As a restaurant owner or operator, your restaurant is likely not only your livelihood but also your dream. Unfortunately, the restaurant industry is notorious for having low-profit margins, making restaurant profitability a crucial and challenging part of running your business.
But challenging doesn’t mean impossible. With the right tactics, your restaurant can
boast healthy profit margins and not just survive but thrive. The key is understanding your profit margins and working to increase them.
Before we dive into the steps you can take to increase your restaurant’s profitability,
here’s a quick primer on profit margins.
Calculating restaurant profit margins
To work out your restaurant’s profit margin, start by calculating your gross profit
over a specific period. That’s your total revenue minus the costs of the goods you sell
(COGS).
For example, let’s say Izzy’s Veggie Bar’s total sales from July to September 2021
was $900,000 and its cost of goods sold was $250,000.
To calculate gross profit, apply this formula:
Gross profit = (900,000 – 250,000) / 900,000
Gross profit = 650,000 / 900,000
Gross profit = 0.72
Now deduct operating expenses like payroll, utility bills, and marketing from your
gross profit. Your net profit – what you are really earning – is the amount left.
Let’s take Izzy’s Veggie Bar as an example again. From July to September 2021, its
total revenue was $900,000, and its expenses were $860,000.
To calculate net profit, apply this formula:
Net profit = 900,000 – 860,000
Net profit = 40,000
Net profit as a percentage = (40,000 / 900,000) x 100
Net profit as a percentage = 4%
Tracking your restaurant’s profit margin over different months or quarters will tell you
if it changes, and whether there is cause for concern. And if there is, luckily, there are
many best practices for improving your restaurant profitability that you can put into
action right away.
What’s a good restaurant profit margin?
In 2019, restaurant profit margins in the US hovered between 3 and 9% – and that
was before the Covid-19 crisis.
While restaurant profit margins vary widely, businesses that operate within the same
category typically share a comparable average profit margin since they pay similar
amounts for food and operating costs:
Fast-food profit margins typically are at the higher end of the range, from 6 to
9%, because fast-food or quick-service restaurants often use cheaper food products
and need fewer staff members.
Full-service profit margins are typically between 3 and 5% as full-service
restaurants require more staff members, buy high-quality food, and pay more rent
and upkeep.
Catering profit margins typically run 7 to 8%. Catering businesses often pay
high food costs, but they generally require less staff and don’t need an expensive
location.
Is your profit margin lower? Every restaurant business is unique, so there’s no reason
to panic. But to make sure you are doing everything you can to achieve and maintain
profitability, take a look at these 6 best practices.
How to increase your restaurant’s profit margins
Rest assured: there are many things you can do to improve restaurant profitability.
Like in any other type of business, the key is to increase sales and decrease costs.
Increasing your sales volume
1. Get on board with online ordering
If your restaurant isn’t offering delivery or takeout yet, it’s time to start. With 46%
of US smartphone users ordering food through their phones at least once a month,
you’re tapping into a huge audience of hungry customers waiting to be served.
Adding online ordering – or increasing online ordering channels – is a great way to
increase your restaurant’s covers and even boost your average check size – with
attractive pairings, sides, and add-ons. (We’ll talk more about menu engineering
later).
Teaming up with third-party services like Uber Eats, DoorDash and GrubHub will
help you acquire new customers by improving your online discoverability, making
your restaurant visible to (tens of) thousands of loyal app users.
You could also consider setting up your own online ordering platform that integrates
with your POS and website, enabling you to sell directly to the end consumer (DTC)
and saving upwards of 30% in commission fees.
2. Leverage Technology
As you gathered from the previous step, you can save more than just time with smart
restaurant technology: you can save money while bringing in additional business too.
It all starts with the right software. Invest in a smart point-of-sale (POS) solution that
does more than just process payments. A fully integrated POS system will help you
manage table turnover rates to staff scheduling, menus, inventory, food waste, and
operational and financial reporting.
A smart POS also integrates with all-in-one restaurant management solutions like
Deliverect, which streamlines your online orders. By handing you the tools to quickly improve order accuracy, speed up your order flow, and get better insights into
business performance, restaurant software like Deliverect helps you boost sales and
maximize profits.
You may think of food tech as yet another expense, but using the right ones will help
optimize labor, reign in expenses, save time and energy, and ultimately boost revenue.
3. Create a winning menu
Often referred to as menu engineering, building an attractive menu is a great strategy to increase guest profitability. Menu engineering combines psychology, data, and
design to ensure that every item on your menu is popular and profitable.
Menu engineering can increase profits by 20%. So why not give it a try?
Start by analyzing your menu items: which sell the most and the least, which
ones are good for your bottom line, and which ones aren’t?
Promote your top-selling and high-margin dishes, and take cost-killers off the
menu. If you’re not ready to let go of a menu item, try changing the price or switching
to lower-cost ingredients.
Suppose you have a high-profit dish on the menu that’s landing well with your
customers but isn’t selling as much as you’d like, experiment and try changing the
item’s name, image, or description. It could be that simple!
An online ordering management platform like Deliverect connects all your online
menus to one management overview. The Deliverect Menu Builder lets you sync
menus from your restaurant POS and update them with one click. This feature makes
it easier to experiment with promotional items and explore new menus to see what
works best for different audiences and situations.
4. Increase your traffic through online marketing
Your online presence is more important than ever. Both existing and potential customers check out your restaurant before deciding where to eat or order from.
Managing your online presence well is crucial if you don’t want to miss out on (a ton of)
business. Here are some tips to jumpstart your online marketing strategy: your online presence starts with a website that features up-to-date contact info, menu and prices, and links to your social media accounts and online ordering platforms.
Thanks to the power of social media, you can connect with both regular and
new guests 24/7. All you have to do is pick one of the many effective social media
strategies out there and get started! Open accounts on all major platforms and keep
your followers fed with compelling content and mouth-watering photos.
Take advantage of digital customer retention. You can offer incentives to
make sure you get a repeat purchase, like loyalty rewards, a discount on their next
order, or a special offer when they buy a meal for a friend.
Try to create as many positive referrals as possible on different platforms to get found more quickly online. Encourage your best customers to leave reviews on Google, Facebook, and Instagram, as well as on dedicated review sites like Tripadvisor and Yelp.
When you control how your brand is perceived online and you’re active across the relevant platforms, you can move customers between channels seamlessly and
maximize the potential of your restaurant.
Decrease your costs
5. Reduce waste by keeping track of inventory
A very common issue in the industry, food waste, has the potential to burn a hole in
your pockets. Approximately one-third of your restaurant’s revenue is allocated to
COGS. If you end up throwing that food away, you’re effectively losing money that
could have been profit.
Using an inventory management system will help you track your inventory better,
ensuring that you don’t over-order ingredients and giving you more insight into your
best-selling products.
What’s even better than that is connecting your inventory management system with
all your restaurant software, so that you can get real-time alerts when an item is out-of-stock, whether it’s been sold online or in-house.
Decrease controllable expenses
If you increase your sales revenue but your expenses increase at the same rate, your
profit margin will not improve. That’s why you also need to optimize expenses.
Try to reduce food costs by comparing vendors, buying local produce, getting
ahead of food waste, and tracking your inventory more accurately.
Use your POS or scheduling software to create more efficient staff schedules
and monitor shifts.
Lower your utility bills by making many small adjustments: reduce idle times
on ovens, boilers, etc., switch to motion sensor lights, make sure your thermostats
and air conditioning are adequately programmed and think about switching to
eco-friendly kitchen appliances all around.
Stay mindful of your equipment and consider buying second-hand. As necessary as kitchen equipment is, it is possible to lower its cost by opting for used equipment that is just as effective.
Getting started
Like we mentioned earlier, there’s no cookie-cutter approach to increase your restaurant’s profit margins. To reach and maintain profitability, you need to look at your own unique situation and determine which strategies will work for your business.
Whatever tactics you choose, you should continuously be working on optimizing
your sales channels and operational efficiency, and regularly review your expenses to
boost your revenue.
Ready to start increasing your profit margins? Get in touch with our experts today
and let us show you how Deliverect can help you optimize and boost your sales.
