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 cost, and increasing competition have all contributed towards 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 shortage. 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 restaurant 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 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 to Calculate Restaurant Profit Margin
There are two types of profit margins that need to be tracked at a restaurant: gross and net profit margin.
Restaurant gross profit margin
A restaurant’s gross 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.
Increase 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 on tables waiting and increasing 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 increase 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.
Decrease restaurant costs
1. Evaluate restaurant operations
The first step towards reducing your restaurant’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% at an 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. Find the right supplier
The cost of goods sold (CoGS) of a restaurant makes up the biggest chunk of 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.
4. Minimize wastage
Wastage is one of the biggest pits in a restaurant’s revenue. This 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.