What Does It Really Cost to Run a Restaurant?

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Restaurants have notoriously slim margins. Mei Mei in Boston reveals just how slim they really are. 

“I have always thought to myself that the version of Top Chef that I would want to watch would be chef-owners plunging a toilet, cleaning an overflowing grease trap, balancing a balance sheet, and running payroll as fast as they could — a decathlon of all the administrative bullshit,” says Irene Li, the chef and owner of Mei Mei, a Chinese-American restaurant in Boston. “And obviously, people would be bored to death by that show, but that’s what it really is.”

These days, Li spends a lot of her time thinking about what it takes to keep a restaurant like hers running. Last year, she was the recipient of an Eater Young Gun award; she’s been a Zagat 30 Under 30 winner, and a six-time James Beard Rising Star Chef semifinalist. That said, she kind of fell into the industry and comes by her genuine enthusiasm for “all the administrative bullshit” honestly.

In the early days at Mei Mei, success was measured by having enough dumplings to get through the day and confirming that the bank account wasn’t empty. Today, every single staff member, from the dishwasher to the line cook, can interpret and speak to the restaurant’s entire profit-and-loss statement because, for two years now, Mei Mei has been opening its books to its staff. This means all staff are able to see every line item associated with money coming in the door and all of the expenses the restaurant takes on — from paying its employees to keeping the lights on. Not only that, each employee actually plays a hand in working to move the bottom line, working on teams tasked with the goal of reducing costs and increasing profits for the business. If the team wants to research and vet new vendors, they have that power. If they want to change the menu prices for a fixed period of time, they’re able to do that too.

In the three years since implementing this practice, Li says she’s seen a measurable difference. The line cook who once questioned Li about the $9 price attached to the Double Awesome menu item, an oozy egg sandwich, can now speak to all of the other costs — the things beyond the eggs, the pesto, and the scallion pancake breading — that they wouldn’t have known to consider before. Because there’s a staff member who called the electric company for refunds when the power went out, one who negotiated for better alarm fees, and another who put in the work to source a cheaper linen provider, there’s an understanding of the full picture of what goes on at the restaurant. As Li puts it, “There’s buy-in because their fingerprints are there.”

Now, it’s no longer enough for Li to share the nitty-gritty financial info with her team. She wants the public to understand it, too.

“The lack of willingness to talk about finances in this industry is holding us back,” says Li. “Culturally, we don’t talk about money at all, and my experience, even with other restaurant owners who I’m really friendly with, is that we’ll talk about all kinds of stuff. HR drama, health inspections — warts and all — but we definitely don’t talk about money. I feel like that is the last barrier that we have to break down in order to really all get on the same page and all figure out how to do a better job.”

Armed with the blessing of her most trusted friends and family, and a lot of nervous “wows,” Li decided that 2020 was the year to start the conversation. So, in the middle of the restaurant, as the Friday dinner crowd was beginning to pick up, we sat down to review the full profit-and-loss statement for Mei Mei for 2019 — something that any diner will soon be able to do.

What exactly are we looking at here?

Profit-and-loss statements (P&Ls) offer a record of a business’s profits and losses over a defined period of time. Essentially, the larger formula you’re looking at is sales - expenditure = profit. When we opened up Li’s P&L, she explained that there are four larger buckets that all of the many line items can be sorted into: income, cost of goods sold (COGS), direct labor, and finally, pages and pages of overheads.

For a restaurant, there are a few goal ratios associated with the major expense categories. Ideally, most operators aim to see COGS and direct labor together at 60 percent (at Mei Mei they target 20 percent and 40 percent, accordingly) and other expenses at 30 percent, leaving you with 10 percent profit. She then explained that independently owned restaurants most often hang out in the 4 to 6 percent range for profit. Don’t worry — there won’t be a quiz.

Businesses are required by law to pull a P&L annually. Most restaurants look at theirs quarterly. At Mei Mei, the entire staff digs in every four weeks.

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At Mei Mei, the catering line item includes traditional drop-off catering, weddings, staff-led cooking classes, and restaurant buy-outs. Historically, Li has seen this line item trend upward over the past few years, which she says is an argument for doing more catering in 2020.

Surprise & delight — easily the most objectively “fun” line item name on the document — covers the $40 worth of product (nonalcoholic) that can be given away at each shift. “Sometimes it’s for when we need to fix something. Sometimes it’s for someone who had a hard time choosing between two dumplings, and we just let them have both. It’s for first-time customers we want to wow, and it’s for that person that comes in soaking wet because they didn’t have an umbrella and could really use a hot tea and a free brownie,” Li says. In 2020, Li actually wants to see this expenditure grow, and is now requiring staff to note what was doled out at the end of each shift.

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COGS covers not only direct food purchases, but also anything that is necessary for providing the product to the guest. So included within this category are things like takeout boxes, napkins, and paper bags. Remember, restaurants are aiming for 20 percent here, and as Mei Mei focuses on high-quality ingredients, Li’s proud of where they’re at.

Catering margins are better due to the fact that the restaurant is able to plan around the exact amount of food and labor that a given job needs — something they, of course, aren’t able to do in the restaurant. Another reason Li believes they’re staying close to their target, all things considered, is the fact that the catering menu is fairly light on meat. This is helpful because Mei Mei only serves meat that is pasture-raised, humanely slaughtered, and sourced from the Northeast — meaning it isn’t cheap.

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Direct labor is high at Mei Mei, but Li says she’d rather overspend a little on COGS and direct labor because she believes it reflects the values of the company — paying people well and serving good food. Back-of-house staff with no experience and front-of-house tipped workers who are still going through training start at $12.75, the Massachusetts minimum wage. Once tipped workers are fully trained and ready to work shifts on their own, they’ll start at $5/hour, slightly higher than the legal tipped wage ($4.95 as of Jan 2020; $4.35 in 2019). Managers start at $17/hour. Everyone makes overtime if they work more than 40 hours (1.5 times their standard rate), though Li says it’s rare to see 50-plus hours, as she and the team work hard to avoid burnout. “Salary plus 90-hour work weeks are a pretty common way that restaurant employers exploit their most valuable staff, and I’ve seen how negative the impacts are,” says Li.

On the health insurance front, Mei Mei contributes half the cost of health insurance for full-time staff. Li says, “It’s the best place we’ve been at, but we’d like to do a lot better.” She also shared that the restaurant does benefit from the fact that a lot of the staff is still able to stay on their parents’ insurance plans. The benefit line item includes training and certification expenses for things like ServSafe, a FOH safety training and certificate program, as well as public transit benefits through the Perq MBTA program. Additionally, staff members have access to a grocery program where they can order what’s used by the restaurant at Mei Mei’s rate.

Throughout 2019, Mei Mei had between 25 and 30 employees on staff. One important caveat when looking at staff wages is that not all of the employee wages actually fall into this bucket. Often, businesses will log salaried employees who work on administrative tasks into the overhead category rather than this direct labor section. As Mei Mei’s staff all have their hands in administrative work, a portion of these wages is allocated to the overhead section instead — more on this later.

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What most people probably don’t realize is that restaurants often rent a lot of their equipment. For Mei Mei, that includes a dishwasher and an ice machine — so yes, it can cost over $6,000 a year just to clean some dishes and to have a reliable source for ice cubes. Next year, this number will go down a bit as Mei Mei purchased its very own ice-making machine.

Another surprisingly large sum? Linens. And at Mei Mei, linens are actually pretty limited compared to fine dining establishments with tablecloths and cloth napkins in the mix. Again, thanks to a staff member identifying a new linen provider, this cost should go down in 2020.

Software services include everything from bookkeeping to scheduling to playing music in the restaurant. Fees, permits, and licenses are a necessary evil for staying on the good side of the law.

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If you’ve ever bought a bunch of household cleaning supplies at once, you’ll know they don’t come cheap — multiply that times more messes, a commercial-sized space, and the need to keep food inspectors happy, and you’ll see why keeping Mei Mei looking spick and span is a pretty sizeable expense.

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Remember when I said a portion of all paychecks was allocated to another section to account for staff members working on administrative duties? At Mei Mei, administrative payroll covers these multitalented folks as well as salaried employees like Li, who’d already fall into this bucket.

Insurance here refers to all of the business’s insurance needs, covering things like vehicles, the building, and workers compensation.

Merchant fees are a biggie on the expense front. A lot of these fees are associated with our favorite delivery apps, which tend to take a pretty sizable cut. For Mei Mei, Uber Eats is walking away with 30 percent of the revenue, DoorDash and GrubHub are pocketing 25 percent, and Caviar is taking 17 percent — Li says that’s thanks to being grandfathered into a pretty good deal. “One thing we tell people is that if you can help it, pick up your food. If not, maybe ask the restaurant what delivery service they prefer you use.”

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It’s pretty expensive just to have a place to operate a business and to keep it lit, with running water and a controlled temperature — especially in a city like Boston. That said, Mei Mei does tack on an optional utility service: composting. And composting actually cost over $4,000 for the company in 2019. But it’s important to Li and to the staff, so that’s an expense that isn’t going anywhere.

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And once we account for the expenses, this is what we’re left with. Notably, this amount doesn’t include the debt repayment for the business or the taxes that they would owe. In Li’s own words, “This is the final story. It’s not nothing. It’s not great. But this is where we are.”

Erin Spencer is a writer and content marketer based in Boston.

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