What is a restaurant without a good profit margin? Failing, most likely. The cost to open a bar or restaurant is high (see: how to get a liquor license compared to how much do bars make), and it can crush you if you're not focused on profits.
Unfortunately, this is the very scenario that many restaurants find themselves in. You can't run a successful restaurant without a healthy profit margin. But, what is a good restaurant profit margin and how do you get one?
We'll help you understand restaurant profit margin as a restaurant KPI and share some ways to improve yours and make your p&l restaurant data look good. Follow this guide and get on the path to greater restaurant sales and bar profitability.
Restaurant Profit Margin: What Is Restaurant Profit Margin?
Also known as net profit margin, restaurant profit margin is the money a restaurant makes after paying its total expenses. This metric measures the business' profitability ratio. It's used to compare how much it costs for the restaurant to earn revenue.
Profit margin is used by many businesses to determine revenues. It's important to stay on top of this metric in order to understand how much money the business is making.
How Much Do Restaurant Owners Make?
On average, restaurant owners make between $30,000 and $155,000 a year. The restaurant size, type, location, and other factors impact the restaurant owner's salary. For example, the owners of a high-end eatery in New York and a dive bar in Alabama will see very different salaries. As a rule of thumb, the owner of a restaurant usually takes less than 50% of the annual profit.
How Much Money Does a Restaurant Make?
The average monthly revenue for a new restaurant under 12 months old is $112,000. New restaurants cost between $95,000 and $2 million to open, so this revenue is often not enough to turn a profit. Revenue also varies greatly depending on the size of a restaurant, location, and concept. Look at restaurants of similar size and geographic location to get more insight into your restaurant's revenue.
Are Restaurants Profitable?
Yes, restaurants are profitable, but they have low profit margins. Profitability depends on many factors including the size and type of restaurant, as well as economic ones. It takes an average of two years for a new restaurant to turn a profit. Unfortunately, there is a very high restaurant failure rate. This is due to a lack of funding or planning for the slower first few years. These should be factored into your restaurant business plan.
The two big factors that affect the profitability of restaurants are labor and food costs. Food costs on their can be 10-20% higher than a bar's liquor cost. Couple that with labor costs of around 20-40%, and you can see how a restaurants costs substantially outweigh a bar's.
The work required to run a kitchen is more detailed and sustained than mixing cocktails. And, to be honest, often the restaurant portion of a hospitality business is supported in large part by the profitability of its beverage program.
Average Restaurant Income
The average restaurant makes around $112,000 each month in its first year. This may be higher or lower for your business, but is ideally at least 2%-6% higher than your total expenses.
Average Restaurant Profit
Profit varies by restaurant, but the average restaurant makes 2%-6% more than it spends. Restaurants with lower overhead expenses or startup costs can see larger profits, but there are many factors that influence this. Geographic location has a major impact as buying habits, competitor pricing, and cost of living vary greatly. Knowing your business and the area it's in are paramount in achieving a profit. Concept also matters as a martini bar and dive bar have different intended customers and their prices match those customers.
Average Restaurant Profit Margin
The average restaurant profit margin is 2-6%. Profit margins in the restaurant industry are notoriously low. Taking steps to keep this number stable or growing is necessary for a restaurant's long-term survival.
How Do Restaurants Make Money?
Like all businesses, restaurants make money by selling more in product than they spend. This requires keeping prices high enough to more than cover the cost of goods sold and labor costs. Together they make up a restaurant’s prime cost which gives you a figure to target when optimizing profit.
The key to running a profitable restaurant lies in proper inventory management. Calculating inventory variance helps eliminate waste, track unused ingredients, and maximize profit.
Most Profitable Restaurants
Some types of restaurants are more profitable than others. Here are five of the most profitable types of restaurants and what makes them successful.
- Bars. In the restaurant industry, there's no business with higher margins than bars. This is because the markup on alcoholic beverages is much higher than on food. Beverages see a profit margin of 60-70%. Bar owners use their pour cost to determine optimal alcohol pricing and maximize profit. Wine profits are also higher than most other beverages.
- Diners. Breakfast places are one of the few types of restaurants that continues to see increased traffic. Millennials may shun other eateries, but diners seem to be immune. Even better, the ingredient cost for breakfast food is very low allowing for greater profit margins.
- Food Trucks. Food trucks have low overhead since they don't pay rent. They also have limited menus which help keep food cost low.
- Delivery-only. With no dine-in or takeout options, these virtual restaurants keep overhead very low. More restaurants than ever are taking this approach, particularly in big cities where real estate is at a premium.
- Pizzerias. There's a reason most cities have a pizza place on every block. Demand for pizza has always been high in the U.S. and the ingredients for pizza are fairly simple and low-cost.
How to Increase Restaurant Profits
There are many ways to increase your restaurant profit margin. Here are some steps you can take without risking losing customers.
- Rework recipes. If your ingredient costs are high, take a look at what goes into each dish. Cheaper ingredients are often as tasty as their expensive counterparts and can increase your profit per plate. Over-the-top costs will also be reflected in your restaurant balance sheet, so look their for warning signs.
- Shrink the menu. Menus become bloated over time. Look at what you offer and what actually sells. If there's a large gap, it's time to cut some offerings and increase profit. This is called menu engineering and all restaurants should do it regularly to avoid large menus.
- Get rid of single use menus. Embracing digital menu technology, like QR code menus, is a great way to eliminate printing and paper costs.
- Upsell as often as possible. Make sure your employees are properly trained in upselling techniques. When multiple customers are convinced to buy more expensive food and drink, the profits add up quickly.
- Start a loyalty program. Regular customers like to feel like they matter to your business. A loyalty program makes them feel more engaged and thus more likely to continue coming back.
- Consult restaurant marketing plan examples. Come up with your own and leverage promotions and restaurant SEO to drive traffic during downtimes.
- Put the customer first. This should be obvious, but treating your customers well pays dividends. Studies show that satisfied customers are more willing to pay higher prices than customers who felt that service was just okay. Treat each customer like they're the most important and you'll see a great return.
- Try specials. Push LTO food dishes that have higher margins or that use ingredients that you have too much of. You can do the same with drinks and offer a happy hour.
Watch the Money Flow In
Now that you've got a better grasp on restaurant profit margins, you can make smarter moves to maximize yours. Whether you own a 50-seat Italian restaurant or a small food truck, optimizing your profit margin is the key to success.
You can try new bar promotions, changing recipes, and giving the best service. You can also adjust your beer pricing, wine price, and wine by the glass pricing. These are all great ways to increase the bottom line and set you apart from your competitors.
Staying on top of inventory is also a vital part of maintaining your profit margin. BinWise can take the guesswork out and get you back to driving profits. You can even use our free restaurant financial audit checklist, learn how to calculate ROI, and get tips for boosting restaurant SEO for an even more robust understanding of profitability.
Frequently Asked Questions About Restaurant Profit Margin
A valuable restaurant KPI to follow is profit margin. To better understand what restaurant profit margin is, read the following commonly asked questions.
How much profit should a restaurant owner make?
The amount of profit a restaurant owner should make will vary based on the size of the business; however, the range a restaurant owner can take home between $25,000 and $155,000 per year. On average, annual pay for restaurant owners is about $70,000.
How do you calculate the profit margin for a restaurant?
To calculate the profit margin for a restaurant, you need to use the profit margin formula.
The profit margin formula is:
Total Revenue - Total Expenses = Net Profit
(Net Profit ÷ Total Revenue) x 100 = Net Profit Margin
What type of restaurant is the most profitable?
The 5 most profitable types of restaurants include:
- Fast food restaurants (also known as quick-service restaurants)
- Fine dining restaurants
- Cafe restaurants
- Fast casual restaurants
- Buffet style restaurants