What comes into your mind when the word ‘restaurant profit margins’ comes into the conversation? As a restaurant owner, it is important that you feel comfortable about this term because knowing the basics about restaurant profit margin helps you protect your profit and your restaurant business.
Knowing the average profit margin for your restaurant type is one of the first steps in improving the profit margin for your restaurant. Though calculation and computation tasks are not the most appealing part of restaurant operations, having an idea of where to implement adjustments is a great help to improve your restaurant profit margin.
As time goes by, the Restaurant Industry tries to make the restaurant profit margin average higher to protect the businesses under them. But this becomes a challenging task as the competition grows fiercer. Thus making it harder for restaurant owners to adjust accordingly.
In this article, all the basic and important matters about restaurant profit margin will be discussed. Leaving restaurant owners, like you, a set of information that can be utilized to improve the profitability of your restaurant business.
Let’s dive right in and know more about restaurant profit margin.
Before diving deeper into profit knowledge, it is important to identify the net profit margin and gross profit margin.
Net Profit Margin
This is the percentage that demonstrates how much profit has been generated after the cost of operations has been factored in. These costs are known to be the following:
- Labor costs
- Food costs / Inventory
- Overhead costs
How to compute:
[Net Profit ÷ Revenue] x 100 = Net Profit Margin
Total Revenue – Total Expenses = Net Profit
Gross Profit Margin
This represents the amount of profit left after factoring in the costs of goods sold(CoGS). This is considered only as one part of the whole restaurant profit margin as it only factors one type of expense.
How to compute:
Gross Profit x 100 = Gross Profit Margin
[Selling Price – CoGS] ÷ Selling Price = Gross Profit
You should note that your net profit margin is a more accurate indicator than your gross profit margin. It is because the net profit margin includes all costs associated with operating a restaurant, including those associated with serving food.
The gross profit margin will provide you a sense of whether your restaurant is operating efficiently, but your net profit margin will tell you how much revenue goes into your business after you deduct all of the expenditures associated with operating your restaurant.
What Is The Average Profit Margin For Restaurants?
Profit margin is known to be the amount of profit demonstrated as a percentage of annual sales. While the average profit margin will depend on your restaurant concept, the average restaurant profit margin as a whole plays within two to six percent, which can be considered a low-profit margin for a business.
Running a restaurant without proper knowledge about profit margin is leading it into its downfall. And while the higher the profit margin (maximum of fifteen%) is considered better, it is important to understand that it is always subject to change as there are expenses that are out of control.
To give you a better idea here’s how a typical rule in restaurant profit margin:
- Thirty percent labor
- Thirty percent food costs
- Thirty overhead expenses
- Ten percent profit
But since the modern restaurant operations are much fiercer and there are different concepts in foodservice and restaurant, this rule now appears only as a standard but not necessarily needed to be followed.
How To Improve Your Average Restaurant Profit Margin?
Now that you know how to manage your numbers, it is now time to check out how to properly improve your restaurant profit margin.
There are two main ways on how to improve a profit margin. First is decreasing expenses corresponding to your sales capacity, second is increasing your sales capacity that’s corresponding to your expenses.
Decreasing Expenses Corresponding To Sales Capacity
Investing in eco-friendly kitchen appliances and lighting can contribute to lower utility bills, which leaves more revenue in the bank. The margins of food waste-reducing businesses are almost four percent higher than those that do not.
Lessen the Cost of Goods Sold (CoGS). The cost of goods sold (COGS) accounts for approximately one-third of a restaurant’s revenue. If you end up throwing away food, you’re losing the money you could have used for other expenses.
Some techniques are available for attaining this goal, including comparing suppliers, taking more accurate inventories, preventing food waste, and more.
This mistake naturally occurs once or twice but is costly each time. Managing your food waste is the best way to prevent it.
Using best inventory practices, such as scheduling counts, having a select team of inventory managers, and using technology, you can reduce mismanaged inventory costs.
Learn to properly bargain with vendors and suppliers. Ask the wholesalers for discounts on the foods you order regularly or in bulk. Alternatively, purchase the foods directly from the farmers or producers to avoid paying the middleman and wholesalers.
Furthermore, purchasing locally can significantly reduce your transit charges and food expenses.
There are always ways to work with suppliers to get the best price possible. Pay attention to your calendar to remind you to check in with your vendors every few months to discuss pricing.
Would a price reduction be possible for timely payment, large amounts of business, or your recommendations to other companies?
Avoid staff turnover, it cannot be done, at least minimize. The cost of hiring and training new staff is high, but losing a great server can deteriorate your guests’ experience, costing you repeat business.
Communicate with your employees and apply their feedback wherever possible to reduce staff turnover and increase loyalty.
The dining staff can increase sales if they are trained about your menu. You can have them identify their favorites and upsell to customers.
It is essential to train restaurant staff to upsell naturally. Get servers excited about the food and drinks they are delivering by serving them samples and encouraging them to be enthusiastic about what they’re selling.
A happy employee receives the hours they need, the appreciation they like, and the environment they thrive in. For your business, your staff must be well suited for your kind of operation, paid well, and acknowledged regularly.
Another aspect of this strategy is to provide great customer service to a satisfied server, which improves sales.
Utilize the data from your POS or EPOS system. Being well informed enables a restaurateur to make better business decisions.
Nowadays, your POS should be capable of much more than just processing payments, which is usually the sole function of legacy-based or traditional till systems.
You can seamlessly integrate your technology with the cloud-based system, improving your business’ efficiency and profit margins as a result.
Increasing Sales Capacity Corresponding To Expenses
Update and manage your menu. The menu is one of the most powerful tools, if not the most, of a restaurant. If designed right, a profit increase of up to fifteen percent is to be expected.
The menu pricing process includes several factors, such as direct and indirect costs, volatile costs, and the like.
You can increase profit margins at your restaurant through menu optimization by first determining the cost per serving and cost percentage for each of your meals. But make sure to account for your overhead costs.
Rather than raising prices to scare away customers, you can reduce food costs instead to increase profit margins. You can do this by discovering cheaper suppliers for ingredients or serving smaller portions.
Guarantee that the quality of your service will not be impacted by this adjustment.
You can use third-party online ordering services to get your name out there, but you should also integrate your own native online ordering system into your website to save up to thirty percent in commission fees.
A recent study found that restaurants that have implemented online ordering have increased sales by eleven to twenty percent, with the majority seeing an increase of sixteen percent or more.” With so many restaurants witnessing a growth in sales, it’s worth incorporating for your business.
You should identify your average customer and run various specials to increase business when you need it most. Take advantage of child-friendly activities, happy hours, two-for-one offers, and other promotions.
A special promotion during slower hours can help turn slow times into busier ones, thereby increasing your sales.
Social media contests are a great, and often free, way to get attention for your promotions. What is the use of promotion if people do not know it exists? If you don’t take advantage of digital-savvy competition, you’ll miss out on tons of business.
Launch a loyalty program. This would capture the interest of potential customers about your restaurant, and for your existing customers, they would have something to look forward to.
Depending on the spending capacity of your restaurant, you can opt to offer dining coupon codes with each purchase, bonus gift cards with each purchase, or happy hour specials for regular customers.
Customers love a loyalty program because it rewards them for enjoying your drinks or snacks. Businesses of other industries have seen sales increase by as much as thirty percent when they implement a loyalty program.
Regularly rewarding guests is one of the best ways to cultivate a loyal customer base and generate positive word of mouth. But first, you’ll need to bring in new customers, and turn them into loyal fans.
Enhance and improve the technology you use. Starting from the POS system to the software you want to integrate into your operations. It is vital to update your technology to ensure smoother operations, as well as better customer service, and an overall higher level of customer satisfaction.
Offering an online payment option is a great integration of technology. While cash still holds value, Millennials, and Generation X are looking for convenience, flexibility, and earning points when paying for their favorite meals.
Allowing diners to pay through their mobile wallet, swipe, or tap helps you cut down on fraud, increase table turnover, and provide a better tip opportunity for your servers.
Here are some of the other perks you can enjoy once you have the perfect technology for your management.
- Avoid inside theft through a reliable inventory management system
- Boost table turnover rate
- Stay updated to trends such as most popular food items, high food profit margin items.
- Manage staff schedule and payroll
- Track and monitor sales
- Better food cost and waste management
What Are The Most Profitable Type Of Restaurants And Their Average Profit Margin?
Trying to provide the best customer experience through food and service while keeping the restaurant ahead of the competition and staying afloat is surely not the easiest task there is. Here are some of the most profitable types of restaurants, and how they keep their profit growth.
While the food cost for this type of restaurant is on par with a traditional full-service restaurant, its lower overhead costs and limited menu keep its restaurant profit protected. The average profit margin for this type of restaurant is six to nine percent.
They typically have fewer overhead costs including rent, insurance, staff, and utilities. And while bad weather can hurt sales, rental fees for events can often make up for that.
Profit margins of three to five percent generally apply to full-service restaurants, which include kitchen staff, managers, servers, bartenders, and a host.
But the numbers vary widely depending on restaurant size, price range, turnover rate, location, and many other factors.
Bars are known to hold the highest profit margin in the Restaurant Industry. This is because alcoholic beverages hold higher markup compared to food. Beverages have a margin of sixty to seventy percent. It’s just a matter of pour cost to identify the proper alcohol pricing.
Fast Food and Quick Service
Through expenses such as labor and food costs, this type of restaurant still manages to produce an average profit of six to nine percent because of the type of operations it offers and the market it serves.
In comparison with full-service restaurants, the profit margin for quick service restaurants is higher because they require lesser staff, use lower-cost ingredients, and use more frozen and prepared food.
Commissions amounting to up to thirty percent from third-party delivery apps may hurt the profit generation of this type of restaurant. But worry not like the average profit of cloud kitchens are established to be above average because of lower overhead expenses.
Having a menu that offers limited types of food to customers, especially the millennials, is one-way diners are keeping up with the competition. It requires lower food costs which protect its profits. Cafes are also known to be profitable, with twenty percent profitability.
Catering businesses, like food trucks, enjoy low overhead costs, but food costs were similar to that of full-service restaurants. While a catering business can make fifteen percent of profit or more, the overall profit margin for a food truck is seven to eight percent.
What Is The Importance Of Knowing The Proper Profit Margin For Your Restaurant?
You may not be looking forward to the tedious task of increasing revenue and decreasing costs, but once you learn the principle, it becomes more automatic. Very soon, you may surpass the standard profit margin of your restaurant.
Here are some of the important reasons why knowing about profit margin is beneficial for your restaurant.
- It helps in building your restaurant’s brand. Proper profit margin leads to generating gross profit, with gross profit comes to the means for brand-building activities and investments.
- It would be a good way to secure your investors. If your restaurant runs with an unbelievably thin gross margin, it would cause a loss of interest from your investors as they’ll know you won’t have the capacity to sustain your restaurant.
- It allows you to make better decisions for your restaurant business. As cliche as it may sound, being well informed about your business allows you to see the bigger picture of what is present. You can be better with your staff scheduling, inventory management, food cost and food waste management, and other aspects that affect the profitability of your restaurant.
When you are looking for ways to increase restaurant margins, you may need to search through all your data points and uncover every possible insight into your costs and sales. And then dig even deeper, looking for ways to improve what you are receiving and what you are putting out.
To wrap things up, the information provided above is a good benchmark of proper profit margin management. Implementing the above tips and tactics would surely position your restaurant in better standing.
Keep in mind that the success of running a restaurant depends on different factors, make sure to keep tabs on the important ones and make your effort worthwhile.