Restaurant Profit Margin: When to Worry & What to Do
We don’t need to tell you that becoming a restaurant owner isn’t a get rich quick scheme – if you spend any time looking at your restaurant profit margins, you already know that.
In order to thrive as an entrepreneur in the restaurant industry, you need extraordinary talent and business knowledge, not to mention copious amounts of hard work and talent that extend beyond cooking and hospitality.
And even then, success is not guaranteed.
The industry is susceptible to a ton of variables beyond an individual restaurateur’s control, including the current state of the economy, food trends, construction in your area, fluctuating food and supply costs, labor shortages, rent increases… the list goes on.
One unit of measurement that both tells the story of your restaurant’s financial success and offers insights into where you can improve are your profit margins.
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
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 arehelpful ways of diagnosing your restaurant health – and in flagging any issues you need to address.
Current State of Restaurant Profit Margins
According to the Corporate Finance Institute, a 10% profit margin is considered average, a 20% profit margin is good, and a 5% profit margin is low. Of course, these figures vary widely by industry.
So, what can you expect for the restaurant industry?
FSRs tend to operate closer to the bone than larger companies, so a slight dip in net profit margin can have a big impact. In fact, it can often mean the difference between continuing in business for another year – or shuttering forever.
Why Diving into Profit Margin Is Important
They say knowledge is power. Having knowledge of your restaurant numbers, including 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.
The State of Restaurants Reports found that the majority of restaurateurs spend two to four hours each week on bookkeeping. Ideally, you should be spending some of that time calculating and considering your net profit margin.
Ignoring these numbers won’t do you any good, so take the time to dive into them. 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.
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.
Are increasing sales ever a bad thing? Didn’t think so.
Here are some areas to look at that can help skyrocket your sales numbers.
1) Implement Online Ordering
According to the State of Restaurants Report, “one tech innovation that restaurateurs can’t stop raving about is online ordering. Restaurants that have implemented online ordering have seen an impressive 11 to 20% increase in sales, with the majority seeing an increase of 16% or more.” With most restaurant owners seeing such a lift in sales from adding online ordering, it’s worth looking into for your business!
2) Run Promotions
Every restaurant has ebbs and flows, especially at the start. The key is to find the pattern and run promotions to pump up business when you need it most. Consider kids, happy hour, two-for-one deals, and other specials. Turning your typically slow times into busier times with special promotions is a great way to boost your sales during slower 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 Renting Out Space for Private Events
Does your business have the capacity to take more volume by catering events? Then this is a great way to add a completely new revenue stream to your business!
To get started, talk to local businesses or associations that meet regularly in your community and offer introductory specials of your catering services. If you have a private room or area, think about offering space to groups looking for a meeting space. Charge a flat rate or ask for a minimum order limit for each person.
Trying to reduce your costs is never a bad idea, whether you’re inspired to do so by looking at your restaurant profit margins or not.
Here are some things you can try to reduce your costs.
1) Reduce Your Inventory Waste
The TouchBistro annual report found that 58% of restaurateurs struggle to manage inventory either regularly or occasionally, and most end up ordering too much.
This mistake naturally happens once or twice, but it’s costly every time. Implement some inventory best practices – like scheduling your priorities for counts, having a select inventory team, and using restaurant technology to keep counts more accurate – to save costs on mismanaged inventory costs.
2) Go Deeper with Other Data
A POS will also help you analyze other helpful data points, 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 typically comprises five to 10% of monthly sales. If yours is higher or property prices are rising in your neighborhood, you might think about looking for a less expensive place to operate.
You should be able to tolerate up to 4% of a rent increase; if you can’t, it’s a sign that it might be time to reduce costs or move elsewhere.
4) Negotiate with Vendors
Think those food, equipment, or supply costs are set in stone? Not necessarily.
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) Manage 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. Instead of shrugging and saying, “that’s the restaurant business,” you can work to prevent this. 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 kind of operation, pay them well, and acknowledge their hard work regularly. A happy staff member has the hours they need, the appreciation they like, and the atmosphere that helps them thrive. This is also a tactic to help increase sales, as a satisfied server gives 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.
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!
Dana is the former Content Marketing Manager at TouchBistro, sharing tips for and stories of restaurateurs turning their passion into success. She loves homemade hot sauce, deep fried pickles and finding excuses to consume real maple syrup.