How many times have you asked yourself if your restaurant profit margins are where they should be? 🤔
You’re not the only one. It’s a question that pops up constantly from restaurant owners, and rightly so. A good profit margin is essential to restaurant success.
But what constituted a ‘good’ profit margin? And what can you do to increase margins to help your restaurant grow?
By the end of this article, you’ll have the answers to these questions. Keep reading to find out:
- What a good restaurant profit margin is
- The common factors that affect these margins
- How to overcome challenges and improve profit margins in your restaurant
But first, let’s clarify what a restaurant’s profit margin is and how to calculate it.
What is a restaurant’s profit margin?
Your restaurant profit margin is the percentage of revenue that you keep as profit after paying all of your expenses, like food, labour, rent, and utilities.
Tracking your margins helps you measure the financial health of your restaurant, ensuring that your restaurant is profitable. If your margins are low or non-existent, you can make changes to increase your revenue or reduce costs.
Why is it important for restaurants to track profit margins?
We all know that margins are tight in hospitality. One small change in your costs could be the difference between a profitable restaurant and a struggling one, so accurately tracking these margins is crucial to restaurant success.
It also helps you price your menu items, ensuring that you set prices that enhance profitability as much as possible. For example, capitalising on low-cost, high-value items to increase margins.
Find out more about menu engineering and pricing your menu for profit!
How do you calculate a profit margin for restaurants?
Here’s how to calculate your restaurant profit margin:
Profit margin = (Net profit / Total revenue) × 100
- Net profit is the amount left after subtracting all outgoing costs (like the cost of goods sold, labour, and overheads) from the total revenue.
- Total revenue is the amount of money you earn from sales before outgoing costs are deducted.
For example, if your restaurant has a net profit of £50,000 and total revenue of £1,000,000, the profit margin would be 5%:
(£50,000 / £1,000,000) × 100 = 5%
This means your restaurant retains 5% of its total revenue as profit.
What is a good profit margin for restaurants?
Generally speaking, a healthy profit margin for restaurants is around 3-5% of your total revenue. But a quick Google search will tell you that there’s a lot of variation in what a ‘good’ profit margin is for restaurants. It fluctuates between anything from 0-15%.
Why are there so many different answers?
Because there are so many variables to consider when clarifying a ‘good’ profit margin. Things like restaurant type, location, and market conditions can all influence margins.
Not to mention, what one restaurant sees as a good margin might not be good for another. A good margin for a small-town restaurant on the coast might be bad news for a venue in central London. There’s no one-size-fits-all.
Common factors affecting restaurant profit margins
Let’s take a look at some of the factors affecting restaurant profit margins in more detail.
Type of restaurant
The type of restaurant you operate can have a major impact on your ideal profit margins. The types of ingredients you need, the turnover of customers, the prices you charge — it all varies based on the type of operation you’re running.
Let’s break it down:
Full-service restaurants (FSRs)
FSRs usually have lower profit margins, often around 3-5%, due to higher labour and overhead costs. They have more extensive menus, sometimes with premium ingredients, and more labour expenses for chefs, servers, and kitchen staff.
Customer turnover, location, and menu prices are some of the biggest factors that can increase profit margins for FSRs.
Quick-service restaurants (QSRs)
QSRs might see slightly higher margins than FSRs (at around 5-8% because they generally have:
- Streamlined menu options with low-cost ingredients
- Fewer staff
- Quicker customer turnover
Prices are typically lower in a QSR, operators need to ensure that prices are competitive yet profitable.
Bars and pubs
Bars and pubs generally have the highest margins at around 10-15%, mostly because of alcoholic beverages. Alcohol sales have some of the highest markups with relatively low costs. Take a look at this report as an example — a small local pub achieves a 53.5% gross profit margin mostly from drink sales (95%).
But success in this category relies pretty heavily on attracting a steady crowd and effectively managing overhead costs.
Cafes and bakeries
Cafe and bakery profit margins sit at around 6-9%. Low-cost, bulk ingredients (like flour and sugar) contribute to these healthy margins.
But the need for raw and fresh ingredients (like eggs and milk) makes it easy for bakeries and cafes to overorder ingredients and produce too many items. This can make a big dent in profits, so bakeries must manage inventory in line with customer demand.
Find out how Nory can help you reduce waste and boost bakery profit margins!
Fun fact 🚨 The UK bakery market is doing pretty well right now, despite the challenges in the industry. Almost 50% of bakeries that took part in the Bakery Market Report 2024 grew their estates over the past year, and a further 23% are holding steady.
Find out more about the current bakery landscape in our latest ebook: The ultimate guide for bakeries to control their costs.
Cost of goods sold
The cost of goods sold (COGS) is the total cost of making a menu item. This includes everything that goes into producing it, like the ingredients and materials. However, it doesn’t include indirect costs (such as labour costs and overhead expenses).
Think about a pizza as an example. The cost of producing this item includes the ingredients (flour, yeast, water, salt, cheese, and tomato sauce) and the packaging for delivery (a pizza box).
The cost of these ingredients impacts profitability. Think about it — if you pay less for ingredients, you have more revenue left after covering these costs. In other words, the lower your COGS, the better your profit margins.
Labour costs
Staff wages play a big role in profitability, accounting for around 30% of revenue. If you’re not scheduling staff effectively, you could be taking a huge chunk out of your profits.
For example, let’s say that you have a full staff working on a Wednesday evening. It’s pretty quiet — so much so that some staff don’t have enough work to keep them occupied.
During this time, you paid all their wages for a full shift but didn’t make enough income to warrant these wages. Your profit margins? They’re pretty much non-existent.
This is why optimising labour schedules is so important. When you schedule the right number of staff to meet demand, you prevent overspending on wages and keep your profits healthy. We’ll talk about this in more detail later.
How to improve profit margins in your restaurant
Maintaining profitability isn’t easy, particularly in the face of rising costs and economic pressures. But there are things you can do to tackle these challenges and keep your profit margins healthy.
Improve inventory management
Inventory management is a tricky nut for restaurants to crack. With fluctuating costs and changing customer demand, it’s not always easy to optimise your inventory spending.
But optimising your inventory management is key to minimising costs, reducing food waste, and increasing profits.
So how exactly can you improve your inventory management?
One of the best solutions is to use inventory management software, like Nory.
Our AI-powered technology can analyse your previous sales and external factors (like seasonality and the weather) to predict how many customers will walk through your door at any given time. Taking your current stock levels into account, we create order guides and prep lists so you can order the ingredients and quantities you need.
With all this information at your fingertips, you can optimise your spending on ingredients to align with customer demand. This means you don’t overspend on items you won’t use, meaning your profit margins are higher.
Optimise staffing and scheduling
As we’ve already mentioned, labour costs can have a big impact on your bottom line. This means that it’s vital that you optimise your labour schedules if you want to improve your profit margins.
This means creating demand-based schedules that avoid overstaffing and keep your profit margins in check. And one of the best ways to create demand-based schedules? Using AI-powered workforce management software.
With Nory, for example, you can automatically schedule shifts based on predicted demand. We analyse things like historical sales, seasonal variations, and the impact of local events to help you meet expected demand without overscheduling.
Nory success story 🥳 Find out how Roasting Plant Coffee cut labour costs by -18% in just two months of working with Nory. With our real-time data, the coffee shop creates optimised schedules across all locations, avoiding overstaffing to minimise costs and increase profits — as well as saving a lot of time.
“I can see where our general managers are saving a huge amount of time making their rotas. It frees up their time to focus on other crucial aspects of their role.” – Kallie Kocourek, Vice President of the UK Market at Roasting Plant Coffee.
Use menu engineering
Menu engineering involves strategically designing, pricing, and arranging items on your menu to boost profitability. For example, putting your top-sellers in a ‘chef recommended’ section. Or adding deals to encourage people to buy some of your less popular but highly profitable items.
All of these things can influence a customer’s decision-making process and, ultimately, your bottom line.
But to really optimise your menu, you need data. You need to know what sells the best and what meals are the most profitable so you can engineer your menu accordingly.
The best way to gather this data?
Technology.
Let’s say you own a casual American-style restaurant with a menu that includes a variety of burgers, salads, and pasta dishes. You want to identify your most popular and low-cost items so you can optimise your menu.
Without technology, you’re manually reviewing sales and performance to pinpoint the popular items and how much it costs to make them. It takes a long time and it’s hard to calculate the exact specifics, meaning that the risk of error is pretty high.
But with technology? This is all taken care of.
Take a look at Nory as an example. With our restaurant operating system, you can track sales and performance in real-time and in one location. It’s instant access to the data you need to make informed decisions about your menu design, layout, and pricing.
Plus, you can break down menu items by food cost, meaning that you can see exactly how much the ingredients cost in each dish.
React to fluctuating costs
We all know that costs fluctuate in hospitality. From the minimum wage increase to rising food costs, things can change at the drop of a hat.
To keep on top of these costs, it’s important to regularly review and monitor your costs and margins. That way, you can be proactive against changes and ensure you remain profitable — even when it’s unexpected.
But constantly tracking costs is time consuming. And let’s be real — you have a restaurant to run. It’s not easy to find the time to constantly be on top of financial metrics and fluctuations.
This is where Nory can help.
Our software tracks your costs in real-time so you don’t have to. Keep tabs on supplier prices, sales forecasts, COGs, budgets, — and of course, your profit margins. If things change or don’t align with your budgets, we’ll let you know.
Nory success story 🥳 See how Rocksalt uses Nory to track costs and supplier prices in real-time to optimise spending.
“I would’ve previously spent around 50% of my time trying to manage pricing from suppliers. Now, it’s a 10-minute job because I can see the price changes instantly, pick up the phone, and take action.” – Stephen Burns, Group Operations Manager at Rocksalt
Watch your profits climb with Nory
Tracking your profit margin is an essential part of restaurant success. It’s as simple as that. It shows you how profitable your business is, how efficient your operations are, and where you can make improvements to reduce costs and increase profitability.
But it’s not always easy. There are a lot of variables to consider, and it can be pretty time-consuming to keep on top of everything.
The good news is that there are systems (like Nory 👋) that can help you stay on top of all your financial data. We can track your prices in real-time, monitor your budgets, and predict customer demand to help you optimise your inventory and labour management.
Want to find out more? Give the team a call and we’ll show you how it works!
FAQs about profit margins for restaurants
What is the average profit per restaurant?
The average profit per restaurant varies widely, but online figures suggest that UK restaurants average between £100,000 and £250,000 in revenue. Depending on outgoing costs, this means that the average profit (at 5%) is around £5,000 and £12,500.
But remember — there are a lot of variables that influence these costs. High-end or successful establishments may earn more by charging higher prices, while others earn less.
Why are restaurant profit margins so low?
There are a lot of factors that create razor-thin margins for restaurants. High costs for food, labour, rent, and utilities are a few examples — plus fluctuating food prices and consumer behaviour. Balancing competitive pricing with quality further squeezes margins.
How long does it take for a restaurant to be profitable?
It takes a restaurant anywhere from 6-24 months to become profitable. But as we’ve already mentioned, there are a lot of factors that determine this timeframe. Some restaurants may reach profitability sooner, while others might take longer. Initial investment, location, marketing, and operational efficiency are some of the things to consider.
