Like any business, the main aim of running a restaurant is to gain profit. While there may be many goals behind opening a restaurant, the operations are always focused on earning a profit. If there is no profit, there's no money, and eventually, there's no restaurant. Keeping your profit margin high is the only way to ensure that your business survives.
Unfortunately, the profit margin in the restaurant industry is infamous for being one of the lowest. High labor costs, employee turnover, material costs, and increasing competition have all contributed to making the average profit margin of a restaurant as low as 3-5%.
Post-pandemic, these numbers have become worse as restaurants struggle to make ends meet with lockdowns, rising costs, and workforce shortages. This is why it's becoming increasingly important for restaurant managers to understand and keep track of their profit margin and try to keep it as high as possible.
In this article, we will take an in-depth look at a restaurant's profit margin and what you can do to improve your restaurant's profitability.
What is restaurant profit margin?
A restaurant's profit margin is a profitability ratio that determines what percentage of a restaurant's sales have turned into profit. It indicates how much profit or many cents of profit the restaurant has generated for each dollar of sale.
For example: If a restaurant reports a 15% profit margin, it means that it had a net profit of $0.15 for each dollar of sale.
Simply put, the profit margin determines the percentage of profit from the restaurant's total sales revenue.
How do you calculate your restaurant's profit margins?
There are two types of profit margins that need to be tracked at a restaurant: gross and net profit margins.
Restaurant gross profit margin
A restaurant's gross revenue or profit margin is calculated by dividing gross profit by total revenue and multiplying it by 100. The gross profit of a restaurant is calculated by deducting the cost of goods sold (CoGS) from the total revenue,
Total Revenue - Cost of Goods Sold (CoGS) = Gross Profit
Gross Profit/Total Revenue x 100 = Gross Profit Margin
Restaurant net profit margin
The net profit margin indicates your restaurant's true profitability and is calculated based on the restaurant's net profit. A restaurant's net profit is calculated by deducting all other expenses (like maintenance, taxes, payroll, utilities, rent, etc) from its gross profit.
Total Revenue - Total Expenses = Net Profit
Net Proft/ Total Revenue x 100 = Net Profit Margin
How to improve your restaurant's profit margin
So far, we have learned that the profit margin of a restaurant is the factor of two things:
- How much you spend i.e, your cost
- How much you earn i.e, your revenue
The more you earn and the less you spend, the higher your restaurant's profitability.
Therefore, there are 2 ways of increasing your restaurant's profit margin:
- Increase your sales and total revenue
- Decrease your total costs
Let's deep dive into how you can do that for your restaurant. But first, let's take a look at average restaurant profit margin types.
Profit margins on average by restaurant type
About full service restaurant profit margins
That 2-6% profit margin mentioned above generally refers to full service restaurants (FSRs), which include at a minimum kitchen staff, managers, servers, bartenders, and a host. These figures, however, can vary greatly depending on factors such as restaurant size, price range, turnover rates, location, and others.
Profit margins at fast food restaurants
The average profit margin for a fast food restaurant or quick service restaurant (QSR) is around 6-9%, depending on factors such as whether the location is chain-owned, franchised, or independent. Fast food or quick-service restaurants have a higher profit margin than full-service restaurants because they require fewer employees, use less expensive ingredients (more frozen and pre-prepared items), and have a higher turnover rate.
Profit margins for food trucks
Food trucks typically have comparable food costs to brick-and-mortar restaurants, but they benefit from lower overhead costs such as rent, insurance, staff, and utilities. While bad weather can reduce sales for the day, it can be offset by event rental fees. Food trucks, like fast food and QSRs, have average profit margins of 6-9%.
Profit margins in the catering industry
Catering businesses, like food trucks, benefit from low overhead costs but similar food costs when compared to FSRs. While a high-end catering business can earn 15% or more in profits, the average profit margin for a food truck is 7-8%.
Increasing restaurant revenue
1. Train staff regularly
Having optimized and streamlined operations at your restaurant help your restaurant earn more revenue, and for that, it's important to ensure that your staff is always at the top of their game. A well-trained staff member will be able to perform tasks in a quick and efficient manner, which will eventually help your restaurant earn more revenue.
For instance, a highly-trained back-of-the-house team can prepare and send out food quickly, reducing the time people spend at tables waiting and increasing the table turnover rate. This will result in more customers, and therefore more sales and revenue.
2. Use technology to increase efficiency
Technology is one of the most useful tools in a restaurant manager's kit to help improve efficiency and increase sales. There are many systems in the market to help make your restaurant's operations more streamlined and earn more revenue while saving costs.
For instance, having a waitlist system in place can help you serve more customers by providing people with more accurate wait times and letting them know when their table is ready with real-time updates.
Other technology like online reservation and table management systems can save your staff bucket loads of time by assisting in tedious and monotonous tasks like standing by the phone all day to take reservations and manually recording guest details, and also help minimize errors which eventually helps in cutting back costs.
3. Use marketing to reach more customers
The simplest way to earn more revenue is to reach more customers, and the only way to reach more customers is through marketing. Make sure you have a good marketing plan in place to both increase sales volume and your restaurant's reach. One of the most efficient ways to attract more guests is through social media. Creating a good social media strategy will allow you to increase revenue at a low cost.
Social reserve buttons, especially, are very effective for reaching more customers. The ability to reserve a table directly through a restaurant's Facebook and Instagram channels allows restaurants to convert their followers into customers at no added cost.
4. Build strong relationships and increase customer loyalty
Having loyal, returning customers is one of the most important factors for increasing restaurant revenue. Not only does it cost 5 times more to acquire new customers, but a 5% increase in repeat customers can also increase your restaurant's revenue by 90%.
The key to building strong relationships with your customers is to make them feel special by providing a personalized guest experience. Just remembering simple things like their name, their dietary requirements, or their previous order can make a huge difference.
5. Implement a loyalty program
Increasing customer loyalty through excellent service and a loyalty program will assist your restaurant in generating more revenue and, as a result, increasing profit margins. What is the key to keeping customers coming back for more? Making unforgettable dining experiences.
Use a restaurant CRM that stores customer information in the form of guest profiles. These profiles function as cheat sheets for diners' preferences, which your team can use to impress guests.
6. Increase your menu pricing
Optimizing menu prices is a simple way to increase profit margins at your restaurant. To do so, you must first determine the cost per serving and food cost percentage for each of your dishes.
Download our guide to calculating food costs for a detailed explanation of how to calculate your cost per serving, current food cost percentage, and ideal food cost percentage.
In order to run a more profitable restaurant business, the average restaurant should keep its food cost percentage between 28% and 35%. While this figure does not directly translate to profit margin, it does allow you to account for overhead costs such as labor, rent, and utilities.
If the food cost percentage of your menu items is greater than 28-35%, you are underpricing those items. Raise your prices to fall within this range.
According to Brian Cairns, Founder of ProStrategix Consulting, the most common mistake he sees restaurant owners and operators make when it comes to menu pricing is failing to account for overhead restaurant expenses beforehand.
“Savvy restaurant owners and operators price each of their menu items to account for overhead expenses—that is, fixed and variable costs that aren’t associated with the meal per se. Things like utility bills, rent, and labor costs,” says Brian.
Brian suggests tallying up your restaurant's overhead expenses per month and dividing that amount by the number of menu items you have to account for in the price of your meals.
That figure represents how much you could raise the price of each menu item to cover your overhead costs.
If you are concerned that raising prices will drive away customers, you can increase profit margins by lowering food costs. Find cheaper vendors for ingredients (but don't sacrifice quality!) or serve smaller portion sizes to accomplish this.
7. Make changes to your menu layout
Menu engineering, also known as menu psychology, is the deliberate and strategic construction of restaurant menus.
To increase guest profitability, menu engineering combines psychology, data, and design. According to some sources, menu engineering can increase restaurant profits by up to 20%.
Menu price optimization (which we discussed above) and menu engineering are not the same things, contrary to popular belief. To successfully engineer the menu, you must first understand the cost, profitability, and popularity of your menu items.
This is why.
Menu engineering's goal is to ensure that every item on your menu is popular and profitable. This ensures that whatever your guests' order is beneficial to your bottom line.
8. Seat guests faster
Table turnover is the amount of time a guest spends at a table in your restaurant from arrival to departure. The more customers you serve per service, the more revenue you can expect.
If you want to maximize your revenue per service, your ultimate goal should be to reduce the amount of time a guest spends at a table (without making them feel rushed) while increasing how much they spend.
It's a fine balance. If you serve a customer too slowly, you will miss out on serving a larger volume of customers. If you serve a customer too quickly, they will feel rushed and unappreciated.
The best way to increase the table turnover and serve more customers per service is to provide your restaurant's front-of-house (FOH) and back-of-house (BOH) staff with workflow-enhancing tools.
9. Implement self-service ordering
Self-service ordering technology can help you reduce labor costs while increasing your own sales volume and capacity, improving your restaurant's profit margins.
Implement mobile order and pay functionality throughout your venue or in specific areas. For example, you could make your lounge or sidewalk cafe self-service zones while still offering full-service dining in the main dining room.
Generate dynamic QR codes and install them throughout the self-service zones to allow guests to order food and beverage items and pay at their leisure.
10. Increase your sales by increasing your cover averages.
Covers are restaurant guests, and increasing the amount spent per cover increases your overall sales. Upselling to customers can increase your restaurant's cover average. Consider rewarding the server with the highest cover average per shift with a prize.
11. Upsell more than just beverages
Including a shareable appetizer on a table, side salads or soup before the main course, or a dessert are all ways for your servers to increase a customer's bill—and sales revenue to your bottom line.
Taking the time to train your dining room staff on your menu offerings, allowing them to taste the dishes, and encouraging them to choose their favorite to upsell to customers can help you increase your sales significantly.
Extra sales per customer, however, are useless if you don't have a steady stream of customers.
12. Examine your menu item sales
Begin by reviewing your restaurant's sales reports for a specific time period. You need to know which menu item is:
The most sales
Sell the fewest items
Profitability is the highest
Profitability is the lowest
13. Consider pay-at-the-table technology
Cash is becoming less and less popular as a method of payment. When paying for their favorite dishes, Millennials and Generation X want convenience, flexibility, and to earn points on their credit cards.
Allowing diners to pay via tap, swipe, or mobile wallet reduces the risk of fraud while also increasing table turnover and making it easier for your servers to be tipped well.
Decreasing restaurant costs
1. Evaluate restaurant operations
The first step towards reducing your own restaurant management system's cost is to evaluate overall operations to identify pain points that may be increasing costs. By doing this, you can find unnecessary processes that can be shortened (or scraped) and any actions that are creating a backlog in your operations, and as a result, wasting resources. Regular evaluation of processes helps you optimize operations and improve overall efficiency.
2. Reduce employee turnover
High labor costs are one of the biggest contributors to low-profit margins in a restaurant because of the high employee turnover rate in the industry (73% on average). Combine that with the ongoing employee shortage, and your labor costs will skyrocket if the turnover rate is not decreased.
The main reason employees leave is toxic environments and not enough pay. Keep your staff happy and motivated by providing them with fair compensation and benefits, not overloading them with work, appreciating them, and providing them with all the required resources to help them perform well.
3. Strengthen your employee scheduling
How do you currently decide how many servers to schedule and which servers to schedule for each service?
We recommend leveraging your restaurant's sales and employee data to reduce labor costs while increasing revenue per service.
If you schedule too many servers during slow business hours, you risk incurring excessive labor costs. If you schedule too few servers, you risk slowing down table turns, spreading your staff thin, and lowering the quality of your customer experience.
When planning your employee schedule, your goal should be to ensure that your restaurant is adequately staffed to meet customer demand at all times of the day.
With restaurant point-of-sale analytics integration, you can use AI to predict the exact number of employees you'll need at each hour, taking into account contextual factors like weather and public holidays. You can also clearly identify which of your servers generates the most revenue, as well as the busiest and slowest business hours at your restaurant.
With that information, you can schedule your best-selling servers during your busiest business hours to maximize revenue per service while lowering labor costs.
With restaurants spending roughly 30% of their monthly revenue on labor (the second largest operating expense after the cost of goods sold), optimizing employee scheduling is an excellent and simple way to increase revenues while decreasing ongoing expenses.
4. Find the right supplier with CoGS in mind
The cost of goods sold (CoGS) of a restaurant makes up the biggest chunk of operating expenses, so it's obvious that reducing that will significantly increase your profitability. In order to make sure you're getting the most out of your money, make sure you properly research ingredients and suppliers and conduct a proper analysis to source the best ingredients in the cheapest way possible. Try to negotiate prices and deals to help control your costs with trusted suppliers.
5. Minimize food waste
Wastage is one of the biggest pits in a restaurant's revenue. A study found that 4-10% of food purchased at a restaurant never goes to the consumer. This can be due to errors in cooking, over-ordering of materials, or even theft. That combined with other material wastage significantly increases the cost of running a restaurant. Conduct a proper, regular analysis to identify the products that are being wasted and come up with a proper strategy to reduce the wastage and save costs.
Your restaurant's profitability is important. Make sure you are always aware of what's happening and keep track of all the important performance metrics.
Frequently Asked Questions (FAQ)
Frequently Ask Questions
After all expenses and taxes are deducted, your net profit is the amount of money you get to keep.
Net profit is frequently referred to as the bottom line because it appears as the final line of your profit and loss statement after all expenses have been deducted; also known as net earnings and net income, can be distributed to business owners or reinvested in the business.
You will need the following information to calculate net profit margin for a specific time period:
For example, suppose Bob's Burger Bar, a quick-service burger restaurant, earns $1.25 million in revenue, gains $50,000, and expenses $1.2 million from July to September 2018.
Net profit = (1,250,000 + 50,000) – 1,200,000
Net profit = 100,000
Use the following formula to calculate net profit as a percentage:
(Net profit | Revenue) x 100
Restaurant Resource Group says that restaurant profit margins range between 2% and 6% on average, with full-service restaurants at the lower end of the spectrum and limited-service (or quick service) restaurants at the higher end.
Restaurant profit margins show how much money was spent to earn the money. Knowing your profit margin allows you to determine whether you require a larger buffer between your COGS (Cost of Goods Sold) and menu prices.