Dollars and Sense of Restaurants that Locally-Source and Own-Source

I admire the genius of chef-driven restaurants like The Grey Plume in Omaha, Fruition in Denver, Husk in Charleston, SC, among other similar best in class establishments.  Their craft is about creating cuisine that reflects an authentic sense of place.  Unique, local, and authentic necessarily means sourcing ingredients locally; or raising it in-house ("own-sourced").

Mercantile Dining & Provisions, Union Station, Denver (Hoffman Strategy Group photo, 2014)

Mercantile Dining & Provisions, Union Station, Denver (Hoffman Strategy Group photo, 2014)

For example, Sean Brock of Husk uses heirloom Carolina Gold Rice that was introduced in southern dishes by West Africans in the 1500's, became nearly extinct because of the instant rice movement, and has been reintroduced in Southern cuisine by David Shields of the Carolina Gold Rice Foundation.  Alex Seidel of Fruition raises micro greens and sheep, and makes artisanal cheeses on his farm in Larkspur, CO.  Clayton Chapman of The Grey Plume sources steelhead trout from Blue Valley Aquaculture in Sutton, NE and produces first-class charcuterie in-house.  The result is a higher quality product made available at price points that appeal to a broad customer base.

Sourcing seasonal ingredients from farmer's markets, area farmers, your own farm, and/or in-house has many challenges: distribution channel from grower to restaurant; food safety regulations; USDA inspections; certifications; among others.  I'll save that conversation for another post.  What I want to generally address is the  economics of farm-to-table restaurant.

Composition of Gross Output (Sales) for Food Service & Dining Place (Data: Bureau of Economic Analysis, 2014)

Think of a restaurants gross output in terms of total sales receipts.  Two basic components needed to produce output are the ingredients and staff.  Without getting stuck in the weeds, I pulled Bureau of Economic Analysis data for the restaurant and bar industry, nationally, and created this chart to make three points.

  1. An average restaurant and bar establishment will spend 22 cents of $1.00 in gross output on ingredients or "material inputs" like tomatoes, potatoes, lettuces, flour, cheeses, proteins, etc.  Another 35 cents is spent on staff, which includes the executive chef's income.  That's 57 cents.  The balance is spent on utilities; services such as computers and software systems, accounting, legal, public relations, marketing, and taxes (i.e., payroll).
  2. Gross operating income before taxes for this average restaurant has grown by 3% per year for the period 2005 to 2013.  Material inputs (i.e., ingredients) have increased by 4.6% per year.  Compensation of employees by 4.2% per year.  And, the cost to purchase services has grown by 5.9% per year.  These trends are taking a bite out of profit margins.
  3. That raises the final point.  Employees are essential to "add-value" for the menu and the ambience.  Services are needed to manage the operations.  So, this leaves control over material input costs as a vertical integration strategy that can lead to improved profit margins.

The farm-to-table philosophy is a smart long-term business strategy.  Vertical integration of locally or regionally sourced fresh seasonal ingredients includes, where possible: owning the farm, the garden, the greenhouse, and the livestock.

Sean, Alex and Clayton are among the best-in-class cadre of chef-entrepreneurs creating really good food and inspiring the next generation of restaurant concepts.  What they, and others like them, are doing makes good dollars and sense.

Jerry L. Hoffman

Hoffman Strategy Group LLC, 4424 Hallcliffe Road, Lincoln, NE, 68516, United States

Jerry L. Hoffman is owner of Hoffman Strategy Group LLC, a firm nationally known for strategic development, economic analysis, and market location consultancy.