DISCUSSION
QUESTIONS:
- The article compares the cost of the “Grilled pork chop with white beans, pancetta, escarole, and assorted olives” dish at Pinot Bistro in Los Angeles to the restaurant’s cost of the ingredients. The menu price is $19.95 and the cost of the ingredients is $5.67. Is $5.67 the marginal cost of the dish? Is $19.95 the marginal revenue? If so, then what is the profit markup ((p-marginal cost)/price) of the dish? If not, then what are the other determinants of marginal cost? Why is marginal revenue different from the price?
- The article tells us that farm-raised salmon is the “food industry’s best-kept secret.” It costs about $2.50 a pound wholesale and is often priced at a whopping 900% markup or more. Why are consumers willing to pay such high prices for farm-raised salmon? (The article provides one suggestion.)
- This question is about pricing economic complements and about rules-of-thumb. Restaurants often aim for a 300% markup. Why? However, sometimes restaurants deviate from this rule. For example, restaurants sell both meat and side dishes, and often the profit markup is higher on the side dishes than on the meat dish. Why?
- This question is about pricing economic substitutes and about rules-of-thumb. The article states, “A loose rule of thumb in the industry: For restaurants where the average per-person check is $40, keep entrees within a $10 price range; for restaurants where the average check is $20, keep entrees within a $5 price range.” Why do restaurants follow this 4-1 rule?
- In many industries, the higher-quality items in a firm’s product line are the higher markup items. For airlines, first-class has a higher profit markup than does coach. In the auto industry, a manufacturer’s higher-quality cars have a higher profit markup than do its lower-quality cars. In the restaurant industry, however, this may not be the case. Why? The article states, “Shoppers who buy a Brand X blouse in a department store don’t subsidize society dames who buy designer wear, and compact-car owners don’t pay more so the dealer can cut deals for luxury-sedan customers.”
- The article states, “Oddly enough, the least-expensive item on a menu occasionally is put there to encourage people to order something slightly more expensive... There are people who wont’ order the cheapest thing on the menu because they don’t want to look stingy. So with the next two or three higher-priced items, you want to make sure they have the greatest profit.” As a restaurant customer, should this pricing strategy affect the dish that you order from a menu? Is it rational for you to make your choice based on the profit markup of the item?
- Economics teaches that the optimal markup for a firm increases as the demand becomes less elastic. Find examples in the article that you think illustrate higher markups for items with less elastic demands.
What Do
Restaurants
Really Pay for Meals?
By EILEEN
DASPIN
Staff Reporter of THE WALLSTREETJOURNAL
Dining in the fall at Quilty's, a stylish New York restaurant, Jaime Wolf knew something about his $23.50 pork chop was bothering him. When he looked at his plate, he realized what it was: The price.
"The food was good, but it didn't seem good enough to match the price," recalls Mr. Wolf, a lawyer. So how much did his meal cost the eatery? About $6.25.
So it goes with entree economics. As any diner can't help but notice, it isn't just the quality of the cuisine that is rising in these booming economic times. The tab is, too. Indeed, the average menu price rose 13% during the past five years -- edging out inflation and far outpacing the rise in wholesale food prices. In some hot spots such as New York, Los Angeles and San Francisco, even the once-untouchable $50-a-plate barrier has finally been shattered.
All of which prompts us to set down our forks and wonder: What do restaurants really pay for the stuff on our plates? Weekend Journal decided to dine out -- and find out. We talked to food consultants, restaurateurs and chefs, and deconstructed the prices on dozens of dishes, from the persimmon salad at Pinot Bistro in Studio City, Calif., to the filet mignon at Charlie Palmer Steak in Las Vegas.
Some of what we discovered was a bit hard to swallow. For one thing, the conventional wisdom has always been that restaurants get you on the liquor -- and indeed, they typically charge five times more for whiskey and wine than they pay for them. But certain kinds of foods have even more staggering markups. Mussels turn out to be one of the biggest cash crops -- with markups of as much as 650% -- and if you are a vegetarian, the price multiples on your entrees are so high you basically are subsidizing the carnivores around you.
But the biggest sticker shock of all may be on a big pink fish. Farm-raised salmon -- referred to in the trade as "the chicken of the sea" -- could well be the food industry's best-kept secret. It costs just $2.50 a pound wholesale and is often priced at a whopping 900% markup or more. "People think it's an elegant dish," says Brian Buckley, director of management studies at Peter Kump's New York Cooking School. "They don't think about it being farm-raised. They see the bears swiping at it as it goes upstream on a National Geographic special."
At the popular New York eatery Docks, a 10-ounce portion of grilled salmon with coleslaw and potatoes is $19.50. Actual cost of the ingredients? $1.90, the restaurant says.
To be fair, focusing on the cost of a restaurant meal's raw ingredients is like calculating the value of a Picasso based on the cost of the paint.
When we eat out, we also are paying for labor, atmosphere and overhead. Restaurants need to make a profit just like any other business. "We are not the Red Cross," says Eric Ripert, the chef and co-owner of Le Bernardin, a high-end seafood restaurant in New York. "What's the point if we're not making money?"
Le Francais, Wheeling, Ill.
Trio of Lamb (Mustard-crusted rack, cumin-dusted loin and braised shoulder
with their own jus)
Total Cost to restaurant: $16.81
Menu price: $32.50
Boiled down, there's a simple rule of restaurant finances that explains all this -- and can help you eat more for your dining dollar. Call it the 300% solution. Many independently owned restaurants, from the fanciest boite in Boston to a barbecue joint in Dallas, aim for an overall food markup of 300% -- or four times -- the cost of the raw ingredients. (Any less, and the restaurant might not turn a profit, food consultants say.) But some ingredients -- especially prime cuts of beef and gourmet seafood such as day-boat scallops -- cost the restaurant so much that diners wouldn't tolerate such a high markup on them. So, since restaurants can't ratchet up the rates enough on those items, they have to make it up on the cheap stuff, such as salmon, lettuce and pasta.
Where the Beef Is
The Sunset Grill in Nashville, Tenn., is a case in point. Its best-selling Angus Beef Tenderloin costs the restaurant $7.42 for the meat, 75 cents for the greens and potatoes, and 25 cents for the sauce, for a total of $8.42. Few diners in town would pay the target 300% multiple for that dish, or $33.68. So instead, the restaurant lists the tenderloin at $25, or just short of a 200% markup. But to even things out and hit its overall 300% target, the eatery boosts the price on its Grill Vegetable Plate -- $1.55 of rice, beans and vegetables -- to $9, close to a 500% markup. "I personally would rather sell nothing but pasta and vegetables," owner Randy Rayburn acknowledges.
Figuring Out the Tab
We asked six restaurants to tell us the ingredients of one
of their entrees, and what they cost the restaurants wholesale. Then we bought
the ingredients at the grocery store. The results:
|
|
||||
|
Restaurant |
Dish |
Menu price |
Grocery store price |
Wholesale price |
|
Carmine's |
Zuppa di mussels |
$12 |
$3.15 |
$2.25-$2.50 |
|
Ingredients: 1 pound mussels with tomato sauce |
||||
|
Heaven on Seven |
Grilled Louisiana Gulf shrimp and Andouille sausage on bed of white rice (comes with a choice of cup of soup, gumbo or salad) |
$18.95 |
$9.00 |
$6.39 |
|
Ingredients: 6 shrimp (about 6.5-7 ounces), 2.5 ounces andouille sausage, 6 ounces white rice, plus sauce and seasoning, and 1 cup of soup |
||||
|
Grill 23 and Bar |
Grilled swordfish |
$24.50 |
$9.00 |
$4.50-$7.50 |
|
Ingredients: 12 ounces swordfish |
||||
|
Docks |
Grilled tuna with steamed red potatoes and coleslaw |
$20.50 |
$8.15 |
$6.55 |
|
Ingredients: 10 ounces tuna, 8 ounces potatoes, 5 ounces coleslaw |
||||
|
Pinot Bistro |
Farm chicken with a roasted garlic glaze and Pinot fries |
$15.95 |
$3.00 |
$4.08 |
|
Ingredients: 12 ounces chicken, 10 ounces french fries |
||||
|
Tennessee's Real BBQ Real Fast |
Slab of Memphis ribs |
$18.95 |
$11.60 |
$5.94 |
|
Ingredients: 2.25-2.5 pounds of pork ribs, 5 ounces cucumber salad, 5 ounces beans, cornbread, sauce and seasonings |
||||
Consider also Charlie Palmer Steak in Las Vegas. The restaurant charges $27 for an 11-ounce filet, for which it pays $9.50 -- a relatively skimpy markup of less than 200%. But it makes a bundle on vegetables and side orders such as the $7 steak fries (which cost the restaurant 65 cents a portion -- or a 977% markup). "The steakhouse mentality is that a steak is a steak," says chef-owner Charlie Palmer. "You want sauce on the side? That's $8. You want a potato? That's $5. And no one says a word." In fact, before he opened the restaurant, Mr. Palmer estimated the average tab per diner would be $56; instead, because the side dishes are so popular, it is $73.
Some patrons do see through a restaurant's smoke and mirrors. Dining at Nashville's upscale Wild Boar in January, Amy Smotherman ordered a $7.95 "Pyramid of Micro-Mesclun & Artichoke Hearts in a Verjus Vinaigrette with Basil Oil" as an appetizer. Because Ms. Smotherman runs a church kitchen, she knows something about food prices. "That lettuce didn't cost them 25 cents," she says. "It wasn't even an ounce of salad."
Abby Benrahmoun, maitre d' at the Wild Boar, concedes "the mesclun salad looks small" but says the dish is labor intensive. "Altogether it's a 45-minute production from scratch," he says, including making and frying the pyramids, boiling and coring the artichokes, and decorating the plate with saffron, squid ink and bell pepper mayonnaises.
Vegetarian Angst
The idea that vegetarians tend to subsidize meat-eaters actually comes as a relief to self-described "dainty" diners such as Valerie Lichman, a New York public-relations executive. When she goes out with her girlfriends, Ms. Lichman says, "we all order salads and side orders of steamed vegetables, and think the restaurant hates us." While Ms. Lichman doesn't plan to change her ordering habits, she says she will feel less guilty from now on since her dinner choices probably generate "a tidy profit."
Still, why don't restaurants simply charge more for high-cost dishes and less for cheaper ones? After all, it seems only fair. Shoppers who buy a Brand X blouse at a department store don't subsidize society dames who buy designer wear, and compact-car owners don't pay more so the dealer can cut deals for luxury-sedan customers.
The answer is partly marketing and partly psychology. Straying outside a certain price range can be risky for a restaurant. A $3 soup on a menu where most appetizers are in the $8 to $12 range will either cause a run on the soup, or scare people away because they think something is wrong with it. Likewise, a dish might not find takers if it is priced too high. When screenwriter Chris Lynch recently ate at the Italian restaurant Drago in Santa Monica, Calif., the waiter announced the daily special was pasta with truffle sauce. "Oooh, I think I'll get that," Ms. Lynch said -- until her dinner companion insisted she ask the price. "It was $58," says Ms. Lynch, who ordered another dish. "Paying that much for an entree when everything else was $15 to $25 seemed outrageous."
A loose rule of thumb in the industry: For restaurants where the average per-person check is $40, keep entrees within a $10 price range; for restaurants where the average check is $20, keep entrees within a $5 price range.
Looking Cheap
Oddly enough, the least-expensive item on a menu occasionally is put there to encourage people to order something slightly more expensive, says Mr. Buckley, the New York cooking-school instructor. "There are people who won't order the cheapest thing on the menu" because they don't want to look stingy, he says. So with the next two or three higher-priced items, "you want to make sure they have the greatest profit."
Indeed, there is often a science to restaurant pricing. The savviest restaurateurs have computer programs that allow them to enter the contents of every dish and get an exact price on each ingredient and the overall cost of a single serving. Tennessee's Real Barbecue Real Fast, a three-chain restaurant based in Framingham, Mass., for example, uses a computer to monitor inventory and register the cost of every ingredient, down to the sprinkling of spices on its signature ribs. "If someone with a heavy hand is portioning out seven ounces of beans, we check into it," chef-partner Steve Uliss says. Owning restaurants "is now becoming a lucrative business if they're run in the right way."
Tracking such minutiae is one reason why the notoriously risky business of operating a restaurant has become a bit more stable, industry watchers say. According to Dun & Bradstreet, 100 out of every 10,000 U.S. restaurants failed in 1997 -- the latest year for which figures are available. But Arlene Spiegel, director of the food-and-beverage practice at PricewaterhouseCoopers, says the business climate for restaurants has "improved in the last three years."
Still, many restaurants maintain they are in an extremely tough industry with very tight profit margins. At Quilty's in New York, where attorney Mr. Wolf thought he paid too much for his pork chop, owner Jason Ungar says the entree "may have a bigger markup" than some others because "pork is probably going to sell anyway." Mr. Ungar says the thinking is: "Can we make up with the pork a little on the steak?" He adds: "I'm sorry if anyone walks out feeling they paid too much for an entree. There's no aspect where we're making a killing."
Write to Eileen Daspin at eileen.daspin@wsj.com1
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