This is part five of How To Open a Restaurant, an occasional series about the realities of opening a restaurant in Toronto. Last time, we looked at the design and construction process. This instalment looks at how to figure out prices for the menu.
Many diners will probably look at a restaurant’s menu and think, why pay $20 for a plate of chicken and vegetables when they could make the same dish at home for a fraction of the cost?
When opening a restaurant, figuring out how much to charge for food is more than just covering ingredient costs and then tacking on a few extra dollars as profit. In reality it’s a detailed formula where every penny accounts for expenses such as labour and rent as well non-food details such as cleaners, napkins and music licensing. But depending on the restaurant, how the breakdown works out differs.
A Hakka restaurant spends hundreds each month on the free tea given out to diners, an ice cream shop walks the line between providing a good deal and increasing ingredient costs, and a burgeoning restaurant empire has to adapt its menus to suit the different neighbourhoods and budgets around the city.
“A lot of people think it’s easy to open a restaurant. It’s anything but,” says Jeanette Liu, who runs Yueh Tung Restaurant in the Bay St. and Dundas St. W. area alongside her sister Joanna, their father Michael and mother Mei Wang. “My parents ran it for over 30 years and it’s a testament to their hard work. People think that restaurant owners aren’t intelligent and they’re just dumping plates on tables, but it takes a lot of brains.”
Yueh Tung is in a peculiar, but not uncommon situation when it comes to food pricing for what’s considered an “ethnic” restaurant in North America. The expectation is that the food must be cheap and in big portions, even if the restaurant is spending upwards of $40,000 on vegetables and anywhere between $60,000 to $100,000 on meat every month. And being in a prime downtown core location, rent is $30,000 a month (it was around $1,000 back in the 80s). To pay for all that with a $10.50 plate of chili chicken is a daunting task.
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“Our margins are very slim, but thankfully we do large volumes. Thirty to 40 per cent of every dish should be your food costs, another 30 to 40 per cent goes to labour, and then 10 per cent for rent and other costs,” says Joanna Liu. “After all of that, if you’re lucky, the profit margins are two to five per cent.”
She breaks down one of their most popular dishes, two whole lobsters wok-fried in ginger and green onion, a staple menu item at most Chinese restaurants. The restaurant charges $55 for it. At the time, the lobster cost $13 per pound (it typically ranges between $11 and $15), so for two one-and-a-half pound lobsters, the cost of the lobsters alone is $39. She estimates the aromatics (ginger, green onion and Spanish onion) cost about $1.20 per order, but that doesn’t include basic ingredients such as salt, pepper, oil and other spices. The remaining $14.80 must cover the cooks and waitstaff, as well as electricity and gas to power up the kitchen before the restaurant sees any profit. If it’s for takeout, 49 cents to a dollar goes towards things such as utensils (five cents for a pair of chopsticks), hot sauce (15 cents) and its container (two cents), food containers (23 cents) and napkins (two cents each, or about $4500 in total for a year’s worth of napkins).
“Some days we honestly make nothing on our lobsters but we keep it on the menu because of the demand,” she says, adding if it’s taken off the menu they risk losing customers. In terms of labour, one cook butchers the lobster, another batters and fries it, and then a third cook tosses it in a wok with the aromatics. Then a server takes the dish out to the table and later cleans the table when the guests leave, and a dishwasher cleans the plate. All in all, that one plate of lobster went through the hands of five staffers that all need to be paid. Variable costs include phone bills, website maintenance and wifi.
Each time a customer pays with debit or credit cards, the restaurant also pays a service fee to use the machines (that money also goes towards paying for a card’s benefits and rewards). To reduce fees, some restaurants require diners to spend a minimum amount in order to pay with a card or offer discounts to diners who pay with cash.
There are also parts of the dining experience at Yueh Tung that customers seldom notice: cleaners every three weeks, carpet washers every three months, filters for the air system as well as the “freebies” that diners expect from a Chinese restaurant: fortune cookies and oolong tea, which costs the restaurant $300 for a two month supply of leaves. The restaurant recently made the tough call to only serve tea when diners asked for it. “If we put it on the table, it either makes people not want to order other drinks or they don’t drink it and we have to throw it out,” says Jeanette Liu. “It was a big decision. It’s OK so far but we thought we would lose business over it.”
Yorkville’s Mediterranean-inspired Bar Reyna also stopped offering bar snacks at no additional charge because it was resulting in food waste and cutting into the restaurant’s bottom line, says owner Nicki Laborie. For her, she also follows the common rule that a dish’s ingredient should cost about 30 per cent of what a restaurant charges. There are exceptions, however.
“We had an octopus dish that I had to take off the menu,” she says. “When the supplier makes it $5 more per pound, you can’t just absorb that cost and I don’t want to offer octopus for $45. But for our zucchini fritters, the food cost is less so we can make more profit on that to balance out another dish on the menu where the ingredients cost more.”
At Laborie’s second restaurant, Reyna, a food stall inside the Assembly Chef’s Hall in the Financial District, management wanted all the stalls to have similar prices that would appeal to the lunchtime crowd.
“It’s all about portioning,” says Laborie. “The Bar Reyna salad at Yorkville is $18 but at Assembly we offer a smaller version that’s ready for takeout and priced lower. The overhead at Assembly is much lower because there’s no table service so we can charge less.”
Laborie recently opened a third restaurant, Reyna On King, in Corktown with most of the menu items under $12 to cater to a more residential neighbourhood. The advantage of having multiple restaurants, she says, is that they can spread out the costs. On one night, Reyna on King was quiet while its sister Yorkville location was getting slammed so Laborie sent buckets of already prepared fries from the King East restaurant to Yorkville. Not only does this cut down on the extra labour required to prep more food at the busier location, it also prevents unsold food from having to be thrown out.
“I’ve been in this business for 25 years and this is what you do when you design a menu,” says Laborie. “A food cost for one dish can be 50 per cent but another can be 15 per cent, so overall you want food costs to be 30 per cent of operating costs. The bar, which is liquor and wine, should be 20 to 25 per cent of over all costs. It used to be 30 per cent payroll but now it’s 35 to 45 per cent, which threw a wrench into things. The remaining 20 per cent goes into rent, marketing, decor and flowers.”
While Yueh Tung and the three restaurants in the Bar Reyna family have to deal with ordering vegetables, seafood and meat, calculating food costs is also a delicate balance for a seemingly simple concept like an ice cream store.
East Chinatown’s Wong’s Ice Cream earns 80 per cent of its revenue during the summer months, says owner Ed Wong. A scoop costs $4.75, but not every flavour costs the same to make. Like Laborie, Wong says the key to designing a menu is to have a mix of items that have a higher profit, and more specialty items that while have a higher food cost, which will draw customers in, such as his black sesame and salted duck egg ice cream.
“It’s no coincidence that the more popular flavours happen to be the more expensive ones to produce,” says Wong. “When you make ice cream the way we do, a lot of it is made by hand. Our coconut mango sticky rice is more difficult to make because the rice has to be cooked, the mango is swirled in, it has to be heated then chilled. It’s a two day process.”
He says that food costs, in particular the price of dairy, have steadily gone up in the last two years (seven per cent in the last year), resulting in him having to raise the price of a scoop to its current price of $4.75 from $3.80 when he opened.
“You have to increase your price or else it’s coming out of your pocket but there’s a fear of driving away your customer base,” he says. “There will be a point when you can’t get enough customers to make a profit. We certainly want to be paid fairly but also provide a good value and experience.”
Wong admits that the amount he pays himself fluctuates. After all, an ice cream shop is extremely weather dependant: if he expects a sunny weekend but it ends up raining, he still has to pay his staff for the shifts they were scheduled for even if they sell a fraction of what was expected.
“Customers may not think that they’re paying for anything else but the scoop, but the money also goes into the person that served them, the space, everything gets factored into the experience of being there,” says Wong.
Karon Liu is the Star’s food writer and is based in Toronto. Follow him on Twitter: @karonliu