Opening a restaurant in Miami is not without its risks. We’ve all seen our fair share of restaurants come and go, and many of us with our own ideas of what may or may not work. But one thing is certain — when a bold restaurateur decides to move forward with their vision, they have to work hard to keep it alive.
This year has been particularly rocky for restaurants in Miami. Fortunately, as we enter the fall season, we’ve begun to see improvements. Data from both the city and industry research firms show healthy growth projections for the second half of the year. According to data released in July, from May onward, Miami’s growth in the restaurant industry has begun to outpace cities like New York, Los Angeles, and Chicago. Also in the month of July, new store openings outpaced store closures.
So what goes on behind the scenes of our favorite local restaurants? What are the daily financial decisions that drive the business? We did some research and sat down with some local restaurateurs to get the down-low on what goes on behind the scenes. You will find that while Miami’s restaurant culture is unique, what drives our local industry is not too different from other major cities.
The true price of a meal
Let’s take a quick little walk together. As you stroll into a restaurant, take a mental snapshot of all the moving pieces. A hostess greets you at the door and asks you how many guests will be joining. You are then escorted to a table where a server will assist you during your meal. Both are usually paid a combination of an hourly wage and earned tips. The chair you are now sitting on and the table in which you place your arms were costs for the restaurant. As you glance at all the thematic décor and table ornaments, you realize these are also additional costs to the restaurant.
Now let’s head to the kitchen, where we find industrial grade cooking equipment and a number of elaborate cooking utensils. The food you order is made from ingredients purchased beforehand, by an army of chiefs who are also paid an hourly wage.
The high level overview can be daunting, and we haven’t even covered everything. Owners and their management staff need to ensure the whole operation runs like a well-oiled machine. This means having to keep their finances in order to keep the dream alive.
Nick Govey, owner of the Ranch House Restaurant, stressed the importance of keeping an eye on the cost of food, which can vary from week to week. In a very telling example, Govey explains that “one week you pay one price for eggs and the next prices go up because the avian flu kills more than 40 million chickens.” This shows how events far from home can have huge effects on the day to day operations of your business. To avoid the risks of volatile food prices, owners often use multiple vendors for their products. While there are an abundance of providers, owners must be constantly vigilant to keep an eye on where to find the best bargains.
In considering equipment, both initial cash outlays and maintenance costs can be substantial. Often, though, restaurateurs move into locations with existing equipment already installed. The value of the equipment is factored into the purchase or rent price. Other times the equipment will need to be purchased, adding to the already hefty initial capital investment.
The decision to upgrade or purchase new equipment can be a costly one. The allure of new, with all its bells and whistles, doesn’t always play out the way you expect. Leon Squndrito, owner of Salvatore’s Pizza, says that the “oldest equipment usually runs the best”. Even if the location has equipment already built in, you must plan for the event of an inevitable failure. Squndrito describes that equipment related to refrigeration and AC is often the common culprits for regular maintenance.
The risks and the rewards
Food is a passion for many, and for restauranteurs, doubly so. However, for a restaurant to survive, it needs to turn a profit. There are a host of macroeconomic considerations that affect potential profitability, including dining alternatives, commodities costs, and increased labor costs, to name a few, most outside of a restaurant owner’s control. Which means that whatever kind of food a restaurant serves, from haute cuisine to local diners, owners must constantly keep a close eye on costs, execute operational effectiveness, and always fight for those margins.
A common calculation in the industry is prime cost, a figure representing total cost of goods plus total cost of labor as a percentage of total sales. Experts say that an ideal prime cost for most restaurants is between 55 – 60 percent. Industry benchmarks show that food costs alone usually take up around 30 percent of total sales and labor costs average between 30 – 40 percent. Prime cost is an important metric because it gives restaurants the ability to hone in on controlling what affects the bottom line most. Data on private restaurants is difficult to find, but comparing publicly traded counterparts, in 2015, profit margins range between 5 – 14 percent.
What does that mean? Running a restaurant means never forgetting it’s a business, while also remembering that it’s a passion. Opportunities are everywhere, but as with all things, they require knowledge, execution, and an understanding of the obstacles ahead. Success takes a lot of work, creativity, dedication, and just a bit of luck. But Miami always seems hungry for more.