The recipe for a profitable operation will keep on changing for restaurants.Dimensions
When I first discovered my now-favourite cocktail, the Paper Plane, I could get one for $10 on tap at the beloved (and now shuttered) Toronto bar, Tequila Bookworm. Over the years, as the drink began appearing on more and more bar menus, $10 became $12; then $15. Today, it’s not uncommon to pay $18 for Paper Plane – or any cocktail, for that matter.
Of course, no one is sweating the dollar amounts on the menu more than the restaurant owners themselves. That goes beyond cocktails: Creative menu maneuvering is now a requirement for any restaurant trying to navigate rising costs without scaring away customers with extreme price hikes.
“Every ingredient we use has risen dramatically in price over the last two years: wheat, dairy, beef, pork, poultry, vegetables, oil – you name it,” says Justin Leon, the owner of Lambo’s Deli, a sandwich shop in Toronto. “The inflation is so intense that we’ve rethought every aspect of our menu. It’s a battle staying on top of invoices as prices fluctuate daily.”
Leon says that it’s a “common misconception” that restaurants are price-gouging. “But the truth is that unless you have massive buying power, most restaurants pay around the same cost for food as the average shopper would in the grocery store,” Leon says.
Demetrios Koumarelas, a professor in the hospitality department at Seneca College, says that what most of his students – and the average restaurant patron – get wrong about restaurant operations is how the price of a dish, or a drink on a menu, gets broken down.
“I ask my students to pick a random dish from their favourite restaurant, and we go through the exercise to calculate the food cost of that dish,” Koumarelas says, whose teachings focus on hospitality math and menu pricing. “I then ask the class, ‘Knowing the cost of this dish is $10, what should we price it at?’ Many answers start as low as $11 or $12. But that’s not a recipe for a profitable operation,” he concludes.
That’s because the actual cost of ingredients should make up just 35 per cent of a restaurant’s total sales. The remaining percentage gets taken up by the expected expenses like labour and rent, and more hidden ones, like bank fees and insurance costs. And all of those prices – not just food – have gone up.
After costs and expenditures, the average restaurant is left with a profit margin of just five per cent. On a good day. Because of this reality, Koumarelas says that most restaurants have had no choice but to raise prices after pandemic lockdowns eased. And at first, “diners were just excited to eat out again, so they were generally ok and understanding of the costs associated,” Koumarelas says. But that doesn’t mean there aren’t grumblings from customers.
As a sandwich shop, there’s only so much the Lambo’s team can do in terms of raising prices. Leon says they’ve upped menu prices by a dollar or two. “There’s a limit to how much someone will pay, no matter how high-quality the ingredients,” he says. So what’s a restauranteur to do? Get creative. During the slower winter season, Lambo’s will be working through a rotation of sandwich specials, with favourites such as the meatball, Italian beef deep, turkey club and reuben treated in the same fashion as much-hyped streetwear drops. “We promote them on our website and allow our customers to pre-order,” explains Lambo’s chef Cris Bascunan.
Lambo’s refuses to compromise on portion size or ingredient quality. To compensate, the team has invested in tomato and mozzarella slicers and food processors to cut down on prep costs in the long run. Plus, the deli has a full line of its own merch. “It helps contribute to our bottom line and keeps our customers engaged with our brand,” Bascunan says.
This tactic is in keeping with what Koumarelas has noticed in the industry at large: “Many restaurants have reduced their menu size, which often leads to cutting waste and cost savings on prep time.”
Menus aren’t the only thing that’s shrinking. “What I’ve noticed is not so much a decrease in the size of the main component of the dish, but often in the sides or accompaniments,” says Koumarelas. These accompaniments – side dishes such as soup and salad – have also seen a greater percentage of price increase, Koumarelas says.
Another increasingly popular tactic is the fixed, three-course menu, epitomized by the offering at the newly opened J’s Steak Frites on West Queen West in Toronto, where the entire menu is simply steak, salad and unlimited fries (that’s it!) for a set price. This kind of hyper-edited minimalism becomes a draw in and of itself.
But back to my $18 Paper Plane. Koumarelas tells me that, whether I like it or not, it’s basically the very reason I go out. “You can’t easily replicate it at home, it looks cool and exciting,” he says, adding that the same thing applies to food.
“Yes, prices have increased, but as long as the quality remains, and the dish tastes incredible, I’m willing to pay that premium – to a point, maybe.”
For restaurants, the recipe for a profitable operation will keep on changing – with innovation remaining the number-one ingredient.