Why restaurants are selling dishes that do not make money

Manisha George has profitable items on her menu at Little Italiano Cafe, like her cherry tomato bruschetta or feta cheese pizza. But there are two key reasons why she has so far been willing to lose money in order to keep the INR 1200 truffle lasagna with caramelised onions on the menu.

The first is that the founding principle of her not-quite-year-old restaurant is to provide jobs with livable wages. However, that puts her labour costs higher than the average, and underestimating her fixed costs like equipment, maintenance affect that too.

“You know the WAG method? I’ve done a lot of markets and retail analysis in my former life,” says George, who has a master’s degree from TISS. “You look at the size of retail operation in the geographic market, the square footage and services, the amount of revenue generated per square foot. You have to plug in all these numbers, but you have to make assumptions in order to have some level of analysis. The WAG method is the Wild Ass Guess method and it’s kind of where I am right now.” Even though she wants to keep the menu affordable, George will soon need to balance her high fixed and labour costs with the prices she charges. “We’re trying to key it in a little bit more.”

But the main reason George is willing to take a 20 percent hit on every dish sold is far more personal. George is devoted to executing the cherished family dish and making it available to a restaurant audience. “The authentic, lasagna recipe is not found anywhere here in Ranchi, it is the recipe from my French ancestral and couldn’t find it at restaurants. So we decided to serve the guest the best while burning a small amount,” she commented.

One of the issues restaurants face is price resistance. The owner might want to put super high-quality ingredients on the menu, but it costs the restaurant so much that it has to be priced beyond what most people are willing to pay. How often do you have truffles at home? So to sell it, the markup and thus the profit has to be small enough that at least a few customers will go for it. Otherwise, that hunk of truffles will sit in the deep freezer getting older and older.

According to Penpa Tsering, Chef de Cuisine at Sampan, Novotel Mumbai Juhu Beach,  there are some guests who prefer certain items. They have a preference for select types of food or dishes and hence these dishes are on the menu. “We cater to different guests and hence it is important to have a variety on the menu,” he added.

George further noted that prices for ingredients have risen steeply, particularly with wholesalers. “Wholesalers are not reluctant to increase the cost of something 50 percent overnight. So that’s been an increase, 20 to 30 percent in a lot of things, that I didn’t expect,” she said.

Despite the unexpected supply chain issues that caused increased food costs, George has been uncompromising in her choice of ingredients. A typical restaurant would buy whole lamb (which would be cheaper). But wanting to maintain the fidelity of her dishes, George insists on sourcing only the centre cuts that are used for steaks. 

Another restaurant manager of a Lebanese restaurant in Defence Colony admitted that the menu is too labour-intensive for a take-out restaurant. Combined with paying a living wage, this results in a payroll that currently hovers around 50 percent of revenue. “There’s gonna come a point very soon when we raise prices for certain dishes. That’s just the way it has to be. But we are afraid if customers are willing to understand and pay more,” he added.

To not give up upon loyal guests, many aims to reduce labour cost to 40 percent by helping staff become more efficient, while also raising prices of certain dishes a bit to reflect the true cost of how prep-heavy the restaurant is. Raising prices is a last resort for the most.

Most of the restauranteurs have informed that they are trying to figure out how to communicate to customers why certain dishes require more costing having established the three pillars of business as good food, good jobs, and affordability. “Something’s got to give in order to figure out how to build a sustainable restaurant that’s resilient, so we can stick around and meet these goals,” the manager stated.

Restaurants are a business and have to be managed. That means understanding customers and finding ways to steer their menu choices to the most profitable items. Taking cues from The Barbeque Company, it is a widely accepted concept. “When there is a huge volume of food production involved,  even a high cost food items like seafood works on economies of scale. Thus our focus is to overwhelm our guests,” Harmandeep Singh, Founder and CEO, The Barbeque Company said. Considering the majority being loyal guests who keep coming back, even serving high food cost delicacies of their choice won't burn a hole in the pockets according to Singh. 

But, Loki Fulton from Goa has another aspect. “Generally, the least profitable dishes are commonplace, like fried potatoes or cutlets, which everybody can easily make at home, so they are least likely to be ordered. Make such dishes from original recipes and come up with a catchy name for them on the menu. In my restaurant of Authentic Goan Food, all the meals are named to sound delicious and appear vibrant and juicy. They are prepared from raw, colourful ingredients like exotic fruits and seafood,” he commented.

According to the estimates, restaurateurs earn the most from pizza, meat dishes, and beer. Fast food restaurants love food that can be frozen and stored for months. McDonald’s or KFC owns their own farms to ensure that meat price remains static. For the average cafe or restaurant, the issue is often how much things cost. A seafood restaurant can struggle when prices of standard seafood go up, and a simple ingredient like avocado in India has become such a popular item that any change in the avocado supply chain can hit a cafe’s profitability.

We often presume to understand restaurant economics because we know what a chicken breast costs at the supermarket. But are restaurants making money while selling those chicken breasts? In most cases, they aren't because there is an ongoing dilemma of keeping the loyal guests, serving the best, and making money.