What it takes to open a restaurant in the Napa Valley
It is no surprise the Napa Valley is well known for several highly rated restaurants. And you probably are not surprised the Napa Valley is becoming a “foodie’s” paradise begging for your food dollars. What you may be surprised to learn is the profit margin of some of these restaurants can be a little as 2.5% according to restaurantowner.com.
Let’s look at a hypothetical restaurateur, a local chef who is ready to venture out on his own and open a new restaurant. Even though it would prove difficult, he locates a great location in Downtown Napa. The site is 3,000 sq. ft. and leases for $4.00/square foot (psf) plus triple-net
expense reimbursement of $0.65 psf for a total rent per month of approximately $14,000. Additionally, percentage rent of 3% on gross sales above $5.6M will be applied. See my previous article on the explanation of these terms.
The site chosen is a “shell” space meaning there are no improvements - basically four walls and a concrete floor. The tenant will need to completely build-out his restaurant. With an estimated start up construction cost of $750,000 and an additional $250,000 for kitchen & bar equipment, dining room furniture, tableware, silverware and glassware the restaurateur secures an SBA loan. His monthly amortized loan payment is in the range of $5,700.
Calculating the potential of 115 seats in his dining room with an average dining bill of $55 per person and table turnover average of five times/day this gives him gross income of $950,000 month. Remember the percentage rent of 3%? This adds approximately an additional $15,000/month for a total rent of $29,000.
On average, about 33% of expenses go towards food costs and 33% on employee costs. Up to 10% can be attributed towards rent and 20% on other costs according to the National Restaurant Association. This leaves on average a 4% before tax profit. In our hypothetical example this is approximately $38,000/month or almost a half million dollars a year.
Not too bad for a successful restaurant. Keep in mind that 90% of restaurants fail and on average it takes two years for a restaurant to meet projected sales capacity from start-up according to restaurantowner.com.
You cannot be too detailed in calculating your upfront and ongoing costs. Every little detail and cost is important. Some things I have not addressed are the costs upfront for inventory and supplies, startup payroll costs for training and contingency reserves all which need to be paid before the doors are open.
Starting a restaurant can be a very stressful endeavor and consuming of every minute of your day prior to opening and oftentimes after as well. In order to have a successful opening and quickly become profitable, more than the national average of 2.5%, a successful restaurateur will take time to know his budget, know his market as well as know how to create culinary masterpieces.
What style of restaurant would you like to see come to Napa? Let me know your answer, question or suggestion for future articles below.