In order for eateries to stay open and continue to welcome in customers, restaurateurs need to keep track of their profit margins. The average restaurant profit margin provides visibility into the business's expenses and whether or not it is generating ample profit from sales.
Each restaurant business will have different margins that they should meet depending on their operation. By understanding these metrics, management will be able to assess the general health of their establishment and make the necessary improvements.
What is the Average Restaurant Profit Margin?
Restaurant profit margins indicate the amount of revenue from sales that remain after all costs are deducted. This measurement demonstrates how well a restaurant is functioning financially and is usually expressed as a ratio or percentage.
The average profit margin for restaurants typically fall between 3 - 5%, but can broadly range from 0 - 15%. However, these metrics cannot be applied to all types of restaurants because different establishments are impacted by different factors. For instance, profit margins will vary depending on the number of staff employed and the restaurant's location.
The type of restaurant operation also impacts average profit margins. For example-
The average profit margin for a fast-casual restaurant ranges around 6 - 9%. However, fast food profit margins can vary based on whether the establishment is a franchise, chain, or independently owned.
These types of quick-service eateries will generally have a higher profit margin, compared to restaurants that provide full service to customers. This is because they require fewer employees to serve and cook for their diners. They also purchase less expensive ingredients for their products, such as frozen meats and pre-prepared food.
Full-service restaurants employ a wide range of staff, including chefs, bartenders, and waiters to serve customers. While the average profit margin for this restaurant industry is 3 - 5%, the number will change depending on the size of the establishment and their menu pricing strategies.
Although food truck businesses share similar food costs as brick-and-mortar eateries, they spend less on rent, employees, and utilities. Due to these factors, the average profit margin for food trucks will range from 6 - 9%.
Catering businesses typically share the same costs of goods sold as full-service restaurants, but they have the advantage of lower overhead costs. Therefore, the average profit margin for catering services is 7 - 8%.
How to Calculate the Restaurant Gross Profit Margin
Gross profit is the amount of money left over after all costs of goods sold (COGS) are deducted from the selling price of a dish. COGS will usually be the costs of ingredients and materials that went into making the final product.
Assessing gross profit margin will provide insight into a restaurant's efficiency and it can be calculated with the formula-
(Selling Price - COGS) / Selling Price = Gross Profit
Gross Profit x 100 = Gross Profit Margin
For example, if a menu item costs $15 and the restaurant spends $7 to make the dish, the calculations would be-
($15 - $7) / $15
$6 / $15 = 0.4
0.4 x 100 = 40
With this calculation, the gross profit margin for this product is 40%.
How to Calculate the Restaurant Net Profit Margin
The net profit margin is when all costs related to running the restaurant are deducted from the gross profit. These operating costs will generally include administrative expenses, payroll, rent, utilities, equipment, and taxes.
Net profit margin is important to monitor because it helps restaurateurs assess their business's profitability. It can be calculated with the formula-
Total Revenue - Total Expenses = Net Profit
(Net Profit / Revenue) x 100 = Net Profit Margin
For instance, if in the past month, a full-service restaurant's revenue was $100,000 and their operating expenses were $70,000, the calculations would be-
$100,000 - $70,000 = $30,000
($30,000 / $100,000) x 100
0.3 x 100 = 30
With this calculation, the restaurant's net profit margin is 30%.
4 Tips to Increase Profit Margins
To effectively increase profit margins, restaurants need to boost sales volume and implement solutions that will decrease expenses. Some of the best practices to enhance profitability are-
In today's digital age, many software solutions will streamline and optimize restaurant operations.
For example, the latest point-of-sale systems (POS) can provide cloud-based reports related to sales and food costs in real-time. This enables restaurant owners to act quickly and make informed business decisions when necessary.
Utilize Online Ordering
Incorporating online ordering can help restaurants increase their sales. With the rise of delivery services, such as DoorDash and Uber Eats, more people can easily order without having to go to the restaurant.
Full-service restaurants can also cut down on their labor costs, as fewer staff members are needed to wait on tables.
Cultivate an Online Presence
Having an online presence will make it easier for potential customers to discover a restaurant. Management can create a website or social media accounts to advertise their eatery's brand and menu items to a broad customer base.
Businesses should also be active on review sites, such as Yelp, and respond to customers and answer any questions. Being professional and personable will help uphold the restaurant's reputation and ensure that customers have a positive impression of the business.
Incentivize Loyal Customers
Implementing a loyalty program can help establish a rewarding relationship between a restaurant and its patrons. For example, repeating customers who reach a certain amount of points from dining in can receive rewards, such as discounts for their next visit.
Not only will the program increase sales by driving consumers to frequent the establishment, but management can also use the customer data to make menu changes to align with customer preferences.
The average restaurant profit margin varies depending on many different factors, such as the type of business and location. By understanding the industry-specific profit margins that an eatery should maintain, establishments can make informed decisions to increase profitability.