Embarking on the journey of starting a restaurant can be an exciting and rewarding endeavor. However, it’s essential to understand that launching a successful restaurant requires careful planning, focus, and financial investment. Our clients often ask us, “How much does it cost to start a restaurant?” That question has no single answer; however, we have outlined the various expenses associated with starting a restaurant to shed light on the key factors that influence the overall investment and critical steps required for developing a focused concept to help minimize expensive mistakes

 

Market Research

Before spending any money, thorough market research is essential. Analyzing the target market, identifying potential customers, and studying competitors will help you make informed decisions throughout the process. This preliminary step will enable you to fine-tune your concept and estimate the overall cost more accurately.

Pre-Opening Budget Considerations

 

Location and Lease

Securing the right location for your restaurant is crucial and can take many months to secure. Factors such as visibility, foot traffic, and demographics play a significant role, as well as parking access, immediate competition, or beneficial concepts in the area that will draw your target to your location. Costs can vary depending on the region and size of the space as well as the desirability of the location. Leasing a commercial property usually involves upfront costs like security deposits, leasehold improvements, common charges and in some instances, a percentage of sales.  It is critical to evaluate all associated costs against the potential for sales as the occupancy cost will be a fixed feature on your P & L, and typically, we like to see occupancy at 6% to 10% of sales.

 

Licenses and Permits

Budgeting for the necessary licenses and permits to comply with local regulations is often overlooked. These include health permits, liquor licenses, signage permits, and more. The costs associated with licenses and permits vary by jurisdiction.

 

Professional Services

In addition to the cost of permits, professional services may be required for legal work, architectural services, construction management, technology installation, and support. You may decide to engage a restaurant consultant to help develop operating standards for your concept or to coach you on developing those standards yourself.  This investment in professional advice may seem like a burden on your pre-opening budget, but expert advice can help you open your doors more quickly and profitably.

Equipment and Furnishings

Outfitting your restaurant with the necessary equipment, such as kitchen appliances, refrigeration units, tables, chairs, and décor, can be a significant expense, especially if a remodel or build-out is required. The cost will depend on square footage, equipment required to execute your menu offering at desired sales volumes, service model, bar requirements, and level of finish that fits your brand (i.e., luxury vs. value).  Oftentimes an estimated dollar amount per square foot can be used to give a reasonable budget line item for your space.

 

Kitchen Setup and Utilities

An efficient kitchen layout that meets health and safety standards is crucial. Costs, including plumbing, electrical work, ventilation systems, and fire safety measures, will need to be included in your pre-opening budget, while ongoing utility costs, such as water, electricity, and gas, will need to be factored into your working profit and loss plan.  Choosing energy-efficient kitchen equipment may increase your initial outlay, but pay for themselves in utility cost savings over the first several years of business.

 

Initial Inventory

Our clients often don’t anticipate the cost of purchasing the initial inventory of ingredients, beverages, and supplies before opening.  This purchase will need to cover pre-opening parties, grand opening events and staff training.  Careful planning and vendor selection can help manage these costs; however, operators can anticipate some waste during the first 30 days while the team gets accustomed to operations, and sales mix information allows for predictive prep planning.

Ongoing Operational Costs

 

Staffing

Employee wages and benefits are recurring costs that must be accounted for in your budget and will be managed by your GM. Hiring and training a skilled workforce, including chefs, cooks, servers, and support staff, will be the responsibility of your manager ,who will set the tone for your culture and will be responsible for the success of your operations, so it is worth investing in a strong manager either through base salary plus bonus for hitting sales targets or through offering educational advancement. Your restaurant’s labor costs are more than just employee wages. They’re comprised of the total dollar amount spent on labor across your operation, including overtime pay, healthcare, if applicable and payroll taxes.  Most restaurants aim to have labor at 28 to 33% of total revenue.

Marketing and Advertising

Promoting your restaurant through various channels, including social media, online listings, and traditional advertising, is essential to attract customers. Allocating a portion of your budget to marketing, often from 3-10% of revenue, depending on your concept and market, can help establish your brand and generate awareness. Third-party platforms like Door Dash have fees that can be off-putting, but their service functions as a marketing tool for your brand, and working with them can be considered a marketing cost.

 

Cost of Goods (COGS)

Sourcing quality ingredients while managing food waste and inventory control is vital for a profitable restaurant, as is managing the cost of packaging and other disposables used in your operations. Keeping track of these costs and optimizing menu pricing can help maintain profitability.  Food cost percentages are an average of the cost of raw materials against revenue, so a 30% food cost means that for every dollar of revenue a restaurant earns, it will have spent between 30 cents to buy the ingredients. This percentage varies widely based on raw ingredients and sales mix as well as whether or not alcohol is served and together with labor will make up your prime costs.

Contingency Fund

We tell our clients to establish a contingency fund to cover unexpected expenses and potential downturns. It acts as a safety net during challenging times, ensuring the continuity of your restaurant’s operations.

 

Starting a restaurant requires serious financial considerations and understanding the costs involved is key to planning and executing a successful venture. While expenses vary greatly depending on location, concept, and scale, thorough research, realistic budgeting, and efficient management will contribute to your restaurant’s long-term success.  We help our clients navigate these decisions to work within their pre-opening budget and establish realistic operating budgets for their concept’s long-term financial and operational viability. If you would like to speak with someone about your start up, we would be happy to discuss your plans during an initial phone conversation at no cost to you or check our resources page for more information on starting your new concept.

 

Few events have caused as much devastation to the restaurant industry as the COVID-19 pandemic. 2021 saw some of the worst industry conditions stemming from unforeseen lockdowns, enforced closures, a crippled economy, and limited capacity.

 

According to the released 2021 State of the Restaurant Industry Report from the National Restaurant Association, we can measure the impact of COVID-19 on the restaurant industry, which is estimated to have lost about $240 billion in sales from a projected $899 billion. For many restaurant owners, few choices remained but to shutter their doors for good. In fact, Fortune reported that over 110,000 restaurants closed for business.

 

The 2021 State of the Restaurant Report delves into the current condition of foundational elements integral within the food industry, including technology, labor, menu changes, and more based on surveying over 6,000 restaurant owners. As destructive as the coronavirus was for many businesses, you would be hard-pressed to find a single restaurant that wasn’t affected by widespread closures, dining restrictions, and adapting to new safety protocols.

 

State of Restaurant Industry in 2021

As stated in Forbes, the COVID-19 pandemic had a debilitating impact on the supply chain companies that keep restaurants and foodservice enterprises in operation. Accordingly, about 85% of food supply chain companies experienced a 30 percent reduction in revenues in 2020 than in years before.

In the first six months of 2021, fewer customers ate on-premises as COVID-19 surged throughout the nation. However, by mid-year, restaurant sales are expected to grow as more consumers get vaccinated.

In fact, total restaurant sales are projected to be around $789 billion, an almost a 20 percent increase from 2020, which is great and welcomed news!

 

Important things to note from the Report:

• Wholesale food costs have increased at an incredible rate
• Hourly earnings have more than doubled in the private sector
• As of June, 11 states and Puerto Rico still have capacity limits on restaurants
• 64 percent of customers prefer to order directly from the restaurant and not a third party service
• Many restaurants focused on optimizing their off-premises dining services – for example, implementing curbside service
• Many restaurant owners reported retaining and hiring employees was a top challenge throughout 2020 and 2021
• Vaccination numbers and stimulus payments helped increase food and beverage sales in the first half of 2021, often resulting in increased takeout orders
• Menu prices have increased to reflect the higher cost of food and labor
• The restaurant industry has had to adapt quickly to survive, including selling alcohol to-go during the pandemic shutdown
• During the early stages of the pandemic, the only option for many restaurants to continue selling involved off-premises curbside takeout and delivery, which remains a popular option over on-premises dining

 

New COVID-19 regulations and mandates required restaurant owners to quickly adapt, especially contactless pickups and delivery, to keep both staff and guests safe and healthy.

 

By necessity, the pandemic endorsed new technology and contactless dining for many customers. More and more people are adopting takeout and delivery as part of their routine.

 

The road to recovery is long and uncertain, but it’s clear that employment and sales are rising slowly. It may take some time to nullify the damage caused by the pandemic shutdowns, but the restaurant industry has proven to be resilient and adaptable: two necessary qualities for survival.

“Hey! Who wants to go out to eat?” has been an often-asked question for the vast majority of American citizens. Dining out in restaurants has been a staple in American culture for more than one hundred years. So, what do we do when a restaurant doesn’t have the food we want, or they close? For many people, the first thing to do is ask why this is happening. As of 2020-2021, the short answer to this question is COVID-19. A more in-depth look can explain further.

Although it is a complex situation, the root of the problem is the supply chain

 

As COVID-19 infection rates spread among side-by-side labor-intensive workers, restaurants began to suffer. Agricultural production and meatpacking were particularly affected. Jobs such as field working, meatpacking plant production, food delivery, and retail became increasingly dangerous as infection and, potentially, death became a common concern. Several meatpacking plants closed, as this environment can act as an incubator for the virus to spread.

 

 

Nonessential workers stopped working because they lost their jobs when the COVID-19 stay-at-home orders were put into place. Essential workers stopped working when they became infected. Some people stopped working when the fear of infection became too great. The loss of these workers created a gap in restaurant industry processes. The problem of decreased number of workers extended from farmers to wholesale buyers to servers and restaurant owners. Adversely affecting production capacity, lack of workers hurt the restaurant supply chain despite policies to social distance and practice increased sanitization.

In addition, the risk of exposure to COVID‐19 changed the willingness of workers to accept jobs. Currently, supplemental hazard pay is in discussion with labor unions as an option for restaurant workers at some fast-food restaurants. There is hope that by increasing the wage specific to these jobs, workers will accept the jobs offered during the pandemic, and the restaurant industry may recover.

The supply and demand of international trade using ocean freight has experienced slower delivery times due to COVID protocols. Labor shortages and restrictions on vessels coming and going have created congestion in some countries’ standard pickup and delivery procedures.  As of August 18, 32 cargo vessels were waiting at sea to unload at the Port of Los Angeles. This backlog of ships was due in response to the increased demand for imports via ocean freight carriers. In addition, transportation proved to be an obstacle, with a shortage of long-haul truck drivers and major railroads pausing new pickups for a week due to backup of railroad cars in the Midwest.

 

The restaurant supply chain has been severely fragmented due to COVID-19. While the world continues to find ways to rectify the situation, being patient while ordering your favorite food at a local restaurant may help.

As for restaurants, you may have to reassess your menu items to pivot during this still difficult time. Wingstop pivoted by creating a virtual brand (orderable online only) named, “Thighstop”—a menu that focused selling just chicken thighs. Selling these lower cost chicken thighs would help offset the rising costs of chicken wings.

 

Restaurant Owners: What do you do now?

Let’s talk. It’s a great time now to dig into operations, restaurant training, as well as menu optimization. Synergy Consultants has been helping foodservice operators through great times and tough times for over 32 years.

The cost of beef is getting higher. In fact, not only are beef prices rising, so are the prices of other common restaurant food staples like bacon, eggs, poultry, fish, coffee and orange juice. The USDA  has shown a 0.4 percent food price increase (the all-items Consumer Price Index, or CPI). However, some of the largest price increases were seen in beef prices, which as spiked 4% from January.

 

So why exactly is beef so expensive nowadays? There are several factors that come into play; the recession had led to a decrease of ranchers as well as the droughts which caused smaller pastures and thus less cattle herds. And there seems to be little hope to a relief in high beef prices any time soon. Market analyst, Kevin Good, has noted that these higher prices may continue into 2015 or 2016.

In the meantime, how’s a restaurant to cope? In times like these, it’s a good idea to take a look at your restaurant supply chain management. Are you inspecting your menu and diversifying with lower-cost products? Are you locking in prices from your vendors to curb seasonal price increases?

If you need help with your supply chain management strategies, contact Synergy Consultants.