Many operators struggle with low profit margins, and it’s easy to fall into this trap. In fact, the average restaurant profit margin just falls between 3% and 6%. By finding the right balance, you can avoid these pitfalls and ensure your business stays profitable.
Let’s explore what this number means, how you can calculate it, what the average margin is for different types of restaurants, and the factors that can affect low profit margins.
Four main costs that affect your restaurant’s profit margin
Since the average profit margin for restaurants varies widely, depending on factors like location, restaurant type, and management efficiency, it’s important to determine the areas you can focus on to enhance profitability.
Knowing the main costs that affect your restaurant profit margin can help you better understand how to manage them effectively.
Fixed costs
Fixed costs are expenses that remain constant, including rent, insurance, and utilities. Since these expenditures are inevitable, they significantly affect your bottom line each month.
Lower rent expenses by negotiating with your property owner for better terms or consider relocating to a less expensive area. If transferring isn’t an option, you can try to reduce other fixed costs like insurance premiums. Compare different policies and choose one that offers good coverage at a reasonable price. Additionally, review and adjust your coverage as needed.
Utilities are another fixed cost to monitor. Reduce your bills by opting for energy-efficient appliances and lighting. Make it part of the protocol to unplug equipment when not in use and fix any leaks promptly.
Variable costs
Variable costs depend on your restaurant’s level of activity, including food and beverage costs, labor costs, and supplies. Your inventory is one aspect to keep track of to avoid overordering.
“If you aren’t taking accurate and consistent inventory at your restaurant, you’re missing out on a 20+% increase in profits,” our own D.J. Constantino writes.
Train your staff to use ingredients efficiently and plan your menu to minimize waste. “You’d be surprised by how using just a tablespoon extra of Himalayan salt can really add up over time,” he adds.
Aside from the cost of ingredients, you should maximize your labor expenses as well. Schedule staff properly to reduce overtime and accommodate your busiest times effectively.
Semi-variable costs
Semi-variable costs have both fixed and variable components, such as maintenance, repairs, and marketing expenses. Create a maintenance schedule for each piece of equipment to keep everything in top condition. You can also negotiate service contracts for regular maintenance at a lower cost.
As for marketing, focus on cost-effective strategies such as social media and email marketing. Track each campaign’s performance to see what works best and allocate more resources toward those.
One-time costs
One-time costs are expenses that occur occasionally and aren’t part of the regular operating budget, like equipment purchases, renovations, and initial inventory.
Invest in high-quality appliances from brands proven to last long and require fewer repairs. You should also opt for those with longer warranties, especially for high-ticket items, such as refrigerators and ovens.
When planning renovations, research costs thoroughly and create a detailed budget to avoid unexpected expenses. Consider phased renovations to spread the cost over time.
If you’re opening a new restaurant or branch, plan your initial inventory carefully. Avoid overordering and focus on essential items since you still need to determine which dishes and beverages are popular. Then, monitor sales trends to adjust your inventory levels accordingly.
How to calculate your restaurant’s average profit margin
Now that we’ve discussed the costs involved in restaurant operations, it’s time to know how to calculate profit margins. Calculating your restaurant’s gross profit margin is the first step in understanding how profitable your restaurant is.
Calculating your gross profit margin
Gross profit margin is the percentage of sales left after subtracting the cost of goods sold (COGS). COGS is a restaurant metric that includes everything you spend on food and drinks to make the dishes you serve.
The formula is: Gross Profit Margin = (Sales−COGS)/Sales
For example, if your restaurant made $1,000 in sales, and it cost you $300 for the food and drinks, your gross profit margin would be:
(1000 −300)/1000 = 0.7 or 70%
This means 70% of your sales are profit before other expenses like labor costs and rent. For every dollar your restaurant makes in sales, 70 cents is profit before paying for other expenses.
Calculating your net profit margin
Meanwhile, the net profit margin is the percentage of sales left after all expenses, including labor, rent, utilities, and other costs, are paid. It gives a more accurate picture of your overall profitability.
The formula is: Net Profit Margin = (Sales−Total Expenses)/Sales
For example, if your restaurant made $1,000 in sales and had $900 in total expenses (COGS, labor, rent, etc.), your net profit margin would be:
1000−900/1000 = 0.1 or 10%
This means only 10% of your sales are actual profit or, for every dollar your restaurant makes, 10 cents is profit after all expenses are paid. Our free restaurant profit margin calculator lets you know whether your business is profitable.
Average profit margins by restaurant type
Understanding the average profit margins for different restaurant types can help you determine whether your business is performing well. Profit margins vary depending on how an establishment operates.
Full-service restaurants
Full-service restaurants offer a complete dining experience with table service. Customers sit down, order from a menu, and are served by waitstaff. These establishments often have a diverse menu and focus on high-quality service and ambiance.
This type of restaurant can charge higher prices for their meals because of the full dining experience and quality service.
However, high labor costs and food costs can make it difficult to maintain a high profit margin. Managing staff and ensuring consistent quality can also be challenging. Full-service restaurants usually have profit margins between 3% and 5%.
Quick-service restaurants
Quick-service restaurants (QSR), also known as fast-food restaurants, offer quick, convenient dining options. They have limited items that are easy to prepare.
A main advantage of QSR is lower labor costs because they don’t need too many staff in one shift. These also have higher table turnover, which means they can serve more customers in less time.
Competition is fierce in the fast-food industry, with major chains dominating the market, such as McDonald’s, Burger King, and Taco Bell. Additionally, keeping food costs low while maintaining quality can be tough.
QSR usually sees profit margins between 6% and 9% due to lower labor costs and higher table turnover.
Cafes
Cafes fall between full-service and quick-service restaurants because customers often order and pay at the counter, but they still provide some semblance of table service. Most cafes and coffee shops focus on creating a cozy atmosphere to attract customers who wish to work or relax.
These establishments entail lower startup costs compared to full-service restaurants and may enjoy steady customer flow throughout the day, depending on their location. Plus, they can get higher profit margins on beverages like coffee and tea.
Conversely, there’s high competition in popular areas, so cafes rely on regular customers for steady income. Additionally, they have potentially high labor costs when it comes to hiring seasoned baristas since their skills are more in demand.
Small cafes have an average profit margin of about 2.5%, but larger chains or corporations typically earn higher. Upselling and creating loyalty programs can help coffee shops boost profit margins.
Catering services
Catering services provide food for events such as weddings, parties, and corporate functions, often preparing food off-site and delivering it to the event location. They can range from small, family-run businesses to large operations.
Since caterers don’t need a full-service restaurant space, they typically save a lot on overhead costs. At the same time, they can charge premium prices for customized services.
One downside to this type of restaurant is that business can be seasonal, with peaks and lows. Another factor to consider is how to manage logistics and maintain food quality during transport.
Catering services typically have profit margins between 7% and 8% because of lower overhead costs and the ability to charge higher prices for events.
Ghost kitchens
Ghost kitchens, also known as virtual kitchens, are restaurants that only offer delivery and have no dining area. They prepare food specifically for delivery through online orders.
These have significantly lower overhead costs since there’s no need for a dining area or front-of-house staff. Moreover, they can quickly adapt to changing food trends and demands.
Running a ghost kitchen relies heavily on having a strong online presence and signing up on multiple delivery platforms. High competition and delivery logistics are other challenges this type of restaurant faces.
Regardless of the disadvantages, ghost kitchens have high profit margins, ranging between 15% and 25%.
A great restaurant revenue management strategy to remember is to dig deeper when calculating your restaurant revenue, as the raw number isn’t always useful on its own.
Bars
Bars mainly serve alcoholic beverages and offer a limited food menu. They provide a social atmosphere and may feature live music, sports screenings, or themed nights.
Just like cafes, bars have higher profit margins on beverages. Specialty drinks and cocktails also provide opportunities for upselling.
However, they do have high startup costs due to the licenses and permits needed to operate. Additional risks are inconsistent customer flow depending on trends and seasons and potentially high insurance costs due to liability.
Bars have a particularly high profit margin, reaching about 78% to 80%, due to the high markup on alcoholic beverages. These establishments can increase profit margins even more by creating signature cocktails and selling them at a premium price or implementing “Happy Hour” specials to attract customers during off-peak times.
Food trucks
Food trucks are mobile eateries that offer a variety of food options, from gourmet meals to street food. Similar to ghost kitchens, food trucks have lower overhead costs. Their main advantage is that they have the flexibility to move to different locations based on demand.
On the other hand, weather and events significantly affect customer flow. Having to comply with regulations and permits for each location can also be a challenge.
Food trucks have an average profit margin of 7% to 8%. For successful eateries, the figure can go up to 14% or 15%.
Why your restaurant profit margin might be low
If you see that your restaurant’s profit margin is way lower than the average, you need to identify the factors that are causing it.
High labor costs
Full-service restaurants often struggle with high labor costs due to the need for more staff, such as waiters, chefs, and hosts. When you spend too much on labor costs, you have less money left over for profit. You can manage this expense by scheduling your staff efficiently.
Cha Time, a bubble tea chain, managed to reduce labor costs by as much as 13% and avoided what David Nehme, their business systems consultant, called a “spreadsheet mountain.” When the company rolled out the use of 7shifts across its locations in Canada, they were also able to forecast sales and help managers make cost-efficient decisions.
“The rewards are returning back time to the manager, giving the head office greater transparency, and then if all goes well, the financial results are just an outcome,” Nehme adds.
High COGS
High COGS and low profit margin can happen if you overpay for ingredients or waste too much food. Fine dining restaurants and catering services face high COGS due to the use of premium ingredients and complex dishes.
To solve this, find better suppliers around your area, like local farms, and check your inventory regularly to reduce food waste and boost profitability. Track sales and labor costs as well for a clearer picture of your COGS and help you make better decisions.
Inefficient operations
Another reason you may be experiencing low profit margins is that your restaurant may not be running as smoothly as it could be. Quick-service restaurants typically encounter inefficiencies, such as disorganized kitchens, due to high customer turnover.
Address this issue by removing unnecessary steps or bottlenecks in your workflows, improving staff training, and investing in the right technology. This can help boost overall productivity, which may lead to higher profit margins. 7shifts improves operating efficiency by managing compliance and tracking tasks with digital checklists.
Poor pricing strategies
Setting the wrong prices for menu items can hurt profit margins, especially for casual dining restaurants with a diverse menu. If your prices are too low, you might not cover your costs, and if they are too high, you might scare away customers.
Analyze your costs and what competitors charge to find the right balance and increase restaurant sales.
Lack of marketing and customer engagement
Without effective marketing, you can’t attract and retain customers, which leads to a lack of customer engagement and fewer sales. Food trucks often face challenges with marketing and customer engagement due to their mobile nature.
Using real-time data on sales and customer trends lets you invest in marketing and make more profitable decisions. Additionally, engage with customers through social media, loyalty programs, and promotions to build a loyal customer base.
Increase your restaurant’s profit margin
Increasing your restaurant’s profit margin is a combination of strategic planning, effective cost management, and consistent monitoring. Now that you know how to calculate gross and net profit margins and the factors affecting them, you can implement strategies to keep your business profitable and competitive.
As a restaurant management software, 7shifts helps you monitor and manage expenses while tracking profit margins. It integrates with other systems, like your POS and payroll systems, for a comprehensive view of your restaurant’s financial performance. Moreover, it’s designed specifically for restaurants, making it easy to use and understand.
Start your free trial today and experience how 7shifts can make scheduling easier and reduce labor costs.
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Vahag Aydinyan
Hello! I am Vahag, Content Marketing Manager at 7shifts. I am writing about content marketing, marketing trends, tips on restaurant marketing and more.