If you’re managing a restaurant, you know how difficult it is to get it off the ground and keep it running. There goes long hours of hustle, management, and decision-making behind those kitchen doors. Ultimately, how you are transforming that pain into financial gain is decided by one thing: profit margin.
However, it’s not just another profit-loss Excel sheet to work on during the year-closing. Your average profit margin score is the beacon of light that you can use to take calculated risks and make informed financial decisions. Moreover, you can be confident about your restaurant’s market worth talking to investors or closing deals with sponsors.
This article will discuss the average restaurant profit margin you should know. We will also understand the different types of restaurant profit margins, their importance, factors influencing them, and tips for improving them to run a successful restaurant business and how to increase profit margins. Let’s get started.
Understanding Restaurant Profit Margins
In simple words, the profit you make after paying for the total expenses of your restaurant is your profit margin. For the restaurant industry, if the margin is good, sales translate to more profit. There are two ways to acknowledge this profit margin: gross and net profit.
Gross Profit Margin
The gross profit margin is your percentage of revenue beyond the costs of goods sold (COGS) without including the cost of ingredients and food preparation. The profit does not account for labor, rent, marketing, or utilities expenses.
You can calculate the gross profit margin using the following formula:
Gross profit margin = Revenue – COGS Revenue 100
For example, if your cost of goods sold is $30,000 against a total sales of $100,000, your gross profit margin would be 70%. Further simplifying, you have minted 70% profit without considering the direct costs of food production.
Net Profit Margins
After deducting all expenses, including the COGS, you calculate the net profit. Your net profit margin shows your restaurant’s overall financial health and efficiency.
You can calculate the net profit margin using the following formula:
Net profit margin = Net profit revenue 100
The net profit indicates your overall restaurant revenue minus all operational expenses.
Importance of Understanding Profit Margin for Restaurant Owners
A fair knowledge of your restaurant’s profit margin can help you with:
Financial health assessment:
Having a precise figure for your net and gross profit margins helps you better assess your restaurant’s financial health and run a profitable restaurant.
Pricing strategy:
You can set appropriate prices for dishes based on your average profit margins. This clarity helps you adjust prices to cover costs and enter the profit zone without pricing out customers.
Cost control:
Calculating the net restaurant profit margin allows you to identify areas for cost-cutting without compromising the customer experience. For instance, you may need to find more budget-friendly suppliers or reduce waste through portion control to reduce costs ultimately.
Budgeting and forecasting:
Understanding profit margins puts you in a better state to forecast future revenues and profits based on current data. As a result, you can make informed decisions about investments, expansions, and other financial commitments.
Seeking investment:
Your profit margins make your business more attractive to investors and lenders. Understanding them will help you demonstrate your restaurant’s worth during pitching to close better deals with investors.
Factors Affecting Restaurant Profit Margin
Food Costs and Food Cost Percentage
Identifying the ideal food cost percentage and getting a complete knowledge about the total cost of your food net from the existing inventory helps you reduce your overall expenses, optimize your profit margin in many ways, and ultimately reduce food costs. Without knowing the items’ price and menu costs and identifying your profitable dishes, you can barely acknowledge areas to make adjustments and plan strategic menu pricing to garner more profits.
Labor Costs
Restaurant labor costs usually account for 22-40% of sales, but sometimes, they can be as much as 75%. This indicates how important it is to optimize labor costs to keep your profit margin high. There are many ways to reduce restaurant labor costs. For instance, you can control the employee attribution rate, roll out a commission-based salary structure, or hire employees on hourly wages to lower labor expenses.
Rent and Utilities
Your total operating expenses towards rent and utilities should not be 5-10% of your monthly sales. It can significantly affect your profit margin if it goes above that figure. Even if you own the building where you’re running your business, there are still fixed payments towards mortgages, building loans, property taxes, and other fees. So, it should be inexpensive and within your budget.
Marketing and Advertising
If your marketing campaign is highly effective, you can save up to 70% of what goes into retaining old customers. Successful marketing campaigns help you create brand value in the market, which commands higher prices and fosters customer loyalty. However, your marketing and advertising costs should be manageable and within your budget. You can always try zero-budget restaurant marketing ideas and understand what works best before switching to paid marketing campaigns.
Equipment and Maintenance
Well-functioning restaurant equipment backed by periodic maintenance is the backbone of a restaurant’s success. In the opposite case, restaurants spend significant money on repairs. Also, poorly maintained equipment uses more energy and will add to your energy bills.
The Average Restaurant Profit Margin
As per industry reports, the average profit margin for restaurants is between 3% and 5%.
It may not sound reasonable, considering the hours of labor and dedication that go into the process. However, even with a slight increase in the percentage, the difference in profit amount could be significant.
For instance, your restaurant makes $500,000 in sales over a year. A profit margin of 10.66% equals $53,000 yearly profit. If you could increase the profit margin even by just 1%, profits would rise to $58,000–an extra $5000 for your little effort.
Variations in Profit Margin
The average restaurant profit margin may vary from one food industry to another for full-service restaurants. Let’s take a look at the figures of some popular food industries.
Fine Dining
Average profit margin: 5-10%
Fine restaurants have a higher table value than average ones because they use premium ingredients.
Casual Dining
Average profit margin: 3-9%
Because they offer foods at lower costs, casual dining restaurants have a broader audience and greater sales volume than fine dining restaurants.
Fast Casual
Average profit margin: 2-6%
These restaurants enjoy higher profit margins for offering fast food items through prepped ingredients in casual dining setups.
Fast Food/ Quick service restaurants
Average profit margin: 2-6%
Fast Food kings like McDonald’s and Taco Bell offer standardized menus and cater to a high sales volume to enjoy a profit margin of two to six percent.
Pizzeria
Average profit margin: 15%
Pizzerias focus on a single main course, so they can easily streamline operations and achieve higher profit margins.
Strategies for Improving Restaurant Profitability
Here are some proven strategies for increasing your average profit margin, whether you run a bar or a full-service restaurant (FSR).
Cost control
For your information, cost control is not cost-cutting. Cost control in a restaurant is a thoughtful practice that evaluates and optimizes current processes to maximize profits. First, you must calculate your overall food cost percentage and compare it against the ideal percentage to acknowledge the weak areas to work on.
Based on that, you may receive suggestions to exercise different courses of action to control costs, such as:
- Tracking and managing inventory
- Purchasing raw materials on credit
- Reducing food waste through portion control
- Predict stock requirements through yield management
- Controlling labor costs by reducing employee turnover
Menu engineering
Menu engineering is one of the easiest ways to shift your focus from poor-performing items to best-performing items on your menu to increase your profit margin. You have to distribute your items into four categories in the menu engineering matrix, as shown below.
Food items in the Star category are your ideal bets. They are popular items with high profit margins. With this clarity, you can redesign your menu and shuffle around some items to push the most profitable items onto the front page.
Reduce staff turnover
As per a recent report, the biggest challenge for restaurants post-pandemic is not finding skilled workers but keeping them for a long time. Due to booming business, restaurant staff are pressured to provide round-the-clock services. On top of that, if they don’t get a competitive wage and paid sick leave, staff turnover increases, leading to extra spending on hiring and training new resources. In this regard, restaurants must learn how to hire and retain staff to increase their average profit margin.
Customer loyalty
Acquiring new clients can be 5-25 times more expensive than building loyal customers. If you can retain even 5% of your existing customers, it will boost your profit margin by up to 25%. These statistics underscore the importance of working on customer loyalty to increase your profit margin. There are many ways to do it. For instance, you can start a customer loyalty program to reward your frequent visitors with reward points to cash out on their next purchase.
Upselling
‘Would you like fries with that?’ This simple and effective upselling line helped McDonald’s mint millions of dollars. They increased the average cart value (= average profit margin) by instilling an impulsive craving in their customers. Upselling is a smart technique to boost restaurant revenue without hurting the bottom line. It’s not just about training your staff on how to do it but also about using different methods of upselling, such as working on menu upselling, offering free samples, and designing your POS to suggest customers items based on their preferences.
End Thoughts
That’s it! We touched upon some significant points about the average profit margin of a restaurant–enough to help you calculate figures for your restaurant right now! But let’s not forget the food market has become dynamic post-pandemic, and customers’ ideas of ideal restaurants are evolving daily. This means there will be more new challenges to address to keep your profit margins stable. It will be wise of you to constantly look for smart ways to optimize your restaurant operations–especially with the help of advanced technologies like what Restroworks has to offer.
