Restaurant Profit Margin: Where Have Restaurant Profits Gone?

By: Donald Burns

6 Minute Read

Mar 28, 2018

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Restaurant Profits

restaurant profit margin

If you listen to the news, you know that the restaurant industry continues to grow. Bruce Grindy, NRA Chief Economist, says in this post: “Restaurant job growth is projected to outpace the overall economy in 2016, and the industry will add more than 300,000 jobs for the sixth consecutive calendar year.” That’s awesome news!

However, restaurant profit margins seems to be shrinking, and shrinking, and shrinking.

So why do so many restaurants struggle? If things are so great and business is booming, why are so many not making the profits they should?

It’s rather simple: bad planning.

The restaurant industry has a unique duality. On one hand, it is a business of emotions. Passion, service, hospitality, pleasure, indulgence, and entertainment are common emotional drivers. It’s also, however, a business of control. Inventory, systems, attention to detail, precision, and consistency are all needed to make a restaurant last. These two elements are much like yin and yang. They need each other to survive. The problems come when you focus too much on one and not the other.

Here are four common areas that will eat away at your restaurant's profits. Improve them to improve your restaurant profit margin.

1. Bad Pricing Strategy

When you match other restaurants as far as menu items and then try to lower your pricing to undercut theirs, you lose. Your restaurant is now a commodity. You might get business in the short term, but those quick sales are not so great when you look at the bottom line.

You don’t want to compete on price. You want to stand out on value.

So how do you do that?

1. Train your team to deliver better service. Invest in programs, books, even audio that make your people better. Remember: restaurants become better when the people in them become better.

2. Develop signature menu items. You need to be able to answer this question: Why do I drive to your restaurant? If you don’t stand out in the market, you are blending in.

3. Don’t get lured into a price war with other restaurants. Sometimes ego gets thrown in the pricing game, as competitors would rather sell something cheaper just to take away guests from another restaurant. This will kill your restaurant's profit margin.

2. Bad Delegation

Many restaurant owners have big visions for their business. Many restaurant owners get stuck working in their business instead of on their business. It’s easy to get drawn in and get trapped there. You want your business to be successful, that’s understandable. The problem is that most are doing work that they could easily delegate to other employees.

"Many restaurant owners get stuck working in their business instead of on their business." CLICK TO TWEET

It's as simple as this: Your business will not grow until you focus on the things that can grow your business. Is your time being used wisely, sitting in the office writing schedules (something a manager could do), or would it be better spent networking and making sure your restaurant is at the top of people’s mind? Are you spending your time wisely running to the store to buy products or training your team how to manage their inventory better? Are these activites improving your restaurant profit margin?

3. Bad Hiring

We know that getting the right people on your team is important. Who you allow to interact with your guests is one of the critical decisions an owner or manager makes. Sometimes, it's not the person you hire that hurts your restaurant... it's the one you don't fire.

Bad employees are a major reason your profits are not there. They don't care and they waste product. They don’t care and they alienate your guests. They don’t care and they piss off the good employees who have to do the extra work they don’t do. They clock in early and clock out late to ride the time clock and raise your labor costs. They throw away silverware because they're too lazy to retrieve it when it accidentally falls into the trash. These people are stealing from you in a way that is far worse than taking product. They steal your time and energy and drive good customers and other employees away. They are kissing your restaurant profit margin goodbye.

Avoid these hires at all costs, and remove them from your staff if you discover them.

4. Bad Controls

Most restaurant owners know what they should do. They should cost out their menu. They should create a yearly marketing calendar. They should fix the chairs with rips in them. They should have a budget and a P&L. They should follow their restaurant business plan.

... They just should all over the place.

If you know there is something you should do in your restaurant to improve your bottom line and you are not, then you need to turn that should into a must! Drop the excuses as to why you cannot get those things done. You don’t have the right people? Hire the right people! You don’t have time? Make time. You don’t know how? Hire someone with knowledge. We can do this all day….

The reason your restaurant is not making the profits you want is the story you keep telling yourself about why you can’t achieve your goals. Divorce the story and marry the truth.

You’re going to need to make a real commitment to get the restaurant profit margin you want. A real commitment. Talk is cheap. Actions and results are the only measure that matter.

Restaurant Profit Margin - 100% All Or Nothing

In 1519, Hernando Cortez decided he wanted the treasures the Aztecs had, so he took 500 soldiers, 100 sailors and 11 ships to the shores of the Yucatan. Cortez knew his men were outnumbered. He also knew that, in 600 years, no one had been able to conquer the Aztecs. Some of his men were unsure of their chance of success. Some even tried to seize some ships and head for Cuba. Cortez found out about this and wanted to make sure that his men were committed to the plan to take over the Aztec empire, so he ordered his men to burn the boats. Now that is going in with a 100% all or nothing mindset!

Too many restaurant owners operate with a noncommittal attitude. Your restaurant will never see the profits you want until you make a commitment to do whatever it takes to succeed. When failure is an option, there is a lack of commitment. Change is hard. The restaurant business can be a challenge. Get a mentor, a coach, or an advisor. Do something that puts you back in control of your restaurant. Develop a pricing strategy that sets you up a a brand leader, not a commodity. Delegate tasks that take you away for building your business. Get rid of those bad employees cutting into your profits. Stop making excuses and start making solutions.

Oh, and burn your boats.

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