The Impact of Energy Efficiency on Restaurant Profits

The restaurant industry may be a profitable business for some, but not for all. This point is made clear in the Restaurant Industry Operations Report (2007-2008) edition, published by the National Restaurant Association. Restaurant net income before taxes averaged 5.6% of total store sales for full service restaurants with an average check per person under $15. Net income before tax, as a percent of total sales, ranged from a miniscule 0.3% for the lower quartile, to 12.4% for the upper quartile. Over 23 % of restaurants in this category reported that they were unprofitable during the survey period.


The same picture holds true for store cash flow. The average level of earnings before interest, taxes, depreciation and amortization (EBITDA) was 9.6% of total sales for the subject restaurants.

The question that begs an answer is the extent to which implementation of energy efficiencies can positively impact restaurant profitability.

Understandably, restaurants spend most of their money on food supplies and labor costs. These combined expenses account for 64% of total sales in full service restaurants with average sales per diner under $15. Beyond occupancy costs, the second largest category of other operating expenses is the cost of utility services – electricity, natural gas and water – constituting 3.8% of total sales.

Utility costs can vary widely as a percent of total sales, even within a restaurant chain, due in part to the variability of commercial utility prices across the country. For example, electricity rates range from as low as $0.05 per kilowatt-hour in the Pacific Northwest, to about $0.30 per kilowatt-hour in Hawaii. Another cause of variation is the power consumption of HVAC systems and the load that weather in different climate zones places on the HVAC system. Yet another cause is that the physical buildings and equipment differ in size and age. When you consider all other variables – hours of operation, sophistication of kitchen equipment, etc. – it becomes difficult to discuss an average utility cost across the industry. It is clear, though, that utility costs are a major expense in restaurants, even though they do differ from store to store.

Even so, using data from the NRA report, we can estimate how improvements in energy efficiency can increase restaurant profitability. The cost of electricity and natural gas are probably 90% of a restaurant’s utility bills, which would make them 3.42% of total sales.

One significant way to improve energy efficiency in restaurants is to install and operate an energy management system. These systems differ widely in their performance, but good ones can reduce the consumption of electricity and natural gas by 10% to 20%. At the upper end of that range, 20%, the utility savings can amount to 0.68% of restaurant revenues. This savings in utility bills is also a direct increase in net income. That implies that installing a high performance energy management system alone can increase restaurant profitability by 12% on average, from 5.6% of sales to 6.3% of sales.

Installing an energy management system to is also a good investment. Using $1.2 million as the average annual sales for the full service restaurant, the annual energy savings (and corresponding increase in net income before tax) is $8,160 annually. The installed cost of a comprehensive energy management system for a restaurant of this size, that is capable of reducing the energy bill by 20%, is approximately $18,000. The energy management system generates a 45% pre-tax return on investment, and it pays back the investment in less than 28 months.

Because energy costs are such a relatively large portion of a restaurant’s expenses, measures to increase energy efficiency can make an appreciable impact on its profitability. There are few alternatives for investing in restaurant chains today that can generate those levels of returns.