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What is the Average Restaurant Profit Margin?

What is the Average Restaurant Profit Margin?

Jenny Day
Jenny Day

While many restaurant owners would like a definitive answer to this question, the average restaurant profit margin varies widely across different types of restaurants.

Average profit margin of full-service restaurants (3-5%)

A full-service restaurant typically includes table service and more involved customer service experiences, spanning fine dining to a sit-down dinner. With greater labor costs, FSR can fall into the 3-5% profit margin range, depending on restaurant size, menu item prices, turnover rates, and location.

Average profit margin of fast casual restaurants (6-9%)

Fast casual restaurants, also known as fast food or quick service restaurants, involve ordering at a counter or doing some level of self-service. Although factors like franchise affiliation may affect profit margins, fast casual restaurants typically have an average profit margin of 6-9%. This profit margin reflects the lower labor costs for pre-prepared food in the kitchen and a higher table turnover rate due to faster service.

Average profit margin of catering services (7-8%)

Catering businesses range in size and business model, but generally, although cost of goods sold (CoGS) may be the same between catering and FSR, catering can operate with much lower overhead costs.  Profit margins average 7-8% for catering service businesses.

How to calculate restaurant gross profit margin

Your gross profit margin is what is left over from your revenue earned after deducting the CoGS and the cost of ingredients for your menu items. This number is helpful to measure restaurant efficiency, but it doesn’t consider all your operating expenses.

One method for examining profitability is starting with the gross profit margin. Your gross profit margin represents what is left over after you sell a dish and subtract the food cost of making that dish. It can be calculated with the following formula:

Gross Profit = Total Sales – CoGS

Your gross profit margin is expressed as a percentage, which you can use to understand how much of every dollar you make goes to your profit margin:

Gross Profit Margin = (Gross Profit ÷ Total Sales) x 100

While calculating your gross profit margin can help you understand the efficiencies of your food cost spending, it doesn’t represent all the information that you need to know. Gross profit doesn’t account for other critical operating expenses, like your labor cost, as well as other elements of your overhead like rent and insurance.

To get the full picture, consider focusing on your net profit margin.

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How to calculate restaurant net profit margin

Your net profit margin is based on your net income, which is your total revenue minus your operating expenses (your CoGS and other operating costs like payroll, taxes, maintenance, and rent). By dividing your net income by your total sales, you can account for all expenses associated with running a restaurant and understand the percentage of net profit you earn for every dollar you bring in.

Your net profit margin represents a different way of looking at your restaurant’s profitability. It is based on your profitability after all your operating expenses, like your food cost, but also additional costs like payroll, rent, and other operating expenses. You can calculate your net profit with the following formula:

Net Profit = Total Sales – Total Expenses

To understand net profit in context, you can calculate it as a percentage of sales.

Net Profit Margin = (Net Profit ÷ Total Sales) x 100

This number represents all the costs of running your restaurant. To get an up-to-date net profit number, you need to pull sales and accounting data from your point of sale (POS) system and your restaurant accounting software. With this data in hand, you can accurately calculate your profitability.

One approach is to increase increasing sales through marketing to new customers, focusing on customer retention, and increasing average check sizes. But it is important to note that often actual profitability may have little to do with total sales. Even if an operator increases sales revenue by 100%, if your expenses increase at the same rate, you are left with the same restaurant profit margin.

To increase profitability, you also want to work on optimizing food and labor expenses, since they are a restaurant’s primary costs. As you decrease your total expenses through efficiencies, everything you save is added back to your bottom line.

Optimize labor spend

The fundamental goal of your labor budget is to match your labor hours to your sales. You want to write a schedule that uses more labor hours when sales are higher and is streamlined during the non-busy periods.

To match labor expenses to sales levels, restaurant owners and operators can leverage sales forecasting. Forecasting projects sales levels based on historical sales data in comparable time periods and other factors. Using this data, managers can write schedules that are better able to track sales per labor hour percentage goals.

In addition, other tech tools can help managers optimize labor spend. From overtime alert management to in-the-moment updates on labor spend, managers have the tools they need to meet labor goals and react to labor costs in real-time.

Reduce CoGS

CoGS is the other piece of your prime cost that lies under your control. If you can reduce what your restaurant spends on food, you can directly add those savings back to your bottom line.

Start tracking your actual vs. theoretical (AvT) food cost variance. AvT analysis examines what you should have spent on food costs, in theory, versus what you actually spent. Your theoretical food cost assumes no mistakes, no incorrect portions, and no food waste. Your actual food cost reflects what really happened in your restaurant.

The difference between your AvT food cost shows your lost profit, representing inventory costs that were wasted. Start optimizing your restaurant food costs by reviewing the variance and addressing the root causes of food waste. Once you know whether the issue is poor forecasting, incorrect ordering, improper storage, or employee theft, you can focus on strategies to better control CoGs.

Conclusion

Understanding what the average profit margin for a restaurant requires you to track essential metrics about your restaurant’s costs and sales. Insight into your profit margin not only ensures your business is healthy day to day but also sets up your restaurant for long-term success.

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