It’s no secret that the restaurant industry is highly competitive. Just ask customers, who constantly have trouble deciding where to eat! Restaurant owners know it’s important to become a family favorite because this can help eliminate choice overload (having too many choices to pick from).
To stay ahead of the competition as a highly profitable restaurant, you must focus on your average profit margin. But first, you need to know what profit margin is and what the average is in the food industry. Also, you’ll need to know what affects profit margin, how to improve profitability, and key considerations when developing your menu.
Let’s get started!
What is profit margin and how does it impact restaurants?
Profit margin is a key financial metric that indicates the percentage of your revenue that is pure profit (since most revenue goes to cover business expenses). Understanding the average restaurant profit margin can provide valuable insights into the industry’s financial viability and help you gauge your restaurant’s financial performance.
What is the average restaurant profit margin?
Average restaurant profit margin can vary significantly depending on several factors, such as the restaurant’s concept, location, size, and the level of competition in the area. On average, restaurants aim to achieve a profit margin between 3% and 5%.
However, it is important to note that profit margins can range widely, with some restaurants struggling to break even or operating at a loss, while others may achieve much higher profit margins.
Understanding the factors that affect profitability and implementing effective cost management strategies are crucial for restaurants aiming to improve their profit margins and sustain long-term success in this challenging industry.
What Affects a Restaurant Profit Margin?
Profit margin is affected by many things, but at its core, it all comes down to revenue vs. expenses. The more revenue your restaurant makes beyond your expenses, the more profitable your business. Lowering expenses likewise can drive higher profit margins. But, it must be done correctly (because you can’t compromise on food quality and expect to keep revenues going high).
Here are a few of the top factors that affect profit margins: food costs, pricing strategies, menu offerings, table turnover, foot traffic (which can be improved through marketing campaigns), staff turnover, customer satisfaction, and operational efficiency. Of these, prime costs (costs that directly impact the production of each dish) are the most influential.
By examining and optimizing these factors, you can enhance your profit margins, ensure financial sustainability, and ultimately thrive in an industry that demands both quality and profitability.
How to Calculate Profit Margins
Calculating your profit margins helps you evaluate the financial health of your establishments and make informed decisions about pricing, cost control, and overall profitability.
Understanding how to calculate profit margins accurately allows you to identify areas of improvement, set realistic goals, and optimize your restaurant’s operations for long-term success.
There are two major types of profit margins: gross and net. We’ll go into greater detail on each of these in a minute, but we’ll need a few numbers first:
- Total revenue. Total revenue includes all income from primary operations, such as food and beverage sales, as well as any secondary sources, such as catering services or merchandise sales. To obtain an accurate figure, it is important to record all sources of revenue and exclude any taxes or discounts offered to customers.
- Cost of Goods Sold (COGS). The cost of goods sold is a number that represents the direct expenses associated with producing or purchasing the food and beverages served. It includes the cost of ingredients, raw materials, beverages, and any other supplies necessary to prepare the menu items. It is crucial to accurately track and record all costs related to the products sold as they directly affect the profitability of the restaurant.
- Overhead Costs. This number represents the indirect costs related to producing or purchasing the food and beverages of your restaurant. These expenses include rent, utilities, insurance, staff wages, marketing, and other indirect costs necessary to run the restaurant. By including overhead expenses, restaurant operators can obtain a more accurate net profit figure, which takes into account all costs associated with the business.
Now that we’ve got these numbers, we’re ready to make our calculations.
All About Gross Profit
The Calculation
Gross profit is a crucial metric that provides insight into profitability by evaluating the relationship between revenue and food costs. Calculating the gross profit margin involves a straightforward process.
First, choose a specific period for analysis (typically a month, quarter, or year). This time frame allows for accurate comparison and performance evaluation.
Once the period is determined, you proceed by subtracting the cost of goods sold (COGS) from the gross revenue earned within that time frame. This gives you gross profit. To get your gross profit margin, you divide gross profit by total revenue.
Important Notes
The gross profit margin solely considers food costs and does not take into account other operating expenses, such as labor or overhead costs. However, it is still a valuable indicator of financial health and should be tracked closely.
One reason is that you are more efficiently able to see which cost management strategies are working and which are not. Also, it helps identify areas where food costs can be reduced.
All About Net Profit
The Calculation
By contrast, net profit represents the amount of money left after deducting all expenses from total revenue. To calculate net profit accurately, we not only use COGS like gross profit does, but we also subtract overhead costs from total revenues.
But we’re not done quite with our calculated net profit alone. Net profit margin, expressed as a percentage, is calculated by dividing net profit by total revenue.
Important Notes
The net profit margin provides valuable insights into the restaurant’s efficiency and profitability since it factors in every business expense. A higher net profit margin indicates better cost management and higher profitability. Therefore, it is a crucial measure to evaluate the financial health and sustainability of a restaurant.
Now that we’ve calculated profit margins, we need to discuss ways to improve those margins
How to Improve Restaurant Profit Margins
Average restaurant profit margins vary based on the type of restaurant. Fine dining establishments typically have higher profit margins ranging from 5% to 15%, mostly due to higher menu prices and better control over costs. Quick-service restaurants and casual dining establishments generally have lower profit margins, typically ranging from 2% to 6%, due to competitive pricing and higher operational costs.
There are quite a few ways to improve your margins, however, and you should try as many as make sense for your business. Here is a list of the ones we’ll talk about:
- Menu engineering
- Marketing and branding
- Table turnover
- Restaurant management software and other technology
- Decreasing expenses
Let’s dive right in!
Menu Engineering
Your menu is more than just a list of dishes; it is a powerful tool that can significantly impact profitability. To get started on menu engineering, analyze sales data, understand customer preferences, and strategically price and highlight certain dishes.
Then you can set ideal prices per item by implementing the BGC matrix, which is a tool that helps you categorize each menu item according to how it performs in your restaurant and price accordingly. You should prioritize your cash cows because the needed investment is low for relatively high compensation.
You can also update your menu layout and shorten your list of available items (because let’s face it, too many choices can cause customers to have choice overload, which increases table turnover; plus, the more diverse items you serve, the more ingredients you have to buy, increasing your direct costs).
All of these are great options for making your menu pop and satisfying your customers to a higher degree.
Marketing and Branding
To increase traffic to your restaurant, implementing effective marketing strategies is crucial. One powerful approach is utilizing social media platforms to engage with your target audience.
Leverage Social Media
Creating captivating content, such as visually appealing food photos, behind-the-scenes videos, or chef interviews, can pique their interest and entice them to visit your establishment. Additionally, engaging with customers through comments and direct messages on social media platforms not only builds a personal connection but also helps increase brand visibility.
An equally important tactic is implementing a points-based loyalty program.
Implement and Advertise Loyalty Programs
By offering incentives like exclusive discounts or freebies, you can enhance customer loyalty and drive repeat visits. Leverage social media to promote your loyalty program and the benefits it provides, encouraging potential customers to become part of your loyal customer base.
One other way is to utilize custom, automated email marketing campaigns, which significantly enhance your marketing efforts.
Dial in Your Email Marketing
Sending personalized emails to your loyal customers, perhaps on their birthdays or anniversaries, reminds them of your restaurant and incentivizes them to return. These campaigns can also include special promotions or limited-time offers, capturing their attention and prompting them to dine at your establishment.
The last point we’ll talk about is using your brand effectively.
Build Your Brand
This is pretty straightforward in theory but can get tricky in practice. To start, you’ll want to run a brand audit, a systematic evaluation of a restaurant’s brand image, brand promise, and brand equity.
It involves a comprehensive analysis of various elements such as brand positioning, messaging, reputation, and customer perception. You will gain valuable insights about current brand performance and identify areas of opportunity for improvement. In some cases, it makes sense to revamp the brand completely and relaunch with a grand opening.
By focusing on social media engagement, implementing a points-based loyalty program, utilizing custom email marketing campaigns, and taking care of your brand, you can effectively increase traffic to your restaurant and build a strong, loyal customer base.
Table turnover
Table turnover is a key part of your restaurant. You need to find a balance between speed and customer satisfaction (though often speed results in customer satisfaction). By doing so, you can enhance your table turnover while maintaining high-quality service.
One strategy to improve table turnover is utilizing technology tools.
Technology Tools
Implementing a restaurant table management system can streamline the entire process, from taking orders to bill payment. By eliminating manual tasks and reducing errors, the workflow becomes more efficient, leading to faster service and quicker table turnover.
Another effective strategy is to train your staff effectively.
Train Staff
Training your staff is an essential part of a successful restaurant strategy. Properly trained employees are more confident and efficient in their tasks, resulting in smoother operations. By emphasizing the importance of prompt service, upselling and cross-selling techniques, and time management, staff members become more adept at balancing efficiency and customer satisfaction, leading to improved table turnover.
The key to this is making the customer happy, seating and serving your guests faster, and helping them get through their parts faster, too. It can be tricky to seat guests quickly; luckily, this is often aided by working on the other two aspects mentioned.
Serving guests goes much faster if they are given ample time to decide on their menu choices. Reducing the number of choices available is helpful because it prevents analysis paralysis and choice overload. Providing online menus and/or self-ordering options is an easy, efficient way to get the job done.
Finally, if you can make the payment process smooth, quick, and convenient (some restaurants offer a portable kiosk on the table), customers will be satisfied (because no one likes issues or wasted time waiting), and you’ll have your tables free for newcomers.
Add more seating
When considering adding more seating to a restaurant, there are several important factors to take into account.
One of the primary considerations is guest comfort level. It’s crucial to ensure that additional seating doesn’t compromise the overall comfort of diners. Adequate space between tables is key to creating a pleasant environment where guests can enjoy their meals without feeling cramped or restricted.
Another factor to consider is the type of restaurant. Fine dining establishments typically require more spacious seating arrangements to provide an upscale and elegant ambiance, whereas casual restaurants may opt for a more relaxed and casual seating layout.
Industry standards for square footage per guest should also be taken into consideration. These standards can vary depending on the type of restaurant and the local regulations. However, a good rule of thumb is to allocate around 15 square feet per guest. This allows for sufficient space for both guests and staff to move comfortably without creating congestion.
Adding more seating can positively impact the restaurant’s margins by increasing the number of guests served per service. This, in turn, can lead to higher sales per service. If you can’t do this effectively in your current space, it might be time to consider moving.
Bonus: Implement a No-Show Fee For Reservations
This only applies to certain types of restaurants but is one strategy to effectively reduce losses from unused tables and safeguard profit margins.
As peak hours are limited, unfilled tables represent a missed opportunity for generating revenue. Instituting a no-show fee not only discourages customers from making reservations that they are unlikely to honor but also ensures that the restaurant doesn’t bear the financial burden of holding an empty table.
Additionally, employing tactics such as calling or texting customers to remind them about their reservations further contributes to reducing no-shows. This allows your customers to notify you beforehand if they can’t show up.
Restaurant management software and other technology
Making good use of software solutions is a great way to increase your profit margins. There are many software options out there that can help you run your business more efficiently.
Tableside ordering eliminates (or at least reduces) the need for staff to take orders manually (which drastically speeds up the ordering process for the customers and your staff alike)
Software-enabled loyalty programs help you reward your most loyal customers through tailor-made offers that entice your customers to part with more funds and keep coming back for more. What’s more, you’ll be able to foster long-term relationships with your customers.
Upgrading your point-of-sale (POS) systems can offer increased efficiency because software is always changing and improving. Not only can it help with sales, it can help with inventory and customer relationship management. You can also see detailed reports and analytics that help you identify areas for improvement and make informed business decisions.
Reservation and table management software is helpful with booking management, dining room capacity monitoring, table allocation, and more, all of which can increase foot traffic and table turnover speeds. Both of these have a tremendous impact on revenue.
Employee scheduling software can contribute to optimized scheduling, which reduces labor costs and potential over- or under-staffing issues. It also helps to improve operational efficiency and satisfies your staff, who will thank you for a more optimal schedule that fits their needs.
Technology should thus not be overlooked when considering how to increase profitability.
Decreasing expenses
In addition to optimizing workflow, you want to look across your restaurant business to find even those costs that are less visible. Maintaining a positive workplace culture, for example, is key to reducing major expenses.
For one, it’s expensive to hire and train new crew members. By creating a supportive and motivating environment, you will build employee loyalty and decrease turnover rates. You’ll also prevent potential theft as you keep your employees satisfied.
A few other areas to look into are equipment expenses, legal expenses, banking charges, marketing costs, insurance quotes, and utility bills. Having a comprehensive knowledge of your expenses will help you know where you can trim the fat and increase your profitability.
Conclusion
In any business (but especially in restaurants), profit margin is a critical metric that gauges the financial health and long-term success of the venture. That said, the ideal profit margin will be different from restaurant to restaurant.
By examining your profit margin and comparing it to the average profit margin of the restaurant industry (or at the very least similar restaurant size and style), you can assess the effectiveness of your operations and make informed decisions for sustainable growth.
By prioritizing this key metric, you can position your restaurant for sustained growth and operational excellence in an industry known for its inherent challenges.
