.50 on the menu which is way off.

                        2. As a former commercial real estate owner, I'll tailor my comments to tata's Denver.
                          1) Every strip center with 20+ bays has a pizza joint, sub shop, and asian take-out.
                          WAY over-restauranted by day; but a really good dinner resto has a chance, because the mid-day retail parking conflict goes away.
                          2)Tough to cut it under 2000 SF. Food prep, refrig.,storage takes 800 SF. Range hood roof penetrations and vapor barriers are a landlord's nightmare.
                          3) Sales per foot of leased space have to reach $200/ ft /yr to be profitable. If you dip to $125, I will work with you to put you gently out of business because your whole family is working for no money.
                          4) Location. Colorado Boulevard has the highest traffic count of any non-interstate in Colorado. Between 8th and Colfax in the hospital district, you could get rich selling chocolate-covered doggie-do on a stick. Likewise in Glendale, with a huge density of day workers, some free-stand restos do 400-600/ft. Fiercely profitable. Further south, the free-stands in Park Meadows Mall do obscene figures. But those are not mom-and pops, but out-of-territory corporates who spent millions setting up. The local athletes are getting richer in their Greenwood Village ventures, and having fun at it. But you know who they are!