Most people who decide to open a restaurant are doing it because it is their life’s dream to cook for others, and what a wonderful dream that is! But let’s be honest: it’s not a charity, and you would definitely like to make a profit sooner or later –– though in the restaurant industry, that rarely happens right off the bat.
So what is the average net profit for a restaurant? And how soon can you expect to start making some money?
Take a look below to find out all you need to know.
How long does it take to start making a profit off your restaurant?
First off, just to be clear, we need to get this out of the way: there is no real guarantee any restaurant will be successful. There are a hundred different reasons that something could go wrong, and most of them happen within the first year or so. This is because running a restaurant is a gigantic undertaking, regardless of whether it’s a large or a small one.
The first year of running a restaurant is when you learn what works and what doesn’t, and you often learn the hard way. Flaky staff, equipment breaking down, customers stealing your cutlery, and countless other potential unexpected costs –– all these are more are reasons why virtually no restaurant will make a profit from the get go. You might have to adjust your concept a little to suit your clientele better. You might find yourself understaffed one day and overstaffed the next. It’s a dangerous world out there! Granted, having a good business plan will help you avoid some of the bigger pitfalls. But there is no way to predict everything, so get ready to be patient and turn every little failure into a learning experience.
And once you’ve survived the first year, great! You’re not quite out of the woods yet, though. Data suggests most restaurants start making a real profit within the first three to even five years. And when you do, your investors will definitely be knocking on your door, but don’t worry –– average restaurant margins should be more than enough to cover them.
What is a profit margin?
Just to be clear, profit is not the money you make, say $10 for a plate of poutine. No, true profit is the money that’s left over after subtracting every single one of the costs you paid to get that plate of poutine to your customer. This includes not only the price of the ingredients themselves –– all that deducting the cost of the ingredients from the cost of the dish will really give you is your restaurant gross gross profit percentage. And what matters at the end of the day is the NET profit.
What’s that, you ask? Well, it is the ingredients, but it is also so much more. The net profit margin takes into account the delivery cost of those ingredients to your restaurant, the wages of the waitress that brought the plate to said customer, the electricity keeping the lights on and the fridges running, etcetera, etcetera, etcetera. Did you deliver the dish to your customer’s home or office? There’s the money you spent on gas and paying your driver. Did your customer pay by credit card? The company likely takes a commission. Ten dollars is never really ten dollars.
As you can see, though restaurants typically have but one source of income, there are virtually infinite expenses that contribute to what your true profit margin ends up being.
Typical restaurant profit margins
There are quite a few people out there who seem to think that owning a restaurant will make you rich –– and even famous –– but in most cases that is far from true, so if it’s riches you seek, you might want to consider a different line of business. Running a restaurant means devoting yourself to quality and your customers every day for years. Add to that unending preparation and planning, dealing with sometimes unfavorable online reviews…running a restaurant is far from the glamorous celebrity lifestyle.
In fact, research shows that the typical so-called FSRs, or full-service restaurants’ profit margin typically oscillates somewhere between 3% and 5%. Profit margins go up some when we’re talking about QSRs, or quick service/fast food restaurants. This is because the typical fast food restaurant typically offers lower-quality dishes prepared from deep frozen or otherwise pre-prepared ingredients and needs less staff to run relatively smoothly. Food trucks also tend to make somewhere around the same amount of money as fast food restaurants, mainly due to a lack of rent costs and the ability to participate in various festivals and other outdoor events. Catering businesses vary more widely, with the high-end ones being able to make a profit of up to 15%, mainly thanks to the ability to prepare many batches of the same dishes in advance. On average, however, that number is closer to 7% or 8%.
So that’s it –– those are the real numbers. As you can see, running a restaurant is unlikely to make you a millionaire. But if you make good food people come back again and again for, you should eventually be able to live off your restaurant quite comfortably.
How to increase your restaurant’s profit margin
2020 has been a difficult year for everyone, and restaurateurs have been facing some especially hard decisions and choices. If your restaurant is underperforming, you may be asking yourself what you can do to increase your profit margins. Once again, there is no one-size-fits-all solution, but there are definitely a few things you could consider doing.
Increasing profits without causing a noticeable decrease in the quality of your dishes or service is a fine line you should tread gently. Cut back on too many costs and you may soon find yourself losing customers disappointed with worse food or slower service. That’s why, instead of cutting the costs of things you already have, consider first trying to introduce new money-making ideas into your business.
If you don’t deliver, 2020 is as good a year as any to start. Delivery has been popular for years, but this particular year has made it an absolute necessity for many people. Not to mention how nice getting a warm plate of food delivered to the door will make your miserable, housebound customers feel…they’ll definitely be back.
Create a lunch menu
Lunch portions are expected to be smaller than regular dinner ones, and lunches themselves are typically lighter, meaning you won’t have to invest a lot of time or money preparing cuts of beef. But perhaps the best part of having a lunch menu is that there are just a few options on it, ones you can prepare in bulk, greatly reducing the time needed to prepare each lunch, and buying in bulk is just cheaper!
Suddenly halving your portions will turn your customers right off, and some of them may never set foot in your restaurant again if they feel they’ve been ripped off. But that doesn’t mean you shouldn’t observe to gauge which dishes tend to leave leftovers, and reduce the portion of those dishes by, say, 10%. That may not seem like a lot, but it adds up.
And don’t stop there. Make note of every foodstuff you are forced to throw out at the end of the week and then optimize your menu or recipes so that you can utilize those ingredients rather than dispose of them. Alternately, you could consider giving customers a large discount during the last hour you are open every day, and then just sit back and watch that food disappear! Making 50% off of something you would have ended up throwing out anyway is definitely better than making 0%!
Restaurants profit margins are tricky and sometimes finicky to manage. Hopefully this article will help you manage your own expectations and help you maximize yours.