About 60 percent of restaurants don't survive their first year. And 80 percent of restaurants go out of business within their first five years.
One reason many restaurants fail is that the owners don't consider the cost to open a restaurant. Restaurant startup costs are more than meets the eye. There are a series of expenses you must consider. But once you know them, you can prepare a smooth opening.
Here is a quick guide to the costs of starting a restaurant.
Rent and Building Fees
Rent and building fees are usually the first expenses that an owner considers. Nearly all restaurants' rent are based on cost per square foot.
The bigger your restaurant, the more you will rent it for. You may be able to get a smaller cost per square foot if your restaurant is big enough, but don't rely on that.
Location is a major determinant of cost. If you are in a high-demand area, you can expect to pay high rents. With enough customers, you may be able to pay the higher expenses off, but you should consider your options carefully.
There are additional expenses when opening a restaurant. You need to decorate the interior, pay for furniture, and set up an electric system. This costs tens of thousands of dollars on top of rental fees.
Labor and Operations
Labor is a huge cost that many people don't consider. You have to pay for wages, Social Security expenses, and medical insurance.
The annual turnover rate for restaurants last year was about 75 percent. Many restaurants hire employees for a few months, spending time and resources on training. This creates huge losses when the employees leave for school or other opportunities.
Operations costs include buying and maintaining commercial kitchen equipment. To save money, restaurants lease equipment or find used products. But these measures can still cost tens of thousands of dollars.
You also need to pay for laundry for tablecloths and napkins. Laundry costs thousands, even if you do it yourself. You have to pay for a machine, laundry detergent and soap, and water.
Food
Food is the other major expense that goes unnoticed. Food and labor costs combined absorb 60 to 70 percent of a restaurant's revenues.
Suppliers can offer discounts, but bills usually run into the thousands. Meat, seafood, and alcohol are especially expensive. You can save money by running a more casual restaurant, avoiding pricey dishes like steak.
You can also save money by running a vegetarian restaurant, but be careful. Organic products tend to be more expensive than non-organic ones.
The Cost to Open a Restaurant Answered
Many people think there is one cost to open a restaurant. There are actually many costs.
Renting a building costs thousands in and of itself. But you need to add renovations and decorations on top of that expense.
Then you need to add labor. You have to hire workers, which is difficult given the high turnover rate. You need to pay for operations, including buying industrial equipment.
You also need to pay for food. No food means no restaurant business. You can save money by avoiding high price items like steak and seafood, but you can still expect to pay a lot regardless of your menu.
It's no wonder that financial experts advise against opening a restaurant. But you can make a restaurant business model work if you do it right. Follow our coverage for more restaurant marketing tips and food service business guides.
