Understanding the Total Costs of Running a Franchise Restaurant

Introduction

The restaurant industry is one of the most dynamic and evolving industries in the United States. According to the National Restaurant Association, the U.S. foodservice industry is the nation’s largest operated industry, employing more than 15 million people in 2019 and generating more than 3 billion in sales. With such a thriving industry comes the need for specialist and in-depth knowledge of the associated operating costs.

Franchise restaurants, in particular, can have a unique mix of unit and central costs, which makes it especially important to consider certain key components when calculating the total operating costs needed to run a profitable business.

In this blog post, we will discuss the different types of costs that go into running a successful franchise restaurant and offer a brief overview of each.

Operating Expenses

Operating costs for franchise restaurants can vary, but most businesses will incur the following expenses:

• Employee salaries and benefits
• Advertising and promotions
• Food preparation and inventory costs
• Assurance
• Rental and occupancy costs
• Licenses and permits
• Equipment and furnishing costs
• Maintenance and repairs
• Utilities and supplies

These costs can be fixed, or they can be variable depending on the business situation. Franchise owners should carefully consider the total cost of owning and operating a franchise restaurant before committing to the business.

Employee salaries and benefits

When it comes to running a successful franchise restaurant, salaries and employee benefits are always top of mind. Salaries are an important factor in determining an employee’s overall happiness and satisfaction with their job, so it’s important to understand the most up-to-date statistical information when it comes to paying employees. Salary and primary benefit costs, including employee compensation and insurance costs, make up the largest portion of a restaurant’s operating expenses, at 34% to 40%, according to the National Restaurant Association.

In the third quarter of 2020, the average hourly wage for all restaurant occupations was .78 in the United States, with an estimated increase to .12 by the end of 2021. Since 2016, wages for Restaurant employees increased by 8%. For tipping employees, the average hourly wage in 2020 was estimated at .04. The payment of employees at the management level and above management, however, are known to be much higher.

Additionally, benefits such as health, retirement, and vacation packages can also be included in payroll costs. As of 2020, health insurance benefits are only offered by 60% of restaurant businesses despite it being required in some form due to the ACA and other state laws. As a result, other benefits aside from health packages should also be considered when making salary decisions. Retirement benefits, such as 401k plans, group life insurance policies, and profit sharing plans are also offered at some restaurants.

It is crucial to consider all costs associated with salaries and benefits when budgeting for a franchise restaurant, as this is the primary determinant of an employee’s overall happiness. As an employer, it is important to be informed of the most up-to-date information regarding salaries and benefits, thus allowing franchise restaurants to take the appropriate measures to ensure that their employees receive the necessary compensation.

Advertising and promotions

When operating a franchise restaurant, it is important to allocate a budget for advertising and promotion. Although the exact amount can vary depending on factors such as the size of the business and its target market, the National Restaurant Association reports that the median total marketing budget for a quick service restaurant was ,203 in 2019 ( compared to sit-down restaurants, which spent a median of ,753).

For franchise restaurants, it is especially important to consider the share of advertising and promotion budget to allocate to franchise fees, 15-20% considered a standard amount. The remaining portion is split between traditional media such as radio, television and print ads, and new digital media such as social media, search engine marketing and mobile advertising.

According to EMarketer Inc, US businesses spent 2.9 billion on digital advertising in 2019 , while traditional ad spend over the same period was estimated at 4.3 billion. This reflects how digital channels have become increasingly popular among businesses as they offer more comprehensive tracking and analytics than local newspapers and TV ads, making it easier to measure ROI.

Online platforms are a cost-effective option for franchise restaurant owners, as they offer better targeting options and lower media costs compared to traditional media. It’s important for businesses to tailor their ads to the right audience to ensure maximum engagement and success. Additionally, other effective tactics for advertising and promotions for franchise restaurants include mobile marketing, social media contests, loyalty programs, and word of mouth campaigns.

Food preparation and inventory costs

Food preparation and inventory costs are major components of total franchise restaurant operating costs. These costs may include supplies such as ingredients, inventory, utensils, napkins, and delivery. The cost of food preparation and inventory, as well as labor costs and taxes, can be quite high and, if left unmanaged, can lead to unfavorable financial results for a restaurant. franchise.

According to a 2020 survey of franchise restaurant operations, the average food preparation and inventory costs for all franchise restaurants combined were ,943 per restaurant. However, costs varied widely by type of cuisine, ranging from a low of ,547 for fine-dining restaurants to a high of ,876 for full-service restaurants. For casual dining restaurants, the average costs were ,199 per restaurant.

In addition to food preparation and inventory costs, franchise restaurants must also consider other operational costs such as labor, taxes, marketing, and rent. These costs can add up quickly and can vary greatly depending on the type of cuisine. For example, the survey found that full-service restaurants had the highest labor costs at an average of ,065 per restaurant, while casual dining restaurants had the highest labor costs. lowest at an average of ,929 per restaurant.

Managing costs effectively is important for any business, but for franchise restaurants, the costs associated with food preparation and inventory can be especially challenging. It is essential for franchise restaurant owners to monitor costs closely and develop strategies to reduce them where possible in order to stay competitive in the market.

Assurance

As a franchise restaurateur, it’s important to be aware of the operating costs associated with running a restaurant, including insurance costs. Insurance costs are often an overlooked aspect when calculating profitability. Insurance is important to protect the business against liabilities and potential losses that may occur, such as customer accidents or employee injuries. According to recent data, in the United States, the average cost of insurance for restaurants was ,949 per year as of 2019. This amount can range from ,000 to ,400 depending on the type of coverage and the size of the restaurant.

When deciding on a restaurant’s level of coverage, there are a few key types of insurance to consider. The first is general liability, which covers potential premises and customer injuries, as well as product or service liability. A restaurant should consider obtaining general liability insurance and adding endorsements for hosts and bartenders, food vendors, and delivery drivers. Property insurance is also essential to cover physical items or buildings, and provides protection against loss due to fire, theft and natural disasters. Another likely expense is workers’ compensation insurance, which is needed to cover employees in the event of a work-related injury. Franchises should also consider obtaining cyber liability insurance to cover regulatory exposures and customer data breaches.

The cost of insurance can be managed in several ways. For example, increasing the deductible on insurance policies may reduce premiums, but a deductible should consider the risks associated with a higher deductible. Additionally, shopping around for competitive quotes can help ease the cost burden, while being aware of discounts for certain types of coverage. Restaurants should consider performing periodic evaluations of their insurance coverage to ensure the policy is still adequate and the restaurant is not overpaid.

Rental and occupancy costs

The costs associated with occupying commercial space for a franchise restaurant, known as rental and occupancy costs, can often be the most expensive expenses required of a business. Typically, these costs can average 3.7% of total revenue, according to the Association of Financial Professionals. However, this percentage can vary significantly depending on location, size, and rental rates. Generally, people in downtown and major locations may experience higher cost percentages, while those in suburban or rural areas may enjoy more cost-effective rates.

According to the U.S. Census Bureau’s 2017 Annual Survey of Entrepreneurs, the average lease and occupancy business expense was ,172,127. This was a significant 16.3% increase from 2016 when the figure was ,736,734.

It is therefore fundamental for restaurant operators to ensure that they stick to their budget for rent and occupancy costs whenever possible, in turn helping to maintain profitability.

The most effective way to reduce rental and occupancy costs is to negotiate a favorable rental agreement. Factors such as job growth, average incomes, costs of living and the mix of tenants all influence the monthly rent rate, so research is essential. It’s worth exploring incentives such as rent-free periods or the landlord’s ability to contribute to the cost of interior upgrades and upgrades.

It is important to consider the overall square footage needs when looking for a space, as well as incidental fees and expenses such as insurance and building repairs, property taxes and other charges levied. by the owner. There are potential savings to be made with more efficient use of existing space, such as using storage areas more efficiently, freeing up space for additional seating, and sharing areas like bathrooms with other tenants.

Educating yourself on rental and occupancy costs and the upfront fees associated with closing a deal is another way to stay ahead of the game. This is essential, as budgeting or evaluating these costs incorrectly can be detrimental to the success of the business.

Licenses and permits

If you want to open a franchise restaurant, you will need certain licenses and permits to do so. The type and number of licenses and permits needed depends on several factors, such as type of business, geographic location, and size of business. Some of the more common licenses and permits required for a franchise restaurant operation include:

• Business License: This is usually the very first license you need to obtain when setting up your franchise restaurant. It’s required if you sell food or drink, and it’s required by the state Department of Revenue.
• Food Service License: This is required if you are preparing and serving food for public consumption. Each state has its own guidelines and requirements for food service licensing, so you should check with your local government to make sure you are compliant.
• Health Permit: This permit is required in order to ensure that your franchise restaurant complies with state or county health department regulations. This may include proper waste disposal, food storage, food preparation, and other related requirements designed to protect public health.

The exact cost of licenses and permits required for a franchise restaurant can vary greatly. The United States Small Business Administration estimates the average cost of licensing and allows a restaurant franchise to range from 0 to ,000 for a single license with a total of around ,000 for the first year . These costs can add up quickly, so it’s important that you take the time to research and budget appropriately.

Equipment and furnishing costs

When starting a franchise restaurant, one of the biggest investments will go towards equipment and furniture. According to the most recent statistics from the National Restaurant Association, typical franchise restaurant start-up costs include up to ,000 for equipment and furnishings . Depending on the size of the restaurant, this cost can vary significantly, but it’s important to factor it into any business plan.

Equipment and furnishing costs cover a range of items, including the following:

• Kitchen equipment and supplies
• Dishwashing and cleaning products
• Furniture and accessories in store
• Computers / POS systems
• Toilet accessories
• Lighting
• Outdoor signage

Savvy business owners can save on equipment and procurement costs by buying used items and getting bulk discounts from suppliers. Additionally, some supplies such as POS systems and furniture come with warranties or service contracts, so it pays to do some additional research.

When considering financing for a franchise restaurant, be sure to consider equipment and furnishing costs. These costs can quickly add up and be a major expense for a business owner. With knowledgeable research and purchasing, these costs can be reduced and responsibly managed.

Maintenance and repairs

When operating a franchise restaurant, there are certain costs associated with maintaining and repairing equipment, furniture, and the building itself. Repair and maintenance costs are significant, accounting for about 3.2% of total expenses for franchise restaurants, according to the National Restaurant Association’s Restaurant Industry Operations Report. On average, the cost of maintenance and repairs for franchise restaurants came to ,967 in 2018 in the United States, an increase of 6.2% over the previous year.

The most common activities that require maintenance and repairs include staff and employee training, unexpected costs due to equipment failures, pest control, and exterior building maintenance such as painting and structural maintenance. Depending on the size and scope of the franchise business, maintenance and repair costs can vary significantly. A survey by Restoration Engine found that larger franchises with more than million in revenue spent an average of ,500 per year on maintenance and repairs in 2018. In comparison, franchises with 0,000 or less in income spent an average of ,500 per year.

Analyzing maintenance and repair costs can help restaurant owners determine whether or not certain activities and initiatives are worthwhile long-term investments. Costs associated with software solutions, as well as plans for replacing and upgrading equipment, can also be factored into maintenance and repair costs. It’s essential to remember that while it’s tempting to try to reduce repair and maintenance costs, sacrificing too much can negatively affect the restaurant experience.

The best way to reduce maintenance and repair costs is to have a proactive approach. Restaurant owners should have an overall strategy in place that focuses on preventative maintenance and repairs. This means having regular maintenance checks, implementing quality control inspections, and taking proactive steps to reduce the likelihood of equipment failure before it occurs. Taking a proactive stance on maintenance and repairs can help restaurant owners save significantly in the long run.

Utilities and supplies

Operating a franchised restaurant has many direct and indirect costs associated with it. In the United States, food, beverage and paper supplies account for the largest percentage of direct costs. The second highest cost is utilities followed by labor, insurance and freight.

According to the United States Census Bureau, in 2018 the average cost of utilities, including electricity, gas, and water, for a restaurant was ,340 . These costs provide a good gauge for restaurant owners to estimate what their approximate utility cost will be for the year.

In addition to utilities, restaurants must spend money on supplies such as cups, paper towels, napkins, and other paper items. According to the National Restaurant Association, in 2018, these supplies cost the average restaurant ,250 per month , which came to an estimated total of ,000 for the year.

For restaurants looking to keep their operating costs in check, there are many ways to reduce the amount of money spent on utilities and supplies. It’s important to shop around for the best supply prices and take advantage of energy-efficient practices to reduce the amount of electricity and gas used.

Conclusion

In conclusion, a successful franchise restaurant is a complex system that requires effective cost management to ensure profitability. The knowledge gained from this blog post should provide a useful introduction to the various costs associated with franchise restaurant operations. While there are too many variables to consider when it comes to each restaurant’s individual costs, understanding the major categories of franchise restaurant operating costs is the first step to gaining a full understanding of the financial implications of the franchise restaurant. running a successful business in this industry.

The major categories of franchise restaurant operating costs are:

• Employee salaries and benefits
• Advertising and promotions
• Food preparation and inventory costs
• Assurance
• Rental and occupancy costs
• Licenses and permits
• Equipment and furnishing costs
• Maintenance and repairs
• Utilities and supplies

These costs, if carefully managed and monitored, can help propel a franchise restaurant to success. Restaurant owners who proactively manage their operating costs can discover creative ways to reduce costs while delivering quality products. This will allow them to maximize profits and ensure strong long-term financial performance.