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How to achieve the highest profit margin restaurant business

Maria Ortega
6 Jan 2023

Many restaurant owners are familiar with the restaurant industry's average profit margin. It is no secret that restaurant businesses have the potential to generate a significant amount of revenue and profit, as long as they are managed properly. But how do you do this? 

In this article, we have broken this question down into five steps: 

  1. What is a profit margin?

  2. Key factors to consider when calculating restaurant profit margins

  3. Different profitable restaurant types

  4. Proven strategies and best practices to increase profit margins

  5. Conclusion and key learnings

 

We will start by explaining what a profit margin is and its importance when considering food business ideas to choose a profitable restaurant type. This will be followed up by discussing some tips for restaurant owners looking to improve restaurant profit margins to run a successful restaurant, depending on the types of restaurants.

What is a profit margin?

Profit margin is a financial ratio that measures the profitability of a business. It is calculated by dividing the final net profit by the total revenue. The result then is expressed as a percentage.

There are a couple of steps to figuring out these numbers and obtaining the actual profit margin. 

How to calculate your final net profit figure:

First, you will need to calculate the gross profit value, in order to obtain the net profit figure. Simply put: Gross profit = revenue - the cost of goods sold (COGS).

COGS are the direct costs of producing your food service from your total sales. These include the following:

  • Labor costs

  • Ingredient costs

  • Overhead costs

Once the gross profit has been found, you can then subtract operating expenses, including fixed costs such as renting and tax, from your gross profit figure. This will give restaurant owners the overall net profit value for the restaurant's financial performance time-period.

How to calculate your net profit margin:

The final step! Divide the net profit value by the revenue, and times it by 100 to obtain the average restaurant profit margin as a percentage.

The average restaurant profit margin in the United States is around 6-7%. The most profitable restaurants will have higher profit margins than the usual, reaching up to 10-12%. What makes them different? These successful restaurants maintain low overhead costs, including food, and they have strong sales volume. This allows the restaurant business to have more financial flexibility, and can potentially lead to increased growth and expansion.

On the other hand, low profit margins mean that a company is making less money on each product they sell. This can make it more difficult for the restaurant manager to maintain financial stability and may limit their ability to expand.

It is an important metric in the restaurant industry as it helps to understand how much profit a business is generating from its sales and how efficiently it is using its resources. Consequently, we support restaurant owners with our restaurant POS system to increase profit margins by providing real-time data and tools to make more informed business decisions while operating more efficiently.

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Key factors to consider when calculating restaurant profit margins

The average profit margin for restaurants in the United States varies widely depending on the average restaurant size and how much the restaurant makes in a day. Other factors that will determine profit margin performance are:

  • Restaurant cuisine

    Different cuisines have varying costs of ingredients and preparation methods, which can impact the overall cost of producing a dish. For example, a seafood-based restaurant like a sushi business, may have higher food costs due to the expense of fresh fish and shellfish. On the other hand, vegetarian restaurants may have lower ingredient costs. Additionally, certain cuisines may require more specialized equipment or staff training. This can lead to further ongoing expenses, impacting the profit margins.
  • Location

    The location of a restaurant is one of the most important factors when it comes to its success and ability to generate profit. A prime location in a busy city can increase foot traffic, create customer demand, and ultimately lead to increased revenue. When selecting a spot for your restaurant, you must consider all the elements that could affect foot traffic and demand, such as the type of cuisine being served and the demographic makeup in the surrounding area. Leasing the right restaurant space for your business model is key to a profitable business. You can also learn about negotiating a commercial lease to ensure you make cost-efficient business decisions.
  • Cost management

    It is a critical factor in any business’s ability to maintain a healthy profit margin. It involves understanding ongoing expenses such as labor costs, food costs and other overhead expenses so that businesses can accurately calculate their break-even point and ensure ongoing profitability. By properly managing these costs, businesses can maximize their revenue potential, while minimizing the number of resources used. Effective cost management is essential for ensuring the long-term success of any restaurant business by maintaining an appropriate balance between the restaurant's revenue and its expenditure. Check out our hospitality POS systems to see how you could achieve more efficient and innovative expenditure management.
  • The restaurant's revenue

    For restaurants, selling menu items and increasing sales volume is essential to maintain their bottom line. It’s key for businesses to understand customer trends and adapt menu items to meet customer demand while maximizing their revenue. By carefully managing menu items, pricing, and customer service, restaurants can ensure that they remain profitable while keeping customers satisfied and coming back for more.

Different profitable restaurant types

Another crucial factor is the variety of restaurant types found in the foodservice industry including:

Food truck business model

Profit margins for food truck owners tend to be much higher than those of other food industry businesses. While food costs and staffing costs are usually low, the biggest advantage food trucks have is the lack of rent or lease payments.

For example, food truck owners can find locations where they can park for free with high foot traffic (AKA potential customers). This ensures a steady sales volume without heavy overhead. Also, it's relatively easy to switch up menu items to match trends or customer tastes, as well as move to different locales if sales are low in one area.

Fast-food restaurant business model

Fast-food restaurants or quick service restaurants, also enjoy a large degree of profit margin stability, primarily because they offer consistent food choices at reasonable prices in comparison with full service restaurants. The pricing strategies found in this restaurant type are highly appealing to consumers due to the value proposition they offer, meaning a higher sales volume percentage. Additionally, automated systems, like self-service kiosks, ensure tight control over food costs, salaries, and related expenses. This boosts profits further in these types of restaurants.

However, these quick service restaurants must also keep customers moving quickly and maintain strict portioning standards. This can mean a heavy investment into efficient operational tools, such as a quick service restaurant POS system, to improve capacity utilization and remain competitive in the restaurant industry.

Full service restaurant business model

Starting a full service restaurant can often imply a significant initial investment. But when managed properly and with an efficient staff, it can provide high profit margins over time. 

According to RestaurantOwner.com, the success of a full service restaurant relies on efficient management of both costs and revenue streams. Therefore, leasing restaurant equipment can be cost-effective for this restaurant type. Rather than purchasing equipment outright, which can be expensive when first starting a business, leasing allows restaurants to obtain equipment for a fixed period of time for a lower cost. Restaurants can also have the option to purchase the equipment at the end of the lease. This can help to minimize upfront costs and allow restaurants to manage their cash flow better.

Additionally, leasing often includes maintenance and repair services, which can help to further control costs. It is important to be aware of the terms of the lease, including the length of the lease, total cost, and any penalties for early termination, in order to make the best decision for your business.

That being said, fine dining eatery spots equipped with top-notch talent can often enjoy better revenue streams due to pricing structures. This makes up for some of their increased operating expenses versus other dining types.

Coffee shop business model

This restaurant type often offers breakfast menu items and serves up coffee or tea to their guests, which can have surprisingly large profit margins. This is particularly true for breakfast-centric locations, such as in large cities. Hot meals such as waffles, pancakes, and omelets tend to be much more lucrative than basic pastry products like scones and muffins. Additionally, the low cost of ingredients associated with most of these breakfast items can lead to an even higher profit margin, as long as proper portions are implemented and customers are satisfied.

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Proven strategies and best practices to increase profit margins

Running profitable restaurants is the key to success in today’s competitive foodservice industry. While much of the focus is on the revenue side of a restaurant's profit equation, it is just as important to implement strategies that ensure profits through cost savings and optimization. 

Crafting profitable restaurants involves leveraging low-cost operations throughout every aspect of a business in order to increase bottom-line margins and gain an edge over competitors. With thoughtful efforts to reduce costs, lower prices and enhanced customer interactions, profitable businesses can be created no matter the size or the restaurant type. 

Therefore, it is essential for restaurateurs to assess the following alternatives available throughout their operation, in an effort to maximize profitable results for their businesses.

Update your menu engineering

Menu engineering has become an increasingly popular method for most profitable restaurants to create menu items that will turn a higher profit margin. By utilizing menu costs and other analytics, a restaurant can carefully tailor its menu of food selections to ensure that they are offering the most profitable options, while still accounting for customer demand. 

As the menu is adjusted and optimized over time, the result is likely to be a more profitable restaurant with menu items that customers truly enjoy. That’s why regular menu engineering can be key for your business.

 

Implement innovative payment processing

As payment methods continue to evolve, it is important for restaurants to keep up with the latest payment processing technology. With increased payment flexibility and improved payment security, modern Point of Sale (POS) terminals can help to increase restaurant profit margins significantly. 

Additionally, by integrating a POS system that supports payment solutions, like Epos Now, restaurants can give customers the convenience of using multiple payment methods for their transactions. This will not only make payment more efficient for the customers but also open up opportunities to make more money and increase profits by fostering higher customer retention.

Ultimately, adopting innovative ePOS payment processing solutions will help restaurants generate greater profits as well as provide customers with a modern and secure payment system to support an excellent dining experience.

Effective inventory management

A POS System's efficient inventory management capabilities can make a real difference to restaurant profit margins. By tracking food costs against sales and allowing food waste to be monitored, food costs can be kept under control. 

Automated re-ordering facilities help to guarantee food stocks are replenished in time for popular dishes, eliminating the risk of lost sales due to inadequate stock levels. Therefore, implementing an efficient inventory management software could provide the boost that puts a restaurant ahead of the competition.

Discover how real-time reporting can drive successful marketing strategies

Most profitable businesses aim to increase their profit margin, and POS system reporting can help them achieve this goal. The POS system can enable restaurateurs to develop more effective marketing strategies tailored to their customer base by providing real-time data about customer behavior.

For example, using POS data to monitor which dishes are most popular gives restaurant owners the opportunity to promote these items and focus on producing more of them to maximize profits. 

Additionally, POS systems often help develop a successful loyalty program that allows owners to encourage repeat visits from regular customers and generate more revenue.

Optimize employee management

Efficient employee management techniques in restaurants can be integral to increasing profit margins, and consequently, bottom-line profitability. Most profitable restaurants have undoubtedly become more sophisticated with the introduction of POS systems and kitchen display systems, which allow restaurants to streamline their orders and largely improve waiting time efficiency. 

Additionally, when staff is managed skillfully, greater productivity is achieved and costs are further minimized. This makes the restaurant capable of competing in whatever segment of the restaurant industry it may be situated in or operating.

Essential skills, such as up-selling to guests during peak hours with alcohol sales like happy hours, could also be implemented by restaurant managers to help the business significantly increase sales. Ultimately, employee management should also constantly strive to maximize profits for any given restaurant type.

Conclusion and key learnings

You can reach profitable margins whatever your restaurant model; from small local caterers to large national chains. However, understanding profitable restaurant types is crucial for the continued success of restaurants in the US. 

Ultimately, businesses must be able to distinguish profitable models from non-profitable models and adjust their strategies accordingly to reach continued success. This includes finding and offering nutritious food at cost-effective prices, running efficient operations, and developing relationships with customers. 

We hope this blog has given you some useful tips on how you can reach a high profit margin for your restaurant business. By using menu engineering, innovative payment processing, effective inventory management, real-time reporting and optimizing employee management, you should reach some great successes and keep ahead of your competition.

Looking forward, the data reveals that Americans are still loyal patrons to profitable establishments, despite being a competitively saturated market. Therefore, analytics will likely remain an extremely crucial factor in developing successful restaurant profit margins for all growing businesses.

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