What Is the Average Profit Margin for a Restaurant?

Restaurant profitability determines whether you get to continue running your eatery or if you have to close your doors forever. Your profit margins ensure you have the revenue to cover all costs and continue reinvesting in your business’s growth.

In this article, you’ll learn about the average profit margins and how they vary depending on the type of restaurant. It also explains how to calculate your profit margins, factors that affect your profitability, and how to improve these figures.

What Is Profit Margin?

The profit margin is how much money is available to your restaurant after covering the expenses to run your establishment. You express this amount as a percentage of your revenue. This metric shows how much you’ll earn for every dollar you spend on your restaurant.

Knowing your eatery’s profit margins is essential to sustain your business financially. Moreover, it highlights the effectiveness of your pricing, cost control, operational, and restaurant marketing strategies.

Obviously, it’s better to have higher profit margins because you’ll have more money on your hands. But, it can take a while to achieve profitability, especially when you’re new to this industry.

Gross vs. Net Profit Margin

While learning about this topic, you’ll continue hearing about gross and net profit margins. These two metrics have different meanings and methods of calculation.

First, let’s look at the gross profit margin. This metric shows how much money remains after you account for the cost of goods sold (COGS).

COGS consists of all the direct costs you must account for when preparing the dishes and beverages on your menu. This includes the cost of purchasing the ingredients from your vendors.

You can evaluate your inventory management and menu pricing strategies by calculating the gross profit margins.

Here’s how to calculate your restaurant’s gross profit margin:

Gross profit margin = [(Total revenue of your restaurant - COGS)/Total revenue] x 100

The net profit margin focuses on direct costs as well as all the restaurant’s operating expenses. This includes COGS, utility, rent, labor costs, and marketing.

It helps evaluate whether you are keeping your restaurant’s expenses in check.

Here’s how to calculate the restaurant’s net profit margin:

Net profit margin = [(Total revenue - every expense you must pay for to keep your restaurant open)/Total revenue) x 100

A good gross profit margin shows that your restaurant is generating money from the dishes you serve to your customers. However, this doesn’t indicate your eatery is profitable. It is only profitable if your net profit margin is also high.

Markup and profit margin may seem to be the same. However, they are different. A markup is how much you increase the item’s cost to reach the price in your menu. The profit margin is your revenue minus COGS.

Average Profit Margin for Restaurant Industry: An Overview

You calculated the profit margin for your restaurant. How do you know if your business is moving in the right direction or requires a few changes? This is where the average restaurant profit margin comes into play.

You compare your metrics with the restaurant industry figures to see whether your business will be sustainable. For instance, if you run a cafe, you won’t have the same margins as a food truck.

General Averages: 10.66% as an Overall Figure.

Let’s answer the question, ‘How much profit does a restaurant make?’ You’ll often hear that the restaurant industry’s profit margin is 10.66%. However, this doesn’t paint the whole picture. Your profitability can vary depending on the type of restaurant and whether you include taxes and other expenses.

Use this figure as an approximate target you should aim to achieve with your restaurant or pub.

Breakdown by Restaurant Types:

The following section gives you a realistic breakdown of how profitable restaurants are, depending on the type of eatery.

__1. Full-Service Restaurants __

How much profit can a restaurant make if it is a full-service eatery? Profit margins in full-service restaurants can range between 2% and 6%. Why is this figure low in these types of eateries? One reason is that these restaurants have higher labor costs because they need a large workforce.

However, this isn’t indicative that you will also see a similar profit margin if you run this type of restaurant. The profit margin for restaurants can vary depending on the establishment’s location, size, table turnover rates, and menu pricing strategies.

2. Fast Casual Restaurants The average profit margin for fast-casual restaurants is anywhere between 2% and 9%. Unlike full-service restaurants, these eateries often use self-service. They also use pre-prepared ingredients, further reducing the COGS.

They also have a higher table turnover rate, so their profit margins are higher than those of full-service restaurants.

3. Fast-Food Establishments What is the average profit margin for a fast food restaurant? Fast-food establishments have a typical restaurant profit margin of 6% - 9%. These numbers are higher than most types of restaurants for several reasons. For starters, they have a standard menu, which makes it easier to prepare the dishes quickly. The prices are lower than those of other restaurants, contributing to the fast food restaurant’s profit margin.

The table turnover rate is higher because diners have quick meals, opt for takeaways, or place orders online. These eateries use cheaper ingredients, usually pre-prepared or frozen, to increase the restaurant’s profit margin on food. The profit margin for fast food restaurants will be higher because they have fewer employees, lowering labor costs.

4. Fine Dining Restaurant Fine-dining restaurant profit margins usually lie between 10% - 15%. The labor costs are higher because you need trained and experienced staff. You also use high-quality ingredients, which increase the overall cost.

However, you can easily offset these expenses because of the substantially higher pricing for all your dishes.

5. BBQ Restaurant If you run a BBQ restaurant, you can expect your profit margins to range between 8% - 20%. The BBQ restaurant’s profit margin varies depending on whether you’re running a casual, fast-casual, or upscale BBQ establishment.

Food trucks have higher average profit margins because they don’t need a brick-and-mortar establishment and have lower overhead costs.

Effective marketing, smart menu pricing, and providing excellent service ensure you have a loyal customer base. Moreover, focusing on these elements also increases restaurant industry profit margins.

6. Chinese Restaurant In Chinese restaurants, profit margins range between 3% and 10%. The type of restaurant you run plays a significant role in the restaurant business’s profit margin. For example, an upscale establishment will have higher Chinese restaurant profit margins.

Other factors that affect your profit margins include the efficiency of your staff, ingredient costs, and portion sizes. You also have higher customer volumes than other types of restaurants.

7. Sushi Restaurant The sushi restaurant’s profit margins are 5% - 15%. It can go higher than 20% because of the higher check sizes.

However, the ingredients are expensive because you need high-quality seafood. Moreover, you also have to hire highly skilled chefs, significantly increasing the labor costs.

8. Indian Restaurant The Indian restaurant’s profit margins vary significantly. The COGS and labor costs can be higher than usual because of the specialized ingredients and cooking techniques. Moreover, preparing the dishes can take longer, affecting table turnover rates.

9. Breakfast Restaurant Breakfast joints have a good profit margin for restaurants because of the low-cost ingredients. These establishments have higher table turnover rates and foot traffic during morning hours. However, the menu pricing can lower the average check size, affecting the breakfast restaurant’s profit margins.

Factors Influencing Restaurant Profit Margins

Knowing the raw numbers, i.e., the average net profit margin for the restaurant industry, is useful for setting targets. However, as highlighted earlier, other factors also affect these metrics. The following section explores these factors.

Cost of Goods Sold (COGS)

Cost of goods sold (COGS) focuses on all the expenses related to the production and sale of your dishes. This includes the following key components:

• Ingredient prices, which can vary depending on the supplier and market rates
• How do you price the various dishes on your menu
• Inventory management methods
• Food waste due to spoilage, improper storage, and other causes

You should expect at least one-third of your revenue to go towards COGS.

Labor Costs

Labor costs account for one-third of your expenses from the revenue you generate through your restaurant. Here are the various elements that contribute to labor costs:

• Wages and salaries
• Employee turnover rate
• Benefits and other packages
• Overtime pay
• Number of staff
• Scheduling efficiency
• Workers comp

If there are any laws that affect minimum wages, expect the labor costs to change accordingly.

Overhead Costs

You must also account for overhead costs, i.e., the various expenses for running your restaurant. This includes:

• Equipment maintenance and repair
• Licenses
• Marketing
• Rent
• Software subscription fees
• Technology costs

Calculating Your Restaurant’s Profit Margin

It’s a straightforward, two-step process to calculate margins in the restaurant business.

First, you have to calculate your net profit. You need to look at your profit and loss statement to do this. It includes your expenses and revenues.

Once you have this data, you can use this formula:

Net profit = Total revenue - Total expenses

After you calculate the net profit, the final step is to calculate the profit margin by using this formula:

Net profit margin = (Net profit of your restaurant/Total revenue of your restaurant) x 100

These formulae help determine whether your business is profitable or still operating at a loss. Every quarter, see how your eatery compares with the industry standard. You should also analyze your financial data and performance metrics to identify areas for improvement.

Strategies To Improve Profit Margins

Now that you know the average restaurant gross profit margin, let’s examine how to improve your numbers.

Strategies To Increase Sales Volume

Food and beverage sales are the biggest contributors to your revenue and profit margins. Here are the strategies to increase your restaurant’s sales volume.

1. Revolutionizing Menu Pricing Menu pricing is key because it determines the average check size, i.e., how much customers spend per meal. If you price it too high, you’ll drive away customers. If it is too low, your profit margins will be lower.

First, you must calculate the food cost percentage using this formula:

Food cost percentage = (COGS/Total food sales) x 100

Ideally, you want to keep this between 28% and 32%. So, if your menu prices are below this range, increasing your rates is a good idea.

Review your prices regularly to ensure the costs reflect market changes. This way, the restaurant’s food profit margin will go up.

2. Leveraging Menu Engineering Menu engineering is the strategic design of your menu to increase sales. A popular design strategy is implementing the golden triangle technique. In this method, people tend to look at the middle before moving to the top right and the top left.

It’s a good practice to ensure you place your dishes with the highest profit margins in these regions. You can also move your dishes with lower profit margins towards other parts of your menu.

Another option is to include your most expensive dish first. You include meals that are expensive but not as pricey as the first dish. The lower-cost meals seem like a bargain compared to the first dish, increasing the net profit margin for restaurants.

3. Enhancing Upselling Techniques Upselling is a powerful strategy because it easily increases the average check size. You need to train your servers to upsell various dishes so that it becomes second nature.

If your guests don’t order an appetizer, your server can recommend appetizers that complement their order. You can even upsell desserts, especially before your guests finish their meals.

For example, fast food joints like McDonald’s and KFC know how to upsell various items on their menu. When you order a burger, their employees always ask if you want to add fries and soda.

Individually adding fries and soda is more expensive if you look at their prices. However, it is cheaper when they are part of a combo.

4. Marketing To Drive Traffic Marketing your eatery is important because it helps attract new customers to your establishment. You must use tried-and-tested strategies to get the best results from your advertising campaigns. This includes:

• Focusing on local search engine optimization
• Running social media ads
• Asking customers to leave reviews
• Using SMS and email marketing to reach a larger audience for cheap
• Starting loyalty programs to encourage customers to keep visiting your establishment

Before you start marketing, make sure you have a restaurant budget to keep your expenses under control.

5. Maximizing Table Turnover Increasing your table turnover rate is vital because you can serve more customers in your restaurant. The table turnover rate is the time it takes for your guests to leave after arriving at your eatery. Here are some tips to maximize table turnover:

• You want to focus on seating your guests quickly so they can go through your restaurant’s menu.
• Optimize your menu and remove items that aren’t popular. If there are too many dishes, it will take time for your guests to decide what they want to eat.
• You must serve at a pace that’s neither too fast nor too slow.
• Ensure there are no delays in handing over the bill when your guests ask for it.

6. Increasing Seating Capacity The last strategy to increase your profit margins is to add more seats. If you can serve more guests, your revenue will increase.

Go through your floor plan and see if you can add more seats. You should also ensure there is adequate space for your staff to walk through the dining area.

If you have an outdoor area or patio, consider using this space to increase your seating capacity. Before you do this, account for the weather conditions in your area.

Reducing Overhead Costs

Use the following tips to reduce overhead costs, increase average profit margins, and efficiently manage your restaurant.

1. Optimizing Employee Scheduling Look at your sales forecast to understand how many customers will be in your restaurant at any given moment. This can help optimize employee scheduling.

For instance, you want to ensure you have enough staff to handle the demand during peak hours. You should also have your top-performing employees working during these hours.

Similarly, having all your staff working in your restaurant doesn’t make sense when business is slow. It’s better to reduce your staff during these periods.

2. Minimizing Food Waste Food waste increases how much you spend to acquire ingredients to make the various dishes on your menu. In other words, you’re throwing money away.

It starts with the kitchen. You want to ensure you can use the same ingredients in multiple meals. Provide adequate training so your staff can use various ingredients efficiently.

Here is another tip — use techniques like the first-in, first-out (FIFO) method. In this technique, you use the oldest ingredients first to reduce spoilage and wastage.

Serve portions that your customers can easily consume and feel satiated. You can even reduce the menu items to decrease inventory costs.

3. Lowering Utility Expenses Look at your utility expenses and see where you can lower your costs. For instance, it’s always a good idea to install energy-efficient lights. Not only do they last longer, but they also don’t consume a lot of power.

Another option is to use ENERGY STAR-certified appliances because they consume energy efficiently. Talk to your building’s landlord to see if you can get a better lease agreement.

4. Smart Inventory Management Smart inventory management can significantly increase your profit margins. Avoid overordering ingredients, especially when business is slow, as it increases food waste.

At the same time, you don’t want to under-order because you won’t be able to serve certain popular dishes. Invest in smart inventory management technologies to efficiently use your ingredients.

Go through your sales forecast to understand customer demand. You should also look at your point-of-sale (POS) system to identify your popular dishes. This way, you know when to place orders with your vendors.

Innovation and Adaptation

The last section focuses on staying innovative and adaptable because of how quickly the landscape changes in this industry.

1. Continuous Improvement Through Feedback It’s important to listen to your customers because they may notice things that are not as obvious to you. Ask your customers to share their opinions by leaving reviews or filling out feedback forms.

Go through their opinions and see where you can improve. When guests notice you pay attention to their feedback, they’re more likely to become your loyal customers.

2. Staying Competitive in a Changing Market You need to pay attention to the market because of the pace at which everything changes. For example, there’s a shift towards sustainability in the restaurant industry. You can introduce more vegan dishes or source your ingredients from local farms. Another option is to try restaurant composting and talk about this initiative.

Similarly, you should pay attention to what other competitors are doing. It can give you an idea of what you should do next to appeal to your customers.

3. Cultivating Employee Loyalty Employee loyalty is important because it reduces staff turnover rates, which are expensive, therefore increasing your profit margins. You must ensure your staff have the necessary training to ensure consistency in your service.

Provide employee benefits like paid time off to improve morale. Cultivate an environment where your restaurant staff feel valued. Recognize employees who are doing an excellent job. Furthermore, provide pathways for your staff to earn promotions and increase their pay.

Wrapping up

You know the real answer to the question — ‘What is a good profit margin for a restaurant?’ It depends!

The primary goal is ensuring your restaurant has a healthy profit margin. It is vital to your success in this highly competitive industry. You must monitor your restaurant KPIs to know what decisions to make for your establishment.

Beambox’s WiFi marketing service provides another solution to increase your profit margins. Providing free WiFi to your guests can be a marketing tool that actively and passively generates revenue. Our solutions make it simple to advertise your offers and dishes.

If you’re offering free delivery to avoid using food delivery apps, you can raise awareness of this move with Beambox. Moreover, our solutions will ensure your network is safe because users need to verify themselves.

We can even help with data collection practices so that you can learn about your customers and their preferences.

Use Beambox today and ensure your WiFi contributes to your hotel restaurant’s profit margins!

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