Restaurant Economics | 3 mins read

Aspects of Restaurant Economics

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Cynthia Vespia

By Cynthia Vespia

Economics of Running a Restaurant Business

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Operating a restaurant business comes with financial risk. According to FSR Magazine, 60% of restaurants close in the first year with 80% closing within five years. Having an understanding of the economics involved in running a restaurant will help limit costs and generate revenue.

What are the Expenses Involved in Restaurant Operations?

Restaurant operations will face costs like employee wages, food costs, restaurant marketing, restaurant automation technology upgrades and real estate maintenance to keep afloat. These expenses account for 80% to 90% of the total revenue being brought in. Increase costs or decreased revenue can upset the balance and quickly turn into a situation with negative cash flow.

Keeping Costs Down

To keep maintain a healthy profit margin, expenses should be monitored. Inventory management checks will show where costs can be cut. For example, purchasing equipment from restaurant supply stores will lessen the cost of buying them brand new.

Profitable restaurant marketing can come down to word-of-mouth. Leveraging social media is a free options to generate interest. Automation tools can pay dividends by streamlining things like monitoring overtime expenses. Which leads to the highest cost associated with restaurant operations- the labor.

Next to food cost, labor costs can be a considerable expense for restaurant managers. Keeping track of employee scheduling goes a long way to curbing labor costs.

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Changes in customer preferences sometimes determines a change in the restaurant industry itself. The economy can also have an impact on a restaurant business. Inflated labor costs and food costs continue to cause shifts in the restaurant industry.

Food Inflation
Food costs are rising as the costs for ingredients continue to rise. Prices for corn, beef and even chicken are being felt across the restaurant industry. Trying to find affordable replacements for ingredients continues to be a challenge.

Quick-Casual Growth
Fast food and casual dining restaurants, known as quick-casual within the restaurant industry, are continuing to grow. Many focus their restaurant marketing on a niche that allows wiggle room with pricing.

Value vs. Price
While pricing is important to consumers, presentation is as well. If a restaurant offers a higher-value whether in terms of food or service, they'll apt to spend a bit more for the experience.

Labor and Healthcare
The restaurant industry is currently facing labor shortages due to a sensitive labor market. Upcoming provisions of the Patient Protection and Affordable Care Act could require the addition of employee health care for some restaurants which will increase cost. Any significant changes to the labor market, like a minimum wage increase, could impact the restaurant industry.

How to Keep up with Restaurant Industry Trends

Some parts of the restaurant business remain evergreen but others are constantly in flux. Some of the ways to capitalize on restaurant industry trends in the economic sector is the following-

  • Read relevant restaurant industry blogs
  • Stay active on social media
  • Talk to others in the restaurant industry

The most successful restaurant owner stays on top of industry trends and implements accordingly. This way, they stay ahead of the competition by advancing their restaurant operations in the direction consumers are already heading.

  • Food Inflation
  • Value vs. Price
  • Quick-Casual Growth
  • Labor and Healthcare

The Conclusion to Restaurant Economics

  • Understanding restaurant economics can be the difference between your business flourishing or closing within five years.
  • The Bottom Line is 60% of restaurants close in the first year with 80% closing within five years without proper economic planning.
  • Costs can vary based on the size, location, and quality of a restaurant business.
  • Rising food costs and labor costs are economic impacts to the restaurant industry.