A ridiculously wildly successful restaurant? Like, a gigantic seafood restaurant on a busy year-round tourist harbor that’s been on all the TV shows, with a line out the door, they charge $29.95 for a $2 plate of dried spaghetti with canned clams and tomato sauce? Why not become a food business expert with basic tips.
Unlike some that shall remain nameless, they do use fresh clams and authentic tomato sauce AFAIK, and the food is quite good)
On the outside, a place like that can clear $8-10 million a year gross at a 25% EBITDA, and if you own your 50-year-old building, there’s not a lot of I, D, or A, so $2-2.5 million profit.
Suppose they don’t own the building and haven’t locked in an excellent long-term lease. In that case, x will be paying $30,000+ per month plus 7% of gross revenues for a top location, so $1M+ of the potential profit goes to the landlord.
Run a restaurant like a food business expert
The Slanted Door in San Francisco is California’s second-highest-grossing restaurant, 29th in the US for 2015 (counting only independent restaurants, see Top 100 Independents) at about $16.9 million per year. However, it’s not making anything like a 25% margin. I have no way to see the numbers, but I would guess more like 10-12%. Like other unique location places, they can host weddings, corporate buy-outs, parties, merchandise, do catering, have an “out the door” casual pickup window, and a little gift store kiosk across from that. Some restaurants license take-home sauces and foodstuffs, which are different than what they prepare in-house. They have cookbooks, but most cookbooks don’t make a lot of money. Or tee shirts, once in a blue moon, somebody buys the tee shirt. Some have party promotions with cover charges. More often, there are winemaker dinners, special meals on holidays, and other ticketed events. The gross and the margin are both higher for special events. Still, they go all out, over the top, with chocolate fountains, specially imported fish, ice sculptures, commemorative gift bags, and celebrity appearances in return.
(Image: Slanted Door is more of a destination restaurant than a tourist’s joint, very busy and upscale casual)
Tao in Vegas is often credited as America’s top-grossing restaurant (a few pure nightclubs beat it in revenue), bringing in $50-70M each year depending on who you ask. Much of that is in bottle sales with 5-10% ingredient cost, and 75% of revenue is alcohol. Who knows how much money anybody makes in Vegas, probably not even the owners or the IRS. It’s Veganomics over there. But I would guess well into the tens of millions.
Tao in Vegas
Dead Fish, Slanted Door, and Tao are outliers, the top .1%, .01%, and .001%. A more modest-sized independent restaurant would be considered successful in grossing $2-4 million yearly. They shoot for 15% profit if all goes well, but they’re lucky to earn any profit at all. If you don’t watch your costs, the busier you are, the more money you can lose. A restaurant that runs at break-even if it has to hire the chef and general manager can earn an owner-operator-chef a decent living if they’re the one in the kitchen.
That’s another factor. If the chef is the owner, they’re taking a home salary in addition to profits. However, if they’re losing money, their salary is the first one that doesn’t get paid. A chef-owner of a reasonably successful independent restaurant can make a good living.
On the other side of the spectrum, some chef-owners hustle. A few days ago I met the very ebullient Joanne Weir. She’s not quite a celebrity chef, more of a one-woman culinary lifestyle brand. She runs a restaurant, does cooking classes, hosts culinary events, tells stories about Chez Panisse, and gets drunk on pre-1900 wine as a guest of Château Mouton Rothschild. She leads food tours of Europe. She has a group of followers who know each other, something of a family. There’s a cookbook, also a PBS cooking show that has run for years. I doubt that any single one of these generates a living wage in the San Francisco Bay Area, but put it all together, and she’s probably doing just fine.
The restaurant industry after Covid 19 crisis is not for the faint of heart. While passion is the spark that inspires restaurateurs to pursue their dreams, profit margins determine whether or not those dreams are a sustainable business.
Unfortunately, profit margins are dwindling across the restaurant industry. For example, two decades ago in Philadelphia, restaurant profit margins stood healthy 15-20%. Today, profit margins in this food lover town have shrunk to between 4 and 7%, which is on par with the national average.
Alas, we’re not here to depress you with statistics about low restaurant profit margins. Instead, we’re here to help you combat this problem with a complete guide to growing profits so that your restaurant can thrive sustainably. In this guide, you’ll learn:
- What the average restaurant’s profit margins are
- How to calculate gross profit
- How to calculate net profit
- Why restaurant profit margins are so low
- How to improve restaurant profit margins
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What is the average restaurant profit margin?
While there is no one-size-fits-all answer to that question, Restaurant Resource Group claims that, on average, restaurant profit margins are between 2% and 6%, with full-service restaurants at the lower end of the spectrum and limited-service (or quick service) restaurants at the higher end.
Before we dive into why restaurant profit margins are low and how you can improve yours, we need to distinguish between two types of profit margins: Gross profit and net profit.
What is gross profit?
Your gross profit is the difference in value between the selling price and the cost of the ingredients and materials used to make a dish (otherwise known as the cost of goods sold, or COGS).
For financially viable restaurants, gross profit hovers around 70%, meaning that for every $100 a guest spends at your establishment, $70 is gross profit.
How to calculate gross profit
To calculate your restaurant’s gross profit, you need to subtract the total cost of goods sold (COGS) for a specific time from your total revenue (your total food, beverage, and merchandise sales).
For example, let’s say Johnny’s Burger Bar’s total sales from July to September 2018 was $1.25 million, and its cost of goods sold was $400,000.
To calculate gross profit, apply this formula:
Gross profit = (1,250,000 – 400,000) / 1,250,000
Gross profit = 850,000 / 1,250,000
Gross profit = 0.68
Johnny’s Burger Bar’s gross profit as a percentage is 68%, meaning that for every $100 a guest spends at their establishment, $68 is gross profit that can be useful to pay for operating expenses.
What is net profit?
Your net profit is the amount leftover from the gross profit after deducting operating expenses like payroll, rent, utility bills, ingredients, and equipment leasing costs.
How to calculate net profit
To calculate net profit margin for a specific period, you need the following information:
- Sales revenue
For example, let’s say Johnny’s Burger Bar, a quick-service burger restaurant, has $1.25 million in revenue, $50,000 in gains, and $1.2 million in expenses from July to September 2018.
Net profit = (1,250,000 + 50,000) – 1,200,000
Net profit = 100,000
How to calculate net profit percentage
To calculate net profit as a percentage, apply this formula:
Net profit as a percentage = (100,000 / 1,250,000) x 100
Net profit as a percentage = 0.08 x 100
Net profit as a percentage = 8%
Johnny’s Burger Bar’s net profit margin is 8%. For every dollar a customer spends, they’re keeping 8 cents as profit.
Why are restaurant profit margins so low?
While many factors contribute to low-profit margins in the restaurant industry, one of the main reasons is three major expenses commonly referred to as the “Big Three.”
- Cost of goods sold (COGS)
As a general rule, one-third of a restaurant’s revenue is allocated to the cost of goods sold and another third to labor expenses. The remaining revenue must cover overhead expenses like utility bills and rent.
Once all expenses are paid, restaurants are typically left with only 2 and 6% in net profit.
Note: COGS, labor, and overhead expenses can vary greatly depending on a restaurant’s type and location. As such, there are certainly outliers (that’s to say, restaurants with revenue lower than average and restaurants with far above average profit) that impact the average. We recommend researching average profit margins for your restaurant type and setting a goal to have average-or-better profit margins year over year.
How to improve restaurant profit margins
There are two ways you can approach this problem: by increasing sales volume and by decreasing overhead expenses.
While many tactics can help you increase sales volume and decrease expenses, we’ve put together our list of the most accessible ways to do so.
How to increase your restaurant’s sales like a food business expert?
Let’s start by tackling how you can increase your restaurant’s sales volume. Here are four things you can do to achieve just that:
- Optimize your menu pricing
- Update your menu layout
- Provide better sales training for your servers
- Increase your traffic through marketing
- Improve your table turnover
- Adding more seating
Optimize your menu pricing simple way to increase profit margins at your restaurant is to optimize prices on your menu. To do that, you’ll first need to know each of your dishes’ cost per serving and food cost percentage. Please read our guide to calculating food costs for a comprehensive breakdown of how to calculate your cost per serving, current food cost percentage, and ideal food cost percentage.
The average restaurant needs to keep food cost percentages between 28% and 35% to run a financially healthy operation. While this number doesn’t directly translate to profit margin, it does give you wiggle room to account for overhead expenses like labor, rent, and utilities.
If the food cost percentage of your menu items falls above the 28-35% range, you have been underpricing those items. Raise your prices so that they fall within this range.
Many Industry experts say that the biggest mistake he sees restaurant owners and operators make when it comes to menu pricing is that they don’t account for overhead expenses.
“Savvy restaurant owners and operators price each of their menu items to account for overhead expenses—that is, fixed and variable costs that aren’t associated with the meal per se. Things like utility bills, rent, and labor costs,” says Cairns.
To account for your restaurant’s overhead expenses in the price of your meals, Cairns suggests tallying up how much those expenses cost you per month and dividing that amount by the number of menu items you have.
That number is how much you could increase the cost of each menu item to cover your overhead expenses.
If you worry that increasing prices will scare customers away, you can increase profit margins by decreasing food costs. Do this by finding cheaper vendors for ingredients (but don’t sacrifice quality!) or serving smaller portion sizes.
- Update your menu layout
Also referred to as menu psychology, menu engineering is the deliberate and strategic construction of restaurant menus.
Menu engineering combines psychology, data, and design to increase guest profitability. Some sources say that menu engineering can increase profits by as much as 20%.
Contrary to popular belief, menu price optimization (what we covered above) and menu engineering is not the same. However, it’s essential to know your menu items’ cost, profitability, and popularity to successfully engineer the menu.
The objective of menu engineering is to ensure that every item featured on your menu is popular and profitable. That assures that, no matter what guests order, it’s good for your bottom line.
Analyze your menu item sales
Start by analyzing your restaurant’s sales reports for a specific timeframe. You want to find which menu item’s:
- Sell the most
- Sell the least
- Highest profit
- Lowest profit
If you’re using Lightspeed, you can find all that information in your Product Sales Report. Follow these steps to access the report:
- From Lightspeed’s Restaurant Manager, click Reports.
- Select Product Reports.
- Set the date range you want to pull sales data for in the top right corner.
- Filter the list by Order Amount and Profit.
Create a menu matrix
Next, categorize your menu items into four categories:
- Stars: High-profit, popular menu items.
- Cash cows: Low profit, popular menu items.
- Puzzles: High-profit, low popularity menu items.
- Dogs/Duds: Low-profit, low popularity menu items.
We call this a menu matrix. Here’s what it should look like once you’re done.
A menu matrix helps you visualize which dishes are most important for your restaurant’s revenue.
Your goal is to use your menu matrix to inform your menu design and draw as much attention as possible to your stars, cash cows, and puzzles since they’re your most popular, high-profit dishes.
Consider phasing out unwanted, low-profit items from your menu to keep your guest’s focus exclusively on high-profit items.
Update your menu layout
There are plenty of design tricks menu engineers use to draw attention to high-profit dishes. Applying menu engineering design tricks can increase the sales of an item by up to 30%.
We’ve listed all the best menu engineering and design tricks in our Ultimate Guide to Restaurant Menu Design. Check it out for an A to Z walkthrough.
- Provide better sales training for your servers
Your waitstaff’s ability to sell food and beverages is the key to making money in your restaurant. Good managers understand that their servers aren’t just order-takers. The difference between a good server and an excellent server is their ability to upsell to diners. That includes these tasks:
- Focus on selling specialty and alcoholic drinks instead of water
- Encourage appetizer sales
- Make the mains matter—complete meal sales and a la carte side items like side salads or soups
- Don’t forget to sell dessert
The key to server training lies in coaching them into a natural delivery, allowing them to sample the new products, and getting them enthusiastic about what they’re selling. When your server is excited about the food and drink, it carries over to your diners.
Increase sales by increasing cover averages
Restaurant guests are typically referred to as covers—and increasing the amount spent per cover increases your overall sales. Servers can boost your restaurant’s cover average by upselling to customers. Consider offering a prize to the server with the highest cover average per shift.
Upselling doesn’t stop with beverages.
Adding a shareable appetizer to a table, side salads or soup before the main meal, or a dessert are all ways that your servers can add to a customer’s check—and sales revenue to your bottom line.
Investing the time to train your dining room staff on your menu offerings, allowing them to taste the dishes, and encouraging them to select their favorite to upsell to customers can go a long way toward increasing your sales.
But extra sales per customer doesn’t help if you don’t have a steady stream of customers.
- Increase your traffic through marketing
The keys to success lie in establishing a regular customer base and enticing new customers to walk through the door. If your restaurant is fortunate enough to have a regular customer base, consider rewarding their loyalty with special programs.
Some establishments have spending thresholds. The diner receives a discount or a free item for reaching a specific dollar amount. Other places offer bonus gift cards with a specific purchase amount or “happy hour” specials for regulars. With Loyalty Programs, you can create a points-based loyalty program so that your customers can earn points for dining with you and redeem them for rewards. You can also send custom, automated email marketing campaigns to promote your special offers and give customers a reason to return.
Rewarding regular guests is a great way to build your loyal customer base and increase positive word of mouth. But to do this, you’ll need to get new customers in the door first—and turn them into fans.
In today’s world, ‘food Instagramming is, in fact, a thing. Most people turn to social media to post their meals and dining experiences and leverage them to find new restaurant locations. Creating your hashtag and promoting it is a great way to increase awareness and gain positive exposure for your restaurant business when done right.
Another option for putting your restaurant at the forefront of diners’ minds is crafting press releases. If you’ve recently received an honor of any sort, such as being voted a “Best Local Restaurant for [Your Cuisine],” a press release is indeed in order. It’s not only a great way to call attention to your honor or award, but it can also get your establishment’s name out there and win new customers.
- Improve your table turnover
Table turnover is the timeframe that a guest occupies a table at your restaurant from their arrival to departure. The more customers you serve per service, the more revenues you’re positioned to make.
Suppose you want to maximize your revenues per service. In that case, your ultimate goal is to reduce the time a guest occupies a table (without making guests feel rushed) and maximize how much they spend.
It’s a delicate balance, to be sure. Serve a customer too slow, and you’re missing out on serving a higher volume of customers. Serve a customer too fast, and you risk making them feel rushed and unappreciated.
The best way to speed up your table turnover and serve more customers per service is to equip your restaurant’s front-of-house (FOH) and back-of-house (BOH) staff with tools that speed up their workflows.
Seat guests faster
Seating your guests faster is the first step to serving more guests per service.
Depending on your restaurant type, your host is the first touchpoint a guest has once they arrive at your establishment. The last thing you want is for there to be a bottleneck at the front door.
To prevent this from happening, Lightspeed developed an intuitive, adjustable floor plan that enables hosts to know in real-time which tables are free, check-in reservations, and seat guests more efficiently.
Serve guests faster
Serving your guests faster is dependent on whether or not your kitchen and wait staff are in sync.
With Lightspeed, wait staff can reduce food wait times by using its built-in tableside ordering feature, along with a kitchen display system (KDS).
Rather than writing down the tables they’re serving on paper and manually sending each of them to the kitchen, tableside ordering enables wait staff to take orders directly at a guest’s table and send them immediately to the appropriate kitchen workstation.
For instance, if a guest orders a cocktail and an entree, both orders are automatically filtered by type (cocktail + entree) and sent to the bartender and cook’s kitchen display system.
The kitchen display system organizes orders chronologically, color-codes them, and even has audible alerts for new incoming orders. All of these features make it easy for kitchen staff to get orders ready faster.
Once an order is ready to be run to a table, kitchen staff can simply send that table’s waiter a notification. The result is less back-and-forth between the front and back of the house, faster service, and faster table turnover.
Shorten your menu
Offering a short menu with lunch specials designed to get diners in and out quickly is a great way to introduce new customers to your restaurant while helping you turnover tables quickly. Ensure that the menu items you choose are quick service at the table. You may consider offering customers their meal for free if it takes longer than 20 minutes.
Process payments faster
The final step to improving table turnover is by processing payments faster. Some adjustable floor plan features color indicators that let the wait staff know which stage of their meal a table is at. o
Rather than ask whether or not a guest is ready to pay (and risk making them feel rushed), wait staff can know before approaching the table.
Equipped with that information, wait staff can approach a table when it’s marked as ready to pay, split the check however the guests want, and accept payments right from their table.
Customers appreciate the efficient service, and owners, operators, and managers appreciate turning their tables faster.
- Add more seating
If your restaurant is fully booked for every service (and if you have enough available square footage in your dining room), you could consider adding additional seating or tables. That is a quick way to increase the volume of customers you serve per service.
Suppose you optimized your menu pricing and design like we mentioned earlier. In that case, you can also substantially increase your sales per service.
Before you add tables to your restaurant floor plan, you first need to consider your guest’s comfort level, restaurant type, and industry standards for square footage per guest.
Average square footage per guest
- Fine dining: 18 to 20 square feet
- Full-service dining: 12 to 15 square feet
- Counter service: 18 to 20 square feet
- Fast food dining: 11 to 14 square feet
For a more in-depth look at the square footage per customer, there are ways to lease the perfect restaurant space.
To add more seats to existing tables in your Lightspeed floor plan, follow these steps.
- Choose the floor you want to edit In Lightspeed Restaurant.
- Select Edit from the top of the Tables screen. A settings panel will appear.
- Select the table that you want to add seats too.
- Add seats by scrolling the Chairs slider to the right.
- Select Save > Done to finalize your changes.
In this example, we added two chairs to table 20.
When you can seat more guests or take larger parties thanks to extra seating, you’ll make more money with the same overhead.
Leasing, renting, or buying a restaurant space without a plan is like walking into a Walmart without a shopping list. You go in for allergy medicine and leave with Claritin and $400 worth of patio furniture.
Where you decide to open your restaurant is incredibly impactful: it affects your labor costs, utility bills, marketing, and overhead expenses.
In other words: The restaurant space you choose is probably the most crucial decision you’ll make.
When you factor in things like the cost of the commercial space lease, permits, renovations, and building inspections, finding the right neighborhood to open a restaurant in is a critical step that can dictate your restaurant’s future profitability.
The good news? You’re in complete control. By crunching the correct numbers, it is possible to know whether or not you can afford a restaurant property based on its projected seating capacity and revenue per service. We’ve outlined five ways to find the perfect commercial space for your restaurant to set up shop in:
Let’s get started!
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Set a realistic budget (and stick to it)
Don’t start looking up restaurant space for lease without establishing a budget you’re comfortable with first. Here’s what you should keep in mind to determine your budget:
- Projected revenue
- Market research
- Wiggle room
- Prepare for the worst
Restaurateurs typically spend 5-10% of their revenue on rent and utilities. Suppose you expect to generate $40,000 each month at your quick service burrito restaurant in Austin. In that case, you should spend between $2,000 and $4,000 on rent and utilities. If you think your fine dining sushi establishment in suburban Seattle will draw $100,000 in monthly revenue, you can spend between $5,000 and $10,000 a month on your space.
How do you know how much space you can afford if you haven’t opened the restaurant yet or are a first-time restaurateur? Conduct market research. Ask restaurateurs in your area with similar concepts about what kind of revenue they generate.
If your realtor shows you a space that’s over budget but hits all of your marks, would you be willing to stretch your budget? Can you sell enough food to enough guests at a high enough price to cover all your expenses and have money left over?
You must project how much in sales your restaurant needs to earn to cover rent, labor, utilities, and the cost of goods sold.
Prepare for the worst.
If you have a few consecutive slow months, or if the economy takes a turn, could you still cover rent? Most commercial spaces lease for 3-5 years at a time. Do you have savings that you could dip into in case of difficult times? Do your research and build up your savings before looking for a space for your restaurant.
If you’ve done everything you can to the correct ship and are still struggling to cover rent, consider talking to your landlord about renegotiating your lease. Suppose your sales are suffering because of external factors like construction on your street or economic problems. In that case, your landlord might be open to renegotiation. Even at a lower price, renters would rather have steady, predictable revenue than the hassle of finding new, viable tenants.
Thoroughly research the neighborhood.
The adage “location, location, location” rings true for which restaurant property you choose. Where do you want your restaurant to be located? Tom Scarda, CEO and Founder of The Franchise Academy, recommends that restaurateurs thoroughly research a commercial space’s location based on these eight factors:
- Nearby competitors
- Customer base
- Foot traffic
NeighborhoodDo you want to be in a well-established area, or one that’s up and coming? While either of those options has its pros and cons, you need to make sure that your target market either lives there or frequently visits that area.
What kind of street do you want your restaurant to be on? You’ll pay a pretty penny to be on the high street, but an off-the-beaten-path location could mean you’ll have to spend a lot on marketing to get people to find your restaurant. Find a location that gives you as much visibility as your budget can afford.
What are other businesses nearby? If you want to open a smoothie shop, having a gym next door will help you generate business. However, if there are already a dozen smoothie shops in the area, yours will have a hard time standing out.
Think about the surrounding competition and complementary businesses near a potential location. Suppose the location is surrounded by similar establishments that target the same crowd. In that case, you’ll, in all likelihood, need to increase your marketing spend to attract customers. If there are businesses that complement yours, you can forge a strategic partnership that encourages patrons to visit each of your establishments.
Be wary of spaces, streets, or neighborhoods that you’ve seen get turned over a lot. Yes, you’re a fantastic business person, and matcha may be all the rage right now. Still, if the commercial space or area didn’t work for others, it probably wouldn’t work for you and your matcha cafe. Take your time to find a location that will help your business thrive.
- Customer base
Is the neighborhood known for attracting the type of customers you’re catering to? Does your target customer live in this area? Consider using a census explorer to understand who lives in the neighborhoods you’re interested in and see if their demographic information matches your restaurant’s target market.
- Foot traffic
Is the neighborhood densely populated? Can you rely on walk-in customers, or will you need to invest more in marketing to attract customers?
Visit the neighborhood during the day and at night. Does your business fit into the neighborhood’s vibe?
Is the commercial space easy to access via public transport? Is there parking?
Make sure your restaurant location is attractive and accessible for your target customer. There’s enough foot traffic to keep you busy with each service, and that the neighborhood’s population corresponds with your target customer.
Find out how much square footage you need
How much space does your restaurant need? The more space, the more you’ll be spending. The less space, the fewer customers you’ll be able to serve inside the restaurant. Smaller locations do, however, present several benefits.
For one, when you have the less square footage of service space, you can pay more attention to your guests and deliver more intimate dining experiences. Additionally, a smaller space means that you need to hire less service staff.
Consider these factors when deciding how much space you need for your restaurant.
Your restaurant’s concept and service style will affect the amount of space it needs. A takeout spot can require just a pickup counter, while a cafe or full-service restaurant would need ample seating. Guidelines recommend that you allocate 60% of your square footage to the dining room and the remaining 40% to kitchen space.
Also, take into consideration industry guidelines for seating space per customer. For example, fast-food restaurants adhere to 11-14 square feet per seat, while fine dining establishments give their customers 18-20 square feet per seat.
Do you want your restaurant to double as a banquet hall or event space? Consider how much more room you’ll need for a private dining space.
In cities like New York, where commercial space is among the most expensive in the world at $171 per square foot, a larger space can cut into profits and is sometimes just downright inaccessible. In affordable cities, it’s essential to think about making the most of a smaller space. Read up on tips for maximizing a small restaurant space before knocking any small commercial spaces off your list.
Let your restaurant’s concept and budget dictate the size of the commercial space you need.
Calculate estimate sales targets to cover expenses
Remember, the commercial space you choose has a significant effect on your daily operations, your recurring expenses, and the number of customers you can serve. Your food sales need to be strong enough to support those recurring expenses.
To find out how much you need to sell per seat to afford a commercial space, you need first to do the following:
- Find the commercial space’s cost per square foot
- Calculate your square footage per customer
How to find a commercial space’s cost per square foot
A location’s cost per square foot impacts how many people you can serve, and much you need to charge for your food to stay profitable. In New York, the average commercial space in trendy neighborhoods like Manhattan or Brooklyn is $120-per-square-foot. For comparison, the average price-per-square-foot in Los Angeles is $52.
How to calculate square footage per customer
Dining spaces take up roughly 60% of most restaurant’s total square footage. The other 40% is allocated to your kitchen, storage space, service stations, etc.
- Dining room: 60% of your total square footage
- Kitchen, storage space, etc.: 40% of your total square footage
How much square footage you allocate to each seated guest depends on the type of establishment you want to open, but here are some general guidelines:
- Fine dining: 18 to 20 square feet per person
- Full-service dining: 12 to 15 square feet per person
- Counter service: 18 to 20 square feet per person
- Fast food dining: 11 to 14 square feet per person
Now, let’s put this into practice and use a commercial space’s cost per square foot and seating capacity to determine how much you’d need to sell per seat, per service, to cover all your expenses.
Let’s say Johnny finds a 1,200 square foot commercial space in Brooklyn that costs $52-per-square-foot. He researched the neighborhood and knew a market for his high-end, full-service Italian fusion restaurant concept. He’s in love and thinks the space has potential, but how can he tell whether or not it’s a financially responsible investment long-term?
How much does Johnny need to make per month to cover his lease?
- Annual lease cost: 1,200 x 52 = 62,400
- Monthly lease cost: 62,400 / 12 = 5,200
To cover his estimated food, labor, and utility costs, Johnny wants his monthly rent to account for only 8% of his total monthly sales.
- Monthly sales target: 5,200 x 100 / 8 = 65,000
Johnny needs to sell for $65,000 per month to cover all his expenses.
How many people can Johnny seat?
Now, let’s calculate how many people Johnny can comfortably sit in this commercial space. He wants to offer 15 square feet per person. Remember, dining space typically accounts for 60% of the commercial space’s total square footage.
- Available dining space: 1,200 x 0.60 = 720 square feet
- Total seating capacity: 720 / 15 = 48 seats
The commercial space can comfortably seat 48 people (or 24 tables for 2).
How much revenue per seat does Johnny need to make to cover his expenses?
Johnny wants his restaurant to offer two services: one starting at 6:00 pm and the other at 8:30 pm. His goal is to turn each of his 24 tables twice each day, and he’s open six days a week.
- Services per week: 2 x 6 = 12
- Customers served per week: 12 x 48 = 576
- Average revenue per seat: 65,000 / 576 = $112.84
Johnny’s restaurant needs to make an average of $112.84 per seat per service to cover his expenses.
Johnny can now take that information to plan a menu that assures that he’s making an average of at least $112.84 per seat each service.
How to decrease overhead expenses
The following way to improve your profit margins is by reducing ongoing expenses like labor and utilities.
- Improve your employee scheduling
- Reduce food waste
- Lower utility bills
- Improve your employee scheduling
How do you currently decide how many servers to schedule per service and which servers to schedule?
To reduce labor costs while maximizing your revenue per service, we suggest leveraging your restaurant’s sales and employee data.
Schedule too many servers during slow business hours, and you risk spending too much on labor costs. Schedule too few servers. You risk turning tables slower, spreading your staff thin, and weakening the quality of your customer experience.
When planning your employee schedule, your goal is to ensure that your restaurant is sufficiently staffed to meet customer demand at any time of the day.
With restaurant point of sale analytics integration Tenzo, you can leverage AI to predict the exact number of staff you will need at each hour, even considering contextual factors such as weather and public holidays. You can also clearly identify which of your servers generate the most revenue, as well as your restaurant’s busiest and slowest business hours.
Equipped with that information, you can schedule your top-selling servers during your busiest business hours, maximize your revenue per service, and minimize labor costs.
With restaurants spending about 30% of their monthly revenue on labor (the most significant operating expense only second to cost of goods sold), optimizing your employee scheduling is an excellent and easily accessible way to increase revenues and decrease ongoing expenses.
- Reduce food waste
A report from the Boston Consulting Group (BCG) estimates that, by 2030, food waste will account for approximately $1.5 trillion in lost revenue for restaurants.
Remember, approximately one-third of a restaurant’s revenue is allocated to the cost of goods sold (COGS). Suppose you end up throwing that food away. In that case, you’re effectively losing money that could have been profit or used to cover other expenses.
The World Resources Institute found that for every $1 a restaurant invests in reducing food waste. They save an average of $7. That type of return on investment is something you should consider if you’re goal is to improve your profit margins.
- Lower utility bills
Did you know that restaurants consume an average of five to seven times more energy per square foot than other commercial buildings? For quick-service restaurants and other high-sales volume establishments, it’s up to ten times more.
And that consumption adds up to higher utility bills.
Tim Powell, Managing Principal at food service management consulting firm Foodservice IP, says that fixed costs like utility bills account for up to 33% of a restaurant’s sales.
Investing in eco-friendly kitchen appliances and lighting can lower utility bills, which leaves more revenue from sales left in the bank.
ENERGY STAR-certified foodservice equipment could help you cut down on how much energy your restaurant uses. While the initial cost of the investment may feel steep, the long-term savings on your utility costs more than account for it.
The benefits of eco-friendly appliances
- Consume less energy
- Lower utility bills
- High return on investment
Businesses that actively reduce their food waste and environmental footprint typically have margins 3.3% higher than businesses that don’t.
Top takeaways for improving restaurant profit margins like a food business expert
The restaurant industry is a tricky business to succeed in.
Use the tips we covered here to increase your sales volume, decreasing your expenses, and grow your profit margins. In summary, our tips were:
- Optimize your menu pricing so that each dish you serve is beneficial to your bottom line.
- Update your menu layout to sell more of your most profitable dishes.
- Train your staff to maximize sales as much as possible (but without sacrificing the quality of service).
- Offer a loyalty program and promote your restaurant on social media channels.
- Improve your table turnover and serve more guests per service.
- Adding more seating to increase revenue per service.
- Improve your employee scheduling to both reduce labor expenses and maximize sales per service.
- Reduce your food waste and environmental footprint to save on COGS and utility bills.
While there’s no one-size-fits-all solution for increasing your profit margins, the above tactics are tried and true ways to do so. Try to apply them to your establishment, and you’ll be in a great position to stay in the black year after year. So follow the simple steps to become a food business expert.