How To Increase Your Pizza Profit Margin
The industry standard for pizza businesses is a 15% profit margin. With 1 million in annual sales, you can expect to earn $150K from pre-tax profits!
One of America’s favorite fast foods is pizza. The pizza restaurant industry is a multi-billion-dollar industry. According to the trade publication PMQ Pizza Magazine, $46.34 billion (about $140 per person in the US) worth of pizza was sold in 2019. And that figure only represents pizza consumption in 2019 alone! If you are interested in learning more about the real economics of the pizza business, you have come to the perfect place. How much money can a pizza business, whether it is a franchise or an independent, make in a year? How does the revenue generated in the pizza marketplace differ from one country to the next? What is the maximum profit margin that may be achieved in the pizza industry — and what factors influence this figure in the pizza business?
Rumor has it that in the US, the most successful independent pizzerias focused on dine-in hit $2m, while franchised pizza deliveries in the US can reach as high as $3m in annual sales. This is the kind of achievement that will get you on stage during a big franchise gathering!
Pizza Profit Margin: How Much Does a Pizza Business Make?
The actual profit margin will depend on lots of factors. But according to different financial models, reaching 15% store-level earnings before interest, taxes, depreciation, and amortization (EBITDA) is an attainable goal for a moderately successful pizza store. A profit margin of this size is considered the industry standard.
This means that with around 1m in annual sales, you can expect to make $150K in pre-tax profit. Also, the word “store-level” means that if you operate a few units, you’ll probably need at least a small office to manage them. Its costs will likely bite off some of the profits generated by your stores.
Many factors can affect the profitability of a pizza business. The most common percentage is 15% and it’s not uncommon to see lower percentages, but sometimes high-profit margins could be as much as 20-25%. To achieve such high levels in profits requires mastery of your foodservice industry and good management skills.
Your Profit Margin Is Defined By Food And Labor Costs
There are so many different factors that could make a person’s pizza business work. To understand what makes some people lose money in the pizza business and others generate a steady income, let’s take a look at key areas of expenditure: rent and utilities, food (unit) cost, labor cost, marketing, and royalties.
- Rent and utilities, which is typically 5-10% of your costs.
- Food (Unit) Cost, on average is 20–30% of your total costs.
- Labor Cost is usually 20-40% of your costs and includes all the related taxes and social benefits.
- Marketing, with recommended costs of 3-7%.
- Royalties, which averages 3-7% to your franchiser if your pizza business is a franchised unit.
Labor And Food Costs Combination: No More Than 60%
Labor and food costs work in tandem — ideally, together they should not go higher than 60%, and the whole combination of rent + LC + FC should not exceed 70%. Therefore, if you lease a less expensive space, you will have more room for LC and FC.
Typically, food cost is less expensive than labor, so you might be looking at an FC-LC ratio of 20-40%. How your pizza business is positioned also has a significant impact on your profit and loss. For example, if you aim for a better quality of ingredients, food costs will rise — and you will have to balance that either with higher prices or reduced labor costs.
How you manage your store is as important as a well-thought-out business model. Labor costs can grow beyond reasonable levels if you do not schedule your workforce properly or if you train and motivate your team poorly. Bad deals with suppliers, food waste, and improper stock management can easily increase food cost.
Sales Must Be Made, Followed by Profits
If you have a successful business concept, it is entirely conceivable to generate a million dollars in sales per year while making no profit. However, the inverse is also true: with effective management, you may expand your pizza business’s profit margin to 20% or even more.
Many newcomers to the foodservice industry have a difficult time recognizing that sales are the most important factor in achieving profitability.
When sales are strong, you may lower your labor costs and make greater use of your fixed expenses, such as rent, utilities, and the general manager’s compensation, by increasing productivity. When sales are too low, it will be difficult to achieve profitability – even if you pay close attention to labor and food costs.
So, first, you must focus on increasing sales over profitability. After that, once you have reached a certain level of sales, you can begin thinking about optimization and profit margins.
For a high-profit margin in your pizza concept, you should also consider the following.
Build Your Business Backwards
Much as solving a maze puzzle by starting at the end is easier than starting at the beginning, start at the end of a business rather than the beginning. Always start with the amount of money that you want to make, and then move back to fixed costs, variable costs, and sales numbers. By knowing the amount of profit you want, you can determine the amount of sales that you need. You’ll then be able to tailor your menu to the food cost percentage that you need, not the other way around. That way, you know how much you can spend in labor dollars before you even open your doors.
Location, Location, Location
The old cliché rings very true when trying to engineer profit. Having enough potential customers (customer base) available, having a need and want for your concept in the community, and having low fixed costs are all part of the recipe for profit. A small Midwestern town of 20,000 people can have a higher profit potential than trying to shoehorn another pizzeria into New York or San Francisco, even though there are millions of potential customers.
Find Your Unique Way!
There are times you just need to do things the way that you want and don’t care what anyone thinks. Do it your way. Choose to lead rather than follow. Everyone may be certain that you’ll soon be going out of business because of the way that you do things. They may be telling you this for many years because you’ll continue to thrive if you do things right but in your own unique way.
BNG POS (Point of Sale) offers the latest software and hardware designed specifically for profitable and efficient service in the restaurant industry. To learn how we can boost sales and profits of your specific pizzeria, contact us here.