Last Updated On September 30, 2020 / Written By Mary Kate Morrow

Just How Profitable are Restaurants?

Why Restaurants Fail

Before a restaurant owner decides to open their business, they should be aware of how difficult it is to make money within restaurant industry businesses. In fact, 60% of restaurants go out of business within their first year of opening.

After five years, only 20% of restaurants are still in business. Whether you are a quick service or full service restaurant, in order to keep an open restaurant it is essential to stay competitive and consistently creative.

Restaurants fail because the restaurant industry is hypercompetitive and it is incredibly difficult to maintain a profitable restaurant long term. Common profitability myths about the restaurant industry include-

1. Larger profit margins result from low food costs- Many profitable restaurant locations have incredibly high food costs. Restaurant owners should focus on money generated by menu items in relation to food cost percentage to develop a more comprehensive picture.

2. Food costs should determine menu costing- Rather than focusing on food costs when menu costing, focus on the dollar amount that customers will reasonably pay for menu items. A great way to understand what food costs are sensible for customers can be accomplished by asking your servers for feedback.

Research about your customer base and competition can help guide menu pricing. Make sure to check out your competitor's menu prices as well as the local spending habits of customers before pricing menu items.

3. Profit and loss statements should be compared monthly- With the majority of restaurants doing more than half of their sales 2 out of 7 days a week, monthly profit and loss comparisons are not universally accurate as a reference point.

An established 28 day profit and loss statement cycle is much more accurate and avoids being skewed depending on how many days are in each month. A 28 day profit and loss statement will avoid the issue of an extra profitable weekend sneaking into a particular month's statement.

4. Only managers should check inventory delivery accuracy- A traditional responsibility of a manager is to check inventory deliveries for accuracy. However, managers on duty generally have the least amount of time available to receive and process inventory deliveries.

Alternatively, an hourly employee with designated time available to dedicate to thoroughly checking deliveries for accuracy is a great option.

5. Buying in bulk decreases food costs- Buying in bulk can be a great practice to keep food costs low but only if food products are used effectively and efficiently. Decrease spoilage and excessive portion size by buying the appropriate amount of food products needed for your restaurant.

Food waste and food theft are also more common when food products are bought in bulk. Proper inventory management can help your restaurant to avoid overstocking or understocking specific food products.

Both overstocking and understocking will negatively affect the profit margins of restaurants. Overstocking results in food waste while understocking decreases menu item availability.

Are Restaurants Profitable?

The average profit margin for a restaurant industry business is only 6.2%. Full service restaurants spend the majority of their revenue on food costs and labor costs.

The razor thin profit margin of restaurant industry businesses is a leading reason for 40% of restaurants closing their doors within their first year of opening. Ever rising food costs and business operation expenses result in only 20% of restaurants keeping their doors open after five years.

Restaurant owners must constantly work towards being more efficient in order to make money and stay in business. Best practice tips for restaurant business owners to increase their profit margins include-

1. Competitive food costs for customers- With so many competitors available, restaurant business owners must keep food costs for customers competitive. This not only applies to full service restaurants but also food truck owners and other alternative food service industry businesses.

Use social media and third-party review sites to see what customers think about your food costs and adjust your menu prices accordingly. Another great way to draw in new customers is through social media discounts that offer limited-time deals.

2. Hire employees consciously- The high turnover rate of restaurant industry employees can eat away at restaurant profit margins severely. It is very expensive to hire and onboard replacement employees and a high turnover rate can decrease company culture and your entire work environment.

By hiring outstanding staff members and offering them a competitive wage with incentives, your business is much more likely to retain top talent employees.

3. Keep food costs low- About a third of restaurant profits go directly to food costs. Food costs steadily rise over the years and are even higher for more organic or specialized ingredients.

Menu costing is a great way to combat rising food costs while making sure your menu is still competitive. Make sure to consistently check individual ingredient costs to ensure you are getting a reasonable price from your current vendor.

Whether you are a food truck or full service restaurant owner, you can work with vendors to keep food costs as low as possible. Creating an established and loyal relationship with a food vendor can help keep your food cost down and provide more room to negotiate lower costs.