Running a restaurant is a passion for many owners — but at the end of the day, it’s a business venture that must generate a profit to remain viable. That’s why restaurant profit margin is such a critical metric; it helps you determine what percentage of the revenue you’re pocketing each month. With that information, it’s easier to make strategic decisions about purchasing, pricing, hiring, and menu design.
What is a restaurant profit margin?
A restaurant profit margin measures the percentage of the company’s revenue that remains after you cover expenses. It’s expressed as a percentage that indicates how many cents of profit your business generates for every dollar you bring in. If your profit margin is 35%, for example, you’re keeping $0.35 of every dollar of revenue. When the business makes $10,000 in sales, you generate $3,500 in profit.
This metric is a quick way to gauge the profitability of your business. You might calculate the profit margin for individual menu items, food categories, or the restaurant as a whole.
Here are a few additional types of restaurant profit margins to monitor:
- Gross profit margin. This critical metric helps you track the profitability of menu items after you pay for ingredients and food items. To calculate gross profit margin, subtract your cost of goods sold from your total sales for a specific period of time. Then, divide that number by the total sales to find the percentage.
- Operating profit margin. This number lets you know how much revenue is left after you subtract the cost of goods sold and operating costs, including marketing, utilities, insurance, payroll, and building maintenance. It helps you understand the profitability of the business before taxes and interest payments.
- Pretax profit margin. As you can probably guess from the name, the pretax margin lets you know how much of the profits you’re keeping before you subtract taxes. You can use it to determine the business’ operating efficiency.
- Net profit margin. Your net profit is the amount of money that’s left after you subtract the cost of goods sold, operating expenses, taxes, and interest. The net profit margin is a critical profit metric; it tells you how profitable the business is as a whole.
What’s the average restaurant profit margin?
According to the National Restaurant Association, the average restaurant profit margin is 5% before you factor in taxes. In reality, the average range tends to fall between 3% and 5%. Your actual margin will vary based on your operating expenses, COGS, interest on debt, and tax burden.
The type of establishment you run can also impact your net profit:
- Full-service restaurants. These businesses, which offer table service and more one-on-one attention, have relatively high labor and supply costs. They often have a profit margin between 3% and 5%.
- Fast-food restaurants. Because fast-food restaurants offer counter service and self-ordering options, they have lower labor costs. Their menus are limited and often incorporate premade ingredients, which helps reduce food costs and increase order volume. As a result, these establishments may report restaurant profit margins of 6% to 9%.
- Food trucks. With their low overhead and labor costs, food trucks typically report profit margins between 6% and 9%. Many trucks also use limited menus to keep food costs in check.
- Catering services. Catering companies don’t need to maintain a dine-in property, which means they have lower overhead than a traditional restaurant. Profit margins often range from 7% to 8%.
- Bars. Thanks to the high markup on alcohol, bars tend to have the highest profit margins in the restaurant industry: 10% to 15%.
These figures are merely guidelines — your average restaurant profit margin may be higher or lower.
Why is your restaurant profit margin important?
The profit margin — in particular, the net profit margin — is a critical indicator of your establishment’s financial health. If it dips too low, your business is likely just breaking even or losing money. If it’s consistently high, it’s a sign that you’re doing something right.
Margins are notoriously low in the restaurant industry. Consistently monitoring your gross profit margin and net profit margin closely can help you spot red flags early and act quickly to prevent irreparable financial damage.
Restaurant profit margins are also an important factor in:
- Budgeting. A clear understanding of your profit margin helps you make informed financial decisions that support the long-term goals. A low gross profit margin could mean you need to find ways to cut food costs; a drop in your net profit margin might indicate a need to streamline operations or refinance a loan.
- Securing funding. Are you planning to expand? When you apply for loans, banks will look at more than your restaurant business plan; they’ll also examine your profit margin to determine the viability of a new location or a larger property.
- Tracking success. Profitability is a big part of a restaurant’s success, whether you run a small business or a national chain. As a restaurant owner, tracking your profit margin helps you gauge the performance of the business over time.
How to get a higher profit margin
If your average profit margin is on the lower end of the spectrum, you’re not alone. Inflation, supply chain disruptions, and rising food costs are eating into the margins at many establishments. Now is the ideal time to assess your operations to find ways to improve.
1. Reduce costs
If your restaurant’s expenses are starting to erode profit margins, it might be time to implement cost-cutting measures. Food costs, which account for a significant percent of a restaurant’s cash outflow, are a natural place to start. You might negotiate better deals with restaurant industry suppliers, switch to lower-cost suppliers, or use cheaper ingredients in certain dishes. Reducing food waste can also help — using ingredients on a first in, first out (FIFO) basis can prevent spoilage and wasted money.
Depending on your restaurant operation, you can also reduce cost by:
- Implementing self-ordering kiosks to reduce labor costs
- Scheduling staff to align with demand
- Improving working conditions to reduce turnover
2. Boost sales
Once your operations are optimized and efficient, focus on increasing revenue. One option is to run promotions for takeout, delivery, and in-house dining. Discounts can help customers overcome spending hesitance, especially when times are tight. Add a daily special, host happy-hour appetizer deals, or create a family meal deal. The more promotions you have, the more reasons customers have to drop in.
Repeat guests can be a valuable source of revenue — because they’re already aware of your business, it costs less to get them in the door than to recruit a new customer. To encourage regulars to come in more often, create a customer loyalty program. The incentives give members an extra reason to choose your restaurant over the competition.
3. Increase menu price
Assuming your costs stay flat, raising your prices automatically increases your profit margin. Proceed with caution; your goal is to shore up net profits without alienating customers.
Ways to boost prices and retain customers include:
- Understanding necessary increases. Run the calculations in advance to determine how high your prices need to be to achieve a satisfactory profit margin. That way, you can plan a strategic rollout and avoid irritating customers with increases that seem arbitrary or reactionary.
- Increasing prices gradually. Raise menu prices in small, more frequent increments to avoid sticker shock.
- Communicating. It’s safe to expect a certain amount of feedback after a price increase. Be transparent with customers about the reasons behind the change.
It can be helpful to upgrade your menu at the same time you revisit pricing. Adding new items, special deals, and more comprehensive menu descriptions can help customers understand the value they’re getting, which can offset their reaction to the higher prices.
How Grubhub can help your restaurant’s profits
Maintaining a good restaurant profit margin is an ongoing process. Grubhub is here to help — we offer multiple tools and resources to support your business, streamline your procedures, and boost sales. Make sure to take advantage of our core services:
- Grubhub Marketplace. List your restaurant on Grubhub Marketplace to reach more than 33 million diners who are actively looking for their next restaurant. Our tech stack is designed to work seamlessly with your establishment’s existing setup, so your staff can manage incoming orders with ease. Have a question? Your designated Grubhub team member is available for consultations.
- Grubhub delivery. With Grubhub, you can use our drivers or your own delivery fleet. Our flexible driver management system takes over the scheduling and tracking process, so you can dedicate your resources to preparing delicious food.
- Grubhub Direct. Create your own commission-free ordering website quickly with Direct. It integrates effortlessly with your existing website and enables customers to order directly from you at no charge. You’ll also get access to customer data for easier marketing and analysis.
Can your restaurant benefit from our services? To become one of our successful restaurant partners, get started with Grubhub today.
