Well, there are good reason for selling stuff under-cost if the loss can be more than made-up for in other charges. Doing this is as old as retail itself-- a "sale" in the retail world. In the restaurant business under-cost prices for a particular item can get more people in the door who then buy drinks, appetizers and other menu items while enjoying the great deal of a $20 chicken. That's easier said than done, of course.
Free breadsticks?(okay if you produce them in house or have a massive amount of locations), $15 worth of produce sold for $14? Hell no.
25% - that's the sales price you can put towards food costings, this should give you a rough idea of the unforseen costs.
If your kitchen isn't running at better than 25% food costings, your kitchen isn't profitable. Some places you can take a cut from this if you are working with another industry(such as gambling), but for a pure restaurant/cafe, don't even think about not hitting that point.
I find it interesting how you can narrow profitability analysis down to individual areas within a business.
As an example: Look at the walk in fridge as a business that 'buys' food from grocers and 'sells' food to the chefs when they need it, 'losing' money when food is wasted. Similarly front of house 'buys' food from the kitchen.
You're argument would be akin to the keyboard buying from the user to write code.
I think I realise what you are leaning towards, and it is like that.
Any piece of equipment has a direct relation to the ROI, honestly it's not pleasant to think of staff that way, but when the margins are that tight, it has to be done. (that's one of the reasons I left hospitality.)
It's not like advertising where you can charge someone 20k for a dm campaign, people will only pay so much for food, and the 'whales' arnt really there (at least not enough to keep an entire restaurant running at a loss).
When you're profit margin is less than 25%, and you can't guarantee the number of users per day, let alone per week, then you're damn eight everything is calculated as a cost down to the cent.
> When you're profit margin is less than 25%, and you can't guarantee the number of users per day, let alone per week, then you're damn eight everything is calculated as a cost down to the cent.
If you cannot project within your margin of error the number of covers you would turn per day or per week then you do not have a restaurant business, you have a hobby.
Selling for a loss in a retail as a lot of benefits that don't really translate well to restaurants though. One of the biggest I'd think is the 'shelf life' of products. In retail items move in and out throughout the year but an item in stock doesn't really go bad so the main reasons to sell at a loss are just to clear out space for other newer items that might sell better. (Also even fairly deep sales aren't even necessarily actually losses for the business because wholesale prices are much cheaper)
In the restaurant business there's not really a good analogue on a regular menu, a loss leader isn't clearing out any stock because the items are constantly just degrading naturally so you'd be better off just pulling the item if it costs more to make and not constantly making it.
It'd be like if JiT manufacturing was a thing and stores made shirts for a loss in the store from raw materials, it just doesn't make sense unless that item has consistent accessories (your drinks and apps) that sell for much larger margins. It's a dangerous game because you're counting a lot on consistent consumer behavior.
People need something to chew on while drinking the wine that has a very large markup on it. Consumer expectation is a big part of pricing. For whatever reason, people are OK shelling out cash for wine and beer at a restaurant, so those get a big markup. That gives you wiggle room to sell some entrees at cost or a loss, which you need because consumers aren't as comfortable with a big markup on chicken since "I could cook this at home" (even though, like the article states, their home-cooked chicken probably hasn't been marinating in duck confit for the past 48 hours...).
Restaurants also need to have a certain amount of variety on the menu to deal with the one picky eater in a party. That's why every seafood restaurant still has one token chicken dish, every steakhouse has a vegetarian dish, etc.
FWIW, the universal mark-up for wine in US restaurants is about 4x-6x.
That is, the PRICE of one glass of wine is roughly equal to the COST of one bottle of the same wine. Restaurants, of course, source their wine through commercial distributors. They get price breaks in volume that consumers can't typically get.
True but then you have to make absolutely sure that the customers you attract are going to order those make ups consistently and that's really hard to do.
As for picky eaters usually those will be one of a handful of cheap easy to make meals where the restaurant just aims to have something reasonably acceptable for those. There's no reason to make those dishes loss leaders.
I responded downthread to someone else making the same point. I'm sure there are some restaurant models that support that idea. My only exposure is to mid- and fine-dining where at least these particular owners weren't putting loss leaders out there. Some items had higher margins than others, but nothing on the menu had a negative margin. There are some exceptions like "holy shit I need more avocados and they're $100 a case all of a sudden" but that situation wouldn't last long.
Bargain hunters, I'm told, are bad customers for restaurants. The person coming in for a great deal on $20 chicken is also squeezing a bowl of lemons into a glass and asking for more sugar packets. That's what they tell me, anyway!
However, my overarching point would be that a restaurateur needs to understand operating costs in great detail. If a loss leader is going on the menu, you need to be engaged enough to know it's a loser, by what margin, and also the benefits of keeping it around. The article in the OP suggested no such CBA was really occurring.
Building a restaurant around bargin hunters, oh the stories I could tell about that. It never works as well as the owners think it would, infact I have seen it work opposite(early bird special, 5 pm dinner for seniors, who ended up not leaving and taking up higher margin table space for 3-4 hours).
Cheap people aren't the type of client you should try to attract to a restaurant, once the deal goes away they will move on to the next sucker. I worked at a place that sold dollar cheese steaks as a way to get people in the door, the dining room was full but a party of 4 would order something like 4 cheese steaks with 4 waters and leave a 50 cent tip. They changed the price to two dollars and the cheapos revolted, left bad yelp reviews and everything.
