Rules Of Thumb

Being aware of restaurant industry benchmarks is important. Keep this reference guide top-of-mind when analyzing your specific restaurant’s results. What is critically important to understand about them however, is that each business is unique and not every guideline will relate to every business in the same way or with the same context. For help in determining which benchmarks are appropriate for you, please contact Jeffrey.

Profitability Standards

Sales per square foot is the most reliable indicator of a restaurant’s potential for profit. To calculate sales per square foot, divide annual sales by the total interior square footage including kitchen, dining, storage, rest rooms, etc. This is usually equal to the net rentable square feet in a leased space:

Sales Per Square Foot = Annual Sales/Square Foot Full-service

Under $150/square foot = little chance of generating a profit
At $150 to $250/square foot = break even up to 5% of sales
At $250 to $325/square foot = 5% to 10% of sales

Limited-service
Under $200/square foot = little chance of averting an operating loss
At $200 to $300/square foot = break even up to 5% of sales
At $300 to $400/square foot = 5% to 10% of sales (before income taxes)

Rent and Occupancy Cost Standards

Rent = 6% or less

Generally, the goal is to limit rent expense to 6% of sales or less, exclusive of related costs such as common area maintenance (CAM) and other occupancy expenses.

Occupancy = 10% or less

Occupancy cost includes rent, CAM, insurance on building and contents, real estate taxes, personal property taxes, and other municipal taxes. Many operators want to keep occupancy cost at or below 8% of sales, however, 10% is generally viewed to be the point at which occupancy cost starts to become excessive and begins to seriously impair a restaurant’s ability to generate an adequate profit.

Prime Cost Standards

Prime cost is one of the most telling numbers on any restaurant’s profit-and-loss statement. Prime cost is arrived at by adding cost of sales and payroll costs. Prime cost reflects those costs that are generally the most volatile and deserve the most attention from a control standpoint. It’s very easy to lose money due to lax or nonexistent controls in the areas of food, beverage and payroll. Many successful restaurants calculate and evaluate their prime cost at the end of each week.

When looking at a restaurant’s overall cost structure, prime cost can be very meaningful, particularly in cost of sales and payroll cost. Some restaurants, such as steak and seafood restaurants, may carry very high food cost and yet be extremely profitable.

Percentage of Cost Standards

Food
Food cost equals 28% to 32% in many full-service and limited-service restaurants.

Alcoholic Beverage
Alcohol costs vary with the types of drinks served:
> Liquor – 18% to 20%
> Draft beer – 15% to 18%
> Bar consumables – 4% to 5%
> Wine – 35% to 45%
> Bottled beer – 24% to 28%

Nonalcoholic Beverage
Standard practice is to record nonalcoholic beverages sales and costs in Food Sales and Food Costs accounts:
> Soft drinks – 10% to 15%
> Specialty coffee – 12% to 18%
> Regular coffee – 15% to 20%
> Iced tea – 5% to 10%

Paper
In limited-service restaurants paper cost should be classified as a separate line item in “cost of sales.” Historically, paper cost has run from 3% to 4% of sales.

In full-service restaurants, paper cost is usually considered to be a direct operating expense and normally runs from 1% to 2% of total sales.

Payroll & Salaries
Payroll cost as a percentage of sales includes the cost of both salaried and hourly employees plus employee benefits, which includes payroll taxes, group, life and disability insurance premiums, workers’ compensation insurance premiums, education expenses, employee meals, parties, transportation, and other such benefits. Total payroll cost should not exceed 30% to 35% of total sales for full-service operations, and 25% to 30% of sales for limited-service restaurants.

Generally, you don’t want management salaries to exceed 10% of sales in either a full- or limited-service restaurant. This would consist of all salaried personnel.

Hourly Employee Gross Payroll
> Full-service – 18% to 20%
> Limited-service – 15% to 18%

Limited-service restaurants generally have lower hourly payroll cost percentages than full-service restaurants. In limited-service restaurants, managers often perform the work of an hourly position in addition to being a manager. In some cases, however, hourly workers may also perform management roles on some shifts, which could lead to higher hourly payroll costs in these restaurants.

Employee Benefits Overview
> Employee benefits 5% to 6% of total sales
> Employee benefits 20% to 23% of gross payroll

Employee benefits can vary somewhat depending primarily on state unemployment tax rates and state workman’s compensation insurance rates. Restaurants that are new or have had a large number of unemployment claims may have state unemployment tax rates that could cause their employee benefits to be higher than the standard.

* All percentages shown are the ratio of each item’s cost divided by its category sales (not total sales).

At-A-Glance

Sales to Investment (Annual Sales/Startup Cost)

Leasehold – at least 1.5 to 1

Own Land and Building – at least 1 to 1

Sales Per Square Foot

Losing Money

Full-service – $150 or less.

Limited-service –  $200 or less.

Break-even

Full-service – $150 to $250.

Limited-service – $200 to $300.

Moderate Profit

Full-service – $250 to $350.

Limited-service – $300 to $400.

High Profit

Full-service – More than $350.

Limited-service – More than $400.

Occupancy and Rent

Rent – 6 percent or less as a percentage of total sales.

Occupancy – 10 percent or less as a percentage of total sales.

Prime Cost

Full-service –  65 percent as a percentage of total sales.

Limited-service – 60 percent as a percentage of total sale

Food Cost

Generally – 28 percent to 32 percent as a percentage of total food sales.

Alcoholic Beverage Costs

Liquor – 18 percent to 20 percent as a percentage of total bar sales.

Bar consumables – 4 percent to 5 percent as a percentage of total bar sales.

Bottled beer – 24 percent to 28 percent as a percentage of total bar sales.

Draft beer – 15 percent to 18 percent as a percentage of total bar sales.

Wine – 35 percent to 45 percent as a percentage of total bar sales.

Nonalcoholic Beverages

Soft drinks (post-mix) – 10 percent to 15 percent as a percentage of nonalcoholic beverage sales.

Regular coffee – 15 percent to 20 percent as a percentage of nonalcoholic beverage sales.

Paper Cost

Full-service – 1 percent to 2 percent as a percentage of total sales.

Limited-service –  3 percent to 4 percent as a percentage of total sales.

Payroll Cost

Full-service– 30 percent to 35 percent as a percentage of total sales.

Limited-service –  25 percent to 30 percent as a percentage of total sales.

Management Salaries

Ten percent or less as a percentage of total sales.

Hourly Employee Gross Payroll

Full-service –  18 percent to 20 percent as a percentage of total sales.

Limited-service –  15 percent to 18 percent as a percentage of total sales.

Employee Benefits

Five percent to 6 percent as a percentage of total sales.

Twenty percent to 23 percent as a percentage of gross payroll.

Jeffrey Summers
For four decades, my coaching, consulting, public speaking, workshops, management team retreats and articles have helped hundreds of hospitality leaders worldwide, build successful Hospitality businesses. The Summers Hospitality Group is a global full-service hospitality consulting firm best known for its unique results-driven, strengths-based system for developing extraordinary leaders and demonstrating the performance impact they have on their organizations.