Restaurant Profit Margins: A No-Brainer Guide to Maximizing Your Profits

Restaurant Profit Margins: A No-Brainer Guide to Maximizing Your Profits

As an owner-operator, your restaurant likely sits at the center of your life. It's not only your business and your livelihood— it's also your dream.

Unfortunately, if your restaurant is typical, your profit margins are exceedingly narrow. According to a recent Forbes article, sit-down restaurants make a profit of about 6%. While 6% is actually a high-water mark for this industry in recent years, it's still considered low by most investment standards. Most mutual funds, for example, yield at least a 10% return, and your money does all of the work for you!

So, why do it? Why run a restaurant at all?

Well, the only reasonable answer can be that you love it. You also want and need to make money running your restaurant.

Fortunately, driving more restaurant sales isn't particularly difficult. In fact, the basic formula for more profits is universal, regardless of the business you're in. The key is to reduce your costs and increase your sales. This means spending less money on your business and getting more guests to spend more money at your business. Profits equal revenue minus costs.

Below, you'll find a series of actionable tips, tricks, and strategies you can employ today to do exactly that!

A Quick Primer on Restaurant Profit Margins

First, your profits (or net income) are “what you make” minus “what you spend”—usually reported over a year. We know this sounds like Business 101—but breaking down those two categories is important.

profit margin formula

To calculate your profit margin—you take your “profit,” divide it by “how much money people spent”—and multiply it by 100 to express it as a percentage.

net profit margin formula

Here’s an example:

Say you made a $300,000 last year. And you spent $120,000.

Here’s your profit:

profit formula example

Here’s your profit margin:

profit margin example

Congrats! You made a 6% profit margin—or just shy of the 2018 industry average of 6.1%.

What’s a Good Profit Margin for Your Restaurant? (Answer: It Depends)

As we’re sure you’re familiar: the restaurant industry is a risky business—and slim profit margins are a big reason why.

Hotels, for example, can yield net margins of around 10%. Alcoholic beverages average out around 20%.

In comparison—restaurants have very little room to mess up.

Say a liquor store’s net margin decreases by 10%. That means, sure, they’ve had a rough year. But if a restaurant’s 3% margin drops by that much? Well, that can mean the end of the restaurant.

Even within the restaurant industry, margins vary pretty wildly. For example, fast-food margins can be much higher than full-service restaurants. In 2018, Wendy’s saw a profit margin of 15.9%. McDonalds brought in a nearly unbelievable profit margin of 33% in 2017.

If you’re reading this though, you’re probably not the giant machine that is Wendy’s or McDonalds (though it you are, hit me up, I’ve got some feedback.) But, what’s this look like for the average business owner?

Full-service restaurants, in contrast, often have a harder time. In 2016, the average net profit margin across the industry was a mere 3%. But the margin for the full-service restaurants was even skinnier—at 1.8%. And when all costs and variables are considered, high-end restaurants need to be particularly well-managed to survive.

It’s important to remember: your net profit margin isn’t the only metric to evaluate while gauging a restaurant’s success. (For more restaurant metrics you should be tracking, check out our breakdown here).

But keeping your mind on your margin, in an industry when profit margins are low, can give you a clear path forward as you evaluate the health of your business.

What You Can Do about Your Profits Margins (Spoiler Alert: It’s Actually A Lot)

When it’s all said and done, there are some factors that are just out of your control.

You can find the cheapest place to purchase food—but you can’t control the weather conditions, or gas prices that may cause food prices to rise. You can find creative ways to promote your business—but in rough economic times, people will still eat out less often.

Shifts in the real estate market can raise rent. Trends can change. There are a mountain of variables for owners to lose sleep over.

So when you’re trying to manage your profits and losses, what you’re really doing is: weighing your risks, developing contingency plans—and mitigating the factors you can’t account for, by focusing on the ones you can.

In the end, it all goes back to those simple formulas above. There are two ways to improve your profit margin: increasing your total revenue, or cutting back your operating costs.

Here are some specific ways to boost that profit margin:

How to Reduce Costs

1. Get Organized

The most profitable restaurants run their businesses with diligent attention to detail. Use purchase orders. Conduct daily inventories. Inspect deliveries for accuracy. Create weekly profit and loss reports, etc. The more information you have, the easier it will be for you to identify opportunities for optimization. We’ve spent a lot of time ensuring that ChefHero partners have access to all of their data whenever they want, but the most important thing is that you use something and apply that data to your business consistently. You’ve probably read how one of the best ways to lose weight is to step on the scale every day? It’s about constantly making sure that the metric is at the forefront of your mind. Make it a habit! You’ve got a million priorities, but this is one of the most important ones.

2. Spend Less Money on Food

Restaurateurs who are serious about increasing their profits must conduct a complete supply-chain audit. You've simply got to know how much your ingredients cost and whether it may be possible to make the same delectable dishes for less money.

Once you have a sense of where your money is going, it's time to turn to your suppliers. First, ask them for a discount. If they can't offer a straight discount (supplier margins are often razor thin as well, with little room to play for many), consider restructuring your order to optimize costs. This may include delivering bulk orders less frequently and/or slightly reducing the quality of your ingredients.

3. Reduce Food Waste

Once you have reduced the costs of your ingredients, it's time to ensure that almost none of it goes into the trash. Reducing food waste throughout your operation can have a massive impact on your profits.

In the kitchen, develop a laser-focus on reducing food waste. Insist that your chefs and prep team measure or weigh all of their ingredients. Create a culture in which food waste is unacceptable.

restaurant food waste

Here’s an example: One restaurant manager we’ve connected with occasionally removes the trash cans from his kitchen and replaces them with food scrap boxes, labeled with each employee's name. At the end of the shift, the manager would then inspect the contents of the food box. If he saw good, usable product, the manager would provide some instant training.

Similarly, make sure your recipes are optimized to use 100% of the food (or as close as possible). For example, have a plan for those carrot tops. Don't just throw them away.

If you offer complimentary appetizers such as bread or chips, train your servers to ask guests whether they would like them prior to bringing it to the table. Some guests will not and that’s one way to save.

Finally, once main dishes go out to the guests, pay attention to how much is getting eaten. If guests frequently leave more than a few bites of leftovers at the end of the meal, consider reducing the portion size by 5-10%. This change should be subtle enough so as not to offend your regulars, and compounding over time, saving 5% on 100 preparations of a dish can add up to a lot of savings, while not compromising the experience for your guests.

4. Decrease Overhead

Once you have reduced food costs and waste, you should investigate the costs associated with running your business and paying your employees.

Let's face it, paying your people is expensive and they'll likely mutiny if you try to implement sweeping salary cuts. As an alternative, find ways to get fewer employees to do essential tasks that might otherwise get hired out. For example, have your servers and bartenders clean up at the end of the night as opposed to bringing in a separate cleaner if you don’t already. Tap your employees when it comes to things you may otherwise outsource, like graphic and web design, marketing, digital branding— you may be working with a creative genius with a specialized set of skills who can help you for a reasonable rate instead of contracting out some of the more technical requirements that you may not be familiar with!

Stay mindful of your equipment. If you need to purchase additional equipment buy used instead. Thinking about a beautiful, instagramable-but-expensive neon sign? Consider a mural and some bright lighting instead. There are tons of ways to keep your business chugging along without adding to your balance sheet.

5. Prevent Theft

This is always awkward to talk about, but as you know, theft is a very real problem and a legitimate concern for business owners, even if you’re close with your staff. Unfortunately, employees or even suppliers and other guests may help themselves to your inventory in all sorts of ways if the opportunity arises. There are a ton of things you can do; make sure that alcohol is locked up at night, install video cameras throughout your business, limit access to your storage closets, and ensure that only one person can access a cash drawer. Most importantly, just be vigilant. No one likes a paranoid boss, but setting expectations in a reasonable, respectful way can go a long way. Here’s a big list of common issues to watch out for.

types of restaurant thefts

6. Reduce Energy Costs

There are many steps you can take to reduce your energy costs. Start by turning off unneeded burners, fryers, or ovens during off-peak hours. Set your thermostat a tick hotter in the summer and a tick cooler in the winter. If you're feeling ambitious, consider installing motion sensor lights in hallways, storage closets, and restrooms. If you own your building, upgrade your windows and/or invest in solar panels.

Sure, it takes some oversight—and maintaining a great guest experience is a must. But with a little follow through, cutting back small costs can lead to big profit margin wins.

Let’s dive into the two main areas where you can trim the fat: food costs, and overhead.

7. Monitor your menu

Make sure you’re pricing your menu to maximize gains. You should evaluate your direct costs, indirect costs, and volatile costs (We break down how here).

8. Save with new smart restaurant technology

These days, even your machines can save you money. New restaurant technologies can make a big difference as you work towards bigger margins.

First, you might want to consider upgrading your restaurant management system.

restaurant pos

Modern Point of Sales (POS) solutions go way beyond billing. They can help you to track everything from table turnover rates, to trends, to employee hours, to inventory so you don’t overspend. Some POS systems even allow you to identify which menu items are most ordered, or that yield the highest margin—so you can design a smarter, more profitable, menu.

If you’re looking to reduce your food costs, modern tools like allow you to buy from an entire market of local suppliers—so you can cut down expenses and delivery fees. Both of the above offer easy interfaces that will save you spreadsheet time—and help ensure that you’re spending smart.

How to Increase Revenue—A Balancing Act

Once you've reduced the costs of your ingredients and decreased your overhead, it's time to turn to your sales. It’s important to note: increasing your sales volume does not necessarily mean increasing your profit margin.

A higher volume of sales generally means a higher volume of materials to purchase, and a higher number of staff to put on the payroll. So alongside revenue, often comes cost—it’s about proportion and balance

A restaurant's revenue is determined by (a) its number of guests and (b) each guest's average spend. The former is usually handled outside of the restaurant, in the form of marketing and promotions. The latter involves tweaking your menu or other items on offer. We'll go over how to do both below.

Win the Internet

The first step to growing your guest-base is to make it easy for them to find you. These days, that means investing in an online presence. Here's how to get your digital house in order:

1. Revamp your website

Your website should reflect the experience of your guests while they're dining in your restaurant. In other words, an upscale restaurant should have an upscale website. A sports bar should look and feel entirely different. At a minimum, your site should have your menu, prices, location, hours, and some photos of your food. You may wish to also offer delivery, take reservations, and/or sell merchandise.

Revamp your website

2. Get listed on business sites

Your guests are already reviewing your restaurant across sites such as Yelp, Foursquare, Restavista, and Google so make sure that you claim those pages and populate them with accurate information about your restaurant — again, including menu items and photos.

3. Take social media seriously

The majority of your guests will do at least a little online research before coming into your restaurant. Thus, it's imperative to think about how your restaurant looks beyond your website and across the social media landscape.

At minimum, create an account on Facebook and Instagram that you frequently update and make sure your dishes are sufficiently photogenic for the Instagram Story generation. For example, train every barista at your coffee shop in latte art so that your guests will snap a photo and tag your business.

Once you’ve created your accounts and some shareable content, be sure to tag high-performing food-related instagram accounts (like BlogTO and Narcity in the Toronto area) when highlighting the delectable delights in your establishment. Use their hashtags to have a better chance of getting picked up and gaining more exposure to customers.

4. Collect and use those emails

Proactively collect guest emails so you can send them special birthday discounts or exclusive invitations to special events. This can be done using a simple clipboard at the front desk or via a little card that you give to guests with their check. Many credit card apps like Square are automatically connected to customers’ email accounts—another good way to capture that important data. We’ll be sharing a how to guide in a few weeks as part of the Ultimate Guide to Running a Restaurant.

5. Expand your marketing game

Host special events, offer discounts, leverage technology—like social media, or your email list—to attract new guests, and increase the lifetime value of repeat guests. We wrote a whole list of marketing tips and tactics that should help get you started.

Turn your restaurant into a "destination"

Keeping those tables full is an ongoing process that takes creativity and persistence. Remember, your restaurant is more than your food. It is also the experience you provide to your community.

Turn your restaurant into a "destination"

1. Offer a happy hour

The slowest time of the day is perfect to offer discounted drinks or apps. Make your happy hour known to people who work locally so they’re enticed to sneak out of work (but not too far) to enjoy your discounts. A personal suggestion? Use your chalkboard to let them know you’ve named a cocktail after their company or business, but only if you really do appreciate their business.

2. Offer free wifi

Free wifi removes some of the stigma of dining alone and can bring more students or worker bees into your venue. Also, countless tourists are roaming foreign (to them) cities without data on their phones, constantly looking for wifi connections. They’re more likely to patronize your restaurant if they can settle in for a few hours, catch up on email, and connect with loved ones back home. They’ll also buy a few things too. Just make sure you’re keeping an eye on your table turnover.

3. Host special events

Events, when properly promoted at least a month in advance, can bring lots of additional guests to your restaurant on that special day. Consider hosting a Superbowl party, a wine tasting, a free class, or a movie night. When properly promoted, even a live band can bring in more guests.

4. Partner with local businesses

For example, if you’re located in the US, hold a 4th of July barbecue with a few other restaurants on your block or cater a local business lunch every Friday. One owner in our network caters regular meals at architectural firms. These "lunch-and-learns" are paid for by materials suppliers (think granite or siding) to encourage architects to use their materials in their designs.

5. Develop a guest loyalty program

Small rewards for repeat visits can turn occasional guests, into loyal guests. We covered the basics of creating a guest loyalty program that works here.

Create New Revenue Streams

Once you start driving more and more guests to your shop, make sure you great creative about new ways to entice them to spend more. Here are a few tips:

1. Train your staff to upsell

If you run a coffee shop, ensure that baristas are giving every guest a chance to buy a muffin or scone. For businesses with full service make sure your servers can deftly point out the differences for your guests between the $8 house wine to that $12 imported brand.

2. Upgrade a few items

Evaluate your existing offerings and see what you can sub out for more profitable, or higher margin items.Sounds like a great idea right? But where do you start? Check out this chart below for a guide to help you quickly evaluate your current menu with a very simple framework.

Create New Revenue Streams

3. Host Parties

If your restaurant can accommodate it, have packages in place for birthdays, weddings, and/or corporate holiday parties. Whether offering a buffet or charging by the plate, make sure to keep the pricing and menu simple. If you are going this route, we recommend you invest in some promotional materials like flyers or a website link that you can easily distribute.

4. Sell Merchandise

If you have a strong brand and/or lots of guest loyalty, consider selling merchandise. Merchandise can be as simple as a gift certificate or as complex as, say, a passport that incentivizes your guests to try all 25 of your global selection of beers on tap. Get creative with this and give your loyal guests fun excuses to spend more of their money at your venue. Hats, recipe books, scavenger hunts, etc. Get yourself a great logo and allow your loyal guests to show off for you, while adding another revenue stream.

So there you have it. Lots and lots of strategies for making your restaurant more profitable and optimizing its operations. Along with these tips, it's worth noting that one of the most important things you can do for your venue is to simply serve great food.

Layer those flavors and blow people away, regardless of your price point. At the end of the day, it is your food and the experience you provide your guests that will drive the growth of your business.

Restaurant Profit Margins tactics
 
Chris Arnett
Chris Arnett
Integrated Marketing Manager
ChefHero