Are Restaurants Considered Retail Stores?

Wicker ChairsNo, restaurants are not retail businesses. Instead, they are considered a point-of-service business. However, both types of business are subject to many of the same laws. Both are responsible for reporting earnings and paying taxes on those earnings. Both are responsible for selling a finished product to the public. And both are required to provide complete and total access to people with disabilities, in accordance with the ADA.

It is important for food-service providers to understand the legal implications of selling food to the masses, and to determine whether they are considered a restaurant or simply a food store, like a convenience store or gas station, according to the law.

What is the primary difference between retail and restaurant businesses?

A retail business is a business where you sell finished goods to consumers. Retail businesses include grocery stores; general retailers like Wal-Mart or Kmart; specialty stores, like those that sell only sporting goods; non-store retailers like Amazon; and wholesale retailers like Costco. Retail locations only deliver a product, not a set of services.

Restaurants not only sell, but also prepare and serve, food items. They do not, typically, handle the sale and purchase of other merchandise, and they provide a service in addition to their sales initiative.

Restaurants can be considered a retail location if they also have a storefront. Perhaps the most well-known restaurant-retail hybrid is Cracker Barrel. The Country Store front that serves as an entryway is actually a retail business, while the seating and dinning area is a very traditional restaurant operation. These types of hybrid retail-restaurant businesses are on the rise.

How is a restaurant different than a retail business?

Restaurants are fundamentally different than retail locations in several ways. First and foremost, as mentioned above, their primary purpose is to provide a dining service, rather than sell a finished product.

The amount that a restaurant is obligated to pay employees is significantly less than minimum wage for retail employees. Retail employees earn at least the federal minimum wage, which is more than $7.00 per hour, but restaurant owners are only obligated to pay servers $2.13 an hour, or the serving minimum wage. The rest of their wages are paid in the form of tips and come directly from the restaurant customer.

The amount that restaurants pay for their supplies is also different. Retail stores always get their goods from suppliers at wholesale price, but restaurants do not. Some ingredients must be purchased from retailers at retail price. For example, many states require restaurants to buy any wine that they serve from state-owned liquor stores, at retail markup.

Restaurants typically order supplies and ingredients a few days, or up to a week, in advance to ensure that the ingredients are fresh, in order to offer a high-quality menu selection. If they do not sell it all within a specified timeframe, then it goes to waste.

A retail store, on the other hand, can order most items several months in advance, and can put the item on sale if it does not sell quickly enough. Overage can be stored in warehouses and put on sale again the next time it is seasonally appropriate. There is no need for waste or loss. The one exception is grocery stores, which have to handle fresh produce much like a restaurant handles ingredients.

Restaurants and retail locations must both have a business license, which authorizes them to conduct business in the city and state in which they are located, but restaurants must have a variety of other licenses as well. Health permits, Safe Serve certification, alcohol service license, and a variety of other certifications will require restaurants to be both inspected and approved for licensure before they can conduct business.

How do markups and profits differ between retail and restaurant businesses?

Typically, markup is higher on restaurant items, but profit margins are higher for retail businesses. This is because the overhead for restaurant businesses is significantly more oppressive.

Most retail stores enjoy a profit margin of between 4% and 13%. Retailers that handle perishable goods, like fresh produce, earn a lower profit, while those that handle non-perishable specialty items, like books, earn a higher profit.

Restaurants, on the other hard, rarely earn profits greater than 5%. Most do not turn any profit in the first two years of business. Instead, the goal for the first two to five years of business is to break even, and begin paying off investor debt. A good restaurant will earn an average lifetime profit of 1% to 2%, and a lifetime high of about 5%, after building a loyal customer base.

Retail markups average about 100%. This means that the retail price is exactly double the wholesale cost. Restaurant markup fluctuates between 60% and 300%, depending on the item, but the markup will seem higher if the restaurant was forced to purchase the supply at retail, rather than at wholesale, and is basing its markup on a price that has already been doubled once.

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