Sunday, August 1, 2010

Spiceonomics 101

As mentioned peripherally in my last post, it's become increasingly common practice to kvatch about Miami Spice season, and to bemoan the absence of "values" among the $35, 3-course offerings. I'll be the last person to defend the ubiquity of the "Spice Trifecta" (farmed Atlantic salmon, chicken breast, churrasco); but I'm equally underwhelmed by complaints about restaurants not offering their "signature dishes" as part of the Spice menu, or the suggestion that restaurants are generally raking in money through their Spice deals.

As to the latter issue, it's one that Lee Klein of New Times seems to be pushing in his latest Spice post, "Five Annoying Things About Today's Herald Story on Miami Spice." Among other things, he points out that Florida restaurant sales totaled $27 billion last year, a statistic that prompts him to ask: "You kinda have to feel sorry for this industry, right?" It goes from there to a brief rant that restaurants whose non-Spice price points average higher than the typical Spice bill have an "effete, elitist, could-care-less-about-locals" attitude.

This faux populism is really rather unbecoming, particularly from someone who just recently praised a restaurant with $17-23 appetizers and $40-50 entrées.[1] The implicit suggestion that restaurants are getting rich off your precious $35 seems an unlikely premise, particularly for restaurants where the average bill is usually higher.

Let's do some math. I've never run a restaurant, so my assumptions here do not come from experience but rather from some haphazardly researched educated guesses based on reported industry averages. Nonetheless, the information I came across was reasonably consistent. Let's assume that at the typical full-service restaurant, food cost averages around 30%. That means that if the average bill per person is $50, the restaurant's food cost for those items is around $15.[2] So where does the other $35 go? Mostly payroll, then rent, utilities, insurance, maintenance, marketing, financing costs, tattoos, recreational drugs, and ideally, some profit. With a little more guesswork, it's reasonable to hypothesize that the average profit margin (pre-tax) is around 5%. So out of that $50 bill, the restaurant is actually making ... $2.50. And that's for a successful, profitable restaurant.[3]

(continued ...)

For simplicity's sake, let's take a hypothetical restaurant that turns 100 customers a night over a 30-day month. Its gross revenue will be $50*100*30 = $150,000. Its food cost will be 30% of that, or $45,000. Its other fixed costs will be about 65%, or $97,500. And its profit will be 5%, or $7,500.

So what happens if you take that $50 per person bill and ask the restaurant to charge $35 for the same thing? They'll just make a little less money, right? Well, no. Food cost will be the same ($45,000); fixed costs will be the same ($97,500). But revenues will be $35*100*30 = $105,000. Spending $142,500 to generate $105,000 is hardly a formula for success.

But Miami Spice brings in more customers, which is good for business, right? Maybe, maybe not. Let's assume that Spice brings in an extra 50 customers per night (a pretty generous assumption, I suspect). Gross revenues will be $35*150*30 = $157,500. Let's assume fixed costs will stay at $97,500 (in actuality, payroll is tied in part to how busy the restaurant is, if additional staffing is required); food costs will be $15*150*30 = $67,500. You're still losing money!

[UPDATED] Doh. Let me partially answer my own question. If our hypothetical restaurant typically averages 100 customers a night, but in August that number drops to 1/2 that amount, and participating in Miami Spice could actually keep that number steady at 100, then you could potentially at least be losing a bit less by participating.[4] Nonetheless, it's self evident that the Miami Spice program becomes more palatable for the restaurants if they can also control food cost at the same time, rather than offer the same exact things for a significantly lower price. There's no good reason why they can't do so while still offering tasty, interesting food.

Now, my numbers may be completely out of whack, and I may have my head rooted firmly in my ass. If anyone has better information, I'd love for them to share it. But it seems hard for me to believe that Miami Spice is any sort of cash cow for local restaurants. There's a reason for the saying, "The way to make a small fortune in the restaurant business is to start with a large one."

Of course, no restaurant is required to participate in Miami Spice. And if they do so, there's no excuse for not actually embracing it. The places that sign up, and then offer sub-standard choices and/or literally hide the menu from customers and condescend to those who request it, are only hurting themselves. On this, I whole-heartedly agree with MRPR. But a good restaurant will be able to control food costs and still put something interesting on the plate, and will also make an effort to ensure that everyone from the kitchen to the front of house is on board. Those are the places you should be looking for.

[1]That New Times review of Villa by Barton G is about as pointless as they come, considering that it notes in the final paragraph that the chef just left.
[2]Some things obviously have better or worse margins than others. Typically, liquor and wine are high margin items. So are desserts. Perhaps counter-intuitively, some high-priced food items like dry-aged steaks and seafoods often have very low margins for the restaurant since their costs start much higher.
[3]Unfortunately, statistics show that most restaurants don't succeed, with a very high failure rate within the first couple years. Restaurant failures are certainly no stranger to Miami, as Short Order regularly documents.
[4]Here's the math: $50*50*30 = $75,000 revenue, $15*50*30 = $22,500 food cost, $97,500 fixed cost means $45,000 loss, versus a $37,500 loss with 100 Spice customers.


  1. The successful restaurant formula typically includes rent being no higher than 10% of their gross. I have a hard time believing they adhere to that formula in Miami Beach, but that may be. Either way, now you have a solid 40% of the formula allotted.

  2. I applaud your "defense" of the Miami Spice program. Your numbers are *slightly* skewed in the sense of labor and food cost, but close. I can't go into our operating details, but you have a general idea of how it works. The thing to remember, is that most restaurants are switching to smaller portions, or adding a "supplement" charge, which in our opinion is BS.

    Food cost during spice rises about 5%, and labor cost about 8%, linen goes up as well - it seems like linen would be insignificant, but it's actually fairly expensive when you add it up for the week. The busier a restaurant is, the more it costs to operate (obviously) however the higher volume makes it possible to operate at higher costs because if you reduce profit by 5% and you increase volume 50%, it will off-set the reduction in net profit.

    Spice is not a cash cow, but it also is not detrimental to the bottom line.

    When planning our spice menu, I made it a point to use affordable products that still allow us to give a creative, full size, tasty offering.

    The restaurants that are serving farmed salmon, skirt steak, and chicken breasts should be ashamed of themselves! I'm not sure if you are aware, but in the documentation and agreement that we must sign to participate, they say that our spice menu should offer a 50% savings over regular menu items - this is not always possible, but we are pretty close.

    During spice, I would say 80% of our sales are from that menu, so I don't understand the restaurants that put out a crappy product - our philosophy is to make the customers happy with spice, and then they will come back once it ends for our regular menu.

    I guess this was kind of a rant/informative post, hopefully I made it a little clearer for you. If you have anymore "insider" questions let me know - i'll answer what I can.