As anyone in the foodservice industry will attest, getting a restaurant off the ground is no simple task.
Enjoyable? For the most part, yes.
Effortless? Not in the slightest.
Long hours and hard decisions await, but with a bit (okay, a lot) of preparation and planning, you can transform logistical pain into financial gain.
A quick scan of industry trends can make the restaurant landscape look a bit bleak: on average, 60 percent of full-service and quick-service operations fail within the first three years. These failures result from myriad reasons: exorbitant labor costs, lackluster marketing, sky-high rent, frequent customer complaints, poorly perceived value of a dollar… the list goes on.
But ultimately, whether a restaurant’s doors stay open depends on one thing: profit margin.
To achieve the levels of success you dreamed of as a young chef or hungry entrepreneur, I've put together a crash course on how to plan for and protect your restaurant’s profitability.
Let's Define Restaurant Profit Margin
Before we tackle profit margins, let’s first establish what the term ‘profit’ means.
Profit is money left over after subtracting operating expenses from gross revenue. How you generate revenue may include more than just food and beverage sales: catering, venue hire, branded merchandise, and franchising agreements are all revenue streams.
Unfortunately, the sky is also the limit when it comes to expenses. Between labor, inventory, payroll, rent, utilities, advertising, credit card processing fees, equipment repairs, general maintenance, and the dozens of other fixed, variable, and above-the-line expenses thrust upon restaurant owners, it’s common to feel underwhelmed at what’s left after you’ve made all the necessary deductions.
During your restaurant’s early years, it’s important to manage your profit expectations. Of course we’d all love to be the next overnight success story, but the fact is the vast majority of restaurateurs take on significant debt and achieve limited profitability when first starting out.
Making conservative estimates and goals will serve you well when unexpected start-up costs crop up. When it comes to profits, sustainability is key.
Where profit is expressed in dollars and cents, profit margin is the amount of profit expressed as a percentage of annual sales. The higher the profit margin, the better, but as we’ll explore in the next section, your restaurant’s profit margins are constantly subject to change, sometimes as a result of things outside your control.
What is the average restaurant profit margin?
Unfortunately, there is no one-size-fits-all response to this question. Just as a restaurant’s success is not wholly determined by the food or drinks it serves, its profit margin is also impacted by a host of factors, like average cost per customer, type of restaurant operation, and so on.
The range for restaurant profit margins span anywhere from 0 – 15 percent, with the most common average falling between a 3 – 5 percent average restaurant profit margin.
Any Introduction to Statistics textbook will explain how outliers - data points on the extreme ends of a spectrum - affect averages. Gross revenue and expenses can and do vary significantly between a QSR and a Michelin star restaurant, so it’s worth researching profit margins specific to your niche.
The biggest takeaway here is to set a goal to maintain an “average-or-better” profit margin year over year.
How can I improve my restaurant profit margin?
There are two ways to approach this problem:
a. increasing sales volume relative to expenses, or
b. decreasing expenses relative to sales volume
It’s important to remain mindful of the many myths concerning how to stay profitable in the service industry: cash overages are better than shortages; increasing food costs will increase profit margins; buying in bulk will save money; etc. What works for one may not work for all.
For example: many QSR and FSRs believe a straight reduction in hourly labor or supplies will produce a “quick win” to cut costs and boost profits. This is a tactic that must be approached with caution, as failure to plan for the effects of these adjustments can compromise your customer experience, staff morale an - ultimately - your bottom line.
When it comes to restaurant expenses, reference is often made to the ‘Big Three’:
- Cost of Goods Sold
As a rule of thumb, one-third of revenue is typically allocated to cost of goods sold (COGS), another third to labor, and the remainder must account for any additional overhead expenses.
I cannot overstate the importance of engaging in proactive planning, something that rests at the heart of every successful business venture, be it a restaurant or a food truck. Setting SMART restaurant goals will offset circumstances beyond your control — things like inclement weather and economic downturns.
To help you on your way, here are three strategies designed to keep your customers, staff, suppliers, and bank account happy.
1. Monitor Your Metrics
Expenses are a bit like toddlers: leave them unattended and they’re guaranteed to run amok.
Critically evaluating your restaurant’s metrics is a great way to protect against runaway expenses. The good news is that metrics are everywhere in the foodservice industry: menu item sales, traffic patterns, and utility usage are just a few examples. This information points to your restaurant’s health and provides justification for responsible, profitable changes. Whether you’re making the switch to energy-efficient light bulbs or overhauling your inventory management system, even the smallest change can have a big impact.
2. Smart Scheduling
Given how much of your revenue goes to payroll, streamlining your staff schedules is an easy way to ensure your restaurant is sufficiently staffed to meet customer demand at any hour of the day. Over-scheduling and under-scheduling both pose a threat to your profit margin, so it’s essential to track what times and days are busiest for you and schedule accordingly. A smart restaurant scheduling solution will save you time scheduling and reduce your labor costs by matching staffing levels to projected sales.
3. Expect the Ebbs
It is perfectly normal for your restaurant to experience ebbs and flows in traffic. The flipside of tracking customer peak times is you’ll start noticing lean times as well — weeks or months when traffic temporarily drops off.
To keep customers coming through your door all year long and give your business a competitive edge, try scheduling special offers, incentives, and promotions to coincide with identified slow times.
For those of you who associate marketing with big dollar signs, look no further than e-marketing. Thanks to the power of social media, you have 24/7, cost-effective access to a world of prospective customers. Once you’ve enticed them to visit your shop, you can keep the engagement going with innovative products like Turnstyle’s Wi-Fi marketing solution. Win-win!
Struggling to keep your restaurant in the black?
It's important to stay up-to-date when it comes to restaurant industry trends. For daily articles on restaurant metrics, pricing strategies, marketing initiatives, and more, subscribe to the Toast Restaurant Management Blog - we'll even send 15 Free Staff Training Ideas your way.