A company's profit margin can make or break a business. This is especially true for the food industry, where a restaurant's average profit margin is pretty low compared to other businesses. The good news is that profit margins are rising for restaurants in the United States from the all-time low they hit in 2008.
Profit margins range from a paltry 3 percent for full-service restaurants, up to 60 percent for meal-kit providers like Hello Fresh.
How to Figure Out a Profit Margin
To figure out your profit margin, you have to add up the cost of goods, supplies, labor, employee benefits, insurance and taxes. Subtract that sum from your gross revenue. This could include profits from food and drink sales, catering, merchandise, franchising and rentals. Sell more than you spend, and you're obviously in a good place, but if your food profit margin is poor, you may not be making as much as you could. This is among one of the many reasons over 60 percent of full-service and quick-service food establishments fail in the first three years.
Food and labor costs are generally the biggest expense, and as some states adopt a $15 per-hour minimum wage, the cost could skyrocket. The average profit margin you should aim for depends on where your business falls within the food industry.
Thin Margins for Full-Service Restaurants
Most full-service restaurants have a tiny profit margin that falls between 3-and-5 percent. It's not abnormal for margins to fall as low as 0 percent or jump as high as 15 percent. This is really dependent on a ton of different factors including if you use costly fresh food or less-expensive packaged food. Do you use canned beverages or have a fountain soda, which is a larger upfront cost for a bigger payout down the road? Each restaurant has a dish that's a money maker – something inexpensive to produce that customers will still pay top-dollar for. Some of the highest margin foods include pizza, pasta and non-alcoholic beverages.
Better Margins for Fast Food Restaurants
Fast food restaurants generally have a higher profit margin than full-service restaurants. The tendency to use frozen, bulk foods along with higher customer turnovers leads to an average margin of 6.1-to-9 percent. That means for every dollar made on a juicy hamburger or side of fries, a business will pull in $.06-to-$.09 in profit. In 2018, quick-service restaurants are expected to grow by 2.1 percent.
Food Trucks Benefit From Low Overheads
On average, food costs for a food truck are 25-to-35 percent. This is similar to a restaurant, but food truck businesses don't have to worry about paying rent for a building. Overall, a food truck's low overhead makes it slightly less financially risky than a full-service restaurant. Not only can food trucks rely on sales, but they can also expect hefty revenue from event rentals. Still, food trucks often pay commissions to set up at events as well as parking fees. They can see their daily business cut in half by poor weather. Despite this, as a quick-service, mobile restaurant, food trucks generally have a margin of 6.1-to-9 percent.
Shockingly Thin Margins for Grocery Stores
Grocery stores have a shockingly thin profit margin that's attributed to the competitive industry. They can only afford to markup their stock a little bit in order to compete with lower-cost chains. On average, grocery stores have a profit margin of 1.3 percent.
Catering Pulls a Decent Margin
Catering profit margins soar well above the average full-service restaurant. It's far closer to the margin of fast food establishments and food trucks. The most profitable caterers can pull in a profit margin of over 15 percent, but most catering businesses fall between 7-and- 8 percent.
Meal Kit Providers Get the Most Bang for the Buck
Meal kits have risen in popularity over the last few years. These services mail a consumer packaged ingredients to cook a pre-planned meal. In an era where busy professionals are generally turning to healthier, home-cooked options rather than fast food, the profit margins of these services soar above catering, fast foods and restaurant businesses. Profit margins for meal kits like Hello Fresh and Blue Apron range from 20 to 60 percent.