The restaurant industry is a penny business. You must constantly find ways to save money and stay competitive while maintaining the quality of cuisine and service that guests are accustomed to, or else you’ll find yourself broke, out of a job and laying people off.
Those who operate restaurants work nights, weekends, and holidays. Pressure to perform is always high and profit margins are almost always small. The industry attracts people with a driving entrepreneurial spirit and a passion for cuisine, hospitality, and making people happy. While celebrity chefs grab headlines, for most folks, running a restaurant is much more grind than glamour.
According to the National Restaurant Association, there are more than one million restaurants in America. In New York City alone there are more than 26,000 restaurants, according to the city’s Department of Health. I haven’t met the owners of all restaurants, but from the many I know that have learned to be successful, it is not enough just to be a great chef or a hospitable host. A successful restaurateur must be a true businessperson, through and through. While there is not one recipe for success in today’s highly regulated and competitive marketplace, successful restaurateurs are just as laser-focused on their restaurant’s financial model as they are on the food.
A traditional financial model for many New York City restaurants in the past had been to target food and beverage costs at 30% of sales, with labor at another 30%. Operating expenses were 20% and occupancy costs were 10%, leaving the restaurateur with a 10% profit.
In today’s highly regulated business climate with increasing regulatory burdens, the increased wage and benefit mandates are pushing restaurant labor costs towards 35%. Sky-high commercial rents have resulted in occupancy costs that exceed 10%. Coupling together labor and occupancy costs, it is easy for a busy restaurant’s margin to dwindle to 5%, or less. In today’s litigious business environment, an innocent violation of a complex labor law often results in a large financial settlement that pushes a restaurant’s profit and loss statement into the red.
Consequently, independent mom-and-pop restaurants appear to be closing up shop. In the city of New York, the decline has been 8% over the past four years while chains have increased their footprint. When local spots shutter, communities mourn the loss of their beloved neighborhood café and parts of their city are start to look like a strip mall. Plus, they lose jobs and tax revenue.
These regulatory and market pressures on independent restaurants have influenced the growth of the “restaurant group.” Unlike a chain, with many locations featuring the same concept, the group operates multiple unique, high-quality restaurant concepts under one umbrella company. The restaurant group hires in-house human resource departments, financial teams, marketing professionals and others that allow them to operate in the highly regulated and uber-competitive marketplace. The group also provides more perks to retain employees, and opportunities for professional growth within the company, which is vital right now as chefs and restaurateurs bemoan the labor shortage, especially among jobs like line cooks. But make no mistake, even the most successful restaurant groups face significant challenges and will often shutter one restaurant while opening another.
The growth of the restaurant group is also fueled by chefs with rock star status and restaurateurs who have become the golden children for investors and developers of hotels and commercial properties. Food and beverage establishments – once a money- losing but necessary amenity to feed hotel guests – are now the driving force behind many hotels. In New York City, you will often see more New Yorkers eating and drinking at hotel restaurants and bars than visitors.
https://www.forbes.com/sites/groupthink/2017/12/10/why-independent-restaurants-are-closing/