Your Guide to Understanding Restaurant Profits
In the restaurant industry, delicious food and restaurant ambiance are often seen as THE KEYS TO SUCCESS! In reality, success also comes from healthy profit, but maintaining an ideal margin is tricky. Restaurant owners have a long list of costs, and one of their biggest challenges is maintaining a clear understanding of all costs to achieve ideal profit margins.
Whether a restaurant is full-service, quick service, or a food truck, maintaining optimal profits is important. Doing this well means knowing the average restaurant profit margins and knowing the best strategies to keep profits where they need to be.
In this article, we will explain the ideal profit margins for each restaurant category. We also outline ways to increase low margins and offer advice on tracking profits to make needed adjustments and hit the best percentages.
What is a Restaurant Profit Margin?
A restaurant profit margin is a number that shows the percentage of profit a restaurant makes over any given period. Typically, it is used for annual figures, but it can also provide results seasonally, monthly, or as often as needed.
What Is the Average Profit Margin for a Restaurant?
In general, the percentage can be as low as 3% and as high as 10%. Below is a clearer understanding of percentages for specific restaurant categories – but before we dig in, it’s important to understand the difference between gross profit margin and net profit margin. You will want to analyze them both.
Gross Profit Margin
The gross profit margin is the money left over after paying the cost of goods sold (CoGS). In this case, the “goods” are food and drinks only. This percentage provides a basic understanding of business performance within a restaurant category, telling owners what items do well and where improvements are needed.
The gross profit margin gives a basic understanding of an owner’s business model and overall restaurant health. For a deeper understanding covering all aspects of their business, owners will need to look at the net profit margin.
Net Profit Margin
Net profit margin is a percentage determined through net income, which is the money left over after deducting all expenses and taxes. This includes food expenses and the cost of staff, rent, and maintenance. It’s every dime spent toward running and maintaining the restaurant.
Typical Profit Margins for Certain Restaurants
Full-service refers to the service you receive in a typical sit-down dinner. It can be a casual dinner or a 5-star, white-tablecloth affair. These restaurants typically have a kitchen, wait staff, possibly a hostess, and a wide range of menu items. These restaurants typically maintain a profit margin of 3 to 5%.
Fast Food and Fast Casual Restaurants
As the name implies, this category includes fast-food restaurants and any type of quick-service restaurant in which customers order from a counter, fill their drinks, and dispose of their trash. These restaurants have a profit margin of around 6 to 9% due to less labor, easier food preparation, and faster customer turnover.
Catering services can range from high-end to casual, and include the perks found in both full-service restaurants and fast-casual restaurants. Menu items can be tightly defined and food costs easily tabulated. Customers have the option of a wide range of foods they serve themselves, or the catering service hires low-cost hourly employees to serve the food to guests. And catering venues don’t require rent except when a kitchen is required for preparation – keeping the cost lower than locations that house both kitchen and dining space. These factors translate into lower costs for catering service businesses, resulting in a healthy profit margin of around 7 or 8%.
This business segment is similar to fast restaurants in that they keep labor and overhead to a minimum. Menus are often small, reducing food costs and the space needed for food inventory. Each meal is prepared and cooked on a smaller scale, helping prevent food waste. Although there is a cost for the truck, there is rarely a cost for rent. There is also no need for wait staff or table clean-up. People pick up their own food and dispose of the trash themselves. All these benefits give the average food truck a similar percentage profit range as a fast-casual restaurant: 6 to 9%.
Doing a Profit Margin Calculation for a Restaurant
The most revealing number will be your net profit margin. To calculate it, start with your gross revenue for any given period and subtract all of your expenses for that same time period. Then divide the number by your total revenue and multiply that number by 100. The resulting number is your percentage.
What is the Most Profitable Restaurant?
As you can tell above, fast-casual restaurants and food trucks provide the highest profits. That said, food orders can reach a higher dollar amount with full-service and catering businesses. And if the menu is priced correctly and demand is strong, any restaurant can be highly successful. Chains like Applebee’s and Olive Garden, and high Michelin-rated locations with long histories show just how successful full-service restaurants can be.
How a Metrics Calculator Helps
A metrics calculator is a powerful tool that improves the overall health of a restaurant. This tool helps shine a light on which restaurant areas are going well and where things need improvement. The calculator lets owners track:
- Gross profit margin
- Net Sales
- Net Profit and Losses
- Gross profit margin
- Operating Expenses
- Labor Costs
- Percent of Sales
How to Improve Restaurant Profit Margins
The higher the percentage, the more money the restaurant is making. Increasing the percentage means increasing the number of sales and decreasing overall expenses. There are many ways to improve both, ranging from adjusting food costs to employing new technology systems that boost efficiency for reduced labor costs.
To do the work effectively requires looking at three areas of the business: CoGS, labor costs, and overhead costs. In a standard restaurant scenario, revenue is allocated equally among each of the three areas: one-third of the revenue goes toward CoGS, one-third goes to labor, and one-third goes to overhead. But there are ways of increasing each individually to boost the overall percentage.
Wage Increases: A Surprising Way to Boost Profits
The goals of hiring wait staff are to provide excellent and prompt service. As it turns out, paying a higher hourly rate does just that. Increasing the hourly rate for your employees results in a wide range of positive changes in the background. Let’s take a look at them.
Higher Wages Make Workers More Productive
Employees may no longer need to have multiple low-paying jobs to make ends meet, giving them more rest, added energy, and a more positive outlook. The result is better overall service.
Increase Local Support
Customers notice the positive results for employees, which makes them want to support your business further. This, combined with better service, increases business to cover the added cost for wages.
Reduce Employee Turnover
Raising the wage also helps maintain quality employees rather than lose them to the competition. In the restaurant industry, the employee turnover rate is extremely high. Given the timing needed for training and the importance of good customer service to maintain repeat customers, raising the hourly employee rate helps you keep your employees and continually improve service. This translates into more business while letting owners focus on other elements of the business for even more growth.
Revisit Menu Pricing and Offerings
With an accurate accounting of CoGS, owners and managers can see which menu items sell best and pay the best returns. They can review low-performing or low-profit items and find ways to improve results by adding other ingredients or adjusting costs to increase volume while still maintaining an ideal profit margin.
Restaurant owners can also taper the menu down by removing low-performing items, focusing on profitable ones, and finding ways to support the demand like improving the beverage menu, offering complimentary sides, and offering other takes on popular dishes. This last initiative also opens the door to better pricing through your suppliers. The more burgers there are on a menu, the larger the volume of orders for buns. This can help lower the costs, resulting in less costly ingredients.
They can also shift to buying local ingredients. Buying locally often means buying wholesale from the farmers, reducing the cost of ingredients.
When evaluating the current menu matrix and menu pricing, the chief goal isn’t to lower food costs. High food costs can be a significant part of success if gross profit margins are healthy. At the same time, evaluating other factors like if a menu item is priced appropriately for the area, clientele, and competition all directly affects profit.
Customer Loyalty Programs and Other Ways to Incentivize Repeat Customers
Benefits like using a POS system to print coupons on receipts and providing deals to customers for specific order volumes or frequencies add to the customer experience and increase the potential of customers revisiting, increasing the volume of customers. Other benefits such as offering healthier meals and logging special orders by repeat customers for easier fulfillment show appreciation for the regular customer base and overall commitment to clientele.
Boost Online and Social Media Presence
The earlier a restaurant shows up in restaurant searches, the more customers will find it and the higher the chance they will order. Setting aside money for better placement online is worth it.
In addition to online placement, using social media to display special messages and provide glimpses of the ambiance and unique menu offerings encourages customers to share this information with friends and family, creating added recognition free of charge.
How Technology Hardware and Software Offer Powerful Advantages
Today’s POS hardware and software are designed to improve efficiency and service to lower overhead and increase your sales volume, but they don’t stop there. POS tools also offer financial reporting and operational reporting solutions for cleaner accounting and forecasting to gain a better understanding of gross and net costs. Here’s how:
Advanced Ordering Capabilities
Tablets and smartphones with intuitive interfaces provide easier and faster order placement, payment processing, and check splitting. More advanced ordering capabilities such as customer table-side ordering and online ordering also improve sales potential. All of these tools increase order turnover while also reducing order mishaps and improving customer service.
Improved Management of Staff
On the backend, managers can view employee performance, run sales reports, schedule staff, and view important sales data that shows what items are working and during what times of the week or year. All costs can be tabulated and tracked for more accurate reads on profit percentages.
When it comes to these benefits, scheduling staff is a big one. This is important for dining room staff as well as kitchen staff. Over scheduling significantly reduces your profits, and under schedule can negatively affect sales turnover and service, reducing customer retention. Today’s scheduling software makes it easy to adjust staff schedules for busier days or seasons and when sales are light, so you can hit the right balance of service and profit.
Improved Inventory Readings to Reduce Waste
Food waste is a big hit to profits. Thankfully, today’s systems make it easier to keep track of stock in real-time. They work by putting you and your kitchen staff in charge of all food stock readings, helping to reduce employee “freebies.”
When organizing stock, it helps to adopt a first-in / first-out method. This food inventory cost method encourages kitchen staff to use ingredients to maintain consistent freshness and reduce food waste. It also aids with profits. Some food items will experience higher food costs from vendors down the road, and when the pricing increases, you can adjust your menu pricing to account for the added cost and then use up the older stock at the lower price. When customers pay a higher price for the previously purchased ingredients, the gross profit margin, and the net profit margin increase.
Improved inventory readings also aid with improved customer service. When stock is low, wait staff can automatically inform customers at the time of order so they can choose an alternate option, improving overall service and keeping turnover timing short.
Today’s POS provides more accurate oversight in real-time, close reads on money movement, and improved stock readings, but it also reduces employee theft. When an employee gains a free meal here and there, pockets extra money, and steals food from storage, restaurants suffer from significant profit losses. A lot of hard work goes into understanding profits, and theft directly throws off the results.
Each of the above benefits makes POS systems a powerful and integral tool for understanding restaurant activities and your overall costs. As a provider of POS systems, BNG POS can supply today’s advanced ordering tools to help streamline and improve restaurant results and get profits where they need to be.
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