Paying rent for your restaurant, cafe or bar; How much rent is ok?

RENT + OPEX = TOTAL OCCUPANCY COST

Rent is the annual rent for your space.

OPEX are ‘operating expenses’ charged in addition to rent. This is normal in a commercial lease. OPEX are maintenance costs associated with the building.

You can sometimes negotiate not to pay certain OPEX. E.g. there is a lift in the building, you are ground level and never use the lift – why should you pay for lift maintenance?

Rent + OPEX is the total occupying cost of the space.

THE 6% RULE

A simple rule of thumb regarding rent for your restaurant, is to try have your ‘total occupancy cost’ (rent + OPEX) at 6% of sales. I.e. If you total occupancy cost is $60,000 per year, 6% of this is $1,000,000 sales per year.

This is roughly $20,000 sales per week, excluding sales tax. Make sure you think you can achieve this level of sales.

This formula comes from a breakdown of typical hospitality profit & loss statements. If you have 100% of sales ($1,000,000), your cost of goods sold (COGS – the cost of your ingredients – food, coffee, alcohol etc) should usually be around 30% or less. Your labour cost (staff wages) should be around 30%. And your other expenses (insurance, marketing, cleaning, utilities, etc) should be around 19%.

So: 100% sales minus 6% rent

30% cost of goods sold, 30% labour, 19% other expenses

Leaves 15% net profit, a healthy margin in the restaurant, cafe and bar world.

THE GOLDEN GOOSE VS THE NOOSE

This 6% rent can be hard to achieve, but should be your target.

Once the rent for your restaurant, cafe or bar is locked in, it is fixed, and very hard to reduce.

A low rent % can be your golden goose, while a high rent % can be a noose around your neck.

If you can find a low rental site, with low competition you are setting yourself up for success.

Yes, high rent sites can work, if high sales are achieved.

But these are usually best left to highly experienced operators with multiple venues under their belt.

My first venue had rent of $20,000 per year and set me up for success. We did sales of $15,000 per week, which meant our rent percentage was around 2.5%. We operated at 20% profit because all our costs were so low and our space so efficient. This meant we made $150,000 profit per year, after my salary. It was an incredible feeling.

My last venue had rent of $100,000 per year, but by then I had earned my stripes and knew what I was doing. We did sales of $40,000 per week, which meant our rent % was just under 5%.

You get into serious trouble when your rent is $100,000 and your sales are $10,000 per week. This erodes your profit margins and puts pressure on you from all angles.

If you ever need help, or have any questions when it comes to looking at rent for your restaurant, cafe or bar, or making decisions on a lease, email me [email protected]. I’m always happy to help.

Check out our last article in the Hospo Hints series which talks about supply and demand when deciding where to open your hospitality venue.