When looking at the restaurant industry as a whole the average profit margin is said to be around 3-5% but can broadly range from 0-15%. However, like many things in the restaurant industry, there is no cookie-cutter answer to what a “typical” profit margin should be for your business.
While the numbers that most experts come up can vary widely, everyone can agree that the restaurant industry profit margins are exceptionally slim compared to other types of businesses. So how can you calculate your costs and decide on which number you’re comfortable with as a profit margin for your restaurant?
Understanding Restaurant Profit Margins
There are two types of profit margins: gross profit and net profit. The confusion and disagreements about an acceptable average profit margin for the restaurant industry could be because many articles don’t distinguish the difference between the two, or clarify which one they are referring to.
Gross Profit Margin
Gross profit is what you have left over after deducting all costs of goods sold (CoGS). This number is useful when you want to measure your restaurant’s efficiency, but since it doesn’t take into account all of the costs of running your business, it’s only one piece of the puzzle.
Net Profit Margin
Net profit margin is when you deduct all the costs of running your business from your gross profit. This includes administrative costs, payroll, utilities, rent or mortgage, maintenance, taxes, insurance, etc. So, if you’re spending $.93 for every dollar you bring in, your net profit margin is 7% for that period. This is the number you will want to use to assess the success and profitability of your restaurant.
Average Profit Margins by Restaurant Type
Full Service Restaurants
That 3-5% profit margin mentioned above generally refers to full service restaurants (FSR) and includes kitchen staff, managers, servers, bartenders, and a host. However, these numbers can vary wildly depending on factors like restaurant size, price range, turnover rates, location, and more.
Fast Food and Quick Service Restaurants
This number depends on factors like if the location is chain-owned, franchised, or independent, but the average profit margin for a fast food or quick service restaurant (QSR) is around 6-9%. This is higher than a full service restaurant because they tend to need less staff, use cheaper foods (more frozen and pre-prepared), and have a higher turnover rate than a full service restaurant.
Food trucks will generally carry similar food cost numbers as a brick-and-mortar restaurant, but they benefit from lower overhead costs including rent, insurance, staff, and utilities. And while bad weather can hurt a day’s sales, that can be made up for in rental fees for events. Like fast food and QSRs, average food truck profitability is around 6-9%.
Similar to food trucks, catering businesses benefit from low overhead costs but similar food costs when compared with an FSR. While a high-end catering business can pull in profits of 15% or more, the overall average is 7-8%.
Could food costs be killing your profit margins? Find out now with our free Food Cost Calculator.
How to Improve Your Restaurant’s Profit Margin
The biggest profit killers in the restaurant industry are CoGS, labor, and overhead. And while there’s no way of avoiding these costs altogether, there are creative ways to reign them in. The are two main ways to widen your profit margins are increasing sales and decreasing costs.
Increasing Sales Volume
Note: While increasing sales volume won’t impact your CoGS number, it will widen your margin when it comes to fixed costs like rent, utilities, and maintenance.
1. Get on Board with Online Ordering
If you’re not using online ordering for take-out and delivery orders yet, it’s time to start. Online orders have grown 300% more than dining in since 2014, and 60% of diners order in at least once a week.
While using a third-party online ordering service can get your name out there to new customers, it’s also a good practice to integrate a native online ordering system on your website. Not only will you save upwards of 30% in commission fees, but it creates a more seamless process by integrating with your POS.
2. Adopt a Loyalty Program
When done right, a loyalty program can keep guests coming back more often, spend more money overall, and makes them more likely to recommend your restaurant to friends. Just make sure your program is easy to use and doesn’t frustrate guests by being overly complicated or difficult to use – it could end up having the opposite effect.
3. Evaluate Your Menu Design
Do you have a high-profit dish on your menu that you get great feedback on, but is not ordered often? Selling more units of that dish could be as simple as changing the placement on the menu or the wording in the description. By using data pulled from your POS, you can make adjustments to your menu based on what is or isn’t selling, and which items are profit-boosters or cost-killer.
4. Upgrade Your Technology
Speaking of pulling data, is your POS fully equipped to give you all the best insights? In this day and age, your POS should be doing way more than just processing payments, which is generally all that most legacy-based systems can do. By switching to a cloud-based system, your technologies can be integrated all in one place, giving you the best possible insights to help you run your business.
5. Get Online
Did you know that 90% of guests research a restaurant before dining (more than any other business type)? That means if you haven’t gone online yet – with a minimum of a restaurant website, operating key social media accounts, and claiming your Google and Yelp pages – you’re missing out on a ton of business that your digital-minded competition is benefitting from.
1. Reduce Cost of Goods Sold (CoGS)
As we said, CoGS is one of the biggest expenses in the industry. Lowering your CoGS can become a balance between wanting to serve your guests high-quality food while keeping costs low. However, there are a few ways to achieve this, like comparing vendors, taking more accurate inventory, getting ahead of food waste, and more.
2. Control Labor Costs
This is another fine balance between maintaining a cost and keeping your staff happy and able to live on their wages. It can be done if you are using software to monitor shifts, create more efficient scheduling, and prevent early clock-ins. There is also something to be said for adding benefits to keep staff happy and loyal. Even if you can’t afford to pay them more money, things like days off, tenure perks, and continuous acknowledgment of their efforts go a long way.
3. Reduce Waste and Theft
Food waste and internal theft are unfortunate but very real problems in the restaurant industry. While it may not be 100% preventable, it can be better tracked by using an inventory management system that increases accuracy versus using spreadsheets or a pen-and-paper method.
4. Decrease Staff Turnover
Not only is it expensive to train new staff, losing a great server can make or break your guests’ experience causing a loss in repeat business. Make sure you are communicating with your staff and implementing their feedback where possible to decrease turnover and increase staff loyalty.