Restaurant Profit Margins Are Shrinking. Do You Know Where You Stand Today?

Written by Brittany Paguni, Account Specialist

The restaurant industry has taken a beating. 2020 has been a historically bad year with over 110,000 restaurants closing. 2021 was not too much better. Rising labor costs, food costs, and skyrocketing rent have devasted profit margins. The current pandemic has changed the industry, and not in a good way. Restauranteurs are having to navigate the tough balance between cutting corners and costs without losing the integrity of the business they have built. The phrase “stuck between a rock and a hard place” has never so accurately described the current climate.

Gross Profit Margin Vs Net Profit Margin

Before we discuss the challenges we face (and offer some valuable solutions), let us review a restaurant's profit margin. Profit is money left over after subtracting operating expenses from gross revenue. There is a difference between gross and net profit margin.

Gross profit margin= Revenue- Cost of goods/ Revenue. Ex. $100,000 in sales -$60,000 cost of goods = $40,000 gross profit. Divide $40,000 by the total sales $100,000 = 40% gross profit.

Net profit margin= Revenue– Cost of goods + Operating expenses/ Revenue. Ex. $100,000- $60,000 cost of goods - $30,000 operating expense = $10,000. Divide that net profit by revenue ($10,000/ $100,000 = 10%.)

As you can see, your profit margin depends on many things that are inside and outside of your control. Every restaurant is looking for ways to be more profitable. It seems revenue streams are limited but expenses are endless. Most customers believe that all their financial problems will be solved by increased revenue. This is partly true, but increased revenue will also allocate for increased costs (extra food purchased, extra staff needed). If you don’t have a solid business model and budget in place and have a plan for that extra revenue, it will disappear as soon as it appears. To run a successful restaurant, you need to make sure your financial skills are as strong as your culinary and management skills.

This is part of why Fobesoft is so valuable for our customers. We help you create and implement a customized budget. You can see where your money is going in real-time on a day-to-day basis. No surprises at the end of the month, or worse the middle of next month when you get your profit and loss statement from your accountant.

What Is The Average Restaurant Profit Margin?

Decades ago, profit margins for restaurants used to be 15-20%. That has changed greatly. The new range for average restaurant profit margin is 0-15%, but most restaurants are seeing 3-7%. The age of your restaurant will affect your profit margin. Most restaurants take on substantial debt and achieve limited profits when first opening.

Your type of restaurant will also play into what kind of profit is to be expected. A fine dining steakhouse will have a different expectation than a fast service place. Below are the industry standard profit margins for different concepts:

Full-service restaurants 3%-5%

Fast-casual and quick-service restaurants 6%-9%

Catering 7%-8%

Challenges The Restaurant Industry Is Facing

One of the biggest challenges restaurants are currently experiencing is labor struggles. Retaining and hiring staff in an increasingly competitive market has been challenging. A lot of employees took a step back during the pandemic and found new careers with increased job security, better hours, and benefits.

Another huge obstacle has been increased food costs. Food purchasing costs are higher than they have ever been. Dairy is twice as much, lots of items are out of stock and there are rampant delivery issues. Some items you just can’t get anymore. This is all affecting the bottom line and also the customer experience.

Keeping your customers happy has gotten particularly challenging. If you raise your prices or reduce your portions they are upset. Online reviews have gotten harsh. There seems to be little sympathy for the challenges restauranteurs are facing. “This isn’t how it used to be”, is a phrase that’s repeated a lot. No, it isn’t and it will probably never be that way again.

Increasing overhead is also cutting into the bottom line. Skyrocketing rent and utility expenses are eating up a large part of the profit margin. With rent and gas being almost double what it was a year ago, there is less opportunity to be profitable.

Ways To Increase Profits

Here’s the good news! There are many ways to increase sales and, decrease expenses. Your expenses consist of your cost of goods, labor costs, and daily operating costs or overhead. A good rule of thumb is that your cost of goods should be no higher than a third of your revenue. The same goes for labor. Whatever is left after calculating your overhead is your profit.

A Few Ways To Increase Sales

Make sure your marketing online. Have a strong social media presence and make sure you are posting frequently. This will drive new business as well as retain current customers.

Use Technology to your advantage. The use of handheld POS systems has revolutionalized the restaurant industry. Your orders can get sent while still at the table, causing food and beverages to be made earlier. Payments can also be processed at the table, all resulting in a faster turnover time.

Consider using a customer loyalty program. People like to feel rewarded for giving you their business. It also incentivizes them to keep coming back.

A Few Ways To Decrease Expenses

Watch your labor closely. Some ideas to decrease labor costs are using online ordering and QR. You can omit the costs of extra waitstaff. Also, be smart about your scheduling. Forecast trends in business and stagger in times. Watch your clock and don’t let your employees accrue overtime.

Reduce food and alcohol waste. Don’t overorder, and make sure you are utilizing the extra product in specials. Analyze your menu sales, and make sure you cost out menu items including labor and supplies used. You want to make sure your menu prices are profitable.

And lastly, save on utilities when you can. Use eco-friendly lights and solar lighting outside. Have your AC on a timer, and make sure to turn off the lights before leaving.

All these little expenses add up over time. There is so much outside of your control as a restaurant owner. By focusing on what you can control, and making adjustments, you will increase your profit margin and be on your way to running a successful and profitable restaurant!



Get The Secret Recipe to Running a Profitable Restaurant


About Geordy Murphy

From concept developer and restaurant general manager, to corporate chef and marketing director, Murphy has been the lead executive in a number of the country’s most prominent restaurants and bars.Connect with Geordy on geo@cypresshospitalitygroup.com


Related Posts

card__image

Diners Say They Are Tipping More Than Before Since The Pandemic

Many people are going out to restaurants now after COVID restrictions are lifted. So, "What is a good tipping percentage in 2022?"

card__image

In this competitive corporate crowd, your business needs to incorporate Restaurant Technologies in all parts of the plan.

card__image

The hybrid workplace model has put a chunk of customers out of reach. Restaurants that did not adapt eventually closes shop