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What kind of restaurant has the highest profit margins?

RealMenJulienne Feb 20, 2013 01:12 PM

Let's define a "restaurant" as any place where you can buy food that's meant to be eaten there, from a hot dog stand to a $400 per head Alinea-type place.

As a percentage of the cost of the meal to the diner, what price level of the restaurant industry has the highest profit margins?

I'm inclined to say fast food, because of their soft drink sales, but that's just a guess. Any industry pros care to weigh in?

  1. b
    baseballfan Feb 20, 2013 01:16 PM

    Not an industry pro but I would hazard to guess that a breakfast place would do pretty well from a profit margin perspective since the ingredients are inexpensive as a rule and the table turnover is high. I am thinking specifically of places that specialize in breakfast and usually are closed by 2 or so in the afternoon.

    Will be interested to see what others with more knowledge say.

    2 Replies
    1. re: baseballfan
      t
      tastesgoodwhatisit Feb 20, 2013 11:24 PM

      This might be offset by other factors, though - they don't make any sales during the evening, people expect breakfast to be fairly cheap, and they won't make have the high profit items from the drink menu (most people don't consume soft drinks or alcohol for breakfast).

      1. re: baseballfan
        DiningDiva Feb 25, 2013 03:49 PM

        Not necessarily.

        A large portion of the menu is tied items that are considered commodity items where the price regularly fluctuates and can be radically affected by the weather. Milk, eggs, cheese, pork and flour (wheat) are all heavily traded commodities.

        Americans are conditioned to expecting food to be cheap and inexpensive (comparatively speaking). The challenge for many restaurants then becomes how to purchase food and price it to fit the neighborhood and niche they fill. Buying the raw ingredients and making from scratch isn't always the most cost effective answer since what you might save in food cost, you most surely use up in labor cost since you've got to have at least semi-skilled labor to turn those raw ingredients into a finished product.

        Pancakes at $10 aren't usually accepted to well even though they may be made from scratch in the kitchen by trained cooks or even a chef. Pancakes from a mix save time, labor and can be sold cheaply to satisfy a customer base that has learned to expect them to be inexpensive.

        There is a B/L place up the street from my house that does great business, especially on holidays and weekends. Line out the door type of business that includes a very large and very good selection of gluten-free breakfast and lunch items. They've had to add dinner 4 nights a week (with liquor license) in order to pay their bills and survive. They've also had to increase their prices, which were far too low for what you got.

        The surprisng thing the owner told me was that they also had a steady customer base of seniors and retirees that would come in and have coffee and occasionally an English muffin or pastry, but they'd take up a table for extended periods of time reading the newspaper or chatting with friends who came in. Coffee and a muffin won't pay the rent, the hired help, or provide any kind of income for the owner.

      2. f
        FoodPopulist Feb 20, 2013 01:47 PM

        An Italian restaurant which serves a lot of pasta and caters to a clientele that typically orders soft drinks with their meals.

        1. t
          thegforceny Feb 20, 2013 05:46 PM

          A list comes out every year. I couldn't find the 2012, but Tao and (now closed) Tavern on the Green have topped quite a few years. Hint: Lots of booze sales.

          http://www.theatlantic.com/business/a...

          1. ipsedixit Feb 21, 2013 10:49 AM

            Based on the comments here, the owners of those Burger Kings and Sonics that sell alcohol must be rolling in dough.

            1. h
              Harters Feb 21, 2013 11:02 AM

              There's a rough rule of "thirds" across the western world about restaurant pricing - one third of a menu price being food costs, one third being wages and one third being the owners gross profit (out of which has to be paid building rental costs, equipment, light, heat, etc - and then the owner's net profit). It pretty much works at all price points.

              I reckon two things swing it towards a higher margin. First, will be a small family business where the owners are the staff - they would have a "claim" on the wages third and the profit third. The other area is probably where a place can sell higher end wine - there is, generally, a high mark-up on wine so being able to sell more expensive stuff brings in the cash.

              2 Replies
              1. re: Harters
                f
                ferret Feb 21, 2013 12:04 PM

                That's pretty much self-limiting. The Subway franchise model won't produce an appreciable level of income on a single-store basis unless you're willing to work in the store but if you own several, then paying someone minimum wage is a more reasonable alternative.

                Ditto higher-end restaurants, you may want to maintain a presence as the owner but it's not like you're replacing a full-time worker.

                1. re: Harters
                  westsidegal Feb 25, 2013 10:30 AM

                  one element you are omitting from your calculation is that landlords will often give a "small family business" a FAR worse deal in terms of rent, what's covered by the rent, the terms of the lease (such as whether the lease is triple net, what any cancellation options are, whether there must be a personal or other financial guarantee etc. ) than they would give to a chain that has a legal department involved in negotiating the lease.

                2. raytamsgv Feb 21, 2013 11:05 AM

                  I would say a place that serves a lot of cheap appetizers (purchased wholesale and reheated) and a lot of alcohol.

                  1. ttoommyy Feb 21, 2013 01:12 PM

                    I would think restaurants that do a high volume of well-marked up alcohol have very high profit margins. Just a guess though.

                    1. p
                      Puffin3 Feb 22, 2013 08:52 AM

                      Ever seen a Chinese restaurant going out of business? Nope. All family owned and staffed (including extended family). Rice. Virtually every ingredient locally sourced from other Chinese businesses like 'market gardens/poultry/pig farms. A family member in China to buy/ship the condiments in bulk. (They run around and pick up say 45 gallon barrels of soy sauce etc etc. Then onto a palate and plastic wrapped and delivered directly to the ship leaving for Seattle. Everything is VERY well coordinated to maximize the bottom line.
                      They need every penny so after Chan and Hui have been accepted into the Harvard business school dad can write a cheque for the full tuition and give both girls new 'BMWs' as going away presents knowing both girls will be spending every spare moment back working at the restaurant until they take it over in a couple of decades.

                      9 Replies
                      1. re: Puffin3
                        raytamsgv Feb 22, 2013 10:34 AM

                        Sorry, Puffin, but you are mistaken. In the San Gabriel Valley (east of Los Angeles), Chinese restaurants go out of business all the time. Most of the owners are not wealthy at all. My parents certainly weren't wealthy. My "full tuition" to public university consisted of financial aid packages. My 'BMW' was a mail-order bicycle that I paid for myself. My siblings and I got out of the restaurant business because it was too much hard work for little profit.

                        1. re: raytamsgv
                          p
                          Puffin3 Feb 22, 2013 10:42 AM

                          Fair enough. 'The exception proves the rule' though.I guess I was referring more to Chinese restaurants that have opened in small towns years ago were they were the only Chinese restaurant for twenty miles around them. I guess now too many Asians are trying to get too small a market share.

                          1. re: raytamsgv
                            m
                            MonMauler Feb 22, 2013 11:18 AM

                            Yeah, I was going to take exception to Puffin's assertion, as well. Two of the universities I went to had a very high percentage of Asian students, and I befriended many. Not one of them that I got to know well had family in the restaurant business. Most of them had parents that were engineers, scientists, professors, attorneys, doctors and the like.

                            The most well-off roommate I ever had was of Chinese descent. His parents came over from china shortly before his birth, and his mom did not speak a lick of English. But he would take some of us to their house on the weekends, and the food was amazing. After dinner us and his parents would play mahjong until the wee hours. Myself and my other four roommates all slept in our own rooms when there. His dad was a florist.

                            1. re: MonMauler
                              p
                              Puffin3 Feb 23, 2013 06:35 AM

                              I guess I was thinking about the Chinese restaurant that was in every little town on the Prairies when I was a kid in the fifties. Their kids are now todays engineers/doctors and the like with their own kids. The original owners of these little 'ma and pa' restaurants wanted a better life for their kids. They worked very hard. Were very frugal and many were able to send their kids off the universities with no financial burdens on the kids. Good on them I say!

                          2. re: Puffin3
                            westsidegal Feb 25, 2013 10:40 AM

                            puffin,
                            don't know when and where you could have avoided witnessing a chinese restaurant going out of business, but having lived a bi-coastal existence my whole life i most certainly HAVE seen chinese and virtually all types of mom 'n pop restaurants go out of business on a regular basis.

                            as a general rule, landlords are not kind to such businesses.
                            many local suppliers are not kind to such businesses.

                            the chinese students that i befriended at berkeley were certainly NOT there with BMWs. they were, for the most part, extremely industrious, self-disciplined, kids who were well aware of the sacrifices their families had made on their behalf. (far more aware and grateful than most of the other students).

                            also, the chinese students, like the hispanic students, often, since they had the best english skills in the family, had to make complicated financial and legal decisions for the family that, for most kids their age would have been considered "well above their pay grade."

                            1. re: Puffin3
                              chowser Feb 25, 2013 11:00 AM

                              I'm assuming from what you've said that you have no personal knowledge of the situation? I know quite a few people/family who've had Chinese restaurants and none fit what you're describing and some have lost their restaurants.

                              1. re: chowser
                                ipsedixit Feb 25, 2013 02:07 PM

                                You're looking at the child of parents who had 3 failed Chinese restaurants.

                                So unless we were just extremely unlucky (highly likely, by the way) and the outliers of outliers, I would venture a guess that Chinese restaurants are not immune from the "GOOB disease".

                                1. re: ipsedixit
                                  chowser Feb 25, 2013 02:29 PM

                                  Did you have sisters named Chan and Hui? I'm rereading all the facts in Puffin3's post and there isn't one thing in it that rings a bell. Well, there is the rice thing. That's one.

                                  1. re: chowser
                                    ipsedixit Feb 25, 2013 02:39 PM

                                    We were excommunicated from the Orange Chicken family before we opened up our restaurants.

                            2. mrbigshotno.1 Feb 22, 2013 01:24 PM

                              Most likely a one man hot dog cart/food truck, probably not paying any insurance, workmans comp etc. Large FF chains make a healthy profit because of their size, they can really get rock bottom wholesale prices. Three quarters of the full service joints are just scraping by, ya gotta love the biz, either that or be a masochist.

                              3 Replies
                              1. re: mrbigshotno.1
                                m
                                MonMauler Feb 22, 2013 09:33 PM

                                I would lean towards this. A relatively cheap offering - pizza, dogs, wings, burgers, alcohol, fries or some combination thereof - with a large enough customer base and enough outlets to be able to take advantage of economies of scale.

                                1. re: MonMauler
                                  DiningDiva Feb 25, 2013 03:29 PM

                                  Actually, wings are NOT cheap. The price of chicken wings has risen pretty steadily (as has the price of chicken tenders) over the last year. We actually discontinued chicken wings because the food cost got way beyond where we could price them for our customers. They got beyond the value/price point. White meat chicken tenders aren't far behind.

                                2. re: mrbigshotno.1
                                  chowser Feb 25, 2013 11:04 AM

                                  I was thinking something along these lines, a place w/out a brick and mortar presence, with a lower fixed cost.

                                3. m
                                  mwhitmore Feb 22, 2013 04:57 PM

                                  I would think pizza. Flour, tomato sauce, polly-o don't cost much. Equipment: a used oven and two fridges, one for bevs and one for toppings. Margin may be higher on pasta, but I never saw a resto serving just pasta.

                                  1. p
                                    PotatoPuff Feb 25, 2013 02:45 PM

                                    Does a movie theater count? The markups on popcorn and soda are unreal.

                                    15 Replies
                                    1. re: PotatoPuff
                                      chowser Feb 25, 2013 02:47 PM

                                      Good point. Places where there is a captive audience probably have the highest. Ski resorts, for one.

                                      1. re: chowser
                                        ipsedixit Feb 25, 2013 03:14 PM

                                        Ballparks, stadiums, amusement parks, airports ...

                                        But then you have to factor in rent ...

                                        1. re: ipsedixit
                                          chowser Feb 25, 2013 03:20 PM

                                          I was thinking of ski resorts where they own the space. It's a major money maker at my resort. I'd love to know Disney's profit margin for their restaurants/fast food places.

                                          1. re: chowser
                                            ipsedixit Feb 25, 2013 03:32 PM

                                            Room service!

                                            Now, that's a high margin business.

                                            1. re: chowser
                                              n
                                              nocharge Feb 25, 2013 06:07 PM

                                              If you omit the rent cost in your margin calculations because you own the space, you are artificially inflating your margins by the amount you could have received if you rented out the space to another operator.

                                              1. re: nocharge
                                                chowser Feb 26, 2013 10:33 AM

                                                Whether you own or rent, there is always the potential to rent/sublet to another business, as long as the lease allows. Net profit is generally calculated, extreme simplification, as gross revenue minus actual costs. You could consider opportunity costs but they generally don't enter the balance sheet.

                                                1. re: chowser
                                                  n
                                                  nocharge Feb 26, 2013 11:14 AM

                                                  I was considering it from a restaurant analysis standpoint rather than accounting. The free rent is essentially return on a real estate investment that may have little to do with how efficiently the restaurant's operations are run. It's certainly an issue I would consider if I were to set bonus targets for a restaurant's management team.

                                                  1. re: nocharge
                                                    chowser Feb 26, 2013 02:17 PM

                                                    That would be the case for all businesses, whether they're rented or owned. If I rented a place and could sublet it for more than my profit, similar as if I owned it, it would make sense to do so.

                                                    1. re: chowser
                                                      n
                                                      nocharge Feb 26, 2013 02:58 PM

                                                      Well, my point is that when analyzing the operational characteristics, such as profit margins, of a restaurant with free rent, it would make sense to consider the opportunity cost associated with not renting out the space to someone else. Otherwise you are mixing in real estate investment with issues such as whether the restaurant management is running a tight ship or the profitability of the particular restaurant concept in that space. When discussing margins for different restaurant concepts, I think it's fair to assume that there is a cost for rent regardless whether it's an actual expense or just an opportunity cost.

                                            2. re: ipsedixit
                                              n
                                              nocharge Feb 25, 2013 06:00 PM

                                              A restaurant consultant once told me that the lowest food cost percentage he ever encountered was at a Chinese restaurant in an airport terminal. High prices and inexpensive ingredients led to a low-to-middle single digit percentage. However, factoring in rent, it's not clear that this restaurant was more profitable than any other regular restaurant.

                                              1. re: nocharge
                                                ipsedixit Feb 25, 2013 06:50 PM

                                                Having negotiated airport leases, it is almost impossible to make alot of money in a terminal.

                                                1. re: ipsedixit
                                                  DiningDiva Feb 26, 2013 09:13 AM

                                                  Are employees at airport food service ops generally hired by the vendor or by the company handling the overall airport contract (like Host, for instance?). And are they paid union wages & benefits or just minimum wage.

                                                  Just curious, no ulterior motive with the question. Restaurants typically don't have to deal with union labor and benes, but it's increasingly common on the non-commerical side of the business. And I am just curious as to where airport food and concessions fall in this dynamic

                                                  1. re: DiningDiva
                                                    ipsedixit Feb 26, 2013 11:07 AM

                                                    That's a complicated question.

                                                    But, yes, the airport concessionaires hire their own employees. They are, as far as I know, not union employees, but because the concessionaires are operating under government (i.e. state or city) contracts, they are generally obligated to provide above minimum wage, benefits, etc. Moreover, because they are operating under government contracts, they many times have to be MBE (minority business enterprises) or DBE (disadvantage business enterprises).

                                                  2. re: ipsedixit
                                                    Veggo Apr 10, 2014 07:36 AM

                                                    One of my golf buddies, who is black and is a very good golfer, has 3 very successful leased spaces at DIA (Denver).

                                            3. re: PotatoPuff
                                              f
                                              ferret Feb 27, 2013 06:22 AM

                                              That's because their take of ticket sales has dropped precipitously. If they can't make money selling you pricey popcorn and soda then you won't be seeing many movie theaters.

                                            4. g
                                              GH1618 Feb 25, 2013 03:42 PM

                                              I'd say that there's too much variation to generalize. As a rule, restaurants are low-margin, high-risk businesses. Those that are most successful have a good concept, a good location, and are well managed. Restaurants of all types succeed or fail based on these fundamentals.

                                              Take fast food as an example. In-n-Out has been hugely successful because it has always been a family business, and the owners found a winning formula and stuck with it. Other chains, such as Burger King, have not done so well.

                                              Take high-end restaurants as another example. They can certainly be a cash cow when they're hot, but they can disappear very quickly if they don't have a concept which holds up over time.

                                              A high-profit margin for a couple of years is one thing. A lower, but sufficient, profit margin which holds up for decades is another.

                                              1. p
                                                Pookipichu Feb 26, 2013 12:45 PM

                                                PIZZA.

                                                Look at Grimaldi's. $14 for a large plain pie. They use polly-o cheese and generic canned tomatoes.

                                                3-4 cups of flour per pizza. Flour is about $3 a 5 pound bag. That's $0.60 of flour per pizza.

                                                Crushed tomato is $0.30 a cup add in spices, etc. then $0.50 a cup, $1.00 of sauce per pizza.

                                                Polly-o mozarella is $2.50 a pound, one pound would be generous per pizza.

                                                None of these are wholesale prices. Approx $4.10 ingredient cost per plain. The money is in the toppings. You pay the same price regardless half or full pie.

                                                $2 for extra garlic? You can buy 3 pounds of minced garlic for $8. That's $0.16 an ounce which is less than what you'd get on your pizza. $2 for extra sauce? Another $0.50 worth?

                                                It's an all cash business, no credit card transaction fees, employing cheap below market labor, no decor to speak of, etc. etc.

                                                7 Replies
                                                1. re: Pookipichu
                                                  f
                                                  ferret Feb 27, 2013 06:26 AM

                                                  You're still describing a roughly rule-of-thirds ratio. Their energy costs, rent, insurance, labor, packaging, paper goods etc. still have to be factored into the price -- before they make any profit. If they were spending $7 to make a $14 pizza then they wouldn't be in business for long. Nobody gets wealth from a single location pizza shop.

                                                  1. re: ferret
                                                    p
                                                    Pookipichu Feb 27, 2013 09:14 AM

                                                    My cost estimates are based on supermarket prices. Factor in wholesale discount, immigrant labor, negligible costs for packaging (pizza boxes) and napkins, the space hasn't seen a renovation in forever, it's heated by the oven in winter, the toppings have an outrageous markup. It's not a rule of thirds when they charge up to 15 times their cost for a topping.

                                                    ... and most importantly,it is an all cash business, you can get rich from pizza. Water and flour and undeclared income.

                                                    1. re: Pookipichu
                                                      chowser Feb 27, 2013 10:34 AM

                                                      I'm not sure if the OP was talking about ways to get rich, illegally, in the restaurant business, eg. cheating on taxes. If that were the aim, then launder money through a cash business--that would be far more than you could make cheating on taxes.

                                                      1. re: chowser
                                                        p
                                                        Pookipichu Feb 27, 2013 01:27 PM

                                                        The OP asked about profit margins. Even declaring all income, an all cash business saves on credit card transactions fees and ancillary costs (equipment rental, need for dedicated landline, etc.) I gave examples of how it is a very high margin business. You are focusing on one aspect of the post.

                                                        1. re: Pookipichu
                                                          chowser Feb 27, 2013 01:47 PM

                                                          True--my mind just went there. Sorry!

                                                      2. re: Pookipichu
                                                        o
                                                        owneroperator Apr 10, 2014 07:06 AM

                                                        Your estimates are based on your perspective of what it costs to operate a food establishment. Based on your comments, I can tell you never have owned and operated your own business and clearly do not know what you are talking about. First off, you are guessing what their prices are on ingredients, you failed to factor in the costs of wages, taxes, payroll remittance, employer contributions, insurance, lease/rent, electricity, gas/propane, phone, pos system, internet, frieght, gas, trasportation...

                                                        The food and beverage industry has some of the worst cost of sales margins out there.

                                                        1. re: owneroperator
                                                          p
                                                          Pookipichu Apr 10, 2014 08:02 AM

                                                          All I know is that the pizzeria store owners I've met, do very well for themselves.... do you own a pizzeria or are you just taking my specific example and generalizing it for your own purposes?

                                                  2. smaki Feb 26, 2013 07:32 PM

                                                    Alcohol often brings in way more than food. Lottery can also be huge.

                                                    7 Replies
                                                    1. re: smaki
                                                      ipsedixit Feb 26, 2013 07:45 PM

                                                      And strippers. Don't forget strippers.

                                                      1. re: ipsedixit
                                                        smaki Feb 26, 2013 09:01 PM

                                                        +1, Was thinking strippers but did not say. TY for the friendly reminder. With over 100 strip joints Portland, Oregon is a very competitive market.

                                                        A couple decades back, a friend here when got divorced opened a strip club. With attention to detail, sold more kegs per seat than any place in Oregon for several years in a row in the '90s. He did very well on beer, lottery, and hard alcohol. Food is not where made the money. Sold good burgers, sandwiches, and sides for a very reasonable price. Says the quality food options were only to keep customers happy, around, coming back, stopping by to eat, and for a lunch draw. He raced West Coast Late Model Series cars on pavement as a hobby. Unfortunately his racing expenses passed strip joint earnings, so lost the place. The location did not make money before him or since.

                                                        1. re: ipsedixit
                                                          m
                                                          MonMauler Feb 27, 2013 02:29 AM

                                                          Who forgot about strippers?

                                                          1. re: ipsedixit
                                                            chowser Feb 27, 2013 07:00 AM

                                                            In In other words, the best way to make money in the restaurant business is to forget about the food aspect.

                                                            1. re: chowser
                                                              ipsedixit Feb 27, 2013 08:00 AM

                                                              Bingo.

                                                              You think Hooters stays in business based solely on their wings?

                                                              1. re: ipsedixit
                                                                chowser Feb 27, 2013 08:40 AM

                                                                My husband swears by it.;-)

                                                                1. re: chowser
                                                                  smaki Feb 27, 2013 01:45 PM

                                                                  I miss Calico Jack's when visit Central & Western Florida (not sure if were or are elsewhere). CJs is like Hooters but with better food and atmosphere IMHO. Bright pink and light blue instead of orange and white. CJs was my favorite oyster bar when lived in Florida in the late 80s and early 90s. The bucket of oysters, chicken sandwiches, seafood gumbo, and CJs juice were hard to beat elsewhere. And great prices. Their slogan, "Only One Thing Tastes Better Than an Oyster... But You Do Not Eat It On A Cracker". Still have some CJs juice cups around. Does anyone know of any around or are they all closed?

                                                        2. b
                                                          bobbert Feb 27, 2013 02:20 PM

                                                          Alcohol. Tap beer. Big markup. The "specialty cocktails" list, huge profit margins. Low labor cost on booze. Line cook gets paid $12 per hour, sets up and breaks down station (while no one is spending money on food) and we'll say, a 3 person line serves 150 meals during service. Food costs, labor costs, etc. Let's compare to the bar where we pay the bartender $2.75 hr. because he gets tips. He shows up to prep maybe 2 hours before opening. He pours 125 $5 pints of beer from the $100 keg. He mixes another 200 $8 drinks that cost $1.50 each and then there's the wine. At the bar - low labor cost combined with high margins and even higher volume. Now that's where the profits are. Way back when I tended bar, albeit a nightclub vs. a full service restaurant, I could put out 1000 mixed drinks per weekend shift and we worked on between 18 and 22% alcohol costs.

                                                          2 Replies
                                                          1. re: bobbert
                                                            smaki Feb 28, 2013 09:22 AM

                                                            +1, good numbers bobbert. Totally agree the kind of restaurant with the highest profits is one with a popular bar.

                                                            OP may have been asking what are the highest profit non-bar restaurant(s). Any further thoughts if we exclude alcohol?

                                                            Once pay the overhead to have a place... Minimum inventory providing the most options helps (example: pizza, salad, and sandwiches can be made with common items). Probably breakfast, lunch, and dinner should all be served. Good coffee, soft drinks, and beverage options are wise (legal and addictive is great such as providing caffeine). Cigarettes. Lottery if able for more traffic and income. Also sweets, corporate catering, and take-out (maybe even delivery) would boost the bottom line of a kitchen. Many create then sell their own brand of take-home items (most through a co-packer). Being unique pays. A focus on family dining brings in more per visit - McDonald's advertising to kids has been very good to them. Those restaurants that gain regular customers who tell (and bring) others do best.

                                                            1. re: smaki
                                                              p
                                                              Puffin3 Apr 11, 2014 08:01 AM

                                                              I'd go with an above average quality food truck. Owners who REALLY knew what they were doing visa vi setting up in profitable locations serving a best quality product and charging for it. The 'down-town' business crowd of 'hipsters' don't care what they pay for a hot dog as long as they can look forward to eating the next one tomorrow.
                                                              Owners doing the driving/buying/cooking/serving/routine maintenance.
                                                              These are all critical elements of course. The only thing missing is for the owner/s to put about 30% of the cash that comes through the window in their pocket/s.

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