Economics of the Restaurant Dollar

I've been noticing lately that when it comes to restaurant reviews there are generally four different adjectives that are used by customers to describe the prices at various establishments. They are as follows:

1. Expensive
2. Overpriced
3. Pricey (as in 'a bit pricey')
4. Reasonable

No one will ever use terms such as 'fair' or 'accurately priced' and God forbid anyone ever refer to a place's prices as being 'cheap.' I think this is mostly due to not understanding where the money goes that they spend.

I actually have lots of thoughts on this but I'll save those for another post some day. However I do want to quickly review the general costs associate with every dollar that comes into the registers.

So have you ever wondered where the money you spend at a Restaurant goes? How much of it is profit versus expenses? Well here is a quick breakdown in terms of ours as well as many other restaurants pricing models.

+$1.00 Gross income into the register
-$0.09 take an immediate 9% and give it to New York State for sales tax.
-$0.30 for employee wages, most restaurants aim for a 30% payroll cost vs gross sales. Most are actually higher.
-$0.15 on average we pay 15% of our gross to utilities, ie water gas electric
-$0.02 for insurances. Restaurants and bars carry lots of liabilities from fire, to disability to general liability all the way to workplace injuries. Basically when you're serving the public and employing the public you need to be insured to your eyeballs.
-$0.02 property/city taxes. Some people say that you never really own your property, you just lease it from the government.
-$0.05 mortgages, maintenance, service, repair, upgrades. The restaurant industry requires that you use a lot of equipment. From computers for the front of the house, to freezers, stoves, etc for the back of the house. Then there are repairs and updates and paying for the building in general.
-$0.33 Cost of Goods Sold. Our target for pricing is so that every meal you have, the items you consumed cost 33% of what you paid for. Most places target this 33% to be the standard. This factor is not a variable and the prices customers pay are not an arbitrary number. They are formula driven to fit this percentage so that restaurants can maintain a profit margin.

So add those up, you get $0.96 of expense for every dollar you receive in the restaurant industry. Leaving you with only $0.04 in profit out of that $1.00 payment.

Now Uncle Sam comes along and takes his cut in the form of corporate income tax. Which as of April 1, 2012 is the highest in the world at just over 29%. Meaning that of your $0.04 profit, the government gets $0.01, leaving you with $0.03 net profit.

So in real terms what does this mean? Say you have a seemingly successful restaurant that grosses $1,000,000 this year... Which for all intents and purposes is a very successful year. You as the business owner walk home with a whopping $30,000 for the year. Not horrible but certainly not going to get you that private jet you had your eye on when you opened your restaurant.

Oh and by the way, you'll probably be putting in up to 80 hour work weeks on a regular basis to earn that $30,000 and to make sure employees are not giving away your shirt.

Side Note: If you were keeping track, you might have noticed that the Government gets $0.10 out of every $1 you make. So in my example where the business grosses $1,000,000 and nets only $30,000... Uncle Sam gets $100,000 just for being a nice guy... And if you don't give him his due cut, he takes your Restaurant.

I'm back, with a new complaint: Why do I pay more for beer?!

Beer delivery just came in from a local distribution company, the same company that we have been dealing with forever, who also services all other restaurants, bars, gas stations, beer stores and grocery stores. There wasn't a problem with the order, or the service, but there was something I noticed yesterday when I was buying some groceries for home that has had me somewhat annoyed over the past 24 hours.

You see, the liquor and beer distributors work in a sort of monopoly like manner when it comes to the products they sell. For example, if you wanted to buy Budweiser, there is only one distributor in the region that has the rights to sell Budweiser. So in a sense, that particular distributor has a monopoly on each particular brand that they sell. If you want to buy Budweiser Beer, you have to buy it from that distributor in one way or another. No matter where you buy it, a restaurant, gas station or beer store, all those businesses bought their Bud from the same distributor.

Why is this? Well it's not necessarily the fault of the distributor. From my understanding of how the setup works, Beer & Liquor companies sell their rights to their products to individual distributors. They never give two different distributors in the same region the rights to sell their products at the same time. This would cause competition in the market which inturn would result in price reductions. Therefore, companies like Budweiser are able to maintain their pricing models and never let competition alter their costing.

I think their argument why this is ok, is due to that there are multiple different beers in the market. And if you didn't like the price of one, then you can purchase a different brand of beer.

Whatever, fine, kudos to them for figuring out how to back into a legal monopoly.

Anyway, this all now brings me to my original point, and the issue that caused me the frustration yesterday. And being in the restaurant business, this is a point that most people outside of the industry, more specifically outside of the pricing and purchasing side of the industry don't understand and refuse to believe.

It is more expensive for Restaurants/Bars to buy liquor and beer from the distributors, than it is for individuals to purchase beer from a grocery store, which gets its beer from the distributor. Meaning that in this particular case, factory direct does not result in savings, and in all actuality results in far higher costs.

Let me explain futher:

Yesterday I was at the supermarket and saw that 28, 12oz bottle cases of Labatt Blue were on sale for $16.99, which by all means is a pretty good deal. This grocery store, purchased this beer from the distributor that I use to buy my beer for my restaurant, and they are selling the case, at a profit none the less, for $16.99.

Today, I received my invoice for my weekly beer purchases from the same company that sells to this grocery store. I see that I am being charged 21.45 for 24, 12oz bottle cases. Meaning that it is essentially $5 less for me to go out and buy a case of beer at a grocery store, than it is for me to buy directly from the distributor... not to mention that I would get 4 more bottles.

So why wouldn't I just go out and buy beer from the grocery store and sell that if it's cheaper? Well, because it's illegal. In New York State, as a restaurant or bar you must purchase all liquor and beer from certified wholesalers who have a license to sell to retailers.

All in all, it's just annoying.