Running a restaurant can be both rewarding and challenging. One of the biggest challenges restaurant owners face is increasing their profit margin. Boosting profit margins is not only about cutting costs but also involves making strategic business decisions. This article will share practical tips for improving your restaurant’s profit margin.
For instance, take the case of “Joe’s Pizza,” a small pizzeria located downtown. Joe struggled to keep his business drifting due to rising food costs and low sales. To turn things around, he decided to implement some changes. Joe increased his pizzas’ prices slightly but added some new items to the menu. Including salads and sandwiches to attract more customers. He also negotiated with his suppliers to get better ingredient deals and started monitoring his inventory closely to reduce waste.
These changes led to higher sales, reduced costs, and increased profit margins. The average restaurant profit margin is around 3-5%. By implementing these strategies, you, too, can enhance your restaurant’s profit margins and thrive in the competitive food industry. So, let’s get started!
What do you mean by average restaurant profit margin?
The restaurant industry earns a 3 to 5 percent profit margin, with some businesses falling between 0 and 15 percent. Previously, profit margins were higher at 15-20 percent but have steadily declined.
To analyze a restaurant’s profit margins, it’s essential to distinguish between gross profit margins and net profit margins. The gross profit margin shows the restaurant’s efficiency. In comparison, the net profit margin indicates the business’s profitability.
What is the gross profit margin?
Deducting the cost of goods sold (CoGS) lets you use the gross profit margin to measure your restaurant’s efficiency. This calculation is crucial in determining the business’s profitability.
What is the net profit margin?
Calculating your restaurant’s net profit margin is crucial in determining its success and earnings. To do this, you’ll need to add up all your expenses, such as rent/mortgage, payroll, utilities, taxes, and goods, and then subtract them from your gross profit. This will give you a clear view of how profitable your restaurant is.
What are average profit margins by restaurant type?
Average restaurant profit margins and the food service industry vary among virtual, full-service, fast-casual, and food trucks. While the ranges of profit margins may be similar, a few percentage variations exist. Therefore, entrepreneurs must consider these factors while deciding on the type of restaurant they plan to open.
What are virtual restaurants?
Virtual restaurants, called cloud kitchens or ghost kitchens, are gaining popularity due to their lower overhead costs, staff requirements, and startup expenses. They can process high volumes of orders, despite being a new concept in the industry. While hard data is scarce, a well-managed and strategically designed virtual kitchen can achieve high profit margins due to lower overhead rates and labor costs.
What are full-service restaurants?
Full-service restaurants have the narrowest profit margins, as labor costs are higher due to the need for more specialized training and a more involved customer experience. The cost of ingredients and rent (depending on the location) tends to be higher. As a result, the average profit margins for this type of restaurant fall within the range of 3-5%.
What are fast-casual restaurants?
Fast-casual restaurants, also known as fast food or quick-service restaurants, tend to have higher profit margins than full-service establishments. This is due to lower labor costs, cheaper ingredients, and quicker table turnover rates. On average, fast-casual restaurants have 6-9% profit margins.
How to enhance your average restaurant profit margin?
To improve your average restaurant’s profit margin, it’s essential to consider all the factors that affect it, such as the costs of goods, labor, and overhead. Think of your restaurant as a machine, with each component serving as a cog or piece contributing to the output – the profit margin. You must adjust the cogs and parts to improve the outcome to enhance efficiency.
Understand and monitor your metrics
You must review key performance indicators (KPIs) to manage your business. This includes metrics from various categories: sales, profitability, customer experience, and marketing. Some KPIs to monitor are cash flow, labor costs, and online customer reviews. By keeping a close eye on such metrics, you can understand your restaurant’s performance and identify areas for improvement.
Once you have identified the key performance indicators for your restaurant, it’s crucial to analyze how they impact your profits. For instance, negative online reviews may be driving away new and returning customers. At the same time, low social media engagement for your virtual kitchen could reduce traffic.
Know your cost of goods
The cost of goods sold is an essential metric that reflects the expense of producing menu items. For restaurants, ingredient and food costs are among the most significant expenses. Therefore, monitoring CoGS is crucial. It’s also important to consider portion sizes and menu prices when analyzing CoGS. Are there opportunities to modify them to improve profitability while ensuring customer satisfaction?
Managing inventory can help control the cost of goods sold by minimizing food waste and preventing over-ordering. While this can be done manually, restaurant technology such as boons.io simplifies and automates the inventory and ordering process.
Understand labor costs
Labor costs will vary based on the type of restaurant. Food trucks and virtual kitchens need fewer team members and have lower labor costs. On the other hand, full-service restaurants have larger teams that include kitchen staff, servers, bartenders, and hosts. Quick service restaurants may have fewer employees than full-service establishments, but they often experience high turnover rates, leading to higher labor costs.
Using software to track hours and schedule shifts is an effective way to manage labor costs. Monitor clock-ins to ensure that staff members are not coming in too early or late. Be mindful of overstaffing during slower periods. If you cannot afford to increase wages, consider offering additional benefits such as discounts, days off, or team outings to boost employee morale.
Know your overhead
Knowing what factors contribute to your restaurant’s overhead costs is essential. These include rent, salaries, advertising, insurance, taxes, licenses, and utilities – essentially any cost unrelated to labor or materials. To calculate the overhead rate as a percentage of sales, add up all of these expenses within the period you are analyzing and divide by total monthly sales. To express this figure as a percentage, multiply the total by 100.
Simply put, reducing your overhead costs will lead to higher profits. Analyzing your overhead rate enables you to create a plan for lowering these expenses.
How to increase your restaurant's profit margin?
Many factors impact your restaurant’s profit margin, not just the number of orders you fill. Your overhead rate can affect profitability, even during a busy lunch rush.
The influence of different factors on a restaurant’s profit margin varies according to the type of restaurant. Virtual kitchens rely on their online and social media presence since they don’t have a physical storefront. In contrast, full-service and fine dining establishments need skilled employees to upsell and increase the average order total.
Invest in restaurant technology
Investing in technology can be valuable for understanding your restaurant’s data and profit margins. You can start with a point-of-sale system (POS) and a primary kitchen management platform, but there’s more! Modern technology can give you real-time data and detailed reports, saving time and providing valuable insights. Without it, getting information can be a hassle.
Have a great website
A website that is simple to navigate is vital to attract more customers and get more orders. You want to ensure your menu is easy to find, read, and always up-to-date. And, of course, you want your website to look fantastic and make people want to place an order with you. Did you know 77% of people search for restaurants online before visiting them? That’s why it’s crucial to highlight any dietary restrictions you cater to and showcase your specials and happy hour deals.
Make sure you have an online ordering system for restaurant
If you’re seeking a simple method to let your customers order takeout from your restaurant, adding online ordering to your website is a great option! It’s much better than relying only on third-party platforms like Uber Eats or GrubHub, which can reduce your profits per order. By having your online ordering system, you’ll make it super convenient for your customers and boost your earnings per order.
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Invest in PR and social media
Hey there! Just having a website isn’t going to cut it these days. If you want your name out there, hop on social media. Platforms like Snapchat and Instagram are perfect for reaching a younger crowd, while Facebook tends to be more popular with older folks. The key is to keep up with regular posts on all your accounts to boost your visibility.
You have a lot on your plate if you’re running a restaurant. While you’re juggling everything, it might be tricky to keep up with social media and PR. Hiring someone to handle your restaurant’s online presence could make a massive difference if you can afford it.
Offer customer loyalty
Did you know that loyalty programs are a great way to boost restaurant support? It’s true! They can even contribute up to 20 percent of a restaurant’s profits, according to Invesp. If you’re considering starting a loyalty program, you can keep it simple by offering punch cards or email marketing promotions. Or, you can get fancy with custom apps that track rewards and points for your customers. Either way, it’s worth considering!
Hire and train good employees
Due to the pandemic, labor shortages in the restaurant industry have made finding great, long-term employees challenging. In full-service and high-end restaurants, well-trained servers can increase profits by upselling food and beverage items, resulting in higher average order totals. Encouraging the purchase of high-profit margin items such as specialty and alcoholic drinks and appetizers can quickly add up. Experienced servers and hostesses can also serve more guests and turn tables over faster.
What is the importance of restaurant profit margin?
Operating a profitable restaurant is tough, and restaurateurs face many challenges. Costs of goods are higher due to inflation, finding and training great employees can be difficult, and profit margins are declining. Paying attention to labor costs, cost of goods, and the total overhead rate can help owners take control of their businesses. Restaurants’ tech, website, social media, and employees can be improved. Being proactive about everything that affects revenue can boost profit margins from 3 percent to 15 percent or more.
If you’re looking to boost your restaurant’s profits, we have some strategies for you to try out. One effective method is to optimize your menu so it’s more appealing to customers. Another is to focus on providing exceptional customer service that satisfies diners.
And, if you’re looking to take things to the next level, consider implementing technology-based tools like online ordering systems for restaurants or loyalty programs. These simple tactics can do wonders for your business and help improve the average restaurant’s profit margin. So, give them a try!