The Economics of Restaurant Ownership

Karl L Hughes
May 5, 2017 · 2 min read

I worked at a number of restaurants in high school and college. In all three cases, I knew the owner/manager pretty well, so I’d often try to learn more about the ins and outs of the role. It’s not that I wanted to go into the business; it’s that I find the idea of restaurant economics fascinating.

Here’s a great clip from a long article by a guy who opened a coffee shop in New York:

There is a golden rule, long cherished by restaurateurs, for determining whether a business is viable. Rent should take up no more than 25 percent of your revenue, another 25 percent should go toward payroll, and 35 percent should go toward the product. The remaining 15 percent is what you take home. There’s an even more elegant version of that rule: Make your rent in four days to be profitable, a week to break even. If you haven’t hit the latter mark in a month, close.

A place that seats 25 will have to employ at least two people for every shift: someone to work the front and someone for the kitchen...Budgeting $15 for the payroll for every hour your charming cafe is open (let’s say 10 hours a day) relieves you of $4,500 a month. That gives you another $4,500 a month for rent and $6,300 to stock up on product. It also means that to come up with the total needed $18K of revenue per month, you will need to sell that product at an average of a 300 percent markup.

He continues by going into how hard it was to make those economics shake out with a 25-seat restaurant entertaining some guests for 30 minutes or more at a time. You have to bring in a lot of foot traffic to get anywhere near $18k in revenue each month. That’s 120 customers per day (assuming a $5 average ticket). That means you’ve got to turn those 25 seats over about 5 times each. Throw in a shitty employee who gives away $100/week in free coffee to his friends and you’ve got to turn over your seats almost 6 times per day. That’s a lot of churn for a small business with little to no marketing budget.

Unfortunately, too many restauranteurs are enamored with the idea of running a restaurant and not the fundamentals of the business. They don’t realize that working 80 hours per week at the place is an almost inevitable reality, and the side effects of that are pretty dark.

Of the three restaurants I worked in, one is still open (a Chick-fil-a inside a mall). The other two were locally or regionally owned, and they shuttered within three years of opening.

Karl L Hughes

Technology team builder, software engineer, and startup enthusiast. CTO at @GraideNetwork and helping technology speakers succeed at @cfp_land.

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