Understanding Restaurant Profit Margins (And How To Increase Them)

The most common query that we receive while fraternizing with restaurant owners is about the restaurant profit margins–what is the average profit margin for a restaurant, how to calculate restaurant margins, and so on. While there are many parameters to gauge a restaurant’s success, your net profit margin gives you a clear picture, whether the restaurant is going to survive in the long run. The average profit margin differs for different restaurant formats. Anything above 20% can be considered as a decent profit margin.

How to Calculate Net Profit Margin For Your Restaurant

You calculate net profit margin for an accounting period by dividing net income by sales.

Net Profit Margin = Net Income/Gross Sales x 100

Where,

Net Income = Gross Revenue – Operating Expenses

Gross Revenue is sales revenue from selling food, drinks, and merchandise plus gains, i.e. income from a transaction that doesn’t fall in your normal business operations. For example – a gain from selling old restaurant furniture or kitchen equipment would not be added in gross revenue. And, Operating Expenses are the costs you incur to run your restaurants such as the cost of ingredients, rent, wages, equipment and depreciation, utilities, interest and taxes, repairs and maintenance.

For instance, for a given year, your revenue from the restaurant sales is Rs. 1.5 million, you earned Rs. 0.5 million in gains and spent Rs. 1.2 million in expenses. 

Net profit will be = Rs. ((1 million + 0.5 million) – 1.2 million)/1.5 million * 100 = 3%

That means you pocketed 3 paise for every rupee of sales.

Now, your restaurant profit margin gets affected by a slight change or an unexpected event. For instance, the price of food grains or rent can affect your margins noticeably. The only way you can increase your restaurant profits is to increase sales without simultaneously increasing your operating expenses. The first thing you need to do is to keep a track on all the running expenses of your restaurant. Then you can take steps to reduce costs and increase your margins.

Key areas to focus on to improve operations and improve your profit margins

1. Reduce Food Costs

Well, it may seem laughable. How can you reduce food costs in a restaurant? If you are to increase sales if at all, your food costs will only go up. That’s right. However, there are ways you can increase sales and still reduce food costs.

  • Waste and theft are major threats to restaurant profits. Decrease the amount of food you throw away. Develop a laser focus on correct portion control. Ask your chefs or prep team to pre-measure all food items and always use measuring utensils. Regularly conduct trash talks (asking why something has been tossed in the trash can) with the crew. It will keep your staff mindful about wastage. Also, keep a track on theft and pilferage. Theft of expensive foods or alcohol can significantly increase your food costs.
  • Negotiate prices with suppliers. Keep a track of your regularly ordered foods or foods ordered in bulk and ask for discounts on them. Or, buy directly from farmers or producers, which will save you the cut of the middlemen and wholesalers. Also, by sourcing foods locally, you can considerably cut down your freight expenses and food costs.
  • Mind your menu. You can actually cut down your food costs marginally, simply by pricing and designing your menu the right way. A number of factors need to be taken into consideration during menu pricing, such as direct costs, indirect costs, volatile costs, etc. Find the correct way of pricing your menu here

2. Decrease Overheads

While reducing fixed costs like rent is difficult, you can focus on other variables like salaries, electricity, and water.

  • Now, you cannot just slash down salaries of your staff without creating a risk of hysteria or even mass walkouts. However, you can hire qualified staff and train them well to be efficient and more productive. Also, by incentivizing employees, you can ensure happy staff, high performance, and more loyalty which in turn translates into reduced hiring, training costs, and more profits.
  • Another thing to consider is making your staff multitask. For example, the servers and bartenders can clean up the tables before going home. It will save you the expense of hiring a cleaner.
  • Restaurants have high utility costs. Apart from using energy efficient equipment, you can also keep a few things in mind to save energy. Program the air condition unit to adjust during nonbusiness or slow hours. Find small leaks and use low flow where possible. Train the kitchen staff to reduce idle times on ovens, boilers, etc. and your dishwashing staff to not run 1/2 racks.

3. Leverage Technology

Installing a good POS system can help you reduce costs and increase profits. A POS system can help you –

  • track inventory and set reordering schedules to avoid thefts
  • reduce waste from spoilage and ordering mistakes
  • increase table turnover rates
  • track sales so that you can keep your inventory in order and hire people accordingly
  • identify trends like best selling items, high margin items, and underselling items to help you redesign your menu accordingly
  • manage employee hours and payroll
  • increase table turnover rates and staff efficiency

Also Read: 5 Ways You Should Be Using Your Restaurant POS (Other Than Just Billing)

4. Increase sales

There are only two ways you can increase your restaurant sales; either by getting more customers or selling more to the existing ones.

Leverage technology and various other means to promote your restaurant, such as hosting special events, offering discounts, etc. to attract new and repeat customers.

Also, you can increase profits by selling more to your existing customers. Some unconventional ways through which you can increase your sales are- 

  • Change the menu to include more profitable or high margin items-Train your employees to upsell these items. At KFCs, the waiters are always trying to sell you more like French fries, ice creams or even upsize your Pepsi.
  • Sell merchandise- Do not laugh at the suggestion. Just imagine all the money Hard Rock has minted so far selling T-shirts. And, does it make Hard Rock charge for its burger any lesser?
  • Dangle temptations- Many restaurants keep candies, toys, etc. for kids that are chargeable at the check out counter. It’s a great way to earn some quick buck on the side. Conrad Hotel in Pune has kiosks in the customer lounge selling chocolates, cakes, and other baked goodies as customers wait for their tables, while Salt Water Café in Mumbai sells various types of bread, dips, and spreads.

No element works without the other. Keep in mind that all of these workings in tandem can only help you control your expenses and increase profit margins for your restaurant.

Also Read: Decoding Restaurant Key Performance Indicators: Measure the Success of Your Restaurant

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