The restaurant industry is a lucrative business for those who are determined and creative. It is also not an easy one--regardless of the restaurant size and business model--with plenty of competition to contend with while trying to stay on top in terms of the quality food it serves and its prices. Today, profit margins have shrunk to between 4% and 7%.
Even as the hospitality industry and catering service businesses throughout the country begin to reopen, owners and operators are faced with a whole new set of issues. Therefore, you must learn how to develop a more resilient restaurant business just like the other types of restaurants who are finding new ways to ensure decreasing costs and an increase in sales.
It is not easy running a restaurant. With reduced profit margins, it can be tough to stay afloat, let alone branch out into other ventures and live up to your end of the bargain when franchising. For financially viable restaurants, gross profit hovers around 70%, meaning that for every $100 a guest spends at your establishment, only $70 is remaining after expenses are paid off.
Even though there is no one-size-fits-all answer to this question, the Restaurant Resource Group claims that, on average, restaurant profit margins range between 2 percent and 6 percent, with full-service restaurants on one end of the spectrum and limited-service (or quick service) restaurants on the other.
Primarily, there is the need to differentiate the two types of profit margins: gross profit and net profit. This distinction is critical when discussing why restaurant profit margins are so low and how it is possible to raise yours.
The difference between the cost of ingredients and materials used to make dishes (otherwise known as CoGS) and how much they are sold for is what determines a restaurant's gross profit. A financially viable restaurant has a gross profit around 70%, which means that if someone spends $100, you will have about $70 worth in your pocket after all expenses.
To calculate your restaurant’s gross profit, you need to subtract the total cost of goods sold (COGS) for a specific period from your total revenue (your total food, beverage, and merchandise sales). For example, let’s say John Doe Bar's total sales from July to September 2020 were $1.25 million and its cost of goods sold was $400,000.
To calculate gross profit, apply this formula:
Gross profit = Total sales - Cost of goods sold
Gross profit = (1,250,000 – 400,000) / 1,250,000
Gross profit = 850,000 / 1,250,000
Gross profit = 0.68
John Doe Bar’s gross profit as a percentage is 68%, meaning that for every $100 a guest spends at their establishment, $68 is gross profit that can be used to pay for operating expenses.
Your gross profit margin is what is left over from your revenue earned after deducting the cost of goods sold (CoGS), the cost of ingredients for your menu items. This number is helpful to measure restaurant efficiency, but it does not consider all your operating expenses.
Your net profit is the amount leftover from the gross profit after you deduct operating expenses like payroll, rent, utility bills, ingredients, and equipment leasing costs. To calculate net profit margin as for a certain period, you need the following information:
Assuming John Doe Bar has $1.25 million in revenue, $50,000 in gains, and $1.2 million in expenses from July to September 2020.
Net profit = (1,250,000 + 50,000) – 1,200,000
Net profit = 100,000
Net profit as a percentage is calculated as follows:
Net profit percentage = (Net profit/revenue) x 100
Net profit as a percentage = (100,000 / 1,250,000) x 100
Net profit as a percentage = 0.08 x 100
Net profit as a percentage = 8%
John Doe Bar’s net profit margin is 8%. For every dollar a customer spends, they are keeping 8 cents as profit.
Understanding the typical restaurant margin is the first step to improving them, and certain metrics, tracked through your restaurant-specific accounting software, are key to getting the full picture of your average profit margin. For restaurant expenses and a wide range of other related issues, restaurant owners focus on three primary key metrics:
Cost of Goods: The total cost of the inventory utilized to produce food and beverage items during a certain period is referred to as the cost of goods sold (CoGS) in this context. The ability to accurately track your cost of goods sold (COGS) using restaurant inventory management software allows you to analyze how much profit you generate every plate, which may be used to inform crucial menu engineering decisions.
Labor: Labor is one of your restaurant’s largest costs. Your labor costs include wages for salaried and hourly employees, in addition to other expenses associated with labor—overtime, payroll taxes, and employee benefits like health care and sick or vacation days.
Overhead: Overhead costs include your directly controllable expenses, like supplies, repairs, and marketing, as well as your non-controllable fixed operating expenses, such as rent, utilities, salaries, and insurance.
Whether for annual sales or otherwise, here are two ways you can approach this problem: by increasing sales volume and by decreasing overhead expenses.
Here are the ways you can increase your restaurant's sales:
Optimizing the prices on your menu is a straightforward method of increasing profit margins in your restaurant. To do so, you will need to know how much each of your dishes cost per serving as well as the proportion of your food costs. To maintain a financially sound business, the average restaurant must keep its food cost percentage between 28 percent and 35 percent selling price. However, while this number does not exactly translate into profit margin, it does provide you with some wiggle room with which to account for overhead expenses such as labor, rent, and utility costs.
Some authorities recommend that you add up how much your restaurant's overhead expenses cost you each month and divide that total by the number of menu items you provide to account for them in the pricing of your meals. That figure represents the amount by which you could raise the price of each menu item to pay your overhead expenses.
If you are concerned that rising prices will drive customers away, you can enhance profit margins by lowering food expenses instead of increasing menu prices. You can also consider the portion sizes. This can be accomplished by using less expensive vendors for ingredients (without sacrificing quality!) or by serving lesser portions. This will also enhance a great customer experience for your business.
With payroll accounting for such a substantial portion of your revenue, simplifying your kitchen staff schedules is a simple method to ensure that your restaurant is staffed to fulfill customer demand at any time of the day or night, while also ensuring a faster service. Over- and under-scheduling both put a strain on your profit margin, so it is critical to keep track of the times and days that are the busiest for you and plan your timetable around those hours and days. The development of a smart restaurant scheduling solution in collaboration with your restaurant management will not only save you time in terms of scheduling, but it will also lower your labor costs and improve turnover rate, by matching staffing levels to predicted sales. This is very vital for other catering businesses.
Operating a fully integrated POS (Point of Sale) system is a necessary expense for common restaurant operations. But it is one that can end up paying for itself in any number of ways. Not only does it input and track customer payments and other processing payments, but it also ensures accuracy when it comes to orders, improves efficiency especially for busy restaurants (making it easier to turn around tables), increases security (safeguarding against theft), and allows you to keep track of employee performance and administrative costs, manage your inventory, analysis of restaurant profit, and gain overall insight into the operation of your business.
And that is just one technological tool at your disposal. Facilitate online ordering, which has emerged as necessary in the time of COVID. Or consider purchasing restaurant-specific accounting software, inventory management software, or various operational or financial supporting systems, to gain a concrete, real-time understanding of your restaurant margins and current state of restaurant profit.
Traditional marketing is associated with big dollar signs. But nowadays, you can take your act online. Thanks to the power of social media, you have 24/7, cost-effective access to a world of prospective customers. Restaurant marketing is easier than ever, and there are dozens of creative strategies to try.
Considering most people live with their faces buried in their smartphones, it should come as no surprise that diners are regularly seeking out restaurant information and recommendations online. So, the first step is to maintain visibility, and that starts with an up-to-date website and Google My Business Listing. Make sure potential patrons have all the (correct) info they need to make it through the doors of your restaurant and to order online, including phone number and address, current menu and prices, COVID protocols, and social media links.
Instagram. Facebook. Twitter. It is imperative to open accounts on all the major platforms and keep them updated with relevant info, compelling content, and of course, mouthwatering pictures. You also want to make sure it is easy for customers to link to you if they have images to share from a recent meal or a glowing review to share. Oh, and while you are at it, consider taking advantage of LinkedIn too. It allows you to engage and network with other people in your industry, and even source talent when seeking employees. Finally, sending emails to your loyal customers is an extremely effective way to get your guests back in the door.
Other ways to increase your restaurant's gross profit margin include:
As shown above, today’s restaurant systems aid with faster sales, more correct ordering, improved customer service, and a deeper understanding of sales and profits to boost your profit further. BNG POS offers the latest software and hardware designed specifically for profitable and efficient service in the restaurant industry. To learn how we can boost sales and profits of your specific restaurant, contact us here.