Opening a restaurant is a dream for many food lovers and entrepreneurs. But, this goal can be tough to achieve. Running a restaurant is hard work and takes dedication.
The key to success is the profit margin. It's one of the most important measures in the restaurant industry. It's important to keep track of it, especially in the first few years.
Restaurant profit margins are tight compared to other industries. New restaurant owners should set realistic and conservative goals. Expect to take on debt and not make a profit at first. In my own experience, it took us 3 years to break even.
These facts may seem discouraging. But, there are ways to improve your profit margins over time.
What is the average restaurant profit margin?
On average, restaurant profit margins range from 3% to 5%. Sometimes, they can fall between 0% to 15%. Once upon the good ol' times (20 years ago), restaurant profit margins were between 15% to 20%. These have been declining over time.
First let's understand the difference between gross and net profit margins.
Gross profit shows how efficient your restaurant is.
Net profit shows your business’s success and profitability.
Gross profit margin
(Total revenue - COGS) ÷ Total revenue
The gross profit margin shows what’s left after you subtract the cost of goods sold (CoGS). It helps you see how well your restaurant uses its ingredients and goods.
Net profit margin
Total revenue - Total expenses
This is the best way to see how much your restaurant is making. To find the net profit margin:
- Add up all your restaurant’s expenses.
- Subtract these expenses from your gross profit.
Expenses may include rent, payroll, utilities, taxes, and supplies. It all depends on your restaurant type.
Average profit margins by restaurant type
Different types of restaurants have different profit margins. Virtual restaurants, full-service, fast-casual, and food trucks all show some range in profit. The differences are only a few percentages. When opening a new place, consider these margins. It may help you decide.
Virtual restaurants
Also known as cloud kitchens or ghost kitchens. Virtual restaurants have lower rent and fewer staff. They need less startup money. But they can handle a lot of orders. Virtual kitchens are a new concept. There is not much data on their profit margins. With low overhead and low labour costs, a good virtual kitchen can make high profit margins.
Full-service restaurants
Full-service restaurants usually have the smallest profit margins. They spend more on labour due to more involved customer service and specialised training. They also spend more on ingredients and rent, depending on the location. So, their profit margins often range between 3% to 5%.
Fast-casual restaurants
Fast-casual restaurants are also called fast food or quick-service restaurants. They have somewhat higher profit margins. These restaurants spend less on labour and ingredients. They also have a faster table turnover. Their profit margins usually fall between 6% to 9%.
Food trucks
Like virtual kitchens, food trucks have low overhead costs and a smaller staff. Bad weather and location can affect profits. But to be fair, all restaurants have slow days. Food trucks usually have profit margins of 6% to 9%.
How to improve average restaurant profit margin
To boost your restaurant’s profit margin, first, look at what affects it. Think of your restaurant as a machine. Costs of goods, labour, and overhead are the parts. The profit margin is the output. If the output is low, adjust these parts to improve efficiency and results.
Track and understand your metrics
Every restaurant owner should check key performance indicators (KPIs). Most owners check a few metrics sometimes. But it's best to check many of them often.
KPIs include:
- sales
- profitability
- customer experience
- marketing
Look at cash flow, labour costs, and online reviews. Checking these metrics often gives you a clear picture of your restaurant's health. This also shows which areas need improvement.
After knowing these metrics, ask yourself how they impact your profits. For example:
- Are bad online reviews stopping repeat and new customers?
- Is your social media engagement low, causing poor traffic?
Know your cost of goods
CoGS, or cost of goods sold, is what it costs to make your menu items. Ingredients and related supplies are big expenses. So, watching this is key. Check portion sizes and menu prices. Can you tweak these to make more profit and still please your customers?
Manage your inventory well to keep your costs down. This cuts food waste and stops you from ordering too much. You can do this by hand, but using kitchen management software makes it easier. This tech automates the inventory and ordering process.
Know your labour costs
Different types of restaurants have different labour costs. Food trucks and virtual kitchens need fewer team members. This means lower labour costs. Full-service restaurants need more staff like kitchen workers, bartenders, servers, and hosts. Quick service places need fewer staff than full-service. But their high turnover can raise labour costs.
Keep labour costs within budget. Use software to track hours and schedule shifts. Watch for early and late clock-ins. Notice if the restaurant is overstaffed. If you can't pay more, offer extra benefits. Give discounts, days off, and plan team outings to keep morale high.
Know your overhead
Do you know your restaurant’s overhead costs? Overhead includes rent, salaries, marketing, insurance, taxes, licences, and utilities. These are not labour or material costs. To find the overhead rate as a percentage of sales, add up these costs for a period. Then, divide by total monthly sales for that period. Multiply by 100 to get a percentage.
In simple terms, lower overhead costs mean higher profits. After you know your overhead rate, start finding ways to cut these costs.
Steps to increase your restaurant profit margin
Your restaurant’s profit margin depends on more than the sales you make. Many factors affect it. High sales during a lunch rush may mean little profit if overhead costs are high.
The type of restaurant you run influences these factors. A virtual kitchen relies a lot on its online and social media presence. It has no visible storefront. Full-service and fine dining spots need well-trained staff. They need employees who can upsell and boost order totals.
Invest in restaurant technology
To understand your restaurant’s data and profit margins, invest in top-notch technology. You may have a point-of-sale (POS) system and a kitchen management platform. But these tools should do more than take and display orders. Modern tech can provide real-time data and detailed reports. Getting this data by hand takes time. With the right tech, you get information in an instant.
Have a great website
Simply put, a great website that is easy to navigate brings more customers and orders. Your menu should be easy to find, and make sure the info is up-to-date.
The look and feel should make people want to order. Most people like to check out a restaurant online. About 77 percent do this before deciding to visit.
List dietary options and specials, like happy hour deals, to attract guests.
Make sure you have online ordering
A customer may want to order takeaway from your restaurant. Make sure your online ordering is easy to find on your site. You could use third-party platforms like Deliveroo or Grabfood. But, these services cut into your profits. It is better to have your own online ordering. It's convenient for customers and boosts your profits.
Invest in social media
A website is essential, but it's only the beginning of your online presence.
Social media platforms like Instagram and TikTok help reach younger customers. A Facebook page is better for older generations. So, be active on various platforms. Post often to attract attention to your restaurant.
Running a restaurant involves many tasks. It's understandable that social media might not be your strength. If you have the budget, hire someone to manage your restaurant’s social media.
Offer loyalty rewards
Customers love to support their favourite restaurants. Loyalty programmes help them do that. Well-done loyalty programmess can boost profits by up to 20%. You can do it low-tech with stamp cards or email promotions. To go hi-tech, invest in software that can track points and rewards.
Hire and train good employees
The “great resignation” and the pandemic have caused labour shortages for restaurants. Finding good, long-term employees is difficult.
In full-service and high-end restaurants, waitstaff can affect profits. Well-trained servers know how to upsell food and drinks, which raises your average order value. Specialty drinks and alcohol have high-profit margins. Selling more appetisers and drinks can boost profits. Skilled servers and hosts can also turn tables faster and serve more guests.
Conclusion
Opening a restaurant is tough. Running a profitable one? That's even harder. Costs are high, inflation pushes prices up, and finding good employees is a challenge. Profit margins are thin.
But you can still take control. Watch your labour costs and cost of goods. Keep tabs on overhead expenses. If they are too high, make changes. Focus on restaurant tech, your website, social media, and your staff.
Stay aware and proactive. Small changes can boost your profit margins from a low 3 percent to a strong 10 percent or more.
To go more in-depth, I highly recommend reading Restaurant Success by the Numbers: A Money-Guy’s Guide to Opening the Next New Hot Spot.
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We use the term 'restaurant' throughout the article for consistency. However this guide can be generally applied to any type of food shop, including but not limited to: bakeries, bars, bistrots, boulangeries, butcheries, cafés, cantinas, caterers, coffeeshops, delis, diners, eateries, food trucks, grocers, patisseries, pubs, and more.
