Where do they really make the money?

Factual Questions
1

Maybe someone here has some insight on this.

I’ve been wondering where businesses really
make their money. For example, I’ve heard that
fast-food places like Burger King/McDonalds/etc
actually lose money on the burgers, but make so
much profit on the sodas that they still make
money.

I’ve also heard that movie theaters lose money
on admission, and make their profits solely at the
popcorn stand.

These make some kind of sense, since the mark-up
on soda and popcorn is so huge - i.e., it costs
the restuarant a few pennies for the syrup used to
make a Coke that is sold for $1.50.

Other financial rumors are that movie studios usually
lose money on the film they make and show in the
U.S., and actually make their money on the overseas
release of the films.

Also, fancy restuarants lose money on the food, but
profit from the wine (huge mark-up on wine).

Is any of this true? If everyone who ate at Burger
King only ordered burgers, and never bought any
drinks, would the place go bankrupt?

2

Fast food places make most of the money on fries and drinks. They make a little on the burgers. If everyone just ate burgers they would profit a little. That’s why they always push fries and drinks on you if you don’t ask for them. I worked at Wendys and their frosties are actually their highest profit margin item - or they were 20 years ago.

I’m sure movies probably make some profit on tickets but the food also helps them a lot.

3

I read in Fast Food Nation by Eric Schlosser (a truly fascinating and frigtening book) that the McDonalds Corporation (not the franchisees) actually makes most of its money on real estate. It owns the land that the McDonalds restaurants are on, and rents it to the local franchisees.

4

I believe the one about the movie tickets is correct. Theatres make practically nothing on ticket sales (that all goes to the studios) and make all of their profits at the concession stand, which is why they are so vigilant in keeping outside foodstuffs out of the theatre.

Another one I’ve heard is that gas stations make almost nothing on the gas they sell (only a penny or two per gallon) and make most of their money on the convenience store items.

5

They must make money on gas - now most places let you pay at the pump with your credit card - you don’t have to set foot in the building. I very rarely go inside now , I just charge it and drive off.

6

I believe this is refered to as a “loss leader” - an item a business sells at little or no profit in the expectation that it will lead to further profitable sales. Another example would be the companies that virtually give away cellular phones in the expectation of making a profit from providing the subsequent service.

7

Video game console manufacturers like Sony, Nintendo and Microsoft lose money on each console sold but make it back on the license fees they charge game developers.

Each console has an “attachment rate” that measures how many games a customer has to buy before the company will make back its losses. Attachment rates for a new system can be as high as 3 or 4. As time passes and the electronic components get cheaper, the attachment rate drops.

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8

Most businesses use loss leaders. Supermarkets will sell some items like toilet paper and meat at a small loss or at cost. This gets you in the store and they know that they will make the money up on other items. Razor companies sell the razor at cost and then make the money on the blades (which is why they all attach differently.

In general, restaurants do not make muck money on food. The net profit is oftem 3% or so. But the markup on drinks and booze is huge. It is just a variation of the same loss leader technique.

9

I distinguish between “loss leader” and “razor blade” strategy. The game console is a variation on the latter - “give away the razor, and make money on the blades”. Variations on the “razor blade” concept have been popular in the computer and telecom industries for years. One popular variation is always “give away the hardware to lock in fees for the service.”.

Loss leaders are more like things that get you into the store, where you will buy something else to make up the difference on that visit. They are a staple of grocery stores - they can advertise that they are selling, say, apples at some absurdly low price. How many people are going to walk into the supermarket and buy just a bag of apples?

I believe the statements about movie theatres are correct, and I would also believe that the margin on burgers is much lower that that on the associated fries and soft drinks. The markup on the latter is truly outrageous, which is why a lot of fast food places were willing to bring the machine out front and let you guzzle as much of the stuff as you want. IIRC, Carl’s Jr. was one of the first to have an “all you can drink” soda arrangement. Jack in the Box didn’t do it for a long time. I think I stuck a suggestion in their suggestion box once that since they were already making an obscene profit on 3 cents worth of syrup and 2 cents worth of carbonated water, they could stand to move the soda machine out from behind the counter, even if somebody would then drink a whole nickel’s worth of syrup. I was undoubtedly exaggerating but the markup IS very high.

10

In the automotive industry, at least in the U.S., size of car = size of profit. I believe Ford never made any money on the Escort. They felt they had to offer a subcompact to compete with the Japanese. The automakers make a pretty good piece of change on full-size cars, a better profit on luxury cars, and a much better profit on SUV’s.

The auto dealers make little or no profit on new car sales, a good profit on service and a much better profit on used cars. Look at a newspaper ad sometime. You’ll see a nice picture of the 2002 Belchfire, but look at the actual listings and the dealer will have 30 used cars.

When I was in retailing, we made little money on clothes because of the continuous sales. Home furnishings and appliances had a lower markup, but fewer sales, so the profits were fairly steady. Jewelry was a great profit center.

Gas stations DO only make a penny or two per gallon, but a moderately busy gas station can sell 10,000 gallons per day, so they don’t mind if you pay at the pump once in awhile.

11

Little Nemo, I think that cell phones would not be an example of a “loss leader”, because they are guaranteed to get their money back over the course of the monthly contract. Anyone who thinks those phones are free is nuts. You’re just paying for it over time.

Cell phones aren’t even in yabob’s “razor blade” category, because you can buy blades from a different manufacturer than the razor. With the phones, the price is simply paid off over the year, whether you use the phone or not.

12

When I worked in pizza delivery in 1990, we were told in management training that a large pepperoni pizza, counting labor and materials, cost 98 cents to make. We sold them for $6.99 a pop.

A 12-oz glass of cola in a restaurant runs about $1.10 - $1.50 (at least in the Deep South). The wholesale cost for that same glass of cola is 3 cents (sorry, no cite) according to several managers in a place I worked.

13

I can back up this part of kunilou’s post, at least. An acquaintance of mine owns a gas station/convience store, and he’s shown me his invoices for gas-generally he sells it for a couple of cents per gallon over his cost. On 9/13, his supplier had jacked up prices, and he actually sold below cost to keep from being accused of profiteering.

14

Several posters have mentioned the tiny profits on gasoline. Is this only for Regular, or also for Premium?

The reason I ask is that here in northern NJ, where many (most?) stations do NOT have any convenience store, it is common to reserve one day a week for selling Premium a good 6 or 7 cents less than the rest of the week. Why would they do that, if it means selling below cost? There’s no way to recoup the loss.

15

I helped set up the inventory database for a small amusement park, part of it was food cost analysis. We even called up Pepsi to ask them what the typical CO2 use was so we could incorporate that. IIRC a 32oz soda cost 7.2 cents and was sold for $1.75. Like .04 was the cup which was a custom printed cup for the park instead of the cheaper pepsi branded stuff.

Whats kinda messed up for many places is that Pepsi/Coke sell alot of their prepackaged products (cans, 2 liters, etc) to restaurants for more than you can buy them for in the store. We were paying I think 8.60 per case for cans when you could regularly purchase them at stores for $5.00. Of course they are “not labeled for individual sale”
I worked for a pizza place that claimed a single topping pizza averaged $1.80 in food cost, we sold it for $12.99.

Where I work now we sell posters. One of our internal divisions prints them. We pay something like $.17 each for them and sell them for $3.99. near the end of the year we put them on sale 2 for 1, arent we generous :smiley:

If it dosent sell after a year or so we mark them at a dollar and they rarely come back.

There are many costs associated with some of these businesses that we really don’t factor in here(insurance, health and hazmat permit issues, not to mention labor, facility, taxes).

$.03 per gallon on 10,000 gallons of gas is only $300 a day profit, you cant pay one person 24 hours a day, and a lease on a 1/2 acre lot on a busy street for that. There has to be a little more in it then that. This is based on a non mini-mart type place.

I was under the impression however that as a general rule a restaraunt runs about 20% food cost. So your $15.99 steak dinner with fixins cost them about $3.25 for the meat, potato, veggies, etc.

Alot of alcohol although quite profitable dosen’t make quite what you think. The taxes on alcohol for resale are astronomical. I don’t have specifics but I know they’re ugly. The thing that allows alcohol to make a decent profit is since it is expensive to start with a lower percentage markup still pays the bills. Any bar owners/managers out there with specifics? I know they are not allowed to just stop by the liquor store and pick stuff up, big no-no. You have to buy it through distributors who add the appropriate taxes.

16

The goldmine in the computer printer industry is (for almost all companies) is the consumable supply that the printer uses. Selling an inkjet printer for a loss makes perfect sense when an inkjet cartridge costs $30+. During a printers lifespan it might use dozens of cartridges which are at 50% to 75% profit margins for the OEM. Very few printer companies forsake the re-sell business

17

Movie theatre owners do receive a portion of ticket sales. The percentage they get depends on how long the movie has been running. Opening weekend, the theatre usually gets only 10%-20% of the grosses. If the movie has been running for several weeks, though, the theatre gets a larger cut, say 60%.

Of course, most movies only last 3-4 weeks at best. Which is why movie theatres rely on concession sales as the mainstay of their revenue.

18

Auto dealerships are pretty thin-margined businesses. I remember the first time I looked at the financials of one of those guys, I said “Holy Crap. They really do lose a little on each car and make it up on volume.”

19

I am presently managing a liquor store.

Two things to remember about liquor sales:

  1. State regulations and taxes will vary heavily, but they are always very high, especially since individual bottles of liquor tend to get “stepped on” 5-6 times by various taxmen.

  2. There is a big, big difference in the bar & restaurant market versus the retail store market (groceries, convenience stores, and dedicated liquor stores).

When you buy at a restaurant, bar, or sports event, expect a 300-400% markup over what the venue itself had to pay for the liquor. They are making a lot of money on each drink, although they are certainly using that profit to cover other, less profitable things.

By contrast, retail liquor usually has a much lower markup - 50% margin (which would be a 100% markup) is almost unheard of. The most price-competitive market right now is hard liquor, especially in larger sizes, where the markup may well be as low as 5%. Liquor stores make money on those terms essentially the way that drachillix says: a half-gallon of vodka might cost $20-30, versus a 2-liter of soda (or a whole gallon of gasoline) at $1.30-1.50 - and there’s nearly as much demand.

Incidentally, re: restaurants having to purchase from a distributor - This will vary from state to state (since every state regulates alcohol differently, especially the tax structure), but I’ve never seen aywhere that it’s an absolute legal requirement. It is true, however, that liquor distributors will tend to charge venue sellers more than they would retail sellers, simply because most venues don’t purchase nearly as much as a retail liquor store. I know that my store has several regular customers who are buying entirely for their restaurant, because our price (distributor charges plus margin) is still cheaper than what the distributor would charge them directly.

20

I once worked for a regional fast food chain. Our manager used to have a fit (safely away the front counter) every time someone ordered 10 burgers with no cheese and no sides or drinks. The wholesale price of the hamburger meat, bun, and condiments (lettuce, tomato, onion, pickle et. al.) - and the labor required to make it - was almost the retail price the burgers sold for. So an order of 10 burgers brought far less than a dollar in profit.

Unless those 10 burgers came with cheese…then there would be about 2 more dollars in profits. We charged about 30 cents extra for a slice of cheese, when even at the store a 24 slice pack of “real” cheese is what…3 to 4 dollars?

Well these are rough numbers. I didn’t stay in that business long. Some managers could be real skinflints…being fussy about pickle size, ketchup packages, and the like.

I can believe that cinemas are that way too. Where I live, a damn pickle is $2.75.