Thinking of opening a restaurant but unsure about how profitable that endeavour might be?
Running a restaurant and worried about your profit margins?
Both concerns are entirely understandable. A report in 2018 suggested that while restaurant margins are slowly increasing, competition remains incredibly fierce.
This means that you need not only great food to stand out but also a dining experience that encourages people to spread the good word about your establishment.
Get it right, and there’s plenty of profit to be had. It’s not as significant as some industries, but it can provide a great source of income.
What’s a typical restaurant margin?
Unfortunately, there’s no one-size-fits-all answer to that question. As you’ll discover in this guide, there are multiple factors that determine a restaurant’s ability to be profitable.
However, most experts will suggest that the maximum profit margin a restaurant can experience sits at around 15%. In reality, most see roughly 3-5% on average.
If that sounds low compared to other industries, it’s because restaurants are impacted by what are commonly referred to as ‘the big three’ expenses:
- Cost of goods sold.
As a result, many restaurants work to the 30,30,30,10 rule, which looks something like this:
- 30% food costs
- 30% labour
- 30% overhead expenses
- 10% profit
In reality, and while the above is a good benchmark, costs are far too elastic in modern restaurant operations for the 30,30,30,10 rule to be gospel. For instance, if you decide to operate alongside a food delivery service, you’ll pay commissions of anywhere between 10% to 30%, and they may change over the course of your tenure.
YCharts provides a brilliant analysis of restaurant profit margins on a quarterly basis and enables you to keep an eye on how the industry is performing on average.
What’s the difference between gross and net profit?
Before we get stuck into the intricacies of restaurant profit margins, it’s important to gain a high level understanding of gross and net profit.
- Gross profit is the figure you arrive at after deducting all of your costs of goods sold. It’s a great number for measuring the restaurant’s efficiency, but it isn’t what you get to keep.
- Net profit is the true profit figure, after you’ve deducted all costs including admin, payroll, rent, utilities and taxes. It’s the figure investors and bank managers are most interested in.
How much does it cost to run a restaurant?
On average, it’ll cost around $450 per square foot to open a restaurant, but that doesn’t tell the whole story.
For instance, a survey by RestaurantOwner.com revealed the following start-up costs for restaurant openings:
- Low average restaurant start-up cost: $175,000
- High average restaurant start-up cost: $750,500
- Median average restaurant start-up cost: $375,000
Big numbers, eh? The good news is that this is by no means something that should hold you back if you’ve got the desire to open a restaurant business. There are plenty of variables over which you have ultimate control when it comes to profitability.
Recommended resource: The Basic Calculation of Operating Costs (opentextbc.ca)
Average restaurant profit margins by type of establishment
Let’s take a look at some of the most common restaurant operations and assess how profitable they might be.
The profit margins we’ve already quoted are generally linked to full-service restaurants.
Therefore, if you’re heading into that sector, a net profit margin of between 3-5% should be achievable. Despite this, the size, location and turnover rate could increase that figure.
One of the most profitable types of restaurant is the much-loved food truck that’s now a firm fixture at events and on city streets.
Get it super-right and you could be looking at a profit margin of up to 40%, although the ‘take-home cash’ in such instances is likely to be relatively low compared to other restaurant models in this list.
On average, food trucks tend to enjoy a 6-9% profit margin.
Fast food and quick service
The high turnover nature of these operations tends to result in less staff required, cheaper foods and smaller retail spaces.
As a result, the average profit of fast food and quick service restaurants can vary between 6-9%, which is considerably above the industry average.
Casual cafe businesses are generally seen as low risk due to their increased mass appeal among millennials and the growing remote workforce.
As a result, if you get it right, a cafe could enjoy 20% profitability. The catch? Those high profits are likely to occur in phases as demand fluctuates and competition forces continual innovation.
This is a relatively new concept, but one made possible thanks to the abundance of food delivery services.
Once again, such operations are hampered by large commission fees -which can be anywhere up to 30% - from those delivery companies, but thanks to less staff requirements and the absence of a dine-in option, profits can hover above average.
Just like food trucks, catering businesses have low overheads, but their food costs match full-service restaurants.
As a result, the average profit is usually around 8%. However, high end catering outfits can command as much as 15%.
4 quick-fire tips for increasing your restaurant profit
As they often say, it’s sometimes the little things that make the biggest difference, and that’s definitely the case when it comes to increasing a restaurant’s profit margin.
Here are four simple things you can to do increase your profits.
1. Add more seating
If the space is there - use it. Providing adding more seats doesn’t impact the dining experience for everyone else, each one represents a new line of profit.
2. Optimise your menu
By working intently on the cost of each dish, you can maximise every menu price for the greatest profitability. It’s hard work, but it’ll squeeze out more than you think.
3. Move to the cloud
If you’re using on-premise software (POS, bookings, accounting - you name it) that comes with a hefty annual support fee, look for low-cost cloud alternatives.
4. Improve the turnover rate
Where is the team least efficient in turning over tables? Identify where you can get diners in and out more quickly without impacting the experience.
Restaurants are profitable businesses that can last the test of time. The secret lies in picking the right kind of establishment for your geographical area and remaining focused on not just the dining experience but also the overheads that can so easily spiral out of control.