What's the profitability of getting into the restaurant industry?
June 26, 2008 11:27 AM   Subscribe

What is the profitability of a small restaurant?

I'm a young entrepreneur graduating soon from college and can not bring myself to getting a 9 to 5. I want to be self-employed and I know that I will be successful. I think the first step is entering a business that I know will make me some residual income.

I've become very interested in owning a small restaurant. I cannot decide if the restaurant industry is for me or not, but I think I could succeed. I could obviously start my own local cafe or something, but I'm worried of the risks. I quick fix could be to open a Subway or Quizno's franchise (something with a low franchise fee), but I don't know if they are very profitable. Does anyone own a franchise restaurant or regular restaurant that could offer some rough figures to get me going in the right direction?
posted by CWitt to Work & Money (28 answers total) 9 users marked this as a favorite
Starting out in a small restaurant will require you to work far more hours than 9 to 5. Depending upon your customer focus, most small diner-type restaurants are open for the more profitable breakfast trade, which means serving customers from 6AM on, which additionally means that until you garner a large staff, you'll have to be on premise by at least 5AM to get everything in readiness. A friend of mine owns a small coney island/diner-type restaurant, and he has a hard time keeping waitstaff. He is open from 6AM until 9PM, but the nature of the business (he's located in a blue-collar area) means that he has rushes early in the morning, and during lunchtime, and then a smaller window around the dinner hour. Meanwhile, he has to stay open during those slow times, and the waitstaff (who rely on tips) working during those lulls get discouraged and move on to a Big Boy or Cracker Barrel or some higher-profile restaurant.
posted by Oriole Adams at 11:40 AM on June 26, 2008

My family was in this business and working 9-5 is a dream compared to it. If you cant handle 9-5 then you are not going to like running a restaurant.

Are you ready for 12 hour days, every day, competing with corporate chains with real marketing budgets, managing employees many of whom barely speak english and didnt finish HS, paying your own insurance, dealing with theft, high stress, complaints, high turnover, etc?

but I don't know if they are very profitable

They're not. The only subway owner I knew had to buy three of them to come close to a typical middle-class salaried job.
posted by damn dirty ape at 11:56 AM on June 26, 2008 [1 favorite]

Its also nice to go home and not worry about work, making payroll, if I set the alarm, if the city will raise the property taxes again, getting there at 5am to make the lunch specials, who has been stealing again, who will not show up for work, the meat bill, the garbage bill, the gas bill, the water bill, etc.

Man, you have no idea how easy 9-5 office life is.
posted by damn dirty ape at 12:01 PM on June 26, 2008

Go spend some time working in the business. Then decide if you're interested. The higher end places are also better work environments. Seems likely, I'm guessing, these would also have a higher risk of failure. OTOH, I knew a guy with a small and successful diner, in a small town, and his family seemed to do well enough. He and his wife both worked at the restaurant though.
posted by Goofyy at 12:07 PM on June 26, 2008 [2 favorites]

How profitable is a small restaurant?

How long is a piece of string?
posted by Tomorrowful at 12:10 PM on June 26, 2008 [5 favorites]

Also being a veteran of the restaurant business, I'm agreeing with everyone else. When I quit my last gig, there's a reason I said to myself, "I'm never working in food service again."

Dealing with customers. Angry customers. This happens a lot more than you think. I've seen first-day managers walk off the job because they couldn't handle that aspect of the job. It can be very demanding having to explain for the 18th time tonight why your steak came out medium instead of medium-rare as you watch the profits sink giving out free food to make things right.
Who is going to cover when you line cook calls out sick? Or your only Friday-night dishwasher quits without even bother to telling you (oh man did I see this a lot. People quitting without even telling management).
At a subway-type place, you'll be dealing with a lot of high school/college students who call in 10 minutes before their shift, "Uh, sorry, I forgot I had an exam I need to study for. Bye!"
There's a lot more stress that goes into running a food place than people realize.

Then again, my uncle owns a top-notch restaurant in Hawaii and loves it. He also loves cooking & dealing with customers- he isn't it for purely monetary reasons.

I would echo Goofyy's sentiments. Try working in the business for a while first.
posted by jmd82 at 12:12 PM on June 26, 2008

Nthing above. My family owned several popular fast food restaurants in the 70's and 80's. We had to have four to have a nice, middle class life. My Dad worked 24/7 for years. It was ALWAYS something. He finally sold them all in the late 80's to take a desk job and never looked back. Food is a very difficult business, think long and hard and definitely work in a restaurant for at least a year before making any decisions. Good luck!
posted by pearlybob at 12:18 PM on June 26, 2008

Maybe I am reading the question wrong, but my read is that CWitt doesn't want a 9 to 5 because they would find it boring, not because they think it would be too much work. If that is the case and you are looking dive into 12-hour+ days because you are looking for that sort of challenge then the food business could be right for you.

I agree with everyone else that you should work in the business for a while and see how it goes from there.
posted by mikepop at 12:24 PM on June 26, 2008

My sister and brother-in-law own a small BBQ cafeteria-style restaurant. My BIL works 10-14 hour days, pretty much every day. (My sister has a new baby so she stays home and does the books - she used to work full days there as well, though.) They do catering, so they work on/around most holidays too. They struggle to find good staff - back in December when I was visiting, BIL had a swollen, bruised face from where his (former) manager punched him in the face after not showing up to open the restaurant *and* stealing $ from the till.

Honestly, in talking with them their biggest problem is finding reliable, trustworthy employees so that BIL doesn't have to be at the restaurant so much. They recently hired someone they hope will pan out - if not, BIL will not be able to travel to my wedding in a few months.

I will also say that they are not very profitable - they really struggle, in fact. But part of that may be peculiar to their circumstance: having to dig the restaurant out of a lot of existing debt from poor previous management; being in a pretty rural/industrial area; etc.
posted by misskaz at 12:27 PM on June 26, 2008

Lots and lots of small businesses fail. When they fail, they take down life savings, borrowed money, people lose their houses. Lenders generally have little interest in a small, unproven business or business-owner. Proven businesses, i.e., well-known franchises, are very expensive.

To be successful in a small business, you need to work long hours, be good at what you do, hire smart, hardworking staff, have good vendor relations, and be lucky.

Very well-run small restaurants in good locations sometimes do pretty well. Start scouting locations. Get a job in a restaurant. Start saving money. Get yourself trained, get financing ready, and when you find a fantastic location that's only obscenely expensive, be prepared to take a huge risk.

When small businesses work, the owner learns a lot, and might make pretty good money. I used to own a small, reasonably successful retail business. I bought an existing business that was tired, which I recommend, and I sold it profitably some years later. It was really fun, I learned so much, and I made money. But the wolf was always at the door, dealing with the IRS was nightmarish(and contributed to my decision to sell) having employees isn't much fun, and the hours were very, very long. No vacation time for 3 years. I'm really glad I did it.
posted by theora55 at 12:33 PM on June 26, 2008 [1 favorite]

The risks for opening a restaurant are huge, chain or independently owned. Here's an article that debunks the popular statistic that 90% of restaurants close or change owners in the first year, but still shows 25% in the first year and 60% over three years.

I worked as manager of a private kitchen (college student housing), and it was very, very tough. I had minimal kitchen experience, and the perspective of an "outsider" isn't always well-received. The people are difficult, both in the kitchen and out in the dining room. I was constantly covering for people's mistakes, from cleaning to ordering to inspections. It would definitely be to your advantage to work at the lower rungs at least for a while to get a feel for the business. The restaurant atmosphere is very different from a "regular" business, which could be to your advantage if you like the hectic always going work life.
posted by shinynewnick at 12:38 PM on June 26, 2008

Try working in the business for a while first.
just as a btw, this is useful advice for any entrepreneur, regardless of the industry that you're engaged in.
posted by bl1nk at 12:39 PM on June 26, 2008

Also, as an anecdote, I have a friend who worked in the restaurant business for years, and was a manager at a high-level chain restaurant when I met her and her husband. The eventually bought a local restaurant and gave it a complete redo to much success, to the point of opening three more of their own in the surrounding area. Despite (or because of) the success, every time I stop by she is literally in the kitchen slinging orders back to the grill just as she was when the place opened several years ago. It isn't a glamorous life even when you do very well.
posted by shinynewnick at 12:43 PM on June 26, 2008

Do you have any experience in the business? If not, I wouldn't even DREAM of opening a restaurant.

Either way, if you decide you want to, it sounds like you need a mentor. You shouldn't be opening a restaurant until you know how to perform every task from washing dishes and sweeping floors to dealing with vendors and doing menu planning or hiring staff.
posted by mynameisluka at 12:44 PM on June 26, 2008

First of, news flash, all people that open businesses "think they will succeed." Obviously, they don't.

Secondly, you're asking a question that is a dead giveaway for your lack of experience in the restaurant industry. And as such, I would definitely take the advice of the others here and look at working for someone else before risking substantial amounts of money on your own venture. I'm definitely not saying that you can't succeed unless you do it a certain way. What I am saying is that small business, especially the food industry, is so grueling that you would be a fool to ignore any possible tool at your disposal.

Thirdly, if you are pursuing business to make money you'd best get out while you still can. It generally doesn't work like that. The months and months of losing money (most 'successful' new businesses do) will soon challenge your will power. If you aren't grounded by a love for what you do, you'll probably crack. If making money is what you love to do, look at different fields first.

And finally, the question is too broad to answer, but a ballpark figure is ten to twenty percent net profit for a well run restaurant. Those figures are practically meaningless without being more specific about location, theme, size, franchise relationship, etc etc. Even within a franchise like Subway you can have massive variability in sales and profits.

Seems to me like you are headed about this problem completely backwards (no offense). At the very least I'd get connected with the Small Business Administration and SCORE. Good luck!
posted by limmer at 12:49 PM on June 26, 2008

Read Kitchen Confidential by Anthony Bourdain, that's got some good information on how and why the vast majority of new restaurants fail
posted by fearfulsymmetry at 12:53 PM on June 26, 2008 [2 favorites]

Read Anthony Bourdain's Kitchen Confidential for more entertaining and harrowing anecdotes of how to fail at restaurant management. He makes a pretty compelling case for why, after a career of working in restaurants, he now writes books and hosts TV for a living.
posted by ga$money at 12:57 PM on June 26, 2008 [1 favorite]

Jinx, fearfulsymmetry, you owe me a Coke.
posted by ga$money at 12:58 PM on June 26, 2008

To find out how much they make in general, go to the business broker sites. Y'know search for "buy a business in CityX". The listings will tell you how much revenue and net profit they make. Of course, this will be a biased sampling of businesses that are good enough to be sold but bad enough that the owners don't want them anymore.
posted by FastGorilla at 12:59 PM on June 26, 2008

Managing food service was the hardest job I ever had. I *dreamed* of having a 9 - 5 job. If I got two full days off in a month, I was deliriously happy. If I worked less than a 12 hour shift, I was also deliriously happy.

You spend your time worrying over every single ounce of food. You measure and weigh everything in the store to figure out your current inventory, plus how much new inventory is arriving in the next delivery, minus how much inventory you expect to use before the delivery after that one, so that you can make a food order.

Order too little of something, and you get to explain over and over again that you are out of . Or, if it is a critical item (like mozzarella cheese in a pizza joint), you get to go out and buy enough to get you by but at a hugely inflated price over what you pay your normal supplier, and thus blow your food cost.

Order too much of something, and if it is a perishable you get to watch it rot away before you can use it, and thus blow your food cost.

You continually worry about portioning, making sure your chefs don't put too much of an expensive item into a dish, and thus blow your food cost.

You continually worry about staffing, checking your sales every fifteen minutes against your projections, to decide whether or not to send someone on break or send them home for the day. Get it wrong, and you blow your payroll cost.

As others have noted, you deal with flaky minimum wage employees, because you can't afford to pay more then minimum wage. They don't show up when they are scheduled. They complain about their schedule. They call in sick because their favorite rock star just killed himself. Oh, and they steal from you every chance they get, whether it is by actually stealing from the till, stealing food, or giving away free food to their friends.

The only type of person who should even consider opening a small restaurant is someone who loves cooking with a passion, has strong business skills to enable them to really manage their bottom line, and who has strong leadership skills to enable them to pull the best performance possible out of a largely apathetic crew. If you are Gordon Ramsay, you will do well. If you are not, you will simultaneously work yourself to death *and* go broke.

posted by Lokheed at 1:01 PM on June 26, 2008 [3 favorites]

Spend a month washing dishes.

Spend a year tending bar.

Spend a year waiting tables.

Spend a year as a front of the house manager.

Spend a year as a line cook.

Spend a year as a kitchen manager.

Then decide if you want to open a restaurant.

Chances are good you won't.

But if you still do, chances are good you can make it work.
posted by BitterOldPunk at 1:02 PM on June 26, 2008 [1 favorite]

Best answer: um, Don't. It's a hell of a business, and you've pretty much got to be committed to making it your 24/7 life. Also, part of what you stressed was that you want to be self-employed. I assume it's that you don't want to work for someone else? Working in hospitality, you're working for everyone - customers, employees, local health dept, etc. It's also something you can't do on your own - you'll need a team you trust - until they bail or screw you over (VERY common). And as you've already seen, 9 to 5 is 1/2 or 1/3 of the hours you'll spend running a restaurant. Oh, and the margins are often so slim the only way to stay afloat is constant expansion - ever wonder why there are so many chain restaurants, even in the family-run segment? It's because each one makes so little the only thing to do is to open another, then another, etc.

Depending on where you live, you might want to look into some kind of food-cart type business as a startup opportunity. Much lower overhead and sunk costs.
You can start and run it on your own, set your own hours (within reason - you do need to be out there enough to make a profit), and if you find that you're not getting a good enough ROI and want to bail, you're facing a much smaller commitment than you would be with a full-on restaurant. Carts are often easier to sell off, sublet, or franchise as well - if you find that your first "CWitt's Chili Spot" does really well, it's much easier to find someone who's willing to "license" another cart and run it themselves for a percentage of the profits. It's not uncommon for people to start with one self-run, then "franchise" another, or a few, until they get to the point where they'd rather stay home and keep the books and collect the checks from franchisees than stand outside selling lemonade or whatever. "Automate" the process enough and it becomes a passive income stream while you do other things.

The "start small" and "work in the business for a while" advice is best. In the cart case, you could do this by coming up with something you could run as a booth at fairs, street festivals, etc. You lose your weekends, but I've known someone who had this type of operation that would net him about $1000 per 18-hour workweekend; he had a low cost of living and a part-time job during the week, but he was able to say "OK, if I want to make an extra $25k this year, I'll trade that for half my weekends".

Good luck!
posted by penciltopper at 1:23 PM on June 26, 2008

In the same vein as those Kitchen Confidential recommendations above, I'd recommend watching a couple of episodes of Ramsay's Kitchen Nightmares will let you look at a few examples of what people do wrong in the restaurant business. Ramsay's formula for revitalizing a business becomes pretty obvious after watching a couple episodes, but it's a pretty good formula. Basically, he comes in, cleans up the kitchen, whips lazy people into shape, takes bloated menus and makes them simple, streamlined, and fresh, and then tries to give the owner a viable business model. There are lots of examples of people who didn't quite know what they were getting into when they bought a restaurant. It's pretty entertaining TV, in any case.
posted by thack3r at 2:20 PM on June 26, 2008

Kitchen Nightmares is good if you are watching the original episodes from the U.K., but be warned that the American version is barely watchable because of the editing. In the U.S. shows, Ramsay just comes across as a prick, and you see the same ten second clips at least a dozen times by the time the show is over. It's like the editor has overdosed on ritalin and can't remember what he spliced in thirty seconds earlier. In the British version of the show, Ramsay may still come across as a hard-ass, but he also comes across as someone who genuinely cares about what he is doing, and cares about whether or not the restaurant he is helping actually succeeds. If you have only been exposed to him via the American shows "Hell's Kitchen" and "Kitchen Nightmares", you probably have a very skewed impression of him.
posted by Lokheed at 2:33 PM on June 26, 2008

What is the profitability of a small restaurant?

African or European?

I know a guy who manages a fast-food restaurant. Thankfully, he is not the owner, so he doesn't worry about how he's going to make ends meet -- that's someone else's concern. However, staffing the restaurant is part of his job. From what he says, I get the distinct impression that it is hard to find people who are not going to steal from you, who are not going to constantly miss work because they are high or hung over (or, worse, come in to work high or hung over), who get along well with others, and whose personal lives are not swirls of drama that spills over into the workplace. This is because mature, reliable people can get better jobs than flipping burgers. So he spends a lot of time interviewing people and replacing crew members who just stopped showing up or who he had to fire. (And filling out police reports for the ones who stole money.) A Quizno's or Subway might be a slightly better place to work than a burger joint, but only minimally, so you can expect to have the same kinds of staffing problems.

Also, supply prices have gone up a lot recently due to rising fuel costs, and so he is spending a lot of his time scrambling to find cheaper (read closer) suppliers who can meet corporate standards. Among other things he now is finding he has to go in a little early every day to chop a day's worth of onions, since buying them whole and chopping them is a lot cheaper than buying them already chopped.

As the owner, you're either going to be doing all that yourself, or paying someone else to do it (taking a chunk right out of your profits, even in months where you don't have any profits). It doesn't sound like that much fun to me.
posted by kindall at 3:04 PM on June 26, 2008

Restaraunt work is hell.

I know a man who is a very successful entrepreneur who just opened a restarant (that my daughter works at.) Unfortunately his previous experience was NOT in food service.

Profit margins on food are razor thin. Restaraunts make their money on beverages, not the food. Plus everything everyone else has posted above is true, true true.

If you want to go into business for yourself, make sure it isn't in anything perishable or in anything that you will need to feed.
posted by konolia at 5:05 PM on June 26, 2008

I cannot decide if the restaurant industry is for me or not

It will be a lot cheaper to figure this out by getting a job, any sort of job, in a restaurant than by starting your own. Try to work in every position there, let them know you want hours and they can call you whenever someone doesn´t show up for their shift. Pay attention to what the managers/owners do, and think about whether that´s something you would like to do.
posted by yohko at 11:22 PM on June 26, 2008

Oh man, it all seems so discouraging and yet so true! Maybe you should look at some other industries, outside restaurant business. If you're thinking about franchising, consider for instance junk removal. Less personnel hassle and, at least, you'll contribute to cleaner environment. Although in general, I disagree with the franchising philosophy altogether -- it's like being hired by a company to run their local branch, but you actually have to invest your own money into building that branch!

The advise about starting small is an excellent one! This way you can test the water without actually investing big. Did you think about small-time e-commerce, like eBay-ing, or opening an Amazon.com store?

Anyway, to go on your own, you have to at least have some sort of idea or vision of what is it that you want to do. Try to figure this out, and it'll be easier to go from there.
posted by cst at 3:12 AM on June 27, 2008

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