I get it. Saving is hard. You work hard for your money and you want to enjoy yourself, which means going out to eat every once in a while. It’s nice to take a break from cooking and you’re sick of eating sandwiches or leftovers every day for two weeks straight. I’ve done this before, after Thanksgiving. Nobody has ever accused me of being a foodie but I have been accused of being a robot many times though. This will help me blend in when robots take over the world. I don’t have to remind you how much cheaper it is to eat at home. But if you do go out, order the water.
Some Things Are Better Deals Than Others
Everything costs more when you go out to eat vs. making it at home. That’s a fact. But some things are better deals than others. For example, french fries are a rip off. A side of french fries is like $3-5 at a restaurant, compared to buying a 10 lb bag for $2 at a grocery store. How many orders of fries could you make with 10 lbs of potatoes? And that’s the retail price. A restaurant is going to get those potatoes for less than what you pay.
The reason restaurants mark up products differently is because they can. When people eat a burger, they want fries. So you’ll pay up to get it. The reason burgers aren’t marked up to the same extent is because nobody’s willing to pay $50 for a burger. With burgers, the cost of making one are so much higher because of all the ingredients and the cost of putting it together, vs. dumping a bunch of fries in the deep fryer.
Order the Water
Even though I know fries have a huge mark-up, I still buy them because my cooking sucks and I could never make fries that good at home. But why would I pay a huge mark-up for the exact same product I could get at home? That’s why I always order the water at restaurants.
Most drinks are just flavored water, so the mark-up on beverages is insane. That coke that you paid $3 for costs the restaurant pennies. That’s why places offer unlimited drinks or fries. There’s no way you could eat that much for them to lose money (please don’t try).
How Much do Companies Make on Different Products?
To give you some sense of how much the mark up is, look at the margins of Coca-Cola (KO), Diageo (DEO), which sells liquor, and Sanderson Farms (SAFM), which sells chicken.
|Net Income Margins||20%||20%||7%|
KO has 60% gross margins. For every $1 in revenue they get, it only costs $0.40 to make the product. This includes the sweeteners, containers, and even the cost of moving the finished products to the sales distribution centers. Net income margins are around 20%, so another $0.40 in costs go to marketing, administrative, and taxes.
DEO also has 60% gross margins, with 20% net income margins. Alcohol is more expensive, but that’s because it’s harder to produce and it’s taxed by the government. But the margins are in line with KO.
Now compare those margins to SAFM. One of the largest poultry producers in the US, the company definitely has scale. But gross margins are only in the high teens. For every dollar of chicken they sell, it costs them $0.83 to produce the chicken. Net income margins are only 7%. That’s 1/3rd the margins of KO and DEO!
High Margins = Quality Business
This post is about saving, but I have to get one investing tidbit in here. KO and DEO are seen as better quality businesses because of their higher margins, which is why they trade around 20x P/E vs. 10x for SAFM. Chicken is a commodity so there’s always pricing pressure, another reason why margins are so low.
Save Your Health and Your Wallet
I know some of you like to have a certain drink when eating out. But again, you can buy the exact same product for much less at a grocery store. If you went out to eat once a week and ordered the water instead, you’d save $260 in a year, assuming $5 per drink. Go more than once a week and if you have a family, it quickly adds up. And that doesn’t even include the health benefits from cutting out empty calories.