Restaurant owners and operators have faced enormous challenges over the last year. After many months of on-again, off-again indoor dining restrictions, outdoor dining capacity limits, and relying on delivery/take out only, a brighter future is on the horizon.
It’s time to focus on getting back to pre-COVID profit margins. As you examine your restaurant accounting and operations, where should you start? We review what can affect your restaurant profit margin, plus seven tips to consider implementing in your restaurant.
What is the average profit margin for restaurants?
To be certain, your restaurant profit margin in 2020 and 2021 probably look significantly different than past years.
Profit margin within the restaurant industry varied widely during the COVID-19 pandemic. Some restaurants, uniquely suited to off-premise channels or their specific community, have maintained their profit margins. Other restaurants have faced incredibly low margins, and as of December 2020, nearly 110,000 restaurants across the country have closed permanently or long term, according to the National Restaurant Association.
As you examine your profit margin, taking a look at the industry’s average restaurant profit margin during normal times, can help you put your numbers into context. As a whole, restaurant profit margins are much lower than other industries, due to perishable item waste, staff turnover, seasonality, and other factors.
While numbers will vary, many full-service restaurants normally have margins between 3% and 5%, and enterprises like quick service restaurants maintained average margins between 6% and 9% before COVID-19 hit.
However, it’s worth noting that just as there isn’t a single way to run a restaurant, there isn’t a standard profit margin figure. Your exact profit margin will vary, depending on your type of restaurant, the state of your region’s economy, and other factors. No matter where your restaurant’s profit margin lies, it’s essential to track this metric over time. If your goal is to get back to a pre-COVID-19 profit margin, you should track against your own profit margin, not an industry average.
How to calculate your restaurant profit margin
When calculating your restaurant profit margin, keep these details in mind:
First, your profit is a way to understand what percentage of your sales turned into profits. Your profit may be calculated in dollars, but your profit margin is your profit expressed as a percentage of sales.
Second, to ensure your profit margin calculation takes into account all relevant expenses, you need to understand the difference between your gross profit margin and your net profit margin.
Your gross profit margin is calculated by subtracting the cost of goods sold (CoGS) from your revenue. This number is helpful to understand a restaurant’s efficiency with food costs, but it doesn’t actually account for all of the wide-ranging operating expenses.
Your net income is your total revenue minus all of your operating expenses. With net profit margin, expenses include your CoGS, as well as operating costs like payroll, taxes, rent and utilities.
Calculate your net profit margin by subtracting all operating expenses from total revenue, and then dividing this net profit by total revenue. Multiply this number by 100 to express your net profit margin as a percentage of sales.
Net profit margin helps you understand the percentage of net profit your restaurant earns for every dollar in sales, accounting for all expenses. With this number in hand, you are better equipped to make operational and accounting adjustments.
Tips for returning to pre-COVID profit margins
Your profit margin is fundamentally determined by two numbers: your sales and your expenses. As many restaurant owners and operators learned during the COVID-19 pandemic, to protect your profit margin, you need to optimize both.
To return to pre-COVID profit margins, start by examining these different areas of increasing sales volume and decreasing expenses.
1. Turn Your Data into Profit
When you are able to leverage accurate, timely data in your restaurant operations, you are able to make decisions that strengthen your bottom line. Up-to-date data is even more critical when economic conditions are in flux.
For example, a real-time Profit & Loss (P&L) statement allows your managers and operators to make adjustments to restaurant operations, in the moment. Rather than waiting for a weekly, monthly, or even quarterly P&L, restaurant accounting software that is integrated with your Point of Sale (POS) system can easily automate an up-to-date P&L report.
Being able to make small, immediate changes to food and labor allows managers to head off costly, long-term problems, and it also informs better ordering and scheduling to help control your prime costs.
2. Crush Your Food Costs
If your restaurant business switched to a delivery or takeout only model during the pandemic, you may have slimmed down your menu offerings, as well as your inventory. If you return to a larger menu at all of your locations, your store-level managers need to prioritize optimizing their inventory control.
Leverage fundamental tools like actual vs. theoretical food costing in your restaurant inventory management software to start tracking the variance between what inventory you should be using versus what you’re actually using. Once you know where that variance lies, you can start diving into individual ingredients to figure out what is causing food waste.
3. Track Costs and Optimize Profits of Off-premise Channels
Many experts are predicting the rise of off-premise sales in the restaurant industry, even once social distancing restrictions lift. Customers are now used to the convenience of delivery and takeout and the comfort of eating at home.
Returning to pre-COVID restaurant profit margins may not mean returning to the same breakdown of in-house versus third-party sales. Moving forward, off-premise channel sales may be a larger portion of your overall sales.
As such, you should be tracking your profitability by order mode to understand your profit margin for dine-in, delivery, takeout, and drive-thru. Regardless of what your sales will look like, if you are prepared to track profitability, you are setting your restaurant up to enable data-driven, strategic decisions.
4. Optimize Restaurant Labor Cost
According to payroll experts, half of the states in the US have or will see minimum wage increases in 2021. Twenty one of these states implemented the increase on January 1, 2021, and four other states will raise the minimum wage over the course of the year.
The first step toward optimizing labor costs is using data to drive labor decisions. Forecasting sales, pulling historical data from your POS into your scheduling software, can help managers schedule labor hours strategically by the day or even the day part.
5. Adjust Your Menu
If you made changes to your menu to accommodate COVID restrictions, you need to constantly reevaluate your menu mix to return to your pre-COVID profit margins.
As always, any menu adjustments should be made with menu engineering tools. Menu engineering leverages data about individual item profitability and popularity to optimize the overall profitability of your menu. With this data in hand, you can choose featured items, make any necessary price changes, and evaluate which underperforming items you may want to consider taking off your menu.
6. Create New Specials and Promos to Increase Foot Traffic Despite Limited Capacity
Depending on your locality, you may have loosening restrictions on indoor or in-person dining. If you adapted your marketing to focus on take out or delivery, now is the time to start considering modifying your messaging to encourage dine-in sales.
New specials or promos can be an exciting way to welcome guests back to your restaurant. You can leverage new specials along with other digital marketing strategies to let your guests know you are once again open for in-person dining. As always, continue to refer to your menu engineering data and sales forecasts to optimize your food and labor spend with any new promotion.
7. Implement New Customer Loyalty Programs
Finally, to start building sales levels again, consider implementing a customer loyalty program. Loyal customers can help build the long-term health of your business by returning to your restaurant frequently.
Build your customer reward or loyalty program leveraging analytics from the very beginning. For example, if you are choosing a featured menu item to promote or discount for regulars, your menu engineering data can help you understand which item will work for both your bottom line and your customers’ preferences.
Returning to pre-COVID restaurant profit margins might not mean returning to the same exact business model you had pre-COVID. However, returning to your previous profit margins is possible with the right tools and a data-driven approach that prepares you for whatever lies ahead.
If you’d like to equip your store-level managers with the tools they need to maximize performance, consider an all-in-one restaurant management software platform, now with the new Smart Ops Release. Restaurant365 incorporates restaurant accounting software, restaurant operations software, inventory management software, payroll + HR software, and scheduling software into a cloud-based platform that’s fully integrated with your POS system, as well as to your food and beverage vendors, and bank. Ask for a free demo of Restaurant365 today.