Almost every restaurant owner has dreamed of owning their own business. But once they go headfirst into the food industry, they realize it requires a lot of work. Important decisions need to be made every day, but, in the end, it all comes down to profitability.
In this guide, we will cover the average profit margins for restaurants in 2023, what this means for your business, and how you can increase your restaurant profit margins.
What is a restaurant profit margin?
A restaurant’s profit margin (also known as the net profit margin) is the metric that shows how much profit a restaurant makes after deducting all of its expenses. Understanding the difference between gross and net profit is essential in knowing how much revenue your business generates.
What is gross profit?
Gross profit is the difference from total sales and the cost of goods sold during a specific period. This metric doesn’t consider all restaurant operating expenses, including taxes, bills, product costs, delivery fees, etc.
To calculate gross profit, you first need to calculate the cost of goods sold (COGS) and subtract it from total revenue, as seen with this formula:
Gross Profit = Total Revenue – Cost of Goods Sold
What is net profit?
Net profit is the difference from gross revenue and all operating expenses in a specific period. This is the percentage of revenue remaining after accounting for both direct and indirect costs, such as administrative expenses, taxes, interest, depreciation, and other operating expenses. Net profit margin provides a more comprehensive view of a company’s overall profitability, as it considers all costs and expenses related to running the business.
To calculate your own net profit, add your total revenue to your gains, and subtract your expenses, as seen with this formula:
Net Profit = Total revenue + Gains – Expenses
How do you calculate a restaurant profit margin?
To calculate your restaurant’s profit margin, you must determine the revenue and expenses associated with running your business. Start by calculating the total revenue, the sum of all income generated from food, beverages, and other sales.
Next, calculate the Cost of Goods Sold (COGS), which includes the direct cost of producing the food and beverages sold, such as ingredients, packaging, and direct labor. With that, you should have this formula: Restaurant profit margin = (Revenue − Cost of goods sold)/Revenue.
To calculate your own profit margin, subtract your total revenue from your cost of goods sold and divide that by your revenue, as seen with this formula:
Restaurant profit margin = (Revenue – Cost of goods sold)/Revenue
What is the average restaurant profit margin?
A restaurant’s profit margin usually depends on the restaurant type and location. For example, restaurants in larger cities typically have lower profit margins than those in more urban areas.
Generally, a restaurant profit margin can range from 0% to 15%. However, the average profit margin for restaurants is usually between 3% and 5%.
5 facts about the restaurant costs
- Restaurant labor costs can account for up to 30% of a restaurant’s total revenue, making it one of its greatest expenses. (Source: National Restaurant Association)
- Food and beverage costs can account for up to 35% of the total revenue of a restaurant. (Source: National Restaurant Association)
- According to a survey by the National Restaurant Association, 56% of restaurant operators said that rising food costs were their biggest challenge in 2021. (Source: National Restaurant Association)
- The COVID-19 pandemic has significantly impacted restaurant profit margins, with many restaurants experiencing a decline in sales and revenue. (Source: Restaurant Business)
- Restaurant technology, such as online ordering and delivery platforms, can help increase restaurant profit margins by improving efficiency and reducing labor costs. (Source: QSR Magazine)
What is the average profit margin by restaurant type?
To evaluate the average profit margin by restaurant, we must understand the various types of food businesses, which can be grouped into 4 categories:
- Full-service restaurants – the full service restaurant model offers table service, has the largest restaurant size, and has higher labor costs than the other types. That’s why this restaurant model has an average profit margin of between 3% and 5%.
- Fast food restaurants – This model requires less labor and includes some level of self-service. The average profit margin for this restaurant model is roughly 6% and 9%.
- Food trucks – Similar to the case of fast food restaurants, the labor costs are lower than in full-service restaurants, as the team is reduced to kitchen staff. As a result, the average profit margin is around 6% to 9% for food trucks.
- Catering services – Although catering restaurants typically have kitchen staff, some businesses may also include waiting staff for special events, which may keep the average profit margin range between 7% and 8%.
How to improve restaurant profit margin? (19 actionable tips)
There are two things you can do to improve your restaurant profit margin if done right. You can either focus on increasing your sales or reducing costs. We’ve prepared a complete guide that’ll allow you to increase your net and gross profit margin effectively. First, you must understand and monitor the metrics influencing your cash flow. Of course you also need to monitor major expenses that affect your restaurant, which are:
The three restaurant expenses that influence your cash flow:
- Cost of Goods – the cost of ingredients, packaging, basic preparation costs.
- Labor – all of the employee wages, salaries, overtime, etc.
- Overhead expenses – costs associated with marketing, operating costs, credit card processing fees, repairs, etc.
Now that you’re familiar with these restaurant metrics, we can focus on creating strategies that can help you improve your restaurant profit margin.
11 tips for increasing sales
Tip 1: Add online ordering to your restaurant’s website
Focus on increasing sales volume by implementing an online ordering system to your restaurant website. Instead of selling your dishes on third-party portals, offer online ordering directly from your restaurant website to increase sales volume. Sign up with UpMenu and activate the Online Ordering System. Next, configure it and add the option to your website.
Tip 2: Build an online ordering app for your restaurant
Use a restaurant app builder to design your own branded mobile app. Upload your restaurant logo and app name, and select your layout and color scheme to make your app match your restaurant’s branding.
Tip 3: Offer tableside ordering
Implementing a tableside ordering option can significantly increase your restaurant’s sales and improve ordering convenience for clients. In UpMenu, set up table numbers and generate a QR code for each table to be printed. By doing so, your customers can order online directly from their table via the QR code.
Tip 4: Manage and optimize your menu
Analyze your menu regularly, check to see what’s selling and what isn’t, and implement changes in your menu. For example, consider lowering food costs by finding cheaper ingredients or offering smaller portions. To build a good menu, start by categorizing your menu items based on the profit they generate and their popularity.
Tip 5: Provide sales training on cross-selling and upselling for your servers
Another idea to increase your restaurant sales is to train your servers in cross-selling and upselling. Your wait staff are your restaurant’s secret weapon, and their role is not only limited to taking orders. They can encourage your customers to order more menu items. For example, they can sell drinks other than water, recommend dessert, and the list goes on.
Tip 6: Implement a loyalty program for your customers
A loyalty program is an excellent tool for increasing your restaurant profit margin and keeping customers tied to your business longer. Customers earn points and stamps, which they can exchange for extra drinks and your delicious dishes. In UpMenu, you can easily create a loyalty program for your customers.
Tip 7: Run promotions
To boost sales, consider running promotions in your restaurant. Using UpMenu, you can easily create discounts and promotions. For example, create a discount on a menu item or a client’s first order. You can limit the promotion availability to the mobile app or website, or create a unique coupon code and send it to your customers to encourage them to order more.
Tip 8: Manage your restaurant’s online presence
Nowadays, diners check online for restaurants before going there. That’s why it’s important to keep your website updated. Make sure to have your current menu uploaded and that it’s mobile-friendly. Additionally, you can share your mobile food ordering app with customers so that they can have your menu right at hand. Moreover, consider becoming active on social media and setting up a Google Business Profile for your restaurant.
Tip 9: Consider offering event space, rentals, and catering services
Do you have an extra room in your restaurant? If so, you can rent it for private events like business meetings, parties, etc. Additionally, consider offering catering services for companies or individuals seeking larger orders.
Tip 10: Increase your dining area
If you have spare space in your restaurant, consider adding more tables or seating. This can increase your restaurant profit margin while maintaining the same costs. However, before doing so, ensure customers won’t be too cramped. Tables cannot be too close to one another, so make sure to provide customers with privacy and convenience.
Tip 11: Improve your table occupancy rate
Increase your restaurant’s sales by improving your table occupancy rate. Table turnover refers to the time a customer spends at a table. Provide your employees with tools to manage table occupancy rates. Serving customers too slowly will make you serve fewer customers. On the other hand, if your service is too quick it can make the customer feel unwelcome or mistreated, so make sure to maintain a good balance.
7 tips for reducing costs
Tip 1: Improve your employee schedules
Plan your employees’ schedules effectively. For example, consider when you’re busy with food orders vs. when you have slower periods. In general, over-scheduling and under-scheduling affect your profit margin, and it’s essential to check the busiest times and days to schedule accordingly.
Tip 2: Reduce employee turnover
Look for ways to reduce your turnovers. For example, consider offering employees benefits and additional skill training or offering more flexible working hours.
Tip 3: Reduce food waste
Approximately one-third of restaurant revenue goes to the cost of goods sold, so reducing unnecessary food waste should be considered. In addition, make sure to keep an eye out for the expiration dates of products and properly store and protect them against spoilage.
Tip 4: Decrease restaurant utility bills
Invest in eco-friendly kitchen appliances and lighting to reduce energy consumption in the restaurant. Although these appliances might be a bit more expensive, they’ll help you lower utility bills in the long run.
Tip 5: Evaluate changing your location
According to Restaurant Real Estate Advisors, as a rule of thumb, the total occupancy cost shouldn’t exceed 6%-10% of a restaurant’s monthly gross sales. If your rental cost is higher or you know that there will be a rise in the rental cost in your area, you might need to consider relocating in order to reduce your costs.
Tip 6: Negotiate prices with vendors and suppliers
Food and equipment costs are not fixed; they might change over time. Once every few months, contact your vendors and suppliers and ask about getting a reduction. Negotiate prices on equipment and food to lower your restaurant costs and improve your restaurant profit margin.
Tip 7: Implement strategies to reduce no-shows
No-shows are a huge problem for restaurants. To reduce no-shows and the losses they bring, implement a reservation fee. By implementing this option, customers will be more willing to cancel in advance to avoid losing money. Another tactic you can use in your restaurant is calling or texting your customers to remind them about their reservations.
- A restaurant profit margin shows how much a restaurant makes after deducting all of the total expenses.
- The average profit margin depends on the restaurant model and location.
- Restaurant profit margin can range from 0% to 15%. However, the average profit margin for restaurants is usually between 3% and 5%.
- To increase a restaurant’s profit margin, you can either increase sales or reduce costs in your restaurant.
Frequently Asked Questions (FAQ)
Why are restaurant profit margins so low?
Restaurant profit margins are often low due to a combination of factors, which can include high operating costs and intense competition in the industry. Some of the main reasons include:
- High food costs: Restaurants must purchase raw ingredients, which can increase in price. Maintaining the quality and freshness of ingredients often leads to increased costs.
- Labor costs: Restaurants typically rely on a sizable workforce, including chefs, kitchen staff, servers, and managers. That means having to pay wages, benefits, and training.
- Rent and utilities: Restaurants usually require a busy location in order to attract customers, which often means higher rent expenses and utility costs for electricity, gas, and water.
- Seasonality and fluctuating demand: Many restaurants experience fluctuations in demand due to seasonality, weather, and changing consumer preferences.
- Competition: The restaurant industry is highly competitive, with many establishments competing for customers. To attract and retain customers, restaurants often have to invest in marketing, promotions, and continuous menu innovation.
- High overhead costs: Restaurants typically have numerous fixed costs, such as insurance, licenses, and taxes, which must be covered regardless of the revenue generated.
What type of restaurant has the highest profit margin?
Your restaurant type can heavily influence your profit margin. The fast-casual and quick-service restaurant (QSR) models tend to have the highest profit margins among different types of restaurants. This is due to several factors:
- Lower food costs: Fast-casual restaurants often have simpler menus with fewer ingredients and are a sustainable business model, which can result in lower food costs.
- Limited service: These restaurants generally provide limited table service, with customers ordering at a counter and then taking the food to go or eating at a self-service dining area.
- Faster turnover: Fast-casual restaurants are designed for quick service, meaning customers typically spend less time dining there.
What is the average profit margin for a McDonald's?
As of September 2021, McDonald’s Corporation’s net profit margin was around 25-28%. However, this figure can change over time and may be different from the company’s current financial situation. This information can be found in McDonald’s annual reports, which are available on their investor relations website (https://investor.mcdonalds.com).
Do most restaurants lose money?
The restaurant industry is known for being highly competitive and having relatively low profit margins. As a result, many restaurants can struggle financially, and some eventually close their doors due to various challenges, such as high operating costs, intense competition, changing consumer preferences, or ineffective management.
What is a good profit margin for a restaurant
Remember that the profit margin for a restaurant can vary depending on the type of restaurant and the specific market conditions. This figure can vary based on the type of restaurant, as fine dining establishments tend to have lower profit margins than fast-casual or quick-service restaurants.
Why is knowing your restaurant profit margin important?
Knowing your restaurant profit margin is essential for several reasons, for instance, it provides valuable insights into your restaurant’s financial health and performance. Understanding margins helps in the following:
- Evaluating profit: Profit margin is a key financial metric that helps assess the overall profitability of your restaurant.
- Monitoring performance: Regularly tracking profit margins allows you to identify trends and evaluate the effectiveness of your business strategies, menu pricing, and cost control measures.
- Identifying expenditure inefficiencies: Analyzing profit margins can help you pinpoint areas where costs may be too high or where revenue is underperforming.
- Planning for growth: Knowing your restaurant’s profit margin allows you to make informed decisions about expansion, such as opening new locations, investing in equipment, or hiring additional staff and for finding ways to increase profit margins.
How do I know if I’m spending too much on goods and raw materials?
If you’re looking how to calculate it, use the following formula: Food Cost Percentage = (Total Food Costs / Total Food Sales) x 100. Then, compare your food cost percentage to industry benchmarks, which range between 28% and 35%, although this can vary depending on the type of restaurant and menu items.
Should I hire a professional to monitor the metrics of my restaurant business?
Hiring a professional to help track and monitor your restaurant’s metrics can be costly. So instead, opt for UpMenu’s reporting feature, which allows you to track sales and popular menu items, and monitor your restaurant’s performance over a selected period.
How will I know if I’m striking a good balance with labor costs and employee workload?
Calculate labor cost percentage: Determine your labor cost percentage by dividing your total labor costs (including wages, salaries, benefits, and taxes) by your total sales. Then, multiply the result by 100 to get the percentage. Labor Cost Percentage = (Total Labor Costs / Total Sales) x 100
Next, compare your results to industry benchmarks ranging from 20% to 35%. This can vary depending on factors such as the type of restaurant, location, and service model.
What are the big three restaurant expenses?
The big three restaurant expenses that represent the largest portions of a restaurant’s operating costs, are:
- Food costs: This includes raw materials, ingredients, and other items directly involved in producing the dishes and beverages sold at the restaurant.
- Labor costs: All expenses related to hiring, training, compensating, and managing restaurant staff, including wages, salaries, benefits, payroll taxes, and insurance.
- Rent and occupancy costs: This includes expenses associated with leasing or owning the restaurant’s physical space, property taxes, insurance, and maintenance.
How much profit does a restaurant make?
A restaurant’s profit can vary significantly depending on several factors, such as location, business model, target market, quality of food and service, management, and competition. Profit margins in the restaurant industry are generally considered relatively low, with net profit margins ranging between 5% and 15%.