Restaurant Profit Margin: The Benchmark and How to Improve Yours

Becoming a restaurant operator is far from a get rich quick scheme. If you’ve ever looked at looking at your profit margins, you already know that. 

Running a successful restaurant takes more than great food and hard work. It requires real business know-how, and even then, success isn’t guaranteed. 

The reality is, there are a lot of factors outside your control, from the economy and shifting diner trends to rising food, labor, and rent costs. 

That’s why your profit margins matter. They don’t just reflect how your restaurant is performing, they help you understand where you can improve and where to focus next. 

In this article, we’ll break down:

• What is a restaurant profit margin and how to calculate it
• The current state of restaurant profit margins
• Why looking at your restaurant profit margins are important
• Ideas to improve your profit margins 

Let’s dive in!

What Is Restaurant Profit Margin?

A restaurant’s net profit margin is a percentage that represents how many cents of profit have been generated for each dollar of sales, after you factor in the cost of doing business. The cost of doing business includes taxes, the cost of inventory, labor costs, or any other general expenses.

You’ll also want to look at your gross profit margin. Your gross profit margin reveals the amount of money you have left after you subtract the direct costs of goods sold (food and labor) from total sales. 

It’s important to note that your net profit margin provides a more accurate picture than your gross profit margin. This is because your net profit margin includes all expenses associated with running a restaurant, not just the ones that help you make and serve the food.

So how do you calculate these numbers?

To quickly calculate your profit margin, you can use our free restaurant profit margin calculator. Or, you can manually calculate your margins using the following equations for net profit margin and gross profit margin:

Net profit margin = Revenue – All costs / Revenue

A restaurant that takes in $20,000/month in sales and spends $18,000 in expenses has a 10% net profit margin.

Gross profit margin = Revenue – Cost of goods sold / Revenue

The same restaurant that takes in $20,000 per month in sales and spends $12,000 in CoGS (only food and labor costs) has a 40% gross profit margin.

While gross profit margin can give you an idea of whether your restaurant is operating efficiently, it’s the net profit margin that will tell you how much is going into your pocket after you factor in all the costs associated with running your restaurant.

However, both net and gross profit margin are helpful ways of diagnosing your restaurant health – and in flagging any issues you need to address.

What is the Average Profit Margin for a Restaurant?

Restaurant profit margins can vary widely depending on concept and location. So what’s a good profit margin for restaurants? The average profit margin for a fast food restaurant is in the 3-9% range while FSRs have an average profit margin between 3 and 5%.

While the restaurant industry has razor thin profit margins overall, the average profit margin for full service restaurants has recently reached double digits for the first time since 2022 according to TouchBistro’s latest State of Restaurant Report. The average profit margin for restaurants in the U.S. was 10.5%, and a similar story was told for full service restaurants in Canada, where 10.4% was the average profit margin.

Why Tracking Your Restaurant’s Profit Margin Is Important 

As the saying goes, “knowledge is power.” Having knowledge of your restaurant’s numbers, especially its profit margins is key to making informed business decisions that, well, power your restaurant. 

Before we get into the nuts and bolts of how you can improve your net profit margin, it’s important to remember that clear, consistent accounting practices go a long way to ensuring your restaurant is on track. One of the most significant things you can do to ensure the success of your operation is to look at numbers – like net profit margin – so you know where you stand. If you’re underperforming, you can look at the reasons why (hint: dig deeper into sales and costs) and take action to improve.

How to Improve Your Restaurant Profit Margin

If you want to maintain or increase your profit margin, you’re going to want to focus on two different areas – increasing sales (giving you more sales to start with when calculating your restaurant profit margins) and reducing costs (meaning you have less to divide by).  

Need some inspiration on how to tackle your sales and reduce your costs?

Check out our top recommendations below.

Increasing Sales

Here are some areas to look at that can help skyrocket your sales numbers.

1. Implement Online Ordering

According to the latest State of Restaurants Report, 81% of U.S. operators and 79% of Canadian operators are seeing takeout and delivery sales increase, showcasing the demand for off-premise dining. To support this channel, operators have implemented order-ahead or pre-schedule online ordering solutions. After implementing online ordering, operators experienced an average increase in overall sales volume of 18% in both the U.S. and Canada. With many operators seeing such a lift in sales from adding online ordering, it’s worth looking into whether  it’s a  fit for your business.

2. Run Promotions 

Every restaurant has ebbs and flows, especially at the start. The key is to track when traffic or sales is the lowest and run promotions to pump up business when you need it most. Consider kid-friendly activities, happy hour specials, two-for-one deals, and other restaurant marketing promotions. Turning your slow times into busier times with special promotions is a great way to boost sales during off-peak hours. 

Social media contests are a great – and oftentimes free – way to get attention for your promotions! What good are your promotions if people don’t know you have them?

3. Create a Loyalty Program

Do you want to be a community’s favorite watering hole, bistro, or coffee spot?

You can help make that happen by starting up a loyalty program that awards points, menu items, or discounts to reward your most faithful customers – and make sure they come back again and again.

A loyalty program is a win-win for your customers and your business. Your customers get rewarded for enjoying your drinks or snacks and you get to increase your sales – some businesses have seen an increase in sales up to 30% when implementing a loyalty program!

4. Give Your Menu Some TLC

Your menu is a goldmine for boosted sales. In fact, restaurants have seen up to 15% increase in profits when their menu is carefully designed. 

Menu design is more than a great way to boost your restaurant profit – you can showcase your dishes, improve the dining experience, and boost your perceived value.

Try to find a graphic designer to create a menu that perfectly aligns with your restaurant’s style, tone, and aesthetic. Give your delicious food the menu it deserves, and watch your sales soar!

5. Consider Catering or Private Events 

According to TouchBistro’s latest report, 39% of U.S. operators and 39% of Canadian operators plan to add private events as one of their top expansion plans for the coming year, followed by the addition of catering services. Both are great revenue streams to add to your business if you have the capacity to take on more volume and are looking for ways to expand.

To get started, talk to local businesses or associations that meet regularly in your community and offer introductory specials of your catering services. And if you have a private room or area, think about offering that up to groups looking for a meeting space or guests looking to celebrate and host major milestones, such as an engagement or wedding reception. Charge a flat rate or ask for a minimum order limit for each person.

Reduce Costs

Here are some strategies you can try to reduce your costs.

1. Reduce Your Inventory Waste

The latest TouchBistro annual report found that reducing food waste was the top step operators in both the U.S. and Canada have taken to reduce their expenses. Inventory waste can be extremely costly to your restaurant’s bottom line and can be solved by implementing inventory best practices. 

For example, scheduling your priorities for counts, having a select inventory team, and using an inventory management software, like TouchBistro Inventory Management, to save on costs and keep counts more accurate.

2. Go Deeper with Other Data 

A great POS can help you analyze other helpful data and insights, such as average cover and table turnover (average number in one shift and average time it takes).

Understanding the minutiae of your restaurant operations will help you make smart business decisions with respect to staff scheduling, training, and goals or minimums for staff to hit.

3. Consider Relocating 

Rent is considered a major pain point for many operators across North America, especially given it typically comprises five to 10% of monthly sales. If yours is higher or property prices are rising in your neighborhood, you might consider looking for a less expensive place to operate.

You should be able to tolerate up to 4% of a rent increase. However, if you can’t, it may be a sign to reduce costs or move elsewhere.

4. Negotiate with Vendors 

Think those food, equipment, or supply costs are set in stone? Not necessarily.

Be proactive and set a calendar alert to remind you to touch base with your vendor representatives every six months or so to go over their costs. Can they offer a price reduction for early payment, high-volume orders, or your referrals to other businesses? There are always ways you can work with suppliers for the best price possible.

5. Reevaluate Your Menu 

Your menu may be costing you more than you think, especially if you aren’t regularly reviewing your food costs. 

Regularly review your menu to see what’s selling and what’s not. If higher priced items aren’t selling the way they should, consider replacing or removing them – especially if there’s a high cost to keeping those ingredients in stock. 

Many restaurateurs also keep a close eye on portion control to ensure guests are getting good value, but dishes aren’t cutting deeply into the profit margin.

6. Train and Treat Your Staff Well

Many restaurants suffer from high staff turnover. In fact, the average turnover rate U.S. and Canadian operators reported was 27% and 28% respectively. But instead of shrugging and saying, “that’s the restaurant business,” there are strategies to combat a high turnover rate. The cost of constantly training staff can take a huge chunk out of your bottom line by raising your labor costs.

Hire people who are a good fit for your restaurant, pay them a competitive wage, and acknowledge their hard work regularly. A happy staff member has the hours they are seeking, the professional growth and training they’re looking for, and an environment helps them thrive. By ensuring your employees are well taken care of they’ll in turn help increase sales, and give great customer service.

7. Offer Pay at the Table Technology 

Cash is increasingly becoming the least common way to pay. Millennials and Generation X want convenience, flexibility, and to earn points on their credit cards when they pay for their favorite dishes.

When you allow diners to pay via tap, swipe, and using their mobile wallet, you’re also cutting down on the risk of fraud, turning tables over more quickly, and making it easy for your servers to be tipped well.

8. Reduce No Shows

People who make reservations and don’t show up are a huge drain for many busy restaurants. You can avoid tying up a table for no one by:

• Using tactics like calling or texting each reservation a day before
• Requiring a deposit for every reservation
• Politely following up with no shows so they understand the impact

Remember what we said about restaurants not being a get rich quick scheme? Understanding your net profit margin and taking steps to increase your percentage takes time, effort, and constant vigilance. 

In order to increase your restaurant profit margin, you may need to make like a detective and uncover all the data points that give you the full picture of your costs and sales. And then dig even deeper – look for opportunities to uncover all the ways you can improve on what’s coming in and what’s going out!

This may not be the glamorous side of running a restaurant, but once you develop an eye for increasing revenue and decreasing costs, the process will become more automatic. You might even surpass that 11% restaurant profit margin standard!