Ultimate Guide to Restaurant Markups

Your Greek salad was tasty, but was it really worth $14?
Your Greek salad was tasty, but was it really worth $14?
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If you're looking for ways to save money, cutting back on restaurant dining might be an option. Depending on your shopping and eating habits, a single meal out for two might ring up at about the same price as a week's worth of groceries for those same two people. For a family of four, a month spent eating in instead of out could easily save you $100 or more.

While cutting back on dining out sounds possible, sometimes you have to go to a restaurant. Perhaps it's because you're conducting a working lunch or business dinner, or you're on the go and need to grab a bite. And sometimes you simply want to go out for a meal; there's a lot to be said for getting out of the kitchen and going somewhere special, especially if it means spending time with friends. There are places that seem more affordable than others do by comparison. But no matter where you end up, sometimes when you consider what you're getting, it's hard not to wonder why a meal costs so much? Is it the ambiance? The service? The trendy locale?

Restaurants are businesses like any other, and they've put a lot of thought into their prices. The markups cover the labor force in the kitchen, the wait staff, the rent, the decor, the music, the advertising -- and let's not forget the food and drink. Restaurants also have to respond to their competitors' pricing, so markups don't always hold steady [source: Canada Business].

In general, a food's restaurant price is about three times its wholesale cost - a 300 percent markup [source: Canada Business]. If the manager is smart, he or she will calculate the markup based on the most expensive version of the food (the cappuccino with soymilk, rather than the one with plain 2 percent milk). Managers also pay attention to the food cost percentage, the ratio obtained by dividing the preparation cost by the selling price [source: Mullis].

But not all markups are created equal. Some items have higher prices to balance out some other items.

In this article, we'll look more closely at what goes into restaurant markups -- the costs, the labor and the business decisions. We'll also examine how markups work at different kinds of restaurants, and explore some of the myths -- and facts -- about those sky-high prices.

We'll start on the next page, with the most important meal of the day -- breakfast.

Breakfast Markups at Restaurants

Most restaurants aim to keep their prime cost -- the combined cost of food and labor -- under 55 percent to 65 percent of total sales [sources: Mullis, Walker]. That doesn't mean the chefs and owners are back in the kitchen rolling around on piles of dough [hey, we couldn't resist], though. Taxes, rent, insurance, utilities and other overhead costs eat up the remainder of sales. A typical independent restaurant might see a profit equal to about 5 percent of total sales [sources: Bockelman, Marvin].

How much you're paying for a morning egg depends greatly on where you're getting it. Is it a fast-food place or a chain? Is it a counter that sells the sort of food you can eat during your commute? Or are you having a nice sit-down brunch? That little word "nice" means a lot. Depending on the locale or circumstance, we might not balk at shelling out $15 for a restaurant breakfast of two eggs, bacon, an English muffin and juice, even though it's likely triple what a fast food place charges for a meal that consists of essentially the same ingredients. Restaurant owners are alert to our perceptions and desires. In general, the price is lower for a meal that "feels" like groceries, and higher for a meal that is itself an experience [source: Pavesic].

The wholesale prices of some breakfast foods are low, simply because of the ingredients involved. It doesn't cost the restaurant much to whip up a big bowl of pancake, waffle or crepe batter, and actually making those dishes takes little labor. Many breakfasts contain potatoes, which have been a famously cheap staple for centuries.

We may soon see a spike in the prices of other breakfast items, though. The retail costs of breakfast cereals have been a source of consumer outrage for years, but wholesale grain prices have been skyrocketing lately, and they're probably going to take your restaurant's bowl of name-brand cornflakes with them. That probably means that the prices of other dishes in that part of the menu, such as the generic oatmeal or granola, will also go up. That's because, if you see a $3 bowl of oatmeal next to a $4 bowl of Raisin Bran, you'll probably assume that the oatmeal is worse [source: Pizam].

Do buddies who breakfast pay more than ladies who lunch? Find out on the next page.

Lunch/Dinner Restaurant Markups

The markups associated with lunch and dinner vary wildly. Rumors fly about the markups associated with different kinds of ethnic foods, but some restaurants featuring ethnic cuisine aim for and operate at the standard 300 percent rate (that is, three times the food's cost) we've seen elsewhere [source: More Business].

However, you will see a higher markup for some Italian food. Why? Pasta's cheap. It has endured for years because it's versatile, hearty peasant fare. What defines a pasta dish is what's on top of it. The noodles themselves cost a restaurant only a few cents [source: Bockelman]. Pizza, likewise, doesn't cost much to make, can be topped with whatever leftovers are on hand -- yes, chefs struggle with leftovers too -- and is almost universally popular with consumers. In some restaurants, pizza returns a 100 percent profit [source: All Business].

In general, look at the food tradition to get a sense of the markup. Tex-Mex food relies heavily on low-cost beans and rice. French cuisine uses butter, liqueurs, fine cheeses, stock, filet mignon -- you know where the costs are coming from.

What about chain restaurants as compared to local eateries? There's an obvious difference between the burger you get at a drive-through and the burger you get at the gastropub down the street. The one at the drive-through probably costs half as much -- and it's not because of the size of the patty. It's because you have no choice about how the meat is cooked, and only a limited range of options for toppings [source: Walker]. It's also related to shear purchasing power. Fast-food restaurants feed more people and therefore buy more ingredients. So they can broker better prices, with large suppliers. Alternately, local eateries might choose to offer local foods. Purchasing organic produce and grass-fed beef from a local farmer is going to cost more, plain and simple.

Furthermore, fast food is fast and cheap because it standardizes food production, allowing owners to spend less time on kitchen training, vendor selection, and other administrative tasks. (It's a substantial savings; chain restaurants typically net twice the percentage of sales that independents do [source: Marvin].) In a restaurant, you're paying for variety. It's easy to understand in retail terms: You'd expect to pay less for a standard T-shirt off the rack at Target than for a shirt on which a local artist screen-prints a design just for you and a few dozen friends.

How're we doing on drinks? Would you like another round? Are you sure? Better read the next page.

Bar Markups

There's one guaranteed way to drive up your restaurant tab: order a round of drinks from the bar. Bar markup is typically high -- often 200 percent -- and up to 575 percent at one restaurant [sources: Dubner, Lape]. Oddly enough, markup acts as a bit of an equalizer among drinks. It's typically lower for the drinks that have a higher wholesale cost, and higher for those with a lower cost [source: Sherman].

The markup on alcoholic drinks has grown more pronounced in recent years, as the wholesale prices of many foods have spiked. In many cases, restaurants have opted to give their customers the impression of a deal on food, recouping the loss by raising the price on alcohol [source: USA Today].

Why not just raise the price of the foods that are getting more expensive? Perceived value plays a big role in how much customers are willing to pay [sources: Bockelman, Mullis]. The ratio between the price of a drink and the price of a meal influences our willingness to buy the drink. We perceive alcohol as a luxury rather than a necessity; we're less likely to object to a high price on a drink than on a sandwich. Plus, sometimes, if an item seems underpriced, we assume its quality is low [sources: Pizam, Sherman]. So -- accurately or not -- we perceive that we're paying for quality when we help ourselves to a $7 draft at the pub. But we're likely to grumble if the burger goes from $8 to $10.

Wines can cost a lot because restaurants don't always buy in bulk, the way retailers do [source: Sherman]. Sometimes the restaurant ages the wine on the premises, so you're paying for an investment of selection, time and storage. If you buy by the glass, the markup is probably higher, because the restaurant expects some of the bottle to be wasted [source: Gibbons].

Cocktails and liquor drinks can be especially expensive because, in some states, they require separate licensing [source: Chowhound]. The decision to maintain a full bar as opposed to a wine cellar is a large up-front expense.

What do these gargantuan markups cover? It costs a bit to train and retain a wait staff that's knowledgeable about wine. A good restaurant likely has specialized glassware -- red wine glasses, white wine glasses, snifters, highball glasses. And as you've probably guessed, it is more expensive to purchase and replace than standard glassware.

We've saved the lowdown on dessert markups for last. Read on.

Dessert Markups

If you regret overindulging in that chocolate cake, well, at least the wallet in your back pocket is looking less bulky. Desserts are marked up like anything else. The profit markup range averages between 15 and 35 percent in restaurants [source: Pizam]. It can even go as high as 70 percent [source: Lassen].

You can always expect to pay more if a restaurant has a pastry chef in the kitchen because that means the restaurant has higher labor costs to cover. If on the other hand, the restaurant's desserts come from a supplier, that's a tipoff that you're probably paying excessively. The supplier sells the desserts in bulk, often without setting portion size. By being able to set portion size, the restaurant has one more way of buying low and selling high.

Dessert presentation can be a sneaky way to drive up the price as well. It all goes back to perceived value. If the food is beautifully presented -- say, set on a large white plate adorned with an artful drizzle of chocolate sauce -- you probably feel as though you're getting something special, even though the plating has cost the restaurant mere pennies in ingredients and labor.

In general, how do you know when something is likely to have a high markup?

  • It's listed first on the menu.
  • There's some sort of spectacle associated with it (think items prepared tableside and appetizers that arrive in flames).
  • It contains alcohol.
  • It makes you feel like you're treating yourself.

[source: Bockelman]

Do restaurant markups mean you can't treat yourself every now and then? That's between you, your pocketbook and your waistline.

To learn more, visit the links on the next page.

Related HowStuffWorks Articles

Sources

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