The food service sector is very competitive. That’s a major factor that pushes profit margins down. Nevertheless, due to the high competition, ineffective businesses rarely survive and only efficient ones continue forward. Calculating profit margins and looking for ways to increase them without a negative impact on restaurant customer acquisition is crucial for eateries. There are many ways to improve a food service company’s profitability. In this post, we’ll share more about the average restaurant profit margin on different types of restaurants and how to calculate net and gross profit margins. In order to increase the chance of restaurant success, check out the paragraph where we talk about the ways to improve restaurant profit margins. Other posts you might find useful include our article on restaurant tipping and the one on restaurant technology trends.
Key takeaway: Calculating restaurant profit margin can help business owners determine the profitability of their food service business. Gross and net profit margin are the two main metrics to track and aim to improve.
What Is the Average Restaurant Profit Margin
The average restaurant profit margin ranges between 3% and 10%. The actual number depends on various factors like rent, efficiency, pricing strategy, inventory shrinkage, and more. There are two main KPIs related to restaurant profit margin – gross and net profits.
- Gross profit margin typically ranges from 70% to 80%. It accounts for revenue minus the cost of goods sold. Gross profit margin is used to show the operational efficiency of businesses. However, a high gross profit margin doesn’t always mean a high net profit margin as well.
- Net profit margin is usually between 3% and 10%. This metric calculates all additional expenses like taxes, debt interest, asset depreciation, labor, rant, and other expenses. Net profit margin shows the overall profitability of a business.
Average Profit Margin for Different Restaurant Types
Restaurant profit margins might vary significantly depending on the service model, the business scale, and the type of restaurant. For example, a restaurant that has just opened is likely to have a low profit margin due to the high initial expenses. On the other hand, already established fast-food franchises with high brand awareness can have much higher margins. Let’s examine the average restaurant profit margin range for different types of eateries.
- Fast food and quick-service restaurants’ profit margins range between 6% and 10%. They are higher than the average for restaurant businesses due to their efficiency, well-established procedures, and multiple options for automation.
- Casual and fast-casual eateries have slightly lower margins that range from 5% to 8%. That’s due to the lower table turnover rate compared to fast-food places.
- Full-service restaurants have various additional expenses and higher labor costs. That’s why their restaurant profit margin usually ranges from 3% to 6%.
- Fine-dining restaurants usually have the lowest restaurant profit margin ranging from 1% to 5%.
- Ghost kitchens have become popular in recent years. Due to the fact that they have fewer expenses, their profit margin can range from 5% to 12%.
How to Calculate Restaurant Profit Margin
There are various formulas to calculate restaurant profit margin. Some of them are related to finding out gross profit margin while others focus on net profits.
Restaurant Gross Profit Margin Formula
Gross profit margin = ((total revenue - cost of goods sold) / total revenue) x 100.
For example, if the total revenue comes to $50,000 and the cost of goods sold is $10,000, the gross profit comes to $40,000. With the help of the formula, we get (($50,000 - $10,000) / $50,000) x 100 = 80% gross profit margin. A fairly high gross profit margin for the restaurant niche market.
Restaurant Net Profit Margin Formula
Net profit margin = (net profit / total revenue) x 100.
For example, if the total revenue of a restaurant is $50,000 and the total expenses are $45,000, the net profit comes to $5,000. Using the formula mentioned above, ($5,000 / $50,000) x 100 = 10% net profit margin. That’s a fairly good number for the food and beverage industry.
How to Increase Restaurant Profit Margin
There are various ways to make a restaurant more profitable. From introducing restaurant technology to using targeted restaurant marketing, managers can do a lot to boost the profitability of a food service business. Here are a few ideas to consider.
- Reduce food costs by monitoring food waste, reducing restaurant fraud, or minimizing food waste. Make sure to find suppliers that offer good prices for wholesale orders of products.
- Lower labor costs by optimizing scheduling through restaurant scheduling software. Incorporating restaurant training programs can also help improve staff efficiency and flexibility.
- Increase menu profitability through proper menu design and by using QR codes for restaurant menus. Train waiters to upsell and promote high-margin items. Adjust pricing according to food costs, restaurant inflation, and service demand.
- Add more revenue streams such as restaurant merchandise, renting out the kitchen to cooking classes and other events, or organizing workshops.
- Use restaurant technology to your advantage. Thanks to solutions like restaurant reservation software and restaurant delivery software, eateries can streamline various processes and improve their efficiency and restaurant profit margins.
- Improve customer service and retention in order to get regular visitors and good brand loyalty. This can be achieved through loyalty programs and other tools that encourage repeat visits.
Frequently Asked Questions about Restaurant Profit Margin
From guides on how to build an eco-friendly restaurant to resources on restaurant accounting software solutions, there are plenty of articles on restaurant industry topics on BlueCart. If you’re a restaurant manager or operate a food service business, check out our answers to commonly asked questions regarding restaurant profit margins.
What Is the Profit Margin of Bars?
Bars have a higher profit margin compared to most food service businesses. That’s because, traditionally, spirits and other alcoholic beverages have a higher profit markup. If you’re asking yourself is owning a bar profitable, you should know these establishments have between 10 and 15 percent margins. In order to increase their profit, bars can offer snacking options or other small bites. Coffee shops also have excellent profit margins, especially if they have a cozy atmosphere and offer high-end tea and coffee beverages.
Is ROI the Same as Profit Margin?
Return on investment (ROI) and profit margin are similar but different metrics. Profit margins are usually associated with calculating the yearly profit of a business and looking for ways to improve it. On the other hand, return on investment is commonly used when calculating the net return of a marketing campaign compared to its total cost. When it comes to restaurants, achieving high ROI can be done by choosing the right marketing channels and targeting the right audience. Return on investment in restaurants can also mean the overall profit compared to the full startup cost of opening an eatery.
What Is the Profit Margin of Catering Businesses?
Catering companies have a profit margin between 5 and 10 percent. This is higher than some restaurants and depends on a variety of factors. Eateries can benefit from offering catering services due to the high markup of the service and the fact that food service establishments already have the necessary equipment to provide the service. Caterers often provide various additional services such as event management, party equipment rentals, and event organization. Check out our post on how to start a catering business and how to combine restaurant and catering services.
BlueCart: The Ordering and Food Inventory Management Tool for Restaurant
Our platform allows specialized wholesalers and broadline distributors to easily build eCommerce catalogs, increase their wholesale sales, and streamline various business processes. BlueCart’s tools can also help restaurants, coffee shops, and various types of food service businesses. From kitchen and bar inventory management to calculating profit margins on dishes and cocktails, there are multiple features to help restaurant owners and managers. Schedule a demo to witness BlueCart’s features for suppliers or sign up as a wholesale buyer today.