At Any Cost

Let us admit something right off: As kids, we hated equations of any kind. We barely passed "math for athletes" in high school and found a loophole in college that allowed us to slide through four years...well, technically six...with nary a course involving numbers.

At least our school featured a strong football program. Ah, the cars, the girls, the money--until the alumni figured out we never actually made the team.

You'll understand, then, why this week's Burning Question--how do restaurants set their prices?--sent us scurrying to the crack Dallas Observer accounting department for assistance. (This proved to be a big mistake. Ken Weis, chef at Nikita, sold us a hamburger one night in a vain attempt to sober up our crew, a massive $9 sandwich packed with certified Angus beef, caramelized onions and other goodies stacked on a delicate bread. "It cost us $2.65," he informed us, "so it's almost a 30 percent food cost for the restaurant." We asked our newest accounting guy to check the accuracy of these numbers. Much to our dismay, accounting guy trimmed $6.35 off our expense checks and turned back to the shredder.)

Despite our mathematical inadequacies, we understand that pricing is the core of the restaurant business. Sure, people think of chefs poaching, basting, braising and performing all the intricacies of food preparation. More often, however, they concentrate on cost, break-even points, price points and daily covers. "Managing food costs and labor costs is essential," Weis says. "If you're a chef, you better learn it really fast."

The public generally evaluates restaurants based on the menu and the quality of each dish. Chefs, though, study the flow of money in and out of a kitchen. "There's no extra money coming from somewhere else," explains James Neel, chef-owner of Tramontana and Bistro Latino. "It's all coming from food sales. That's how we pay for things." And in the restaurant industry, "things" include personnel, lighting, refrigeration, linens, tableware, satellite television, paper and so on. "Say food cost,"--the amount restaurants pay for ingredients--"is 35 percent," says Michael Marshall, executive chef at Mi Piaci. "That's 65 percent profit. But out of that comes everything else." Al Biernat's spends $60,000 each year just on air conditioning.

Price, then, starts with cost. Setting a price for each menu item, however, is as tricky as rocket science or grade-school math. "You consider the menu mix of the restaurant," says Al Biernat, owner of (ta-da!) Al Biernat's. "You try to get no higher than 38 to 40 percent food cost. If 70 percent of your sales are food and 30 percent liquor, what will be your overall cost?"

Geez, Al. We failed this one in fifth grade. The answer has something to do with two trains or a bunch of apples.

Steak houses, by the way, operate with higher acceptable food costs than most restaurants, particularly chains. While independent establishments receive few price breaks from purveyors, corporate operations wield great influence on the market. McDonald's purchases more beef than any other restaurant in the world, accepting bids from a handful of meatpackers. If prices creep beyond a comfortable level, they may threaten to take their orders elsewhere. Meatpackers squeeze their prices by increasing efficiency or scaling back payments to ranchers. As a result, some half a million American ranchers hung up their chaps over the past 20 years and quit the biz--keep that in mind the next time you supersize.

Single-unit establishments just don't have that kind of pull. Most of them teeter on a very thin edge between profitability and a brief death notice in Dotty Griffith's Dallas Morning News column. "We shoot for 30 percent food costs," Neel says. "We can live with 33 percent. Anything over that and it makes no sense to be in business."

After paying for ingredients, rent, staff and all the accoutrements, most successful restaurant owners realize a profit of 5 percent.

So how do all these places stay in business?

"If you have items ranged from 30 percent to 20 percent food cost, the more you sell of the 20 percent items the better," Weis points out. Chefs and managers, therefore, train wait staff to push certain items, especially salads and appetizers. "Calamari happens to be dirt cheap," Neel says. "My food cost might be 10 percent, so that makes up for other things."

They also pay close attention to customer preferences and spending habits. Patrons will spend, say, $8 for a plate of calamari, even though the restaurant could sell the stuff for half that price. Boost the price to $9, however, and demand may plummet.

"You gotta be realistic," Biernat says.

Wine and alcohol also save many a restaurant from bankruptcy (or, in the words of Homer Simpson, "beer, the cause of--and solution to--all our problems"). Most establishments mark up their wine offerings by two and a half to three times the original cost. "You make up the money in the long run selling booze," agrees Chris Peters, executive chef at Lola. Indeed, he refuses to open a lunch menu simply because few people drink hard in the middle of a workday.

Whatever happened to good, old-fashioned values? That's what we want to know.

Consumer habits come into play here, as well. Gilbert Garza of Suze points out the risks of sticking a reasonable price on wine. Mark it too low and diners assume it's a recent vintage imported from Moldova--something worthy of the Denny's crowd. "High-end wine, you're not going to go more than double," Biernat adds. "Low end, however, you can buy a $7 wine and sell it for $7 a glass."

So, there it is. Restaurant prices are based on the cost of every single thing in the place, from basic ingredients to lighting, as well as a feel for just how much customers will fork over for a dish. Many establishments fear even a slight increase in electricity or meat prices, or even smoking bans--anything that may alter the delicate equilibrium between cost and revenue. After all, it's not always quality that keeps a restaurant in business.

So, in the words of Nikita's Weis, you just have to ask yourselves, "Would someone be averse to paying $13 for four good, handmade raviolis?"

That, according to our accounting guy, is the $3.87 question.

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