Restaurant unit economics: turns, delivery, and franchising
Build the P&L of one restaurant, compare a delivery order with a dine-in order, and see how a franchisor and a franchisee split the money.
Industry brief, with a one-minute summary: Restaurants and food serviceKey takeaways
- One restaurant is the unit. Its sales are capped by seats, turns, and kitchen speed.
- Menu design: a short menu with shared ingredients lowers waste and speeds service.
- Supply: chains buy through approved suppliers and a distributor that delivers to each restaurant several times a week.
- Kitchen flow: the slowest station (often the grill or fryer) sets the maximum orders per hour at peak.
Key idea
One restaurant is the unit. Its sales are capped by seats, turns, and kitchen speed. Delivery adds sales without seats, but the aggregator's commission can take much of the margin.
Worked case
The yearly P&L of a casual restaurant in Dubai
The prompt
An illustrative casual dining restaurant in Dubai has 80 seats. It turns each seat 1.5 times at lunch and 2 times at dinner. The average guest spends AED 120 and the restaurant opens 360 days a year. Food and drink cost 30 percent of sales, labour 28 percent, rent is AED 1.2 million a year, and other costs are AED 1.5 million. What are its sales and profit?
The structure
- Restaurant profit = sales minus prime cost minus rent minus other costs
- Covers per day = seats x turns per day
- Sales = covers x average spend x days open
- Prime cost = (food share + labour share) x sales
Working it through
1. Covers per day
80 seats x (1.5 + 2) turns.
Covers per day:80 × (1.5 + 2) = 2802. Yearly sales
280 covers x AED 120 x 360 days, in AED thousands.
Sales (AED thousands):280 × 120 × 360 ÷ 1,000 = 12,0963. Prime cost
30 percent plus 28 percent of sales.
Prime cost (AED thousands):12,096 × (0.3 + 0.28) = 7,0164. Profit
Sales minus prime cost, rent of 1,200, and other costs of 1,500.
Restaurant profit (AED thousands):12,096 - 7,015.68 - 1,200 - 1,500 = 2,3805. Margin
Profit as a share of sales.
Restaurant margin (percent):2,380.32 ÷ 12,096 × 100 = 19.686. If dinner turns fall to 1.5
Covers fall to 240. Assume food stays at 30 percent of sales but labour and other costs stay the same in AED.
Profit with fewer dinner turns (AED thousands):240 × 120 × 360 ÷ 1,000 × 0.7 - 12,096 × 0.28 - 1,200 - 1,500 = 1,171
The recommendation
The restaurant earns about AED 2.4 million, close to 20 percent of sales. Losing half a turn at dinner cuts profit roughly in half, because staff and rent do not fall with covers. Filling seats at peak times is the first lever.
Worked case
A delivery order compared with a dine-in order in India
The prompt
An illustrative burger restaurant in India sells an average order of INR 400. Food costs 30 percent of the menu price. On a delivery platform it pays a 25 percent commission and 2 percent in payment and platform fees, plus INR 20 of packaging. What does each delivery order contribute before labour and rent, and what if the restaurant lists delivery prices 10 percent higher?
The structure
- Contribution per order = price minus commission minus fees minus food minus packaging
- Dine-in: price minus food cost, but it uses a seat and service staff
- Delivery: no seat, but commission and packaging
Working it through
1. Dine-in contribution
INR 400 minus 30 percent food.
Dine-in contribution (INR):400 - 400 × 0.3 = 2802. Delivery contribution
Subtract commission of 100, fees of 8, food of 120, packaging of 20.
Delivery contribution (INR):400 - 400 × 0.25 - 400 × 0.02 - 120 - 20 = 1523. Delivery at a 10 percent higher menu price
Commission and fees grow with price; food and packaging do not.
Delivery contribution at INR 440 (INR):440 - 440 × 0.25 - 440 × 0.02 - 120 - 20 = 181
The recommendation
The restaurant should list delivery prices about 10 percent higher, because that lifts delivery contribution from about INR 152 to INR 181 an order. First, a delivery order contributes far less than dine-in at INR 280, due to the 25 percent commission, fees and packaging. Second, even at the higher price delivery stays below dine-in, which means the restaurant should also push repeat customers to its own ordering channel, where there is no commission. The risk is that higher prices lower delivery volume. As a next step, test the higher prices for a month and track orders.
Worked case
How a franchisor and a franchisee split the money
The prompt
An illustrative franchised burger restaurant in the US sells USD 3,000 thousand a year. The franchisee pays a 5 percent royalty and 4 percent into the brand marketing fund. Before these fees, the restaurant earns an 18 percent margin. What does the franchisee keep, and what does a franchisor with 1,000 such restaurants earn in royalties?
The structure
- Split restaurant profit between franchisee and franchisor
- Franchisee profit = restaurant margin minus royalty minus marketing fund
- Franchisor royalty income = royalty rate x sales x number of restaurants
Working it through
1. Profit before fees
18 percent of USD 3,000 thousand.
Restaurant profit before fees (USD thousands):3,000 × 0.18 = 5402. Franchisee keeps
Minus the 5 percent royalty and the 4 percent marketing fund.
Franchisee profit (USD thousands):540 - 3,000 × 0.05 - 3,000 × 0.04 = 2703. Franchisor royalties
USD 150 thousand of royalty from each of 1,000 restaurants, in USD millions.
Franchisor royalty income (USD millions):3,000 × 0.05 × 1,000 ÷ 1,000 = 150
The recommendation
The franchisor should keep growing through franchising, because it earns about USD 150 million a year in royalties from 1,000 restaurants with little capital of its own. First, each restaurant pays a 5 percent royalty, worth USD 150 thousand a year. Second, the franchisee keeps USD 270 thousand, about 9 percent of sales, half of the USD 540 thousand restaurant profit. The risk is that weak franchisee profits slow new openings, since the franchisor's growth depends on franchisees staying profitable. As a next step, track franchisee margins every quarter.
Restaurant operations and supply chain
- 1Menu design: a short menu with shared ingredients lowers waste and speeds service. Menu engineering places high-margin dishes where guests notice them.
- 2Supply: chains buy through approved suppliers and a distributor that delivers to each restaurant several times a week. Some use a central kitchen to prepare sauces and dough.
- 3Kitchen flow: the slowest station (often the grill or fryer) sets the maximum orders per hour at peak.
- 4Labour planning: staff rosters follow forecast sales by hour, because labour is the cost a manager can change fastest.
- 5Food safety and quality checks, with inspections from local authorities.
A cafe in Singapore has monthly sales of SGD 80,000, food and packaging cost of SGD 25,600, and labour cost of SGD 24,000. What is its prime cost as a percent of sales?
A restaurant in Mexico City has 60 seats and served 270 covers at dinner. How many table turns did it achieve at dinner?
A franchisor in the UK has 400 franchised restaurants with average sales of GBP 1.5 million each and a 6 percent royalty. What is its yearly royalty income, in GBP millions?
Why can a small fall in covers hurt restaurant profit so much?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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