Most restaurant profit margins fall between 3% and 6%, but that number can go up to 10% or more. Your average depends on the type of restaurant you run and the food you offer. Read on if you want to compute your current earnings. Plus, learn effective methods to protect and increase those gains.
Steps to Protect Restaurant Profit Margins
- Become familiar with your profit margin and the inner workings of your business.
- Determine your ideal profit margin based on your restaurant type.
- Reduce labor costs that are over 30%.
- Fine-tune your social media strategy.
- Improve inventory tracking methods.
- Implement upselling techniques.
What is Profit Margin?
Simply put, profit is what you pocket from your food business. It is the amount left after subtracting expenses from your gross revenue. You can look at either your gross profit margin or your net profit margin:
Gross Profit Margin: Calculate this by summing your revenue and subtracting the cost of goods sold. Divide the difference by the total sales to determine a good gross profit margin.
Net Profit Margin: Calculate this by considering not only the cost of goods sold but also operating expenditures, including payroll, taxes, maintenance, and rent. Subtract all expenses from your revenue, then divide by total sales.
How to compute profit margin?
Your profit margin fluctuates based on inventory trends, inflation, the economy, etc. Follow this formula to check your current numbers:
- Gross revenue – total expenses = profit
- Profit / gross revenue = profit margin
- Profit margin X 100 = profit margin percentage
What is the average profit margin percentage for restaurants?
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Restaurant type
Average profit margin percentage
Rationale
Full-service restaurants 3-5% A full-service experience includes table service and customer interactions, which generate higher labor costs. Your profit margin percentage also depends on menu item prices, restaurant size, and location. Fast-casual restaurants 6-9% Fast-food or quick-service restaurants involve self-service, like ordering at drive-throughs or walking up to a counter. With lower labor costs, pre-prepared food, and a faster turnover rate, fast-casual restaurants have a slightly higher average net profit margin percentage than full-service restaurants. Catering services 7-8% Catering businesses may have lower overhead costs than full-service restaurants. But the cost of goods is almost the same as a full-service restaurant due to few pre-prepared food items.
The average net profit margin percentage for restaurants is about 3-5%. But a wider scope shows that it can range from 0-15%. Many restaurant owners aim for a profit margin of 5% or higher.
How to Protect Profits?
1. Understand and monitor your metrics.
Education is everything. Establishing expectations and gaining knowledge on restaurant profits are your best weapons. Here’s what you need to know:
- Cost of goods sold (COGS): Know the total cost of inventory used in creating menu items to monitor how much you make per plate.
- Labor: Understand wages for salaried and hourly employees, payroll taxes, and employee benefits.
- Overhead: Consider all operating expenses, like supplies, marketing, repairs, rent, and utilities. Install restaurant management software to track costs.
2. Keep labor costs below 30%.
If your labor costs consume 30% of your outgoing cash, you are in trouble. Keep that number between 20% and 30% by:
- Reducing staff turnover: Staffing is expensive. The average restaurant loses almost P150,000 annually to staff turnover. It is best to hire intentionally and keep good employees happy with rewards and appreciation. Hold regular meetings to find out how your staff is feeling. Work with them to build loyalty.
- Reducing employee costs: Cut ways to cheat the clock-in system. You might need to change processes to ensure staff efficiency. Also, consider reducing your team and hiring on-call personnel for busier days.
3. Establish a social media strategy.
Many restaurants focus on gaining likes on social media. But that can be useless without a strategy to convert followers into customers. Some tips to remember:
- 1/3 of your posts should promote your restaurant and bar. The other 2/3 should engage by making followers laugh, think, or feel.
- Include email list sign-ups, digital coupons, reservation opportunities, and restaurant events in your promo posts.
4. Prevent employee theft.
Employee theft comes in various forms, including cash mismanagement, time-wasting, over-pouring, etc. Unfortunately, 75% of employees steal from the workplace at least once. Here are controls to prevent theft:
- Take a physical inventory at least once per week, separate from the POS inventory.
- Set a strict policy on “on the house” items for customers, friends, and family.
- Thoroughly check deliveries and compare invoices with the physical goods.
- Reward managers for preventing theft.
- Install cameras, especially in storage areas.
- Make it clear that there is a zero-tolerance policy for theft or unapproved handouts.
- Lock up alcohol at night.
- Limit and restrict access to storage rooms and refrigerators.
5. Watch your average check.
Even a well-known restaurant can incur diminished profits if the average check remains low. Use upselling methods that suit your brand and train your employees on them. Here are some creative ways to upsell:
- Suggest a dessert to-go if the customer is too full at the end of the meal.
- Train servers to vividly describe food and drinks.
- Let customers know which dishes are highly popular and which are running low.
- Run upselling competitions within your team.
How Can I Protect my Restaurant Profits?
Before making moves to boost your restaurant profits, protect the restaurant profits you are already making.
How to Increase Restaurant Profits?
Once you’ve established a plan to protect your restaurant profit margins on food and beverage, it’s time to increase your gains. Follow these suggestions:
- Upgrade restaurant technology to predict and optimize sales.
- Use smart scheduling to manage staff.
- Introduce a customer loyalty program.
- Build your online presence.
- Update your website.
- Adopt online ordering and delivery.
- Optimize your menu by keeping low-cost dishes that boost your net profit margin. Replace nonperforming menu items.
- Provide free Wi-Fi to encourage customers to come and stay longer.
- Offer happy hour.
- Use an appetizer and dessert cart so customers can see products.
- Launch new and exciting menu items regularly.
- Host events in your restaurant, including corporate affairs.
- Provide catering services for local events.
- Modify recipes to minimize food costs.
- Find out if you can get better deals from local farmers (bonus: customers love locally sourced food).
- Negotiate with your suppliers to get lower prices.
- Reduce food loss and waste by altering portion sizes and storage methods, educating staff, and using reusable items.
- Install motion light sensors and energy-efficient bulbs.
- Regularly clean and maintain equipment to minimize replacements and repairs.
- Turn off idle equipment during slow hours.
Hard work, patience, and innovation can help increase your restaurant profit margins. Crunch the numbers, identify areas for improvement, and take the necessary action to maximize your gains.
Want to get more orders? Attract more customers by planning your marketing strategy ahead with our free marketing plan guide.
Congratulations on your Growing Restaurant Business!
You may need to dig deep to find out where you can grow your profit margin, but it is possible. Imagine surpassing that 10% restaurant profit margin. Hopefully, these guidelines will help you improve your profit margin and enjoy the type of success you have worked so hard to accomplish.
