Yes, Chef: Restaurant Economics of The Bear

Running a restaurant is hard. It can be chaotic, stressful, high-pressure work. We know this from watching the hit FX/Hulu series The Bear. It's also a business with very challenging economics. In fact, a poignant adage about the food business is: “Best way to make a small fortune in restaurants? Start with a big one.”

A few years ago, JPMorgan did an analysis on nearly 600,000 small business it lent to, including almost 25,000 restaurants. The median daily cash inflows for restaurants was $968 while median outflow was $957. Those are thin margins; a bad weather day and you could easily slip into the red, needing to dip into your cash balance to keep this going. But the typical small restaurant had a cash buffer of just 16 days (where cash buffer is the number of days of cash outflows a business could pay out of its cash balance were its inflows to stop).

Things have only gotten harder with inflation, even for the type of high-end restaurant that chef Berzatto dreams of turning The Bear into one day. The WSJ recently published a story on 'Why a $500 Steak Dinner Only Yields a Profit of $25' and breaks down where the costs go (as shown below).   

Source: WSJ. (Click to enlarge)

Food and alcohol make up the largest share of costs at 40%. For steakhouses, in particular, which rely on beef to bring in customers, costs have ballooned. Beef is more expensive than ever, rising 60% since the pandemic. The WSJ article provides an example involving the Gibsons Restaurant Group (based in Chicago, where else?). Gibsons currently pays $25 for a 13-ounce NY strip steak and charges customers $70 for it. In 2016, the same steak cost $16. The Group says that to keep the same margins as then, it would need to charge $89 for it today. WSJ notes that a Chicago steakhouse needs to keep cost of ingredients to around 35% of what customers pay and so has to balance out higher beef costs with lower cost items that are more profitable, such as sides, pastas, and deserts. But still, "beef regularly breaks the 35% target. For prime steaks, it is around 50%...one error in the kitchen, and $50 ends up in the trash." 

Labor takes up another 37% of costs followed by overhead at 23%. Labor has become more expensive since the pandemic (but so has the cost of living for those same employees) and fine-dining restaurants need to pay servers and cooks able to handle $100 dishes. So, why do it for a measly 5% profit margin? Because it's a calling...as Ritchie said "the kitchen is where we find our truth." Here, let Will Hunting explain.