The UEAT Blog

The Ultimate Guide to Restaurant Profit Margin

Posted on
June 21, 2023
Restaurant Profit Margin
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If you’re looking to increase your profit margin and optimize your expenses, this article will help you solve all your doubts while learning the best tips to successfully manage your restaurant!

What is the average profit margin of a restaurant?

Although there is no perfect answer to this question, the average profit margin of restaurants is usually between about 2 and 6%.

It’s important to distinguish earnings from income, because they can often be confused. While the revenue is the total of the money inflows (total sales or total turnover), the profit margin is the percentage of that revenue that is converted into profit.

The simplest formula to calculate the profit margin is:

Income – Expenses = Profit

Why are restaurant profit margins so low?

There are different factors that can contribute to a low profit margin when it comes to the restoration industry. However, there are three main expenses, which are known as the big three which can lead to low profit margins for restaurants: Cost of Goods Sold (COGS), Labor and Overhead.

Typically, almost a third of the income generated by restaurants is allocated to the cost of selling products, while the other half is allocated to labor costs. At the end of the day, the remaining income goes towards rent payments, bills, and administration fees.

Understanding gross profit and net profit

What is gross profit?

Gross profit is the total profit of your business after deducting service expenses. It does not take into account other expenses such as taxes.

What is net profit?

Net profit refers to the total profit of your business after deducting all expenses, including taxes and other expenses.

What food has the highest profit margin?

Salads

Ordering a salad to accompany a dish is quite common, which is followed by an increase of more than 10 dollars in the bill. The price of the raw material of a normal mixed salad is very low, but nobody sells it for 3 dollars, which would perhaps be a reasonable profit margin.

Wine

Even if it’s not food, the sale of bottles and glasses of wine represent some of the highest profit margin items in most restaurants. Many establishments have become used to charging their customers more than triple the value of the bottles. You could even say that many restaurants survive thanks to this.

Fried appetizers

Within the fried appetizer category, french fries are particularly cheap and their preparation is not tedious or laborious at all. This makes it a very profitable appetizer for any restaurant. In addition to being popular and combining well with beer, they are usually shared by many people.

Desserts

Desserts don’t usually cost less than five or seven dollars and in most cases, it’s hard to justify such a price for a slice of cheesecake or carrot cake. In the case of haute cuisine restaurants, desserts have reached a fairly high level of complexity, and sometimes their price is justified, but paying $10 for a piece of brownie and a scoop of vanilla ice cream is something else. But as they say, there is always room for dessert and it’s hard to resist!

Tea and coffee

Any infusion costs more than a dollar in any bar or restaurant and can sometimes cost 2 or 3 dollars, but it’s a very cheap product that does not require time and effort to prepare. Something similar happens with coffee, although in this case, if the product is more expensive, it can be justified, and its preparation is a bit more laborious.

Bottled water

Almost all restaurant owners agree to say that bottled water is one of the products with the greatest profit margin. It’s a great source of income for restaurants, but not so much for bars, where it’s not ordered as much compared to other drinks.

Chicken

Chicken meat is a very cheap meat compared to lamb or veal and if it’s justified by a complex preparation, it can be sold at a similar price. However, any chicken dish that exceeds 17 or 18 dollars is difficult to justify.

How to maximize restaurant profit margins

When you calculate the balance of the profit margin of your restaurant and it is not positive, the most important thing is to start redesigning the financial direction of your business before it is too late. Although each restaurant is different, it is possible to see patterns in the aspects that tend to negatively affect profit margins in restaurants.For example, if you have high employee turnover rates, high labor and equipment costs, expensive supplies, etc.

Here are some tips to help you maximize your restaurant profit margins:

1. Invest in smart marketing tools

With our smart restaurant marketing tools, you can easily differentiate yourself from the competition by:

  • Creating the right promotions for the rights customers
  • Fostering brand promoters and repeat customers
  • Building business intelligence
  • Having complete control of your business and full support from our team

2. Optimize your food costs

Lowering the cost of basic supplies is one of the best ways to increase your profit margin. To do this, try negotiating with your suppliers, or having multiple suppliers to assess different pricing options, reduce waste, simplify the menu, or buy ingredients in bulk.

3. Lower your prices

This is an effective strategy in the restaurant industry. Lowering the prices of your most popular dishes will attract more customers. This will increase your total sales and therefore your profit margin. This advice is especially useful if these dishes are generating economic losses or inflating the cost of your inventory.

You can also choose to keep the prices where they are or create promotions that include lower-cost dishes but do not increase the overall cost.

Upselling for restaurants

4. Implement an online ordering system

With active lifestyles, consumers no longer want to be faced with a restaurant’s busy phone line, they want to order on their terms. With our online ordering system, you can strategically enhance your customer journey and improve your profitability.

You can also achieve a higher conversion rate, increase your average bill, create loyal and recurring customers, foster loyalty and offer multiple delivery options to your customers (commission free).

Request a platform demo 

5. Decrease employee rotation

If your employees quit, you will have to invest more time and resources in recruiting new staff. It could also affect the quality of your restaurant’s service and your sales. It is always advisable to maintain good communication with your employees, listen to them, motivate them and encourage their loyalty so that they feel comfortable and want to work in your restaurant for a long time.

Constant training, internal and family recreational activities, financial incentives and vacation days can be very useful to lower employee rotation.

6. Monitor your results periodically

All the information you have is useful to evaluate your results and how to improve your numbers, so the more you have, the better. It’s important that you set a weekly sales goal and  make or receive a monthly income statement from your accountant which indicates your gross and net sales, cost of sales, contribution margin, operating costs, gross profit and net profit.

It’s also highly recommended to know the breakeven point (either by service, day, week or month), which refers to the minimum sales required by a business to start earning money. It’s important to review the numbers, as well as make sales budgets and cost projections, from weekly to annual, and compare them with previous periods.

7. Invest in AI

Our Artificial Intelligence recommendation system will help you upsell like never before! It systematically offers upsells that customers actually want to eat baked on past purchases. Our  AI module is based on millions of data points and provides a unique experience for each customer based on their taste and food preferences!

How AI is changing the food industry

Tips to reduce overhead expenses

Limit the number of dishes on your menu

Large menus make life difficult for you and your clients. If your kitchen does not have the appropriate dimensions or equipment, and you do not have the necessary staff to serve a very extensive menu, do not hesitate to shorten it in half and only keep your best dishes. It’s important that you focus on quality, not quantity. Another aspect to take into account is that, the longer your menu is, the greater the food waste.

Limit portion sizes

There is a great deal of money that gets lost when portion sizes are too big – not to mention food waste. To avoid this, determine the optimal serving size for each dish and the ingredients that make it up, and make sure your staff uses the proper utensils to measure the amounts indicated.

Today, customers value quality more than quantity, and the size of the portions you serve is directly associated with the cost of your plate. If you discreetly control the size, you control the cost and save unnecessary expenses.

Be active on social media

Being active on social networks gives you great visibility without the need for large investments compared to traditional advertising. A great way to stand out is to set up a search engine optimization (SEO) strategy in order to get organic traffic online – you can start by setting up a Google My Business account in order to appear in local searches. It also helps if you have positive reviews on platforms such as Tripadvisor.

Keep an eye on your products

A key factor in the restaurant industry is the expiration of products and raw materials. Unlike other types of business models in which products don’t expire or cannot be returned, in the food and beverage industry, you must be very careful when purchasing products. Everything that cannot be used will eventually be thrown away.

If you plan to open a restaurant, keep in mind that there are quite a few software programs that can help with your inventory management. Correct booking management can also help you understand what materials you will need to use. On the other hand, the professionalism of your chefs and staff is also very important. Knowing how to cut food correctly and not throwing too much of it in the trash will help you avoid waste. For example, some ingredients used to prepare a salad that finally don’t reach the diner’s plate can be used in sauces or other dishes.

Practical guide to online ordering systems and marketplaces

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