Profiting in a Food Franchise
Food Franchises, like all others have a formula for success and never is it more important than in a Food related franchise. Whether it is a fast-casual, quick serve or a restaurant, controlling costs is one of the most important steps a franchisee must be able to do if they are going to make money.
The breakdown for the three largest cost components are Labor Costs, Rent and Food Costs, otherwise known as COGS. I will explain them in more detail.
The costs to employ people is a variable cost because schedules must be managed and hiring the right people to work at the right time is crucial in a Food Franchise. These costs should be between 26% and 30% of your gross Sales. Successful operators are constantly crunching numbers to keep these costs in line because each percentage point means lost income.
Rent is a fixed cost, but that doesn’t mean you can sign a lease and then forget about it. The negotiation of a lease is one of the most important aspects of any business. If rent is over 10% of Gross Sales, it is going to be an issue when it comes to turning a profit. It is also going to be an issue when the Franchisee wants to sell the business and is expecting the Landlord to write a Lease Assignment for the new owner. Options, rent increases and who pays for repairs can save or cost an operator a lot of money.
Food Costs, known in the industry as Cost of Goods Sold, is a variable expense and all Franchisors will require their stores to purchase the majority of these items from selected vendors. Many will also allow Franchisees to purchase a percentage from vendors specific to the market the store is located. If food costs get above 33%, the Franchisee is going to have difficulty making money. Waste, shrinkage, theft and poor management are all reasons food costs go up. In markets where food prices are rising, the operator must adjust prices in order to stay profitable.
These three major categories of expenses will total nearly 75% of total costs. This leaves 25% for overhead and variable costs and hopefully, the net will be in the 20% range. If a franchisee can net 20% they will be very happy and successful.