As a restaurant owner, you have a lot of company in the industry. In 2017 there were over 647,000 restaurants in America alone, and more than half of them (346,105) were independently owned rather than part of chains. Thanks in part to the large number of restaurant funding options available, ambitious restaurants entrepreneurs have found a lot of success in this industry.
That’s not to say owning a restaurant is a risk-free venture. Consider, for instance, that in 2017 almost 11,000 independent restaurants went out of business, which is a 3% contraction. Success in restaurants is possible, but it’s never guaranteed and it’s rarely easy.
As a restaurant owner you should always be armed with knowledge. We have rounded up some eye-opening stats about the present and future of the restaurant industry. Explore what these statistics mean before applying the insights to your own restaurant’s strategy.
Profit Margins are Slim
The average restaurant profit margin is 6.2%, and in reality, that margin can be far less for some eateries. By comparison, for small businesses involved with computer services or online retail the average profit margin is 25.4% and 43.7%, respectively. There is a very thin line between success and failure in the restaurant industry. A number of unavoidable circumstances can tip that balance unfavorably, turning a profitable restaurant into a money loser. With that in mind, owners must practice careful financial management and investigate various restaurant funding options to ensure the balance sheet stays in the black.
Unexpected Expenses Are Common
One study broke down the costs at an average full-service restaurant. As expected, wages make up the biggest cost at 34.6% of the operating budget, followed closely by inventory purchases (like food and dishware) at 32.5%. Costs like marketing, depreciation, rent, and utilities rounded out the costs, but all were eclipsed by the 15% that restaurants spend on “other expenses.” These expenses might include replacing a broken stove, fixing a leaky toilet, or renovating the bar area – anything that does not fall under the umbrella of normal operating costs. Restaurants would like to minimize these expenses, but anything that is hard to predict is hard to manage. As a result, a large percentage of the restaurant budget must be kept on hand as contingency funding, and even then it can prove to be inadequate.
Sales Could Be Slow
Sales at independent restaurants are expected to grow less than any other restaurant category in 2019. Experts predict sales will grow by 4.9% at fast-casual restaurants, the highest, compared to just 2.8% at full-service restaurants considered “midscale” or “family dining.” This forecast is even less than it was in 2018, suggesting that independent restaurant owners could be facing cash flow issues in the near future. One way to overcome budget shortfalls or inject new capital into the business is with a restaurant owner loan. They offer a bridge between temporary obstacles and long-term sustainability.
Staffing is Getting More Expensive
Unemployment is extremely low right now – 3.8% as of March 2019. Restaurants require a lot of staff, experience a lot of turnover, and therefore spend a lot of time looking for qualified cooks and servers. Finding those employees in a compressed labor market will not be easy. Worse, since the demand for staff is so high, restaurants will need to pay more to attract workers. Plus, 18 different states are exploring changes to their minimum wage laws. For one reason or another, restaurants will likely have to spend more on wages/perks to avoid operating with a skeleton crew.
Food Costs are Going Up
According to the USDA, the consumer price index (CPI) for “food-away-from-home” (restaurant purchases) rose by 0.4% in February 2019, making it almost 3% higher than it was in 2018. A number of forces – oil prices, weather, and demand – are pushing food costs for restaurants steadily higher. Meanwhile, costs for “food-at-home” (consumer purchases) are rising more slowly following a several year decline. Right now, it’s relatively cheap to eat at home and unusually expensive to cook commercially. Restaurant owners will need to find a way to cover these extra costs without slowing down sales. Taking out a restaurant owner loan is one option to meet that need.
Restaurants are More Sustainable Than Reported
Not all the numbers are bad. For instance, for years it’s been widely cited that 90% of restaurants fail within their first year. Two economists decided to test this metric by looking at data for single-establishment restaurants over the course of 20 years. They discovered that only 17% of restaurants fail in year one, which is equal to landscapers and mechanics and less than real estate agents. The popular perception of restaurants as wildly risky endeavors simply isn’t true. However, when 1 in 5 new restaurants closes within 12 months, success obviously isn’t easy or guaranteed. Cash flow issues are the most common cause of failure, which is why it’s so important to have contingency plans and funding sources in place from day one.
Most of these statistics emphasize the precarious financial position restaurants are in. Just remember that lack of funds is a problem, but it’s not evidence of a failing or unsustainable restaurant. Lots of restaurants go under because they have inadequate restaurant funding options, not because their service, menu, or business model are flawed. As long as your restaurant plans for the expected and the unexpected, you’re likely to end up as a positive statistic.