What Is the Average Restaurant Profit Margin? How to Increase Profit Margin

For those who aren’t in the business, owning a restaurant may seem glamorous. If you’re a restaurant owner, however, you know how much of a slog it can be: long days, working nights and weekends, and tight profit margins. While owning a restaurant can be incredibly rewarding, there is no question that it is also really hard.

Even before the COVID-19 pandemic, running a restaurant was challenging – particularly when it came to turning a profit. The average restaurant profit margin is a slim 3 to 5 percent. Fortunately, there are a number of things that you can do to increase your profit margin, from increasing sales to decreasing costs.

At Budget Branders, we understand how difficult it can be to turn a profit in the industry. As former restaurant owners ourselves, we are all-too-familiar with how something as simple as an increase in the cost of supplies can put you in the red. That is why we are committed to helping restaurant owners get the custom branded disposable products at prices and in quantities that work for their bottom line.

In its simplest terms, profit is what you are left with after deducting expenses from your total revenue: total sales – expenses = profit. For restaurants, profit margin is expressed as a percentage of annual sales. To calculate your profit margin, you will need to divide your net profit by your total revenue, and then multiply the number by 100 to get a percentage.

Revenue can come from a number of sources, including sales of food and beverage, catering sales, venue rentals, franchising agreements, and even the sale of branded merchandise and packaged goods. Similarly, your expenses can include anything from labor to inventory to equipment repairs to rent to utilities.  These expenses may be fixed or variable, which can make it hard to predict exactly what your profits will be from month to month.

To successfully launch a restaurant, it is critical to keep an eye on your profit margin. If your expenses creep up, it can eat into your profit margin – which means that you’ll need to take action to stay afloat. 

Every restaurant is unique – and their profit margins are, too. There are a number of factors that can impact a restaurant’s profit margin, such as the type of food that they serve, whether they offer alcoholic beverages, and the average sale per customer. For this reason, restaurant profit margins can range from 0 to 15%.

On average, however, restaurant profit margins fall between 3 and 6%. Full service restaurants often have thinner profit margins, while the profit margin for catering businesses and food trucks may be larger due to lower expenses.  Examples of typical profit margins include:

• Food trucks: 6 to 9%
• Full service: 3 to 5%
• Catering and events: 7 to 8%
• Fast food and takeout: 6 to 9%

Because there are such variations between profit margins for restaurants, it is important to understand typical profit margins in your niche. From there, you can keep an eye on your profit margin and make sure that it is either in line with the average for your industry subset – or better than average.

If your restaurant’s profit margin is below where you would like it to be, there are two ways to improve it. First, you can try to increase your sales volume relative to expenses. Second, you can try to decrease costs relative to sales volume.

These options may sound straightforward – but they can be difficult to implement. For example, if you decide that you want to reduce expenses by letting go of staff, you may quickly find that your sales drop because customers are unhappy with longer wait times or poor service.

If you want to reduce your expenses, then you may look at the “big three:” cost of goods sold (COGS), overhead, and labor. Typically, ⅓ of revenue is allocated to each of these three expenses. Cutting these costs without impacting sales requires careful planning.

First, you will need to carefully monitor your restaurant’s metrics, including traffic patterns, utility usage, food waste, and menu item sales. By closely tracking these items, you can figure out ways to decrease your expenses. For example, if you find that you are throwing out too much spoiled food, you may choose to overhaul your inventory management system.

Second, use technology to your advantage. A fully integrated point of sale (POS) system can be expensive – but it can be a great way to improve efficiency, reduce errors, and even manage your inventory. At the same time, smart scheduling tools can allow you to decrease payroll costs by staffing your restaurant appropriately based on the ebb and flow of your business.

Third, rethink your marketing plan. Traditional advertising – via newspapers, billboards, or even radio ads – can be expensive. More customers than ever before rely on the internet (and in particular, social media) to find a place to eat. Cultivating an online presence can be a less expensive and more effective way to advertise.

Fourth, take a hard look at your food cost percentage and food waste. If your food costs go up relative to menu prices, it can take a bite out of your profit margin. At the same time, throwing away too much food can be disastrous for your bottom line. Be sure to constantly evaluate what is selling, what isn’t – and what you should be charging for dishes based on what you are spending for the goods to make it.

Fifth, think about what steps you can take to retain employees. Payroll and labor costs can eat up a chunk of your budget – particularly when you have to regularly train new staff. By reducing turnover, you can keep customers happy – and your costs low.

Sixth, think about how you can maintain a consistent flow of business. This can help to reduce costs in slow times – and increase profits. Offering online ordering, expanding your menu, or even doing special promotions can help avoid ebbs in your business.

Throughout the year, paying close attention to your expenses can help you increase your profit margin. At the same time, you can employ a variety of tactics designed to increase sales – from hosting live music to participating in a local restaurant week to running specials. By closely tracking your costs and sales, you can meet or even exceed the average restaurant profit margin for your specialty.

The restaurant industry is highly competitive – which can make it hard to turn a profit. If you are looking to increase your profit margins, boosting your marketing outreach with custom branded disposable products may be just the ticket.

Disposable cups, bags, and bowls are more important than ever during a time when takeout and delivery sales are the cornerstone of the restaurant industry. Having branded disposable products is a great way to get your name out into the community – for a relatively small cost.

Budget Branders is dedicated to helping small and medium-sized businesses succeed. We offer excellent service and affordable prices – and only sell in quantities that make sense for small business owners. To learn more or to get a quote on our products, fill out our online contact form, or hit the “live chat” button.