Lesson 8: Brick & Mortar
More than one restaurant owner ended up muttering “What was I thinking?” when they started a brick-and-mortar eatery. We’ll walk you through the process to reduce the chance you’ll have a similar epiphany down the road.
Brick & Mortar Restaurant
Costs
If you’ve been running a Cottage Food operation or selling out of a food truck, the cost of starting a brick-and-mortar restaurant may give you sticker shock. The costs can vary widely, depending on the type of restaurant you’re starting, whether it’s a takeout-only stand or a full-menu sit-down restaurant. The kind of food can also impact costs since fast food businesses typically have lower food costs compared to a higher-end establishment because of the choice and quality of ingredients.
Startup costs can range from $175,000 to $750,000 plus. Following is a list of costs you may need to consider in your own cost projections.
- Rent/Lease
Space costs money, and the monthly cost of renting, leasing or even owning your space will account for roughly 5% to 10% of your overhead. The actual cost depends upon your location, community, square footage and what is included in the rent or lease.
- Utilities
The average restaurant spends 3% to 5% of its overall operating costs on utilities, including electricity, gas and water. The cost of operating the kitchen is pretty predictable; it’s the cost to light and heat the dining space that will affect your monthly cost the most.
- Labor
Labor is the biggest cost center in a restaurant, right up there with the food. Labor costs include hourly wages, vacation pay, sick leave, benefits and payroll taxes on the hard cost side, and the cost to recruit and train on the soft cost side. The target goal is to keep costs around 25% to 30%. Obviously, quick-service restaurants have lower labor costs (fewer people).
To calculate labor costs, divide the total labor costs for a period by the total sales for that period, multiplied by 100. If your labor costs were $20,000 for a month and sales were $70,000, your percentage would be 28% of operating expenses. A major variable is the cost to recruit, train and keep employees. Since the pandemic, this has increased the soft cost of labor, which is more difficult to calculate but has an impact on your bottom line just the same.
Return to Main Office
Courses
Introduction
1. Cottage Food Basics
2. The Business Plan
3. Pricing
4. Marketing
5. Food Booths
6. Food Trucks
7. Pop-Ups
8. Brick & Mortar
9. Exit Strategy
- Technology
It’s hard to run a profitable restaurant without technology. While some items may seem luxurious, especially when there are so many demands for dollars elsewhere, technology can streamline operations, reduce hours spent managing staff, inventory and operations, increase customer satisfaction and even increase sales.
Employee scheduling is time-consuming. One in four restaurants report that the manager spent three or more hours on employee scheduling. A simple scheduling tool or app can give you more time to focus on other activities that demand your attention.
A good point-of-sale (POS) system is essential. In the old days, a cash register worked just fine, but these days, POS systems will provide customers with an experience they expect and allow you to gain insights from your sales. These days, it’s standard for wait staff to carry devices that will enable customers to pay for their meals right at the table. Some restaurants even have devices on the table so they can place orders for additional drinks, play games, and, when it comes time to leave, slip in a card and pay without waiting for a server to make their rounds. More than a third of customers expect contactless/mobile payments as part of their dining experience.
Technology can also help you get orders from the table to the kitchen more efficiently and allow you to manage online orders and takeout by connecting your menu and ticketing system to services such as Doordash or Grubhub.
- Marketing
There’s no point opening a restaurant if no one knows you’re there. If you’ve built through the ranks of food business operations, you probably have a good following of loyal customers. But they won’t be sufficient to fill enough seats on a sustained basis to make your business run in the black. You need to market your establishment and build awareness and brand with the community, not just the locals, but those who may be drawn to your community by your concept. Franchises have the benefit of nationally supported advertising campaigns, but as a local restaurant, you don’t have that luxury.
As you think about your costs, you want to allocate about 3% to 6% of your overall budget to marketing. You may need to spend more than that in the initial years to build awareness and establish your brand. But don’t make the mistake of paring it back too much down the road since restaurants depend on a steady stream of new customers as well as regulars. We have a lot more about developing a Marketing strategy in our Entrepreneur Academy.
- Licenses & Permits
The cost for proper licenses and permits can run hundreds to thousands of dollars. A liquor license can be the most costly item on this list. If you don’t have them already, you will need a state (and sometimes a city) business license, Employee Identification Number (IRS), Certificate of Occupancy, food handling permits for your staff and a food service license.
- Professional Services
A restaurant consultant isn’t a necessity, but if you haven’t run a brick-and-mortar operation before, you may want someone who can point out some things you hadn’t thought of. Additionally, you may need additional professional assistance, such as an attorney, interior designer, architect and certified public accountant. This can run you anywhere from $0 (if you know people who know people) to $50,000.
- Contingency
When you get things up and running, it may take time to turn a profit. Make sure your budget includes a contingency fund so you can handle the initial ups and downs of sales and any unanticipated costs you may come across, such as a piece of equipment that needs repair or inclement weather that keeps customers away.
- Other Costs
Depending on the space, you may need to estimate other startup costs. The actual cost depends on how much work the space requires, front and back of house. These include the décor, remodeling and furnishings. These can run anywhere from $5,000 and up for an interior and $1,000 to $40,000 for the exterior (including signage). The cost of equipment is another expense. You will need new dishes, linens, glassware and utensils, and any new kitchen equipment – stoves, refrigeration, prep counters, ovens, etc. Finally, you will need to factor in the cost of sanitation services, including keeping the kitchen and dining areas clean and hiring a linen service for your tablecloths, napkins and uniforms.
If you are on a tight budget, consider purchasing the higher-cost items from an auction, second-hand equipment dealer or a liquidator. Even in good times, the restaurant industry has a high turnover rate, and the secondary market is an excellent place to source high-end kitchen equipment for a cost far under retail.