Understanding Restaurant Profit Margins
What is a Restaurant Profit Margin?
A restaurant profit margin is the total dollar amount remaining after subtracting all restaurant expenses from a restaurant's total revenue. Restaurant owners should calculate restaurant profit margins in order to understand how to best improve business operations and optimize their bottom line long term.
With the vast majority of restaurant industry businesses surviving on a razor-thin profit margin, it is absolutely crucial for a restaurant owner to calculate and compare their profit margin with their competitors. Restaurant owners should make sure their average profit margin meets or exceeds the average range of similar restaurants.
For example, it is reasonable to anticipate a different average restaurant profit margin range for a fine dining small business in comparison to a fast food chain restaurant. A restaurant profit margin that is lower than the average range can indicate a deeper restaurant operations issue that warrants immediate attention and corrective action.
By identifying issues earlier on, restaurant owners have a higher chance of long term success. Accepting and understanding the low profit margins that the restaurant industry possesses can additionally assist restaurant owners to more realistically measure business success and avoid unnecessary burnout or dissatisfaction.
Profit margins help guide restaurant owners when they are faced with important and high stake business decisions. For example, a healthy profit margin may indicate that a small business could consider expanding its storefront locations.
Alternatively, a low profit margin could indicate that labor costs or food costs have gotten too expensive to be sustainable long term. Always make sure to consider average restaurant profit margins both for the entire restaurant industry and by restaurant type.
The Average Restaurant Profit Margin
Depending on the restaurant type the average restaurant profit margin ranges widely. The entire range of restaurant profit margins including outliers is generally estimated to be between 0-15%. When evaluating the entire restaurant industry comprehensively, the average profit margin is 3-5%.
There are many reasons for restaurant profit margins being so low in comparison to other business types. Depending on your location, your restaurant might spend a lot of money on rent. Or depending on what type of talent you have employed, your labor costs may be higher than average in comparison to other industries.
There are also numerous restaurant operating costs that many professionals may not initially consider that majorly impact a restaurant's profit margin. For example, equipment repairs or replacements can be expensive and completely unexpected. These expenses are necessary to continue running restaurant operations and are therefore nonnegotiable.
Even smaller changes can alter a profit margin greatly. For example variations in food costs for a specific product depending on availability and season or credit card processing fees.
Although it is helpful to know the average range for restaurant profit margins, it is more realistic to consider profit margin by restaurant type as the restaurant industry profit margin average will likely be vastly different for a fine dining establishment as opposed to a food truck owner.
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Profit Margins for Different Food Businesses
Understanding the average profit margin for your specific restaurant type can help more realistically compare and optimize an individual restaurant's bottom line profitability. Whether you are a small business that offers a fine dining experience or the owner of a fast food chain it is crucial to research restaurant type averages.
Common restaurant types and their respective average restaurant profit margins include-
1. Food truck- Food trucks are increasingly popular in the restaurant industry and boast a profit margin of 6-9%. Food trucks have discovered creative ways to increase profits and minimize costs such as using the power of social media for marketing. Additionally, food trucks generally possess fewer overhead costs than a full service storefront restaurant.
Food trucks provide their patrons with quick service and a fast casual dining experience. Food trucks may also be able to offer their customers lower food costs by offering fewer menu items and a decreased need for customer service interactions compared to a full service restaurant.
2. Full service- A full service restaurant generally has a profit margin of 3-5%. This restaurant type generally has higher labor costs especially if there are bartenders and managers consistently scheduled.
Full service restaurants vary significantly in their profit margin net depending on a wide range of factors, from their physical store front location to menu item diversity.
3. Fast food- With low food costs and fast casual service, the fast foodrestaurant type is has a higher average net profit margin than a full service restaurant. There are generally fewer labor costs and food costs as a fast food restaurant requires less staff and cheaper ingredients.
The fast food restaurant industry has an average profit range of 6-9%, comparable to the average profit margin for food trucks. An important consideration for fast foodaverage profit margins is whether the restaurant is chain owned, independently owned, or franchised.
Even within the same restaurant type, there can be vast differences between average restaurant profit margins as well as large variations over time. In order to understand restaurant success, it is important to look at the average net profit margin for your restaurant type as well as the average profit margin for the restaurant industry in general.
For example, in 2012 the average fast food industry average profit margin was lower than normal, at only 2.4%. That year, McDonald's had a net profit margin that was around 20% while Wendys only had a profit margin of 0.3%. In 2017, all McDonald's restaurants had a net profit margin of over 22%.
How to Calculate Profit Margin
Sustainability is crucial in the restaurant industry with so many establishments not surviving beyond their first few years of operation. Focusing on predicting and maintaining a healthy restaurant profit margin can help your restaurant survive and ultimately thrive.
Not taking the time to regularly calculate restaurant profit margins can quickly jeopardize a restaurant's bottom line. In order to calculate a restaurant's profit margin properly, you must have an understanding of not only your total sales but also your expenses.
There are two different profit margins that restaurant industry professionals consider, the gross profit margin and net profit margin. To calculate your restaurant's gross profit margin deduct the cost of goods sold from gross revenue.
To calculate your restaurant's net profit margin deduct all costs associated with running restaurant operations from the gross revenue. These costs include not only the cost of goods sold but also any restaurant operating expenses.
When calculating restaurant operating expenses it is important to factor in even the smallest costs. For example, credit card processing fees might not seem like a priority to factor into your average restaurant profit equations, but they will add up over time and decrease the accuracy of your calculations.
A successful business not only calculates its profit margin but additionally always seeks to optimize it. Thankfully there are many low cost methods and best practices to consider in order to improve a restaurant's profit margin.
How to Improve Your Profit Margin
The two main methods to improve restaurant profit margin is to increase sales and decrease costs. Restaurant owners can get creative finding alternative ways to increase profit margins including-
1. Loyalty program implementation- A loyalty program is a low cost way to increase total sales at your restaurant. Some restaurants even incorporate a customer's social media accounts into their loyalty program which can help with advertising and expanding its customer base.
2. Online ordering capabilities- With 60% of restaurant diners ordering food to their home at least once weekly, online ordering is becoming more relevant than ever before. In fact, online ordering has increased by over 300% since 2014.
Online ordering can be used for both take out and delivery which may decrease labor costs as these order types require less customer service interactions between staff and customers than the traditional dining experience. Restaurant owners can retain even more net profit by creating an online ordering option directly on their website as opposed to having to pay commission fees to a third party online ordering platform.
3. Online advertising- Social media and customer reviews can make the difference between a customer choosing your restaurant or a competitor. In fact, 90% of diners research restaurants before they visit them, a higher percentage than any other industry type.
Increase sales by creating a great social media presence and always make sure to respond to customer reviews left on third party review sites in a timely manner. Customer reviews can also provide a great opportunity to get feedback on how to improve restaurant operations as well as customer service experiences.
4. Menu item evaluation- Offering more menu items does not necessarily result in total sales increasing. In fact, too many menu items can negatively impact the net profit margin through unnecessary food costs and food waste at your restaurant.
Regularly evaluate food costs and labor costs incurred for each individual menu item in order to make sure the total sales and total revenue of a specific item justify its continued presence on your menu.
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How to Decrease Overall Costs
Optimizing restaurant operations will improve restaurant profit margins and decrease overall costs incurred. Various best practice tips to decrease costs include-
1. Labor cost control- Labor costs are one of the largest expenses for a restaurant industry business. Restaurant owners must provide their staff with a liveable wage while also avoiding the restaurant's bottom line suffering.
Providing extra paid days off and incentivizing staff members are two options to consider if you cannot afford to pay higher hourly rates or salaries. Remember, your customer service experience and total sales are largely influenced by the quality of your employees, so cutting labor costs excessively may end up hurting your bottom line.
2. Proper inventory management- Costs of goods sold are another large expense for restaurant industry professionals to consider. Make sure to consistently cross reference vendor prices and keep an accurate inventory to keep both food costs and food waste as low as possible.
Proper inventory management will also reduce food waste and labor costs by avoiding over-ordering. Under-ordering can be just as detrimental to the restaurant profit margin if it results in decreased total sales and limited menu item availability.
3. Less staff turnover- Regardless of your restaurant type, a great employee can make a huge difference in your restaurant revenue and customer service capabilities. The restaurant industry is known for its high staff turnover rates and keeping a high performing employee on staff can be a difficult task.
Labor costs are also majorly affected by high staff turnover rates because it is expensive to hire and onboard new staff members. There are many ways to decrease staff turnover, ranging from consistent check-ins to regular salary bonuses.
- The restaurant business is highly competitive, with razor thin profit margins that generally fall between 3-5%.
- Maintaining a high profit restaurant requires constant consideration and control of a large variety of costs including labor costs and food costs.
- Whether you're a food truck or fine dining restaurant owner, different restaurant types have varying average profit margins. While food trucks and fast food restaurant profit margins are ordinarily are between 6-9%, full service restaurants are around 3-5%.
- The two different profit margin types are gross profit margin and net profit margin. Restaurant owners should understand how to calculate both margins.
- There are various ways to increase restaurant profit margins ranging from loyalty program implementation to menu items being consistently evaluated for profitability.
- There are also many ways to decrease overall costs ranging from decreasing food costs through inventory management to decreasing labor costs through less staff turnover.