Owning and operating a restaurant is no small task. There are lots of different parts that have to work together seamlessly for the restaurant to operate efficiently. To make matters worse, the profit margin for restaurants is one of the lowest in all industries. There is no concrete answer to the average profit margin for a restaurant, as there are many factors to consider and it varies by restaurant type.
A restaurant's profits refers to the money it has left after subtracting operating expenses from the restaurant revenue. These operating costs can include expenses such as employee payroll, inventory, rent, utilities and credit card processing fees.
In addition to the of selling food and beverages, a restaurant can generate revenue by offering catering services, renting out their restaurant as a venue space and offering franchising opportunities.
Even with the multiple choices of revenue streams, restaurant owners still find themselves with little money left after covering expenses and any debts they may have.
- Full-service: Full-service restaurants are classified as those that have management, servers, kitchen staff, bartenders and a host. These restaurants generally have margins between 3% and 5%. Their lower profit margins can be attributed to the high labor and overhead costs involved with running a brick-and-mortar location. What helps full-service restaurants is that the restaurant margins on alcohol are much higher than regular food.
- Fast food: Fast-food restaurants generally have higher profits, with the average margins being between 6% and 9%. The reason the profit margins are higher than full-service restaurants is because it normally takes less staff to operate a fast-food restaurant and the products are much cheaper to buy.
- Catering: Catering operations without brick-and-mortar locations have average profit margins between 7% and 8%. The cost for their products is comparable to full-service, but they generally have less staff on payroll and do not pay rent.
- Food truck: The average profit margins for food trucks is between 6% and 9%. Although the cost of their ingredients are also more aligned with full-service restaurants, they reap the benefit of having low overhead cost because they do not pay rent and have few utilities to pay.
As is the case with any other type of business, a restaurant can improve its profit margins by increasing sales volume or decreasing expenses.
One of the primary ways a company can decrease expenses is by becoming more efficient with its scheduling. For example, there is no reason for a restaurant to be fully staffed during down hours, when low numbers of customers are coming in. If a business can still operate efficiently during those times with fewer staff members, a restaurant can save money by not having to pay employees to be there.
Aside from staffing, a restaurant can cut costs by optimizing their ordering processes to avoid over-ordering ingredients and risk having to lose some to expiration. Consistently having to dispose of products because they are old adds up quickly for a restaurant and should be avoided at all costs.
Not only is that money wasted from the thrown-away product, but it is also more money that will be spent ordering new products when it's time to use them.
Although the goal of any business is to increase sales volume, in the restaurant industry, an increase in the average restaurant income does not directly correlate to notable increases in profit margins because costs tend to rise as well.
However, as sales increase, restaurants need to order larger quantities of products, and these bulk orders can save them money on purchasing orders.