This post will reveal the average profit margins in the restaurant business.
I spent 10+ hours studying the ins-and-outs of the restaurant business and collecting data so I could get the information to you accurately.
So if you want to compare your performance to the industry standard and find ways to improve your profits, this guide is for you.
Oh, and I'm not going to waste your time, I’ll get straight into what you need to know.
Let's dive in.
Restaurant Profit Margin Benchmarks
The average profit margins in the restaurant business are:
- 65% gross profit margin
- 30% contribution margin
- 5% net profit margin
These margins are tight. That's why it's vital that restaurant owners spend time working on their business to create a sustainable business model and efficient operations.
In terms of the cost breakdown, the average restaurant business spends:
- 35% of revenue on cost of goods sold (e.g. ingredients)
- 35% of revenue on indirect expenses, which is mostly labor costs
- 25% of revenue on overheads like rent and utilities
That means for every $1 in revenue the average restaurant business pays 35 cents on cost of goods sold, 35 cents on labor expenses, 25 cents on overhead, and earns 5 cents in net profit.
But it is possible to do better in the restaurant business. Why settle for average margins if great margins are possible?
Here’s the net profit margins that are attainable in the restaurant business:
- Great: 20% net profit margins
- Good: 10% net profit margins
- Average: 5% net profit margins
- Bad: <2% net profit margins
Remember, these figures are not one-size-fits-all. They are benchmarks for the average restaurant business.
A restaurant business focused on a profitable niche can have net profit margins as high as 30%, but revenue might be fairly limited. However a large restaurant business focused on a mass market offering can make good money on margins as low as 5%.
It all depends.
Profit margins are driven by a range of external factors like your market and competition, and internal factors like your positioning and operating efficiency.
You need to understand your particular market, be clear on what’s possible, and then work on your business and operations constantly to get the best results.
If you are happy with your profit margins compared to these benchmarks, congratulations. You are either in a good market, you’re running an efficient operation, or both.
If not, you’re also in luck.
Because you might have the opportunity to increase your profit margins by making some improvements to your business and operations.
Let’s look at how.
How to Improve Restaurant Profit Margins
There are five ways to improve restaurant profit margins:
- Increase prices
- Focus on profitable business
- Reduce direct costs
- Reduce indirect expenses
- Lower overheads
I would suggest focusing on them in that order too.
You’ll find more opportunities to move the needle by focusing on your prices, profitable business and direct costs than by fretting over indirect costs and overheads.
My popular (and free!) newsletter can help you with this.
Every week I will send you a quick and high-value idea to grow your revenue, increase profits and improve operations. Each idea includes simple steps to put it into action.
It’s like outsourcing your business improvement to me. Let me remind you to take the simple actions that lead to better results. The ones you often forget to do.
Here’s how you can increase the profits of your restaurant business:
1. Increase prices
Your options are:
- Increase prices for all menu items, or
- Increase prices for the select menu items
The beauty of price increases is that they fall straight to the bottom line.
Your business does not take on any additional expense when you simply change your prices. That’s because changing the numbers on your quotes costs you nothing.
If you increase prices by 10% for a $500,000 business, you will make an extra $50,000 in revenue AND profit. That’s why price increases rank as the best opportunity.
If you decide to do it, you can start doing it immediately too.
Even better again, if you increase prices you can turn some low profit or unprofitable menu items into profitable items.
A win for your overall profit margin.
2. Focus on profitable business
Take a look at your business and answer two sets of questions:
- Which customers are the most profitable? Which are the least profitable?
- Which menu items are the most profitable? Which are the least profitable?
Now that you have a list of customers and menu items by profitability, you can:
- Focus on selling to more profitable customer types
- Find ways to discourage less profitable customers from making reservations
- Focus on selling your more profitable menu items (or upsell higher margin menu items)
- Stop offering less profitable menu items
If you can find a way to make improvements across these four areas, you will have a more profitable business overall, and it will be less work. That’s because you will have removed menu items that take a lot of effort to serve, but deliver little in profit to you.
Shifting your focus to increase the amount of revenue you generate from more profitable customers and menu items, while reducing the amount of work on your less profitable ones, is a big win for your profit margins.
3. Reduce direct costs
There are a number of ways to reduce direct costs.
They boil down to either reducing the volume of inputs you use (e.g. ingredients or labor hours) or finding ways to lower the price you pay for those inputs.
Ask yourself these questions:
- Are you paying for labor hours you are not using?
- Is there a way to increase labor productivity, or use contractors instead?
- Can you improve processes in ways that will save time?
- Can you deploy equipment to speed up manual tasks?
- Are your workers being wasteful with materials?
- Will suppliers offer volume discounts or renegotiate terms?
Depending on your answers, take action accordingly.
You should be constantly keeping track of all your inputs, making sure they don’t grow out of hand, there’s no wastage and that you’re getting the best deal from suppliers.
Comparing your profit margins to industry averages is a valuable exercise. By baselining your performance you can see if there is room for improvement in your business.
The fact that you are interested in exploring this exercise is a great sign.
It means you are thinking about the right issues and that you are considering the options available to improve your restaurant business.
Did you know?
With some simple changes the average business can grow revenue by 10%+, improve margins by 5% and generate tens of thousands of dollars in extra earnings per year.
What would that mean for you?
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