How do restaurants in expensive cities make money?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Locked
Topic Author
Derivative
Posts: 262
Joined: Wed Jul 03, 2013 8:05 am

How do restaurants in expensive cities make money?

Post by Derivative »

How do franchises/restaurants/retail businesses in expensive cities (e.g. New York, Bay Area, LA -- the areas next to 3+million dollar homes and top universities/businesses) make money? Isn't their rent astronomically high? For example, if you own a Subway next to Stanford University, how do you make a profit given the sky high rent/real estate by selling $5-$8 subs? Wouldn't Subway owners profit more in a LCOL area with lower rent? It's not like they can sell $20+ subs right? I don't get the math.
miamivice
Posts: 2303
Joined: Tue Jun 11, 2013 11:46 am

Re: How do restaurants in expensive cities make money?

Post by miamivice »

I live in a HCOL area, and have asked the exact opposite question. How do restaurants in rural areas (LCOL) make money?

The difference is that in the HCOL area, restaurants tend to be very busy and have a lot of volume. In LCOL areas, especially rural areas, they don't have the same volume.

For example, in a HCOL area I find often there is a 45 minute wait time to get into a restaurant on a Friday or Saturday night. (Sometimes as long as two hours). I went to a LCOL area (can't remember if it was Saturday or Sunday night) and we were the only diners in the restaurant. As we ate one or two more tables filled up.
Liberty1100
Posts: 255
Joined: Fri Nov 21, 2014 12:36 pm
Contact:

Re: How do restaurants in expensive cities make money?

Post by Liberty1100 »

In high school, I worked at a dunkin donuts in my small town as a summer job. Just that single dunkin would generate $2-3million in sales per year. Now factor in how large the margins are for a cup of coffee and a donut and you will get an great number.
User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: How do restaurants in expensive cities make money?

Post by Pajamas »

Higher prices and/or higher volume.

McDonald's in NYC charges more than it does in a small town and they are also very busy. Dollar menu? Probably not at all, or much more restricted. Chain stores like CVS and Kmart in Manhattan don't even have weekly flyers like most of their other stores do.

Stores like Trader Joe's charge the same in NYC as they do in other places but do way more in sales per square foot than in any other place in the country.

You can get a rotisserie chicken in a high-cost area in NYC for $5 at the grocery store (if you know where to go) but it is half the size as somewhere else.

Also realize that expensive cities are not homogenous as far as costs. For instance, rent is much lower in upper Manhattan than in lower Manhattan and even lower on a side street than on a major avenue right around the corner.
Last edited by Pajamas on Thu Mar 15, 2018 3:59 pm, edited 7 times in total.
CMD1
Posts: 135
Joined: Tue Nov 28, 2017 8:10 pm

Re: How do restaurants in expensive cities make money?

Post by CMD1 »

$5 subway sandwich? Haven't seen one of those since I moved to Seattle. Even an hour out of town its more like $9-10. Honestly, here the price increases have been very apparent and high as the minimum wage has marched up toward $15. It really squeezes the middle class that want to eat at, especially as they are already paying a higher and higher portion of their income on housing.
User avatar
Sandtrap
Posts: 12808
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona
Contact:

Re: How do restaurants in expensive cities make money?

Post by Sandtrap »

The average pizza costs less than $1 to make. The highest cost is the cheese. A Little Caesars Pizza Franchise in a busy HCOL area can do extremely well. A small compact unit in a busy "Food Court", also extremely well. High volume, low cost.
j
Wiki Bogleheads Wiki: Everything You Need to Know
Isabelle77
Posts: 660
Joined: Thu Dec 17, 2015 1:43 pm

Re: How do restaurants in expensive cities make money?

Post by Isabelle77 »

Liberty1100 wrote: Thu Mar 15, 2018 3:51 pm In high school, I worked at a dunkin donuts in my small town as a summer job. Just that single dunkin would generate $2-3million in sales per year. Now factor in how large the margins are for a cup of coffee and a donut and you will get an great number.
I worked at an Old Spaghetti Factory in a large expensive city when I was a teenager. The owner told me once that each plate of spaghetti and meatballs cost him 8 cents. Add a 30% alcohol mark up and you're in business!
Topic Author
Derivative
Posts: 262
Joined: Wed Jul 03, 2013 8:05 am

Re: How do restaurants in expensive cities make money?

Post by Derivative »

Okay, so establishing a restaurant in HCOL living area makes more profit generally than in a lower/middle COL area?
User avatar
LadyGeek
Site Admin
Posts: 70086
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: How do restaurants in expensive cities make money?

Post by LadyGeek »

This thread has run its course and is locked (not personal nor actionable). General comment threads are off topic in the forums with "Personal" in the title. See: A reminder that non-investing general comment threads are OT
- It must be personal. In other words, you must be asking about your own situation. You can also ask on behalf of someone specific, such as a family member.

- It must be actionable. You must be able to do something specific with the replies that will make a difference in your situation.
If you have a specific question, please ask directly and provide sufficient information for members to supply appropriate advice.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Locked