The Bottom Line
Setting Restaurant Hours to Maximize Profit
You’re coming out of a movie and are excited for a late dinner, but plans are quickly thwarted. Every restaurant you approach is either putting its chairs atop the tables or empty to the point where you can’t be ‘that guy’ who holds them up from closing. You wish that just one place would stay open late, and curse those that don’t.
Many of us have found ourselves in a situation like this. Demand here clearly exceeds supply. The key question, however, is whether enough demand is present to make an increase in supply worthwhile. If you become the one restaurant to stay open in your area at an otherwise dead time, you could have a potential monopoly on the dining market. That choice certainly comes with risk, and careful calculation is necessary before expanding your hours.
Know your costs
If you want to expand your hours, the first thing to understand is how it will affect everything below the top line of your income statement. Factor in every component: labor is an obvious first thought, but how about the cost of keeping your restaurant lit? Running the oven, stove and other appliances? If it’s hot or cold outside, then keeping your dining area at room temperature is another cost.
Break down your monthly bills into hourly costs and add them together. This will set a firm breakeven point. From there, add a hurdle rate—the minimum additional profit you want above your breakeven point to make the change worthwhile. Now it’s a matter of assessing demand and evaluating whether it will deliver your desired return.
Observe your surroundings
Understanding your landscape is critical to gauge if proper demand exists to justify expanded hours. One part is as simple as observing what goes on inside and immediately outside your restaurant. When exactly does your lunch/dinner rush end? How often do you see people peering through the glass, wondering if you’re open? Does the crowd change form as the night goes on [i.e. dinner groups vs. bar-hoppers]?
Knowing your competitive landscape is just as critical. What are the hours of all the restaurants nearby? How many of those restaurants are truly comparable to yours—similar food, ambiance, full-service vs. fast-casual, etc.? Are these places attracting different crowds throughout the day/night?
Record your observations over the course of a non-holiday week and estimate additional revenue from expanded hours. Take seasonality into account [i.e. do more people visit during summer]. Break this number down into revenue/hour. If estimated revenue/hour exceeds your breakeven and hurdle rate, then it’s time to adjust your hours!
Transitioning to new hours
If you’ve justified expanding your restaurant’s hours, make sure you’re delivering a product with minimal excess. Late-night menus and happy hours that offer a limited [but satisfying] selection are a lot more prevalent than they used to be, maximizing revenue with minimized overhead costs. Some restaurants go so far as to only offer drink service during off-peak times. Again, all is well as long as you’re observing happy customers who aren’t longing for more.
Making your customers aware of new hours is vital. Before making the change, hit the ground running by adding a note to your menus and posting signage. Send the message through your social media channels. Launching an event around the change, such as a party during the new hours on the first night, could serve as an excellent promotional tool.
If your new hours prove profitable, chances are your competitors will follow suit. Keep a consistent eye on your traffic to stay on top of demand. What are people ordering over the course of the day? What are people asking for that you don’t have? Adjust your operations to changing demands in order to make the most of your expanded hours.
Reducing your hours
Some restaurants may very well have the opposite problem, where they’re open too early or too late and the operating costs aren’t worth the handful of people who come in at those times. In this case, use the same methodologies in reverse to determine optimal hours. Maybe it is worthwhile to close earlier, or for 1 - 2 hours between lunch and dinner, or to reduce your menu offerings after 9 p.m. so that some people staff members can leave sooner. Just remember to take labor laws into account.