By Rory Crawford
Success in the restaurant industry isn’t easy.
The statistics aren’t pretty: 60 perrcent of restaurants don’t make it past their first year and 80 percent go out of business within five years. Despite the hurdles, many restaurant owners and operators believe that as long as they’re making money, they’re doing “good enough.”
The failure in this approach is that it doesn’t account for a universal truth—costs increase.
According to an IBISWorld report on single location full-service restaurants in the U.S., 67 percent of a restaurant’s costs go directly to wages and purchase expenses. Additionally, the average profit margin for a restaurant, after removing all other costs, is only 6.2 percent. With a profit margin this slim, insolvency is unfortunately never far away.
The biggest risk for the restaurant industry is rising wages and food costs. If you’re not constantly working to improve profitability and grow your revenue, the costs will take over. It’s imperative that you’re consistently and actively reducing costs to maintain your current level of success. How can you do this? Improving efficiencies.
More Restaurant Competition, Lower Menu Prices
Competition in the restaurant industry is at a recent high. Sales at casual, fine-dining and fast-casual restaurants will grow at a slightly faster clip this year, according to a forecast from Technomic. And sales at restaurants was expected to reach $825 billion in 2018, according to the National Restaurant Association, the ninth consecutive year of sales growth for the industry.
It’s classic supply and demand economics—the greater the supply, the lower the prices. Competition amongst restaurants in the United States is both driving down menu prices and making it more difficult to increase them. And it’s not just competition from similar concepts. Limited service restaurants (including quick service and fast casual) are one of the fastest growing segments in the food service industry.
Restaurant Wages are Rising
Wages represent a significant portion of your operating costs—34.6 percent, according to IBISWorld—and you can expect that number to increase for a few reasons:
Our national unemployment rate is the lowest level in decades.
Minimum wage laws in 18 states and dozens of other cities and counties is increasing payroll costs
Thanks to the high turnover rate and a record low unemployment rate, it’s becoming harder and harder for restaurant owners to keep people without increasing payroll. If your restaurant is in one of the 18 states with new minimum wage laws, you may already be experiencing the crunch. All of these factors create incredible opportunities for those looking to work in the restaurant industry, but it’s not so great for your bottom line.
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