Restaurant Operating Costs: Where Does the Turnover Go?

Cüneyt OnurRent, produce, labour and energy: where does a restaurant's turnover go? Restaurant operating costs are the real test that begins once a restaurant opens.

Money comes in, but most of it goes straight back out in costs. In this article we break down restaurant operating costs item by item. The ratios are based on observations from the restaurants we have designed over more than thirty years. We also explain what is changing these ratios most today: inflation.

Why Do Some Restaurants Open and Close So Quickly?

A restaurant opens on a corner and doesn't take off. Another opens in its place, and that doesn't work either. Maybe the fifth one finally works. Yet the reason is usually neither the food nor the look of the place; it is that the business was miscalculated from the start.

The wrong segment, the wrong location and wrong cost assumptions come together, and in the end turnover doesn't cover costs. That is why, in the first meeting, we always ask investors the same questions: What will you sell? To whom? What hours will you be open? Which service model will you choose? And how much budget are you setting aside? The answers also set the framework for operating costs.

Venues built on the right calculation last a long time: Düveroğlu and Balıkçıköy Fahri have been operating with their original design for years.

Restaurant Operating Costs: How Turnover Is Distributed

The table below shows how turnover is distributed across costs in an average restaurant. The ratios are sector averages, so they vary with segment, location and period.

Added together, costs excluding taxes and commissions reach roughly 75–85 percent of turnover. In other words, profit is made in the narrow margin that remains. Good management means constantly controlling these percentages and being able to bring each of them down.

How Has Inflation Changed Restaurant Operating Costs?

Today the main reason pushing these ratios up is inflation. Ingredients, energy and wages are rising fast, while menu prices can't be raised at the same pace because guests are price-sensitive. As a result, the share of costs in turnover grows and profit shrinks.

Energy is a good example: once around 1–3 percent of turnover, its share has risen to 3–5 percent today. Similarly, the cost of produce has risen from one third to 35–38 percent, and labour has gone up by a few points too.

And investors' expectations often don't change: they want to offer mid-segment guests upper-segment quality at lower-segment cost. In an inflationary period this equation doesn't work, which is why the calculation must be made before opening, with realistic ratios.

Restaurant Operating Costs, Item by Item

Rent

Rent should be about ten percent of turnover; we consider this the optimum ratio. Between 12 and 15 percent is manageable, but then you need to save on other items. Anything higher is risky.

In fact, rent is a consequence of the choice of segment: the segment defines the target guest, the target guest defines the location, and the location defines the rent. For details, see our choosing a restaurant location article.

Cost of Produce

In the past, the cost of raw produce was expected to be one third of turnover; today it is around 35–38 percent. Produce covers raw inputs such as meat, vegetables, dairy, bread and water, so the structure of the menu and correct portioning directly affect this item.

Labour

Labour's share has risen from 20–23 percent to 25–27 percent, and finding qualified staff is getting harder. A good operator manages this item through efficiency: a kitchen and service layoutthat does the same work in fewer steps can keep labour within 21–23 percent. The difference is often the profit itself.

Energy

Although energy's share looks small, it is one of the fastest-growing items. The biggest energy items are the kitchen's machinery and equipment and the heating, cooling and ventilation units; lighting's share is much smaller by comparison. That is why energy is now a cost that must be calculated at the design stage.

Waste, Complimentary Items and Losses

Waste, complimentary items and losses average 1–3 percent. These losses arise in the natural flow of business: a dropped plate, a dish the guest didn't like or a broken bottle is a cost that doesn't turn into revenue.

Taxes, Financing and Card Commissions

On top of these come tax differences, financing costs and credit card commissions. Because the rates vary with regulations and banks, we don't give figures here, but they must always appear as a separate line in the budget.

How Do Architectural Decisions Affect Restaurant Operating Costs?

Restaurant operating costs are not only the operator's concern. Decisions made at the design stage affect most of these items for years:

• The right floor area: A space larger than necessary means both higher rent and higher energy costs.
• Kitchen and service flow: Every extra step taken by waiters and cooks adds to labour costs.
• Kitchen equipment, heating, cooling and ventilation: Most of the energy bill comes from here. We cover this in detail in our restaurant technical infrastructure article. Lighting's share is smaller; you can find the right choices in our restaurant lighting article.
• Material selection: Durable materials also reduce maintenance and renewal costs.

That is why we begin a restaurant project not just with a drawing, but with a cost table. We cover the opening investment separately in our cost of opening a restaurant article.

A restaurant is not an expense but an investment. So the first question is: how many years will it take to pay back?

Frequently Asked Questions About Restaurant Operating Costs

Source

The ratios in this article are based on what CO Mimarlık founding partner Cüneyt Onur said on the programme "İşte Bunu Konuşalım", broadcast on Endüstri Radyo on 20 November 2023. You can listen to the full programme on SoundCloud, and read selected excerpts from the interview on our Restaurant Design page.