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Old 01.02.2006, 19:53
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restaurant prices...

I decided to begin a new thread about food, and place it in the general category, which is perhaps a bit more appropriate...

I was a bit surprised to read the comments in the previous thread, and I must admit, I was happy to discover that people are still passionate about their food. Perhaps the global food giants of the world (Nestle, McDonalds, Starbucks..) won’t succeed in controlling and dominating our dietary instincts in spite of their best efforts....hmm...

Before tackling that issue, I would like to make an attempt at sharing a bit of knowledge I have picked up from my experiences within the Swiss world of gastronomy – or more directly how restaurants function here, and what their economic climate is like.

I am often confronted with comments regarding restaurant prices in Switzerland – almost always from the Expat community. Mostly, the comments begin on a negative note regarding prices, and then deteriorate from there. Quite frankly, most Expats believe restaurant prices in Switzerland are way too high. As for me...well...I...

One way to begin looking at the situation is to view the economics of a restaurant in Switzerland, which is surprisingly similar to restaurant operations in the US, UK, Australia, Germany, etc. (I haven’t looked into the Asian world).

As a first step, I only looked at average percentages. Another clarification I need to make is with the term ‘economics.’ I am only looking at average income statements, and not balance sheets and cash flow. From this point and perspective, it becomes easier to discuss how the numbers get managed...and that will be by far the more interesting discussion...

Ok...before I ramble too much, here is the typical breakdown of a restaurant in Switzerland (restaurant is defined as 20+ seats, with table service...the numbers do not include take-away, fast food, street food, etc.). All averages are based on results up to and including 2004.

Revenue
Food Revenue 57%
Beverage Revenue 43%
Total Sales 100%

Cost of Sales
Cost of Food 30%
Cost of Beverages 25.5%
Total Cost of Sales 28%

Gross Profit 72%

Operating Expenses
Labor & Benefits 44.1%
Direct Operating Expenses 11.7%
Occupancy and Finance 14.6%

Profit (Loss) Before Taxes 1.6%

I will go into a bit more detail in future posts regarding the details of each category, and how the different revenue and cost sides are managed. But for now, I think it is easy to say...there ain’t a lot of play room in these numbers! The other point I want to make is that when compared to other countries, the percentages are quite similar....Gross Profit is almost always between 65% and 72%...Operating Expenses are almost always around 65%...Before Tax profits are usually between 2% and 3%.

With these numbers, it is simple to figure out menu prices... The chef is usually tasked with this responsibility, and in fact his/her pay is tied to actual performance. In other words, the chef will have a performance objective of say 28% food cost (this leaves a bit of play room), which is tied to an end of year bonus. Thus, when making out a menu, the chef will look at the cost of producing a particular plate... Typically, the protein item represents the highest cost (and in most cases the only part that is managed). So, let’s say that protein cost is CHF 8. The chef will now add an amount (typically CHF 3) for the vegetable, starch and sauce. That means the plate cost is CHF 11. To achieve the 28% objective, the chef divides the CHF 11 by a lesser percentage...say 25% (that’s a bit of insurance), and the menu price for the dish is CHF 44... At the end of the day, other factors like waste and theft, go into the figure and the final food cost usually ends up around 30% (and no one gets a bonus). Clearly, the major factor in figuring a menu price in this manner rests on the cost of protein...and in Switzerland, that is high (about 78% higher than EU countries the last time I looked).

The beverages are also interesting in how they are managed, as are the general operating expenses...but I will go into that in a future posting...

(hmmmm...I guess a vegetarian restaurant with equally high prices, would mean higher margins ) ...

Jack
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Old 02.02.2006, 07:52
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Re: restaurant prices...

Thank you for that insight. I realised a while ago that it is not the restuarants who are so expensive but the actual food. Even the meals we prepare at home can quickly work out to only be a few franks cheaper than in a restaurant. On average if I buy a steak I end up spending around SFR 10 for 1 person. Ontop of that, as you said, is the cost of vegetables (also not always cheap) and all the other ingredients. The question really is why is food so expensive here??? As I student I often just lived off spaghetti and butter... Hardly a well balanced diet but most of my fellow students did the same as we could not always afford more here in Zurich (as for going out... the less said the better!)
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Old 02.02.2006, 11:46
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Re: restaurant prices...

Nice post Jack.

The one thing I do find interesting is that by using your calculation method you directly tie the purchase cost of the food to the labour costs. I personally do not see that link and although I do not indeed cannot dispute your figures find it amazing that Labour costs are so high. Now that I know that CHF 20 of my steak is going to the people preparing and serving it tips are out of the window...

Richard
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Old 02.02.2006, 11:55
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Re: restaurant prices...

Jack another question...

In many EU countries the food is priced at break even and sometimes a "loss" and the profit made on the drinks sold. Given that the price of drinks here is so high are they not on a double whammy?!
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Old 02.02.2006, 12:24
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Re: restaurant prices...

Quote:
Jack another question...

In many EU countries the food is priced at break even and sometimes a "loss" and the profit made on the drinks sold. Given that the price of drinks here is so high are they not on a double whammy?!
Richard,

I think that really depends on the establishment. There are also places here that sell food at, or near breakeven, and try to make it up on an increased quantity of beverage sales (Iroquois, eg.). I think this also applies to the restaurants you may be referring to in your post....As a general rule, however, the percentages are really quite similar for the restaurant industry (I have even found references to food cost percentages in some of the first restaurants that appeared in France, and they were also 25% - 30%).

Clearly, there is a problem with food costs in Switzerland for restaurants (primarily a result of limited distribution, cartels, protected markets), and I will go into more detail as my time permits. There are also some additional challenges for restaurants on the cost side - real estate and labor being two of the primary factors. The squeeze really begins to show up when people begin spending less of their disposable income on going out...

Jack
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Old 02.02.2006, 14:06
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Re: restaurant prices...

Quote:
The squeeze really begins to show up when people begin spending less of their disposable income on going out...

Jack
But then are you not in the classic supply and demand model whereby if the price is too high the demand will fall until the price adjusts? And in the interim the restaurateur has to earn less or go bust thereby reducing supply and making those who are still left profitable and able to charge higher prices... If everyone keeps their wallets shut it will not be long before the restaurants change their pricing. I do find it interesting that there are enough restaurants who surely buy their produce from the same suppliers but are not in Zurich city and charge a fraction of the price.

Again while I do not dispute your model I have seen a similar argument for the price of champagne whereby the growers actually only make 5% but do charge 5-10x+ the price of German sekt... So what to the Germans earn!
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Old 26.04.2006, 12:57
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Re: restaurant prices...

Quote:
The squeeze really begins to show up when people begin spending less of their disposable income on going out...
Actually, this is very evident here in the far ostschweiz. In my particular town there is an increasing percentage of low-income foreigners. It is my observation that these people only very rarely go out to restaurants. In fact, they choose to live with almost no luxuries or extravagant activities so that they can have large families. That is their right and I make no criticism, but it does affect businesses that rely on people spending some loose cash. Restaurants I think are one of the hardest hit.

Going back to the food, I find the best places to eat are modest, family run places with no special attractions (eg mountain/lake view) other than (relative) value for money eating.

I have no problem paying a lot for a meal, so long as the quality, quantity and service are up to scratch.
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Old 03.02.2006, 18:43
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Re: restaurant prices...

Quote:
Thank you for that insight. I realised a while ago that it is not the restuarants who are so expensive but the actual food. Even the meals we prepare at home can quickly work out to only be a few franks cheaper than in a restaurant. On average if I buy a steak I end up spending around SFR 10 for 1 person. Ontop of that, as you said, is the cost of vegetables (also not always cheap) and all the other ingredients. The question really is why is food so expensive here??? As I student I often just lived off spaghetti and butter... Hardly a well balanced diet but most of my fellow students did the same as we could not always afford more here in Zurich (as for going out... the less said the better!)
Hi Lynn, not good to think that all of those students studying for degrees that they will probably never use in a productive way at the taxpayers' expense are also malnourished!

You mention the fact that your steaks are costing 10 francs, but it might interest you to know that they actually cost you 17 francs. The reason is that taxpayer money subsidises farming by an astonishing 70% - the highest rate in the world. Now if you are student and eating spaghetti you aren't paying tax, and since you aren't eating much then at least other people aren't subsidising the farmers on your behalf...

Technically I know it isn't correct to apply 70% to the retail price, and that it should really be applied to the wholesale price, but let me have my fun ok? The main point here is that despite the 70% subsidy, the prices are still high on Swiss produce. Why is that? Well I think if we really want to talk about that one we'd better start a whole new thread, and put that one in the complaints corner!!

Mark
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