You need to make your restaurant’s rent in 3 days in order to be profitable
In expensive cities, this is cut to 1 day
For every dollar that minimum wage rises, businesses are 14% more likely to go out of business
photo: flickr user Robby Virus
Yuka Ioroi of Cassava in the Richmond district of SF calls the 3 Day Rule the “golden rule of restaurants”.
When she and her husband started their restaurant, she knew that her rent needed to be at a level that she could make in three days of sales – and not on the busiest weekend of the month!
From her experience in the restaurant industry, this ‘3 Day Rule’ is a great rule of thumb.
Sure, you can go into a very complex analysis of every single cost – for example, how much oil you will need for the fryer and how often you will need to change it.
But this level of complexity is often a distraction when you are starting a business. Here are the basics:
Overall Sales Projection
Food Cost (around 33% of your sales)
Labor (around 30% of your sales)
Debt Cost of buildout and equipment (varies)
Rent (6-10% of your sales)
= Gross Profit (2-3% average)
Unless you have personally financed the buildout and equipment cost (and have no debt), this will likely be the order of magnitude of your expenses.
So – if rent should be 6-10% of your sales – you should be able to make your rent in three days.
Think about it – if you’re closed one day per week – then you are open for an average of 25 days per month. Three days would be 12.5% of your average open days, but sales obviously vary between weekends and weekdays.
So, depending on your restaurant, you probably want to look at a Wednesday, Thursday Friday type of combination.
Now it’s the 1 Day Rule in San Francisco
In San Francisco, Yuka now believes that her rent needs to be made in 1 day – and we are not talking about a Saturday – more like a Wednesday.
Why is that? Because labor costs are going up.
Minimum wage in California is around $10 per hour. That is actually more like $12 or $13 per hour for employers when you add in workers comp, payroll tax and unemployment insurance.
But in San Francisco it is at $14 per hour as of July 1st, 2017. And because taxes increase on a percentage basis of wages, that is more like $20 per hour. That is a 40% increase in labor cost for restaurant owners in San Francisco!
Other areas such as Los Angeles and New York are experiencing similar increases in minimum wage.
So, if your labor cost was around 30% of sales beforehand, it has now jumped to 42% of your sales. Where is that money to come from? Your profits aren’t high enough to absorb it. Your food costs aren’t going down. Your debt isn’t going away.
It has to come out of rent, because that is your highest fixed cost.
And the higher wages go, the more restaurants go out of business.
According to a Harvard Business School study, “a $1 increase in the minimum wage [in the San Francisco Bay Area] leads to an approximate 14 percent increase in the likelihood of exit [from the industry] for the median 3.5-star restaurant.”
Your Rent is Probably a Fixed Cost
Decreasing rent is a great strategy if you can make it work. You need to take into account your overall volume of sales and try to find the smallest and cheapest place that will accommodate your vision.
However, if you’ve already moved into your place – or are trying to open in a highly competitive market like San Francisco or New York – your rent is probably not going to get much lower.
In that case, you will need to improve both your overall sales, and profit margin.
See our article: 3 Strategies to Improve Your Profit Margin in a Restaurant Business
Please don’t hesitate to post questions or comments below.
The survival of small business is critical for our economy. We’re all in it together!