Those in the restaurant industry are familiar with the oft-repeated stat:
Nearly 60% of restaurants fail within the first year, and 80% go under within the first five years.
The restaurant failure rate is high. No two ways about it. So how do you give your business the best chance to succeed?
You lower common restaurant expenses.
Sure, you can fall back on well-worn strategies like “offer great customer service,” or “try to increase check size.” But sometimes those strategies aren’t enough.
You have to consider your cost drivers. That’s what cuts into your bottom line. And they’re usually lumped into four groups: food cost, liquor cost, labor cost, and operational cost.
Here we’ll give you some tips on how to manage costs for a restaurant business. But first we’ll set the stage and look into the boogeyman itself: Just what are the common restaurant expenses?
Restaurant Monthly Expenses
Let’s look at what typically makes up monthly restaurant expenses before we get into cost reduction strategies in restaurants. Know thy enemy, etc.
The most common restaurant expenses are broken down by startup expenses and operating expenses. We’ll focus on the typical restaurant operating expenses in this article.
Typical Restaurant Operating Expenses
Here’s a restaurant operating expenses list that makes it pretty clear what you’re up against:
- Occupancy cost. This is your rent along with electricity, water, cable, phone, internet, and property insurance.
- Food cost. This is how much it costs to acquire and prepare food.
- Liquor cost. Similarly, it’s how much it costs to acquire and prepare alcohol.
- Labor cost. All payroll, benefits, provided meals, sick leave, taxes, and uniforms.
- Inventory variance and shrinkage.
- Kitchen equipment cost.
- POS system cost.
- Marketing and advertising cost.
Woof. Restaurant expenses pile up higher than a good corned beef sandwich. Now let’s take a look at what they should cost.
Average Restaurant Expenses
Here’s a table that sums up the percentage of what most businesses spend on monthly restaurant costs:
These are all ballpark figures, of course, to give you a general idea. Every business is unique and will benchmark and measure against their own internal restaurant KPIs.
Cost Reduction Strategies In Restaurants
Now that we know what we’re dealing with, let’s look at how to reduce cost in restaurants.
How to Control Labor Costs In a Restaurant
The average labor cost for restaurants is around 30% of total revenue. That means a good labor cost for a restaurant is between 20 and 30%. Above 30% is high and below 20% isn’t realistic.
If you clock in at 30% or above, you need to control labor costs. Here are a few ways.
Forecast Sales and Schedule Strategically
Your staff schedule should be directly tied to forecasted traffic and sales volume. Always. If it’s not, you’re missing the single easiest opportunity to reduce labor costs. If you've looked at restaurant marketing plan examples, you'll know that it's easy to predict waves of traffic from promotions. And possible to capitalize with restaurant SEO.
There are a lot of inventory management and sales forecasting tools out there for hospitality businesses. BinWise Pro being one of the industry leaders in leveraging historical sales and purchasing data for sales forecasting. It can do everything from beer keg tracking to purchasing to helping set par level (see par level definition).
But the important part here is not to start copying and pasting your staff schedule week after week. Your weeks won’t be the same, and your schedule shouldn’t be the same.
When your labor costs make up a third of all costs, it makes sense to minimize them. After all, a single percentage in labor cost savings can equate to around $800 a month in savings for the average full-service restaurant.
And when your forecasts don’t pan out and you’ve got a bunch of servers standing around waiting to be cut, just cut ‘em. Your closing servers will be more than happy for the extra sales. They’ve gotta be there anyway.
Tie Bonuses to Labor Cost, not Sales
Try incentivizing management to meet labor cost goals instead of sales goals. If they’re able to avoid paying overtime and run at an optimized labor cost. All while driving adequate revenue? Maybe they should get a little something extra.
Hire the Right People
This is the most obvious but hardest to get right. You must hire the right restaurant and bar staff. That increases employee satisfaction and retention. Two big parts of driving down labor cost.
So what is “right”? Who are these mythical people?
That depends on your bar or restaurant. But as the hiring manager or proprietor, you know the culture you want for your restaurant. You know what personalities will mesh well with the existing employees.
There’s no hard-and-fast rule here. You’ve got to hire the best people you can. And ferreting those out of the woodwork is what makes a good bar manager a good bar manager.
But here’s a tip:
Don’t put too high a premium on experience. People can be trained. Positivity and enthusiasm are worth five times more. Because they can’t be taught.
Hire bright-eyed folks who are actually happy to walk into work and invest in them with training.
And that’s how to cut labor costs in restaurants.
Ways to Reduce Food Costs
Food cost varies week-to-week. So learning how to improve food cost is a matter of pulling and analyzing data often. Which is very easy with bar inventory software like BinWise Pro that puts historical sales and invoicing data right at your fingertips.
If you’re running high, here are some useful food cost control procedures:
Use a Food Cost Calculator 👈
We’ve got an entire post 👆 written about calculating and lowering food cost, and you should check it out. It’s detailed and has a bunch of actionable information.
Keep Tabs on Seasonal Ingredients
Many ingredients spike in price during different times of the year. And if your menu offerings or prices don’t reflect that, your food cost will spike. Make sure you flag any seasonal ingredients you buy a lot of and keep an eye on their historical pricing every time you order. Your pricing strategy or menu engineering may need to change as ingredient prices do.
Don’t put all your eggs in one supplier’s basket. If you build relationships with multiple vendors, you’ll be able to scour their catalogs for the best deal.
Watch Out for Waste
This is a tough one. Waste is hard to control, so prevalent, and often stands in the way of speed. But food expiry and spoilage brutalizes bottom lines. Get strategic with your back of house staff on how to use ingredients before they expire or create menu items around parts of ingredients that aren’t currently being used.
React to Unfinished Plates
Watch your servers and bussers clear tables. Are they routinely carrying half- and quarter-full plates to the dish pit and dumping it all in the trash? You’re paying for that.
If your guests aren’t getting close to finishing their portions, it may be time to reduce your portion size. And reduce your food cost.
How to Control Liquor Costs
Use a Pour Cost Calculator 👈
We’ve got another post 👆 about calculating and lowering pour cost, too! Click through, give it a read, and try to do what it says. You’ll save a lot of money on your beverage program.
You know what pour cost is and you know how to calculate it. But what happens if you’re not pleased with the number on the other side? Here are 4 tips to lower pour cost percentage.
Price Drinks Strategically
One of the easiest ways to reduce pour cost is by pricing drinks strategically. Set a target pour cost first, then set your alcohol pricing and beer pricing accordingly to achieve it. Here’s a handy formula to help:
Drink Price in $ = Ingredient Cost in $ ÷ Target Pour Cost in %
For example, let’s say you want to start serving BinWise Signature Wine as a new item on the menu. The average pour cost for wine is between 30% and 40%. Wine profitability sounds like a lot, but it’s built in to your wine bottle price. So set your target pour cost for this menu item at 30%. Now let’s assume that you bought the BinWise Signature Wine for $5 per bottle from your favorite distributor. You’ll have the following:
$5 per bottle (Ingredient Cost) ÷ 0.30 (Target Pour Cost) = $16 per bottle (Drink Price)
This means that the ideal price for your BinWise Signature Wine should be $16 or higher. Wine by the glass pricing can be similarly tweaked according to target pour cost.
Manage Variance Effectively
Product variance, or “shrinkage,” is the difference between the amount of product sold and the amount of product used within a given time period. Unless your bartenders know how to free pour perfectly, your variance likely has room to improve. To calculate variance or shrinkage, use a variance formula:
Monetary Value Variance = Cost of Product Sold in $ – Usage in $
Percentage Value Variance = (Variance in $ ÷ Usage in $) x 100
For example, let’s say you want to determine the variance of BinWise Signature Gin in April. Your records indicate that your bar’s usage was $12,000 but the total cost of product sold was only $8,000. Using the formula, you will have:
$8,000 - $12,000 = $4,000
($4,000 ÷ $12,000) x 100 = 33.3%
This simple calculation shows that you lost 33% of the BinWise Signature Gin you bought. Made no money on it. Stuff like this drastically brings down your business’s profitability. Knowing the variance helps you identify potential inefficiencies happening at your bar, from inventory miscounting, over-pouring, and even theft.
These are the same issues that cause too high or low a liquor pour cost, so by minimizing your variance, you're helping greatly.
To get the most accurate calculations, consider drilling home standard liquor pours and a standard 5-ounce wine pours to your staff. You'll get the same benefits a kitchen does using a standardized recipe.
Order Products in Bulk
Where do bars get their alcohol cheaply? At suppliers who offer bulk discounts. Ideally, bar operators take their inventory weekly or bi-weekly. This keeps everything trued up and management aware of which products are moving out the door more quickly than others.
That, in turn, allows them to make strategic wholesale purchasing decisions.
Most distributors prefer to sell more without breaking up cases, so they offer buy-in-bulk deals and specials (also called “volume discounts”). By knowing your usage and ordering smartly, you can easily lower your pour cost by lowering ingredient cost.
How to Reduce Costs in a Restaurant: Other Operational Costs
Food, liquor, and labor are the big ones. But there are a few other stragglers that you can make a dent in. Here’s how to reduce expenses in a restaurant from other operational standpoints.
Implement a VoC Program
VoC stands for Voice of Customer. It helps restaurants listen to what customers have to say about a business and implement changes based on it.
And while it obviously has implications for customer satisfaction in the restaurant industry, it can be used to reduce operational costs, too.
The right VoC program excites staff about providing excellent service. If an employee receives positive feedback, they’re rewarded. Doing so not only encourages the right behavior, but it’s been shown to lower employee turnover, too.
A VoC program also helps allocate training to the most impactful areas. By reviewing customer feedback, operators can assign training programs on the operational aspects with the biggest areas of opportunity. That means you save time and money on unnecessarily providing comprehensive training too often. Shorter, more precise operational education will make the biggest impact fastest.
Reduce Energy Usage
While residential customers are experiencing the first declining electricity costs in over a decade, restaurant energy costs continue to surge on.
Why? Restaurants are wiring up. As more and more restaurant operations become automated, it makes sense that we have more things plugged in.
So, what’s an operator to do? The first order of business is to tackle the low-hanging fruit, like replacing conventional bulbs with LED bulbs and setting up smart thermostats.
Consider switching to energy-efficient kitchen equipment that, while costly at first, will pay you back via energy-cost savings in the long run. ENERGY STAR, a government-backed energy conservation organization, has an entire resource dedicated to energy-efficient commercial food service equipment.
Then go through this energy conservation checklist:
- Keep a regular cleaning and maintenance schedule (including restaurant hood cleaning)
- Check seals and gaskets often
- Clean refrigerator condenser coils
- Shut off unused equipment
- Use OEM commercial kitchen parts
You can check out our resource on how to clean a bar or restaurant for tips.
Drive a Hard Rent Bargain
An average commercial price per square foot is around $30 in the U.S. $50 in the big cities. So it’s important to keep an eye on your rent or lease to make sure you aren’t forced into closure with a space you can no longer afford.
The best thing you can do? Be prepared. When negotiating a new lease or space, be crystal clear on what is included. Like what the terms are and what your escape clauses look like. Once you are locked into an agreement, getting out can be difficult and costly.
Worrying about skyrocketing rent? If your lease permits it, consider subletting your space. A sublet is a great option if you can spare the room and are looking for another way to cover your costs.
These are just a few of the ideas that you can implement in your restaurant operation. They’ll help control runaway cost drivers and firm up your restaurant’s bottom line.
Negotiate Your Utilities
Most people agree that calling utility companies is pointless and soul-sucking. Soul-sucking it may be, but it’s not pointless. Utility companies often have pretty loose policies and those policies are in the hands of support reps you can talk to.
When you’re just starting out, try to negotiate a package deal with internet, cable, and phone all bundled together. And if you’ve been a customer for a while, remind them of that. Then tell them that you don’t want to switch providers, but you may have to because of your budget. Maybe there’s something they can do for you.
Cutting Cost Ideas for Restaurants: Equipment
It’s possible to cut monthly restaurant expenses by leasing kitchen and bar equipment. While you won’t build equity, the monthly payments tend to be lower.
You might also consider purchasing used equipment if you’ve got someone on your side who can check that the equipment has consistently been maintained.
Which leads us to maintenance. Kitchen and bar equipment needs regularly-scheduled love. An espresso machine, for example, should be backflushed every few days and backflushed with detergent weekly. All equipment likely has similar needs. And if you’re not keeping up with those needs, you’re heading for big repair and replacement costs.
Get Those Costs Outta Here
“Do better” is classic and terrible advice that a lot of people get on the internet when asking for help. And that’s what a lot of tips about increasing restaurant and bar profitability amount to.
Have better food.
“Great, anyone care to tell me how?” you ask.
But the great thing about lowering costs is that it’s actionable, it's not just about reading restaurant management books. (Actually, our How to Upsell post is actionable, too.) And it does the same thing as increasing sales: it generates more profit.
Instead of focusing on getting unsustainably bigger, try cleaning up your business around the margins, running lean, having a strong restaurant business plan, staying on top of your restaurant balance sheet, and being strategic.
That stuff adds up, believe it.