According to Forbes magazine, the average restaurant profit margin in 2011 increased from 1.93 percent to 5.01 percent. Regardless of this 250 percent increase, restaurant profit margins tend to be slim, making it necessary for most eating establishments to compensate for slim margins with high sales. Despite these low margins, tenacious restaurant owners open and maintain restaurants even in tough economic climates, finding creative ways to earn a livelihood based on a passion for food and for creating memorable dining experiences.
Calculating Profit Margin
Profit margin is the percentage of a restaurant's gross sales left over after subtracting all operating expenses such as ingredients, labor, equipment repairs, rent, utilities, depreciation on equipment, printing menus and decorating a dining room. Restaurant profit margins tend to be low in part because preparing and serving food to customers creates high labor costs. In addition, a restaurant must maintain at least a skeleton staff even when business is very slow, because customer flow can be so unpredictable.
When restaurants compensate for slim margins with increased sales, they do not automatically increase their profit margins, because they may be making extra money by earning the same percentage of a larger number. However, additional volume can increase profit margins by introducing economies of scale. Kitchens can produce food more efficiently when they manage higher volumes, and a restaurant pays staff for less down time when it is consistently busy. In addition, restaurants may negotiate lower prices on ingredients by purchasing in higher volume.
Restaurants can increase profit margins by decreasing expenses, adding to the difference between incoming revenue and outgoing expenditures. Strategies for decreasing expenses include adjusting employee schedules to minimize staffing during slow times and fine-tuning order protocols in order to minimize waste and decrease inventory levels. In addition, restaurants can save money on everything from utility bills to laundry expenses by paying careful attention and making judicious changes. These changes depend on accurate and timely accounting procedures to provide critical feedback.
Restaurants rarely earn the same profit margin on everything they offer. Some items, such as drinks and pizza, have dramatically lower food costs than menu items such as steaks that are made up entirely of proteins. Menu prices tend to be based on customer expectations as well as prevailing trends determining what the market will bear. Restaurants can improve profit margins by encouraging customers to buy more of high-profit items by using suggestive selling or by listing these foods in prominent menu locations.
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