The number of customers every day can be mind-boggling, yet the cash flow can be unimpressive. The key to this situation is increasing the profit margin of the restaurant. Easier said than done, huh?
Profit margin is basically the term that describes the average share of the profit in the company’s income, calculated on every item sold. The margin can significantly differ depending on the product sold. For example, fries or soft drinks are usually high-profit margin goods due to their relatively low cost of production and high selling price. On the other hand, delivering a burger can be a low-profit meal because it takes a lot of work.
Profit margin in a restaurant
According to the Restaurant Resource Group, the average profit margin of a restaurant is between 3 and 5 percent when it comes to a full-service restaurant. For fast food restaurants and food trucks, this value is between 6 and 9 percent. Both QSR and food trucks find great savings in using more preprepared food and cutting service costs.
Calculating the profit margin for a restaurant
The concept of a profit margin sounds pretty straightforward, and calculating it requires only basic math that can be done using a card and calculator or a spreadsheet. The calculations are as follows:
- Gross revenue – total expenses = net income
- Net income / Gross revenue = profit margin
- Profit margin X 100% = restaurant profit margin percentage
With all of the math in place and the benchmarks listed above, one can easily determine where his or her company ranks and performs.
Basically, the higher the margins are, the more money is left in the owner’s pocket at the end of the day. Observing the profit margin is one of the key tools in business operations optimization. Dropping margins are an early sign of upcoming trouble; even with no evident drop in the company’s sales, low margins drain profitability.
And business is not about moving the cash around; it is about earning it.
Why are restaurant profit margins so low?
First and foremost, they are not THAT low. According to CFOhub, restaurants’ net profit margins are around 5.69%, which is close to the research cited above. Household products reach 11.71%, precious metals reach 15.79%, and banking reaches up to 23.79%. On the other hand, brick-and-mortar retail has around a 2.79% net profit margin, automotive has 1.4%, and advertising has 0.34%.
The profit margins in the restaurant come from relatively high costs, ranging from media and energy to staffing, meal ingredients, and advertising. Also, a relatively low profit margin may not be bad information—it just requires higher traffic to make money. But again, just think about all the money the higher traffic would have brought if there had been a higher profit margin in place.
How to increase profit margins in a restaurant
Due to high costs, increasing a restaurant’s profit margin is not an easy task, yet it is not impossible. Regardless of the business’s size and general operations, there are some tricks and techniques that just work well.
#1 Optimize menu pricing
The menu serves both informational and marketing purposes. Basically, lower prices incline higher traffic, while higher prices lower the traffic, boosting the owner’s income. That is, pricing optimization is all about searching for the sweet spot in the price.
When it comes to pricing, there are some tricks the company can use to get better results. For example, customers tend to spend up to 8.15% less when there is a currency sign near the price.
The optimization can be done either manually or automatically. In the first case, searching entails a lengthy trial-and-error process of gathering experiences. In the latter case, sophisticated software such as Ordering Stack can be used to run A/B testing or a series of tests over a set period of time.
# 2 Optimize menu layout
The menu is not only about prices. It is also about the art of selling. Use attractive images of the food and catchy names, and manipulate the order of the items that appear there. It is common for customers to read only the header part of the menu; optimizing this part may either catch their attention or redirect their interest to the sets with the best profit ratio.
There are some techniques that support using the layout to increase sales or boost the visibility of the highest-margin goods. For example:
- Expose the high-margin items next to expensive ones – their price will look more attractive compared to a more pricey item.
- Make comparing prices harder – dots connecting the price with the item or two legible columns that expose costs are the easiest way to make customers count their money more carefully
- Deliver the description first – make sure the customer has easy access to the persuading and attractive dish description and images rather than the price.
- Make the best performers the most attractive; play with large images, frames, and layouts to expose the dishes you wish to sell the most. Just grab the customers’ attention.
#3 Automate what you can.
One of the key reasons behind low profit margins is high restaurant business operational costs. These high costs come from a huge amount of manual work to be done. This includes cooking, preparing the meals, delivering them, or keeping the restaurant clean.
On the other hand, there is a lot of work that can be automated in the company, yet restaurants rarely do so. This includes integrating the ordering systems to reduce manual work with order processing. Adding a Kitchen Display System (KDS) to the system described above can also make it easier for the ordering area and the kitchen to talk to each other.
Just to name a few changes, the State of Restaurant 2023 data show that 76% of restaurants have changed their POS system in the last year. Also, 97% use at least one online ordering platform, with three being the standard.
Orders can be collected and queued automatically, including the preparation of every particular part of the meal—for example, one needs more time to fry the fries than to grill the burger.
#4 Invest in energy-saving
With cost-cutting being one of the most effective strategies for increasing profit margins, energy conservation is a low-hanging fruit. investing in better equipment, buying more effective lighting systems, or using big data analytics to predict the usage of a particular resource.
According to Live Energy Savings, a typical restaurant uses 67% of all gas used for cooking and 43% of all electricity expenses for refrigeration. Betting on these two and reducing energy consumption as much as possible is a quick and reliable way to save money.
A sophisticated system like Ordering Stack harnesses the power of cloud computing. Users can find ways to save energy by making a central data warehouse instead of a bunch of communication loops. Also, it stores information about the expenses, and by doing so, it can be used to spot ways to save some bucks in the process.
Last but not least, reducing energy expenses limits the company’s carbon footprint.
#5 Reduce waste
Another side of the same coin: every kilogram of food thrown into the trash is a kilogram of ingredients to be wasted. Analyzing the order flow is the key to reducing the wasted ingredients that cannot be used.
It is estimated that up to 40% of all US supply is wasted, with food constituting nearly a quarter (22%, to be precise) of all garbage ending up in landfills. Restaurants should not contribute to this huge waste, not only from a business point of view but also ethically.
However, it is impossible to eliminate all waste. The restaurant business is always a little unpredictable, so it’s best to be slightly overstocked so you never miss an opportunity.
# 6 Train the team
“Human Resources” are called “resources” for a reason. People are a company’s greatest asset, with talented and dedicated employees bringing multiple advantages to the company.
QSR businesses are commonly associated with high turnover and dynamic changes in staff. Yet it should not be an excuse for not training the team and building competencies. By giving the team training on how to use new technologies, the restaurant can take advantage of the latest tools without confusing the team with tools they can’t use.
#7 Test, observe, learn, react
Finally, the key to building up the profit margins in the restaurant is to experiment. New bundles, new combinations, or new types of promotion lead to better usage of the resources and more effective budget allocations.
Yet the key is to test whether the suggested solution works. If it is, exploring the new possibilities is the best idea. If not, there are plenty of new experiments to conduct and knowledge to gather.
With the high volumes and traffic of QSR and fast food restaurants, every percentage point of profit margin can translate into thousands of dollars in either gains or losses. If the restaurant is run well, it can make money by automating, cutting costs, and cutting expenses. All of these are much easier to do when you use an advanced ordering system like Ordering Stack, which collects data and makes the optimization process easier.
If you wish to talk more about these opportunities, don’t hesitate to contact us now!