Despite the fact that Almaty’s restaurant industry is highly competitive, restaurateurs are virtually clueless about the financials of their businesses. Perhaps that’s because they don’t know the benchmark or have poor accounting.
The absolute majority of businesses in Kazakhstan cook their books for tax evasion: they actually have many times the revenue they report, so in this article we are not going to discuss taxes. From personal experience, if a restaurant is not committing tax fraud, then the sum of all taxes would be at least 9% of the revenues. Both approaches have their strengths and weaknesses, and it’s up to a business owner to decide how he or she wants to run things. Playing by the rules makes book keeping simpler, reduces employee theft, lets you hold employees accountable in case of violations, including pressing criminal charges, while restaurant chains can have a documented track record which will facilitate assessment of the company in the future, reduce the risk of illegal asset seizures, etc.
Most figures are averages based on a restaurant with average sales ($63,000-95,000 per month), limited customer service, affordable prices and above-average customer traffic.
Restaurant industry is the most competitive industry in Almaty. There is no official data regarding the number of restaurants, but it can be assumed based on some numbers that the city has at least 3,000 outlets (Almaty has 1,629 outlets according to Tripadvisor and 2,134 outlets according to 2gis (canteens, restaurants, bars, cafes, coffeehouses, restobars, gastrobars), while according to the Statistics Agency of Kazakhstan, there were a total of 23,000 outlets in the country in 2011). Officially, the population of Almaty is 1.7 million. That gives us 566 persons per outlet, whereas the average for the United States is 510 persons per outlet.
FROM PERSONAL EXPERIENCE, THE RATIO OF EXPECTATIONS TO THE AVERAGE CHECK FOR RESTAURANT VISITORS IN ALMATY IS ONE OF THE HIGHEST IN THE WORLD.
People living in Almaty would tolerate rudeness at car repair shops with the average check of $158, unsightly restrooms in clinics with the average check of $32, but they show zero tolerance to unsmiling waiters or cold food in a restaurant with the average check of $6.
The costs of opening a restaurant do not start with down payments, designer and contractor fees, the cost of furniture and equipment, automation systems and CCTV-cameras – they start with travel costs when you are searching for inspiration. First you need to choose the format which could be a quick service restaurant, a fast casual or fast dining restaurant, a fine dining restaurant, cafes, bars (pubs); you also need to decide whether your place is going to be popular and trendy. Contractors fees, commercial cooking equipment and furniture could set you back from $400-500 to $2,000-2,500 per sq.m. Spending is easier than earning: Almaty has many places with over one million dollars worth of investment which never opened or already shut down. You can also take advantage of the declining market by leasing a place with furniture and superb equipment without investing anything (although you will have to customize the kitchen to your needs, change the sign board, etc.) Yet retail business is not about capital investments and expenses (rent, wages, procurement), but rather about revenue.
IN OUR MARKET ENVIRONMENT, A RESTAURANT IS SUPPOSED TO BREAK EVEN IN 2-2.5 YEARS.
You shouldn’t consider investment in a restaurant separately from the acquisition of real estate: real estate investments involve passive income and usually take seven years to reach a break-even point. Far too often restaurants mask their inefficiency by not paying rent. Even if you bought the place, calculate the fair market rent and charge the restaurant.
Capital costs should include advertising costs, and unless you open a trendy place, then save some money on celebrity endorsements, because you can feed your potential customers (from a few hundred to a few thousand guests) with your anchor dishes, and coupon services is a fairly efficient channel to accomplish this goal. The most interesting thing is that you don’t actually lose sales during these campaigns: your guests will pay you back your investment through additional orders and more visits. And seeing that the place is packed will inspire your staff and passers-by.
Also do not forget about the down payment which is typically one monthly rate, but may rise up to three monthly rental rates plus payment for the first month for shopping malls.
Be sure to include at least one month’s worth of sales in your cash flow for some quick fixes in your restaurants, as well as capital expenditures, lease payments and wages.
Income is based on two fundamental factors: the average check and customer traffic.
UNDERSTANDING OF THE RESTAURANT’S AVERAGE CHECK LETS YOU MAKE A PERFECT MENU WITH THE “RIGHT” PRICES.
The cost of anchor dishes is approximately 60-70% of the average check. Ideally, your restaurant should have a situation-based menu taking into account multiple scenarios. For example, a man having lunch, a young couple out on a date or a family with two children having dinner, business meetings, etc.
You determine the optimum number of seats based on the customer traffic, you calculate the average customer stay time depending on the format, which, in turn, will determine the table turnover rate. For a customer traffic of 400 people per day in a place with limited customer service, the optimum number of seats will be between 90 and 100, or 300-400 sq. m. of floor area.
Let’s imagine a place with an average check of $6.3 and 400 guests per day. It will generate the annual revenue of $924,000 with profitability of 25%, or $231 thsd a year, before taxes. The optimum break-even period for restaurants in Kazakhstan should be about 2 years, i.e. the maximum investment amount should be equal to earnings for this period, being less than $316,000-348,000.
In the current economic situation, monthly sales of a restaurant can be divided into six categories: up to $31,000 is considered poor, between $31,000 to $63,000 is satisfactory, between $63,000 to $95,000 is average, over $95,000 is above average, more than $142,000-158,000 is high and more than $221,000 is very high.
Additional income can be earned from retro-bonuses and advertising. If sales are good, large companies pay retro-bonuses, but don’t count on them because they are subject to change and are unpredictable – think of them more as an incentive. Often retro-bonuses are paid in goods of which the owner may not know: the supplier does it to stimulate sales by boosting the buyer’s interest. You can also sell advertising, table tents, flyers, video ads, menus, trays, branded products, stickers, coasters, but revenues will not be high.
The two main cost items are food cost and wages which together form prime costs. This number should not exceed 60%, and if it is higher, then you should think if it makes sense to keep this place running. Purchasing costs, including household items, should not exceed 28-30% of the revenue. If you are going to work with a limited menu, make sure that the absolute majority of products is available on the local market, then calculate food costs and menu prices – on average, they should be three times the food cost. Also keep in mind that for drinks purchase prices should be no more than 17-20% of the menu prices.
DO NOT COMPROMISE ON FOOD QUALITY: FIRST, YOU WILL LOSE CUSTOMERS, AND SECONDLY, IN MOST CASES BUYING MORE EXPENSIVE AND HIGHER-QUALITY PRODUCTS IS ACTUALLY CHEAPER.
For example, by buying boneless meat you can save not just on the butcher’s salary, and by purchasing more expensive peppermint you get higher quality products for the same money. Always consider the waste from cold processed products.
Wages make up approximately 25-28% of total costs, while places bring this number down to 20% thanks to effective labour organization and use of automation systems. More efficient use of automation systems, understanding the importance of standardized business processes and assessment of their effectiveness allow not only to improve the quality of products and services (which you can measure by tracking the number of complaints), but also save up to 8% of the revenue.
Ideally, the rent should not exceed 10%, but in some cases it can reach up to 20%, and the business owner must decide why he or she pays the extra.
Utility bills usually make up 2-3% of the revenue, including communication and security alarm costs. Good Internet connection will be essential for automation systems, CCTV-cameras, plus you can set up a separate network for guests.
For a non-chain restaurant, the main administration cost item is the director’s salary, who is normally the owner, and for restaurant chains administration costs make up to 3% (usually these include the salaries of regional manager, bartender and chef).
The overhead costs (accounting, legal, maintaining automation systems, HR, training) constitute at least 3%.
One dollar spent on marketing must bring generate at least $33 in sales; marketing costs must not exceed 3% of the revenue and less once the place reaches its sales targets.
So, summing up the expense part. Food cost – 29%, wages – 25%, rent – 10%, utilities – 2.5%, other costs – 8.5%, total – 75%. Depending on the menu (local cuisine dishes will cost significantly lower), restaurant format (a fast food place will have low wages) and success of the restaurant, the numbers may vary.
Restaurant industry is not only the most competitive, but also one of the most difficult businesses, being a combination of production, customer service and promotion, where the role played by each of the elements is critical for the entire operation. Failure to understand this forced many places to go out of business. If the owners and the management are familiar with and can understand the key business performance indicators, they will be able to predict the effectiveness of their restaurant and see room for improvement. For potential investors, these indicators may become major points of reference in the assessment of business integrity.