Understanding profit margins for restaurants is crucial for restaurant owners as it provides a clear indicator of the financial health and viability of their business.
The profit margin, which is calculated by deducting all expenses (including food and beverage costs, labour, rent, utilities, and other overheads) from the total revenue, demonstrates how much net income is generated from every pound of sales.
It essentially reflects the efficiency of the restaurant in managing its costs and optimising its operations. A higher profit margin indicates a more profitable and sustainable business.
Consequently, monitoring and improving profit margins is of paramount importance as it helps restaurant owners identify areas where they may need to cut costs or increase prices, enables informed decision making, fosters growth, and contributes to long-term business success.
Without a thorough understanding of their profit margins, restaurant owners may struggle to sustain their operations, remain competitive, and navigate the volatility of the food service industry
Understanding restaurant profit margins and how to stay profitable
Let’s kick off by defining profit margins. In essence, profit margins represent the extent to which your revenue, or the earnings you’ve acquired, surpasses your total expenses as an enterprise.
Profit margins play a pivotal role in your restaurant business plan, especially in relation to your menu and financial projections.
The reason is, they offer you an understanding of how much to levy for each dish, the number of customers you need to serve each day, the breadth of your menu, and so forth.
There isn’t a set guideline concerning how substantial your margins need to be in order to thrive in this sector.
However, as a triumphant restaurant owner, you should have these figures readily accessible to maintain a comprehensive perspective of your operations and make knowledgeable decisions.
Continue reading to discover how to compute your profit margins, and what measures you need to employ to augment revenue and curtail costs for your restaurant.
The average profit margin for restaurants
The typical profit margin across the global restaurant industry falls between 2-6%, with individual instances possibly fluctuating anywhere from zero to 15%.
In simpler terms, there’s no uniform solution, largely due to the considerable variations in revenue and expenditures that can exist between different countries, or between diverse restaurant types such as fast food outlets and Michelin-starred establishments.
The profit margin also hinges on the daily operational costs, rent, utilities, and so on within your locale, coupled with the efficiency of your financial management as a business proprietor.
What is the average net profit margin for restaurants in the UK?
Understanding the average net profit margin for restaurants in the UK involves considering a broad spectrum of expenditures. These expenses encompass everything from rent and utilities, to payroll, maintenance, marketing, software, licensing and administrative costs. Therefore, maintaining a strong cash flow and ensuring your profit margins are substantial enough for your business to thrive is vital.
As previously highlighted, profit margins for restaurants can greatly fluctuate depending on the nature of the business and the manner in which it’s operated. The fundamental truth is that expenditures within the restaurant industry are generally higher than most other sectors. This, coupled with the fiercely competitive pricing in the industry, explains why profit margins can appear relatively modest.
Different types of food service businesses will have different profit margins. For instance, cafés can have profit margins as high as 20%, while upscale catering businesses might witness margins around 15%. These figures are only approximations and actual numbers may vary based on various factors, including location, menu prices, operating costs, and management efficiency.
But how much do restaurants actually make?
We’ve previously discussed that a restaurant’s yearly turnover is contingent upon several factors, making it challenging to pin down a practical number, especially for newcomers in the industry.
However, it’s worth noting that the overall statistics for UK restaurants present an optimistic picture.
As per data from the Office for National Statistics, in 2020 alone, the UK was home to 39,230 restaurants and mobile food service businesses, each with an annual turnover ranging from £100,000 to £249,999.
There were 2,010 businesses that produced revenue between £1m and £2m, and a select 60 enterprises clocked in revenue exceeding £50m.
These are impressive numbers, particularly given the distinctive difficulties posed by the pandemic to the industry.
With the increase in vaccinations and ongoing relaxation of restrictions, these statistics are anticipated to climb as the nation works towards economic recovery.
How to calculate profit margin for your restaurant business
In order to determine the profit margins for your restaurant, there are two primary types that you should be familiar with: gross profit and net profit margins.
The gross profit of a restaurant is the remaining amount after all the costs of goods sold (CoGS) have been subtracted, and it serves as an effective measure of your business’s everyday efficiency.
However, it doesn’t take into account factors such as operational costs, hence it forms just one element of a more comprehensive, detailed financial overview.
This is where the concept of net profit steps into the picture.
Gross profit margin
To work out your gross profit margin, employ the following equation:
(Selling price – CoGS) / Selling price = Gross profit
Gross profit x 100 = Gross profit margin in %
For instance, if you offer a main course priced at £18, which costs £6 to prepare, the calculation would proceed as follows:
£18 – £6 = £12
12/18 = 0.67
0.67 x 100 = 67% Gross profit margin
Net profit margin
Moving on to your net profit margins.
This is the most effective way to assess the overall profitability and success of your restaurant.
In essence, you need to subtract the costs of operating your restaurant from the total revenue. These costs encompass a wide range of expenses, including supplier invoices, payroll, rent, utilities, taxes, and so forth:
Total revenue – Total expenses* = Net profit
(Net profit / Revenue) x 100 = Net profit margin
*Total expenses = CoGS plus the costs of running your restaurant as detailed above.
To illustrate this with an example, let’s assume that your revenue for the previous month was £100,000, with expenses amounting to £60,000:
£100,000 – £60,000 = £40,000
£40,000/£100,000 = 0.4
0.4 x 100 = 40% Net profit margin
So, how much do restaurant owners make?
Glassdoor suggests that the median salary for a restaurant owner in the UK stands at £41,564, with reported figures ranging from a low end of £19,000 to a high end of £90,000.
In the restaurant business, unexpected costs are inevitable, from malfunctioning equipment and plumbing issues to inventory discrepancies and more.
The initial phase of being a restaurant owner can sometimes seem daunting, but there are strategies to anticipate and deal with these financial hurdles, ensuring that you still draw a respectable salary.
Moreover, if you’re in your inaugural year of operation, it’s important to align your salary and turnover expectations accordingly to ensure sustainable long-term gains.
How to improve profit margins for restaurants: Minimise costs and increase revenue
Bolstering your profit margins involves more than just adjusting your food and beverage prices and monitoring your profit and loss statements.
Here are several key recommendations to help increase your revenue and reduce unnecessary expenses
Tips for increasing restaurant revenue
Ecommerce
Over the recent past, eateries and cafes nationwide have accelerated their ecommerce initiatives. Some venues amplified their existing online services, while others, like the London-based Tredwells, transitioned their operations and dived into ecommerce for the first time.
So how could you emulate this?
Think about devising a reduced menu for deliveries and pickups, or even branded merchandise that allows customers to savour your distinctive tastes at home.
Take Dishoom for example. This popular chain has an online shop where customers can purchase meal kits for replicating their favourite dishes at home, in addition to cocktail kits and their signature cookbook.
Loyalty Programme
Think about implementing a loyalty programme to entice customers to keep returning, particularly in your early stages of business.
You could provide anything from exclusive discounts and promotions to a complimentary item with every tenth meal.
The decision is yours, and your customers will undoubtedly appreciate it.
Assess Your Menu
Adopt a quality over quantity mindset when designing your menu.
While offering your customers a broad selection of options and accommodating various dietary needs is crucial, an over-abundant menu can overwhelm both diners and staff.
Furthermore, you risk spending money on large quantities of food that may spoil before you get a chance to utilise it, which is effectively the same as throwing money away.
Regularly review your menu to determine what’s working, what isn’t, and what new offerings might keep customers returning for more.
Enhance Your POS System
A modern, cloud-based point of sale (POS) system offers more than just payment processing or reservation organisation.
Leverage your POS to delve into your restaurant’s most crucial insights and utilise that data to manage your business more efficiently.
It will help ensure you’re extracting maximum value from every pound and penny.
Rethink Your Floor Plan
Get innovative with your spatial utilisation.
The number of covers you can serve daily can significantly impact your bottom line, so it’s worthwhile to spend time optimising your floor plan and maximising your space.
Amidst the coronavirus restrictions, UK-based restaurants and cafes had to creatively adjust their floor plans, striking a balance between public safety and maintaining sufficient daily covers to feasibly keep the doors open.
Social Engagement
Are you utilising social media to its full potential to enhance your business?
For promotional purposes, you need visibility where your customers frequent. It’s highly likely that 99% of your target audience is active on social platforms such as Instagram, Facebook, and TikTok.
Establish profiles on the platforms your customers use and post regular updates about your restaurant, including enticing photos of your dishes and images of your amicable staff to humanise your business.
There’s no need to maintain a presence on every platform – concentrating on one or two initially is a sensible strategy. This way, you won’t spread yourself too thin.
Currently, most social media platforms prefer or are entirely based on video content, so consider creating brief videos of your staff in action, your best dishes being prepared, or sharing professional kitchen tips for home use.
If you haven’t yet set up a Google My Business listing, it’s a good idea to do so.
This is a complimentary Google profile that will make your restaurant more discoverable. It also provides key information like location, operating hours, and reviews, which you can encourage satisfied customers to leave as part of your social marketing plan
Tips for minimising costs
Cutting down the Cost of Goods Sold (CoGS)
In designing your menu, consider the CoGS to maintain a high quality without compromising your profit margins.
You don’t necessarily have to opt for cheaper ingredients to achieve this. Simply comparison shop and acquire quotes from various vendors to find the best deal before making a commitment.
Maintaining accurate inventory data is also crucial to reducing these costs while minimizing food wastage, a significant issue in the food and beverage industry today.
Minimising Waste
Managing your inventory efficiently is merely one aspect of your business operation.
Ensure that you’re serving the right portion sizes for each course.
While some patrons might appreciate large portions of their preferred dish, often, this will simply result in more food being discarded and wasted at your expense.
Regularly review your menu to identify less popular items, and align your food orders accordingly.
If your specially made Wagyu burgers are not popular with your clientele, remove them from the menu to prevent valuable stock from being wasted and impacting your bottom line.
Lowering Staff Turnover
Recruiting and training new employees are time-consuming and expensive processes, making staff retention crucial.
In this competitive industry, a fantastic waiter or a sought-after chef could be the difference in securing repeat business.
Invest in regular training for your staff to ensure everyone stays sharp and is motivated to continue developing their skills.
Ensure your team is fairly compensated and, if possible, offer an appealing benefits package to keep them satisfied and appreciated.
In line with this, take time to acknowledge success and recognise individuals for exceptional work or when they exceed expectations in providing excellent service.
Conversely, it’s valuable to collaborate with your restaurant manager to establish protocols for dealing with underperformance and resolving issues before they escalate.
For instance, if a staff member consistently arrives late, is distracted by their phone during work hours, or isn’t providing satisfactory customer service, what steps will you take to address this?
You might decide on a formal three-strike warning system or set aside one-on-one time to discuss these issues with the employee and jointly devise a performance improvement plan.
The key lies in discovering what works best for your establishment
Final thoughts: Preparation is key
In conclusion, understanding profit margins for restaurants is a fundamental aspect of running a successful establishment. This understanding shapes the pricing of dishes, aids in cost control, and influences critical decisions that impact overall profitability.
Navigating the intricacies of restaurant profit margins can be complex, but with a focused approach and diligent management, restaurateurs can turn a healthy profit while providing outstanding dining experiences for their customers.
The key is to remain adaptable, continuously evaluating and adjusting strategies to maximise margins in a constantly evolving industry.
Lee Jones is a seasoned Business Finance Specialist with over two decades of invaluable experience in the financial sector. With a keen eye for market trends and a passion for helping businesses thrive, Lee has become a trusted advisor to countless organizations seeking to navigate the complexities of finance.