POV: You’re a restaurant manager tasked with improving your business’s profit margin for the quarter. Should you hire a social media team to spread online brand awareness in hopes that it will lead to higher traffic in your store? Or should you start a loyalty program to drive sales?
Here’s the thing: Elevating your restaurant profit margin is more than upping your sales and marketing efforts. What you need to prioritize is how to minimize your restaurant expenses while maximizing its revenues.
Ahead, you’ll learn the two types of profit margins and how to calculate them. Most importantly, you’ll discover sustainable ways for optimizing your restaurant profit margin without making your customers bear the brunt of higher menu prices.
Before we go into the specifics of a restaurant’s profit margin, let’s first look at a related concept — profit.
In layman’s terms, profit refers to the amount a restaurant has earned after deducting the costs from its gross revenue:
Profit = Revenue - Costs
Meanwhile, profit margin is typically expressed as a percentage of your total revenue:
Profit margin = [(Revenue - Costs) / Revenue] x 100
The greater your restaurant's profit margin, the more efficient your restaurant’s operations are in making a sale. In other words, a high profit margin is indicative that your food service business is in good health, making it better able to withstand economic downturns or slow seasons.
There are two types of restaurant profit margins you need to be familiar with:
Gross profit margin
Net profit margin
Gross profit margin is calculated by subtracting the total costs of goods sold (COGS) from total sales. It’s then expressed as a percentage of the restaurant’s revenue.
Gross profit margin = [(Total revenue - Total cost of goods sold) / Total revenue] x 100
The gross profit margin metric is ideal for figuring out if your restaurant’s operations are efficiently optimized. That said, this number solely focuses on COGS and excludes other overhead and operating expenses. As such, the restaurant's gross profit may not be an accurate metric of how profitable your business is.
To calculate the true extent of your restaurant’s profitability, you’ll need to work out your net profit margin. It’s the value that ultimately determines if your business is in the black or red.
What you have to do is subtract all expenses — think operating costs like kitchen equipment and overhead expenses like rent, employee salaries, and insurance — from the total sales made.
Net profit margin = [(Total revenue - Total costs) / Total revenue] x 100
Compared to gross profit, the net profit margin is a more accurate measure of your restaurant’s profitability as it deducts the total expenses and not just the cost of goods sold.
As a restaurateur, you probably know that profit margins in the food service industry are on the slimmer side compared to other industries like banking and real estate.
CSI Market has published statistics for the average restaurant profit margins in Q3 of 2022. The data shows that the average gross margin stands at 68.75%, and the average net profit margin is around 9.36%. For the record, the average profit margin in the restaurant industry can be anywhere from 0-15%.
Of course, the exact figure of your restaurant's profit margin will depend on the nature of your individual business.
Compared to quick-service restaurants (QSRs) like fast-food drive-thrus and food carts, full-service restaurants (FSRs) usually earn lower profit margins. That’s mostly due to a higher labor cost, fixed menu pricing that’s usually immune to changes at a moment’s notice, and exorbitant rent, especially in upscale locations.
The industry benchmark of profit margins for full-service restaurants is typically in the 2-6% range. A Forbes article showed that the net profit margin for these restaurants hit a relative high of 6.1% in 2018.
A quick-service restaurant, like a food truck or fast food restaurant, may actually have a higher profit margin than a swanky fine-dining restaurant.
Fast-casual food establishments can generally run on little manpower, which equates to less costly wages. Plus, counter service concepts and pop-up stalls don’t need much space to set up, which helps decrease rental costs.
Throw in the high foot traffic and fast service that’s typical of QSR food concepts, and it’s no wonder that they enjoy an average profit margin of 6-9%.
You’ve calculated your restaurant's profit margin. Now, you just need to work out how you can improve it.
First, identify which costs can be lowered and which can’t (or won’t be feasible to reduce). Next, think of ways to increase sales. Below, we share various ideas to help you kickstart your brainstorming plan.
Labor costs are one of the “big three” expenses that dilute your profit margin. For that reason, it makes sense to prune your payroll so you aren’t incurring more costs than needed. One way to do so would be to use a self-service kiosk like KioskBuddy.
Small food-service businesses, like cafes and fast-casual restaurants, can benefit from KioskBuddy to streamline their labor costs. Thanks to its effortless setup and intuitive interface, KioskBuddy lets customers order and pay on their own without needing staff input. This way, you can free up your employees for higher-impact tasks like serving and cooking for a better dining experience.
KioskBuddy can also help you avoid the risk of overstaffing and unnecessary labor expenses. For instance, installing KioskBuddy at your counter essentially fills a cashier position so you can save on labor costs in that area. In particular, it’s a boon for restaurant concepts with an ultra-lean manpower structure — think food trucks and farm stands.
Operating a restaurant in our modern world means you can take advantage of technological advancements.
Case in point: A point-of-sale system (POS system) is the ultimate tool in helping you track sales and think of ways to boost your numbers. For example, your POS data can help you determine the menu items that bring in the highest profit margin and those that don’t. In this case, you may want to remove the low-profit dishes (especially if they aren’t a big hit with guests) to optimize your COGS (see next section).
If you’re using KioskBuddy, you’ll be happy to know that it directly connects to the Square for Restaurants POS to effortlessly pull in the sales data you need. Plus, self-ordering kiosks are shown to increase basket size by 20%-30% because customers feel less pressure from a kiosk than a cashier.
What’s more, self-ordering can help shorten the waiting time for customers. This, in turn, will likely have a positive spillover to increased customer satisfaction and a faster table turnover rate.
COGS is another one of the three major expenditures every restaurant owner faces. As such, it’s prudent to keep your food costs low as much as possible through various measures:
Optimize your supply chain: Source from as few vendors as you can to take advantage of bulk discounts, lower delivery costs, and less paperwork.
Take note of your inventory: Your POS data comes in handy once again. Use the sales reports to forecast sales volume and trends, especially with seasonal changes. From there, decide how many supplies you need to have on hand to meet demand. If food waste is a problem, try downsizing the portion sizes of your menu items. Also, if your budget allows, consider investing in inventory management software.
Design your menu wisely: Avoid having too many items on your menu, as it can lead to decision paralysis and prolong the ordering process. Also, use menu engineering techniques like profiling high-profit dishes to appear aesthetically pleasing to your customers. This way, they may be more inclined to order these items.
If there’s no viable way to bring down your COGS, you may want to consider passing on the cost increments to your customers as a last resort. The good news is, quick- and limited-service restaurants like food trucks and cafes can quickly adjust the prices on their menu items in real time. This is especially true if you’re using digitized menus on platforms like KioskBuddy. Meanwhile, restaurants operating with print menus may not be so adaptable to cost changes.
The words “profit margin” are music to any restaurateur’s ears. But to reap their true benefits, you need to first understand the different types of restaurant profit margins and how to calculate them. Most importantly, you need to have a firm grasp of the relationship between profit margin and relevant expenditures like operating expenses and overhead costs to maintain a healthy bottom line.
If you’re looking for ways to level up your restaurant profit margin, analyze every aspect of your business operations. From trimming away your labor costs to using your POS sales reports to forecast consumer demand, there are viable ways to improve your profits without increasing menu prices.
Above all, a tool like KioskBuddy can help you with labor restructuring and sales data collection to achieve your goal of a higher restaurant profit margin. Start your 30-day free trial with KioskBuddy today.