If you’re like me on a typical Sunday night, you’re sitting at home relaxing and getting mentally prepared for the upcoming week while reading or watching your latest TV series. Everything is fine and dandy until the thought creeps up on you. You ignore it at first but it keeps coming back. You log into your online banking account and there it is. Shamelessly looking at you right in the face.. . Marconi 187.50$
How did we end up spending so much money ?! To quote Bradley Cooper in The Hangover “Because we obviously had a great f***ing time.”
Why does it cost so much to eat at a restaurant ?
Here’s my attempt at trying to make you feel better. This is the Economics Behind The Plate — where your money goes when you go to a restaurant and hopefully how you’ll rationalize your next 200$ restaurant bill.
This is how a typical successful restaurant divides up its income to be able to operate and be competitive:
Food Cost (all the raw materials in your plate) =30%
Labor Cost (wait staff, kitchen staff, managers)= 30%
Overhead (rent, utilities, breakage of dishware, marketing, etc) = 20%
Profit= 20% (in theory! The reality is usually way less as explained here).
Which means that when you see a 10$ dish on the menu, there’s 3$ of raw materials, 3$ to pay for the staff (waiter, dishwasher, manager, busboy, cleaning crew, kitchen crew), 2$ to pay for all the overhead (rent, utilities, breakage, marketing) and finally 2$ profit for the business that took the financial risk of signing a lease, renovating the space, buying equipment and paying a full staff to be there to homerun your Saturday night out ;).
If a restaurant doesn’t aim to make 20% profit, does that mean it can allow itself to spend more on Food or Labor? This is not a good idea. Remember this industry has many moving parts (service, ingredient costs fluctuations, wastage, theft) and something always goes wrong — which is why the industry average comes out to 1.7% and most restaurants fail. I would highly advise for a restaurant operator to stay within these cost guidelines to ensure its long-term viability.
I make the same dish at home and it costs me way less!
Sorry, but you’re not making the same dish. For the simple reason that the food quality you’re buying at the grocery store is not restaurant grade. When the fisherman comes back to shore he’s looking to make the most off his catch. He therefore sells the best fish to those willing to pay more, restaurants. Then comes the general public. Maybe you can’t tell the difference but there is one. Also — remember how expensive that first grocery run costs when you move into a new place? That’s because you have none of the spices, herbs and unique ingredients you’ll need when you’re making that signature dish. You need to factor that in to your food cost when you make your mean tikka massala!
Ok so you’re telling me I’m only getting 3$ worth of actual food when I’m paying 10$ ? I’m shocked !!
Absolutely. You’re paying not only for the actual food but also to sit back in a nice environment with people serving you like a king, pumping out your food and drinks in minutes. What you ordered has hours of prep work behind it (slow braised, made from scratch sauces,etc) so that it can be ready for you in half an hour or less. If you’ve ever had to make a full meal from-scratch for a group of people you’ll relate to how much work and time (probably all day from morning to night in the kitchen or running around picking up ingredients) is involved.
Don’t forget none of this is an exact science. There are some restaurants that go higher in Labor to save on Food cost. This typically happens in kitchens that make a lot of from-scratch prep, transforming raw ingredients in-house which means one less middleman between the farm and the table. With enough volume, this can be a viable option.
Other restaurants go lower on Labor and higher on Food cost. This can happen when there’s less service involved, or if the restaurant buys a lot of its product ready-to-go and already transformed. Fast casual restaurants and chain restaurants usually fall here. Each scenario is different.
Because of the linked dynamic between Labor and Food costs, the sum of the two is called the Prime Cost. Instead of saying you want 30% on each, you could say you want an overall Prime Cost of 60% and you’ll tweak between both parameters to get there.
Please remember that at the end of the day, you pay for what you get. Montreal is such a competitive restaurant scene you should trust the high Offer on the market will always drive prices down. Social media and word of mouth will ensure that the bad apples gets weeded out. When you’re paying a lot, it’s usually because it’s really unique and of high quality (once you’ve tried Marconi you’ll relate, my current obsession).
Now that you understand restaurant price dynamics please be mindful of what you’re putting into your body when you get that 5$ Subway deal…
If you enjoy reading this, you might be interested in attending the Influence Montreal conference on May 19th. It features different talks about entrepreneurship in different industries — I will be speaking on the panel covering nightlife! It also features a keynote talk by Gary Vaynerchuk ! For more info: http://bit.ly/influenceMtl (promo code PJisinmtl gives you 15% off).
Cheers!
-PJ
