These days, the challenges of running a restaurant are well-known. Operators face a labor shortage and an uncertain economic climate despite rising customer expectations. As a result, success requires dedicated planning, strong management skills, and a keen financial sense.
To ensure that your business continues to grow and thrive, familiarize yourself with the ins and outs of your restaurant’s profit margin. In this post, we’ll cover:
What is restaurant profit margin?
Why is restaurant profit margin important?
What’s the average restaurant profit margin?
How to calculate restaurant profit margin
Tips for improving restaurant profit margin
What is restaurant profit margin?
A restaurant’s profit margin is the percentage of annual sales that can be considered pure profit. From a bookkeeping perspective, profits are whatever is left over after subtracting expenses from your restaurant’s revenue.
Why is restaurant profit margin important?
Given the current labor crunch as well as food inflation costs, restaurateurs everywhere have to keep a close eye on every dollar spent. Consequently, restaurant profitability is a strong indicator of financial health.
If you ever want to secure a business loan or seek restaurant investors, your restaurant’s profit margin is a crucial metric. Higher profits show you’ve mastered some skills in controlling expenses and growing revenue.
What’s the average restaurant profit margin?
Across the restaurant industry, profit margins vary depending on the type of restaurant, its geographic location, and a couple of other factors. However, in general, restaurant profit margins tend to be relatively low compared to other industries, as restaurants deal with high operating costs on top of losses due to seasonality, staff turnover, and waste.
Full-service restaurants generally have the lowest margins. Ingredient costs run higher, and more labor is involved, which adds up to higher expenses.
Fast casual restaurants and food trucks tend to have higher profits, less food waste, and lower labor costs.
How to calculate restaurant profit margin
Restaurant profit margins are typically expressed as a percentage. However, you can calculate your restaurant’s profit margin by subtracting the cost of goods sold (COGS) from total revenue and dividing that number by the total revenue. COGS refers to the total cost of any menu item – including raw ingredients and labor.
In the following examples, we’ll look at the formulas for gross profit margin and net profit margin.
Gross profit margin formula
To calculate your gross profit margin, you’ll need to deduct your COGS from your total revenue for a given time period – let’s say a month.
Gross profit margin = (total revenue from food and drink sales - cost of goods sold) / total revenue from food and drink sales
Hypothetically, let’s say your restaurant’s total revenue for the month of August was $20,000, and your COGS amounted to $10,000.
Here’s how we’d calculate your gross profit margin:
Gross profit margin = (20,000 - 10,000) / 20,000
Gross profit margin = 10,000 / 20,000
Gross profit margin = 0.50 or 50%
In this example, your restaurant's gross profit margin for the month of August is 50%, meaning that for every $1 a customer spends, 50 cents is gross profit.
Net profit margin formula
Your net profit margin refers to the profits left over once you deduct all of your fixed, variable, and mixed expenses from your gross profit margin. That sum is smaller – but represents the money you actually have on hand.
To calculate your net profit margin, you need to deduct all costs from your revenue over that same month, then divide that sum into your revenue. Included in your costs are expenses like your rent, payroll, equipment rental, etc.
Net profit margin = (revenue - costs and expenses) / revenue
For this example, to find your restaurant’s net profit margin for the month of August, we already know you generated $20,000 in revenue. Let’s say your total expenses came to $18,000. Here’s how you’d find your net profit margin:
Net profit margin = (20,000 - 18,000) / 20,000
Net profit margin = 2,000 / 20,000
Net profit margin = 0.10 or 10%
At 10%, your restaurant’s net profit margin is a lot less than its gross profit margin. For every $1 you generate in revenue, you take 10 cents home.
6 tips for improving restaurant profit margin
1. Reduce food waste
Not only is excessive food waste notoriously bad for the environment, but it can also negatively impact your restaurant profit margin. To minimize what you are throwing away at the end of every day, conduct a thorough waste analysis. Track the weights and types of waste (paper goods, produce, meat, etc.) to get a baseline understanding. Next, ensure your staff is storing food properly and your prep cooks are yielding the most out of your ingredients. For example, rather than toss what you don’t use, you can make soups and stews with many of your leftovers.
Monitor your sales data to forecast busy and slow days so you can order the correct amount of ingredients. Once you have a handle on your food cost control, you can move on to other strategies.
2. Keep a close eye on expenses
For maximum profits, restaurateurs need to constantly monitor their food costs – especially now, when prices can fluctuate week to week. The price of ingredients continues to fluctuate wildly; ditto with the price of gasoline and transportation.
Allen Young from Major Phillie Cheesesteaks saw a dramatic rise in his food prices.
Provolone’s our #1 selling cheese and it used to be $38 a case. It is now $60 a case. Chicken prices have reached a high as well – chicken breasts were almost at $200 a case.
Manuel Bucio from Chicago-based Ice cream store Razpacho’s saw the price for lettuce go from around $18 a box to $90.
For things that I buy online, prices increased a little bit, maybe 20 to 30%, but transportation increased 100 to 200%. So it's really been a challenge. It's been difficult. But I personally have a hard time raising my prices, thinking, ‘What about the customer – how are they going to take it?'
One way to avoid raising prices is to keep a watchful eye on expenses instead. Restaurateur Kwini Reed from LA’s Poppy + Rose shared her insights on this topic at Main St Summit: LA.
We're constantly looking at our revenue and expenses. I'm in the books and scrubbing. ‘Do I need this? Can I get a better rate here?’ If you have three different purveyors, you need to start bargaining and figure out how to get costs down.
3. Practice menu engineering
Menu engineering is a process that factors in the profitability and popularity of every item on your menu to help increase your restaurant's revenue.
Start by analyzing each menu item (breaking down the cost of all ingredients) as well as the sales volume for a recent time period to see which dishes are the most profitable and which are the least profitable. Then adjust accordingly. Substituting lower-cost ingredients in the least profitable dishes – or removing them entirely – can help reduce costs.
For online orders, photos and descriptions make a big difference too. Investing time to design a menu that sells is another form of menu engineering.
Bucio is always making tweaks to Razpacho’s online menu to optimize it. “If it's not working – what’s going on, what’s missing? Then I start making changes or upgrades so it looks good, like working on a different menu description.”
4. Train (and incentivize) your staff to upsell
Upselling is the art of suggesting items to customers – especially items with higher profit margins. It’s one of the most effective ways to increase sales and improve restaurant profit margin without increasing labor costs. Be sure to give your employees a chance to taste new menu items and have them pick a favorite profitable dish, along with drink and dessert pairings, to recommend to guests.
A savvy waitperson might say, "Can I offer you dessert tonight? Our crème brûlée is my personal favorite." Simple actions like this can help increase your average meal profits.
For off-premise sales, build upselling into your ordering process. Many technology platforms like DoorDash automatically suggest add-ons as customers finalize their carts. When customers are finalizing their orders, the DoorDash app automatically suggests additional sides and beverages in a "People also ordered" carousel, which is a simple way to increase the overall order size.
5. Grow your takeout and delivery business
Now more than ever, offering delivery is a great way to increase restaurant sales. With McKinsey estimating the global food delivery market at over $150 million, restaurants are no longer choosing whether or not to implement delivery, but how to do so.
Offering pickup and delivery can drive incremental revenue to your business and improve profit margins. Packaging costs will rise due to paper products and takeout containers, but rent margins will decrease assuming you don’t need to lease any additional space for your delivery business. Plus, while food and food preparation costs are usually about the same, the labor required for off-premise operations often runs lower, especially when partnering with third-party delivery companies like DoorDash.
Takeout and delivery options also help restaurants meet rising customer expectations. According to NRA's 2022 State of the Restaurant Industry report, 54% of consumers say that purchasing delivery or takeout is essential to the way they live. And 67% of delivery customers say they ordered food for delivery from a third party service in the last 6 months.
With DoorDash, there are multiple options to choose from, including a la carte delivery using Drive On-Demand (where there is a flat fee per delivery) and Marketplace (where there is a set commission per order).
6. Keep your restaurant technology up to date
Gone are the days of scribbling orders on pads of paper and/or staying after hours to tally up daily receipts with a calculator. The latest restaurant technology offers modern alternatives to outdated practices in daily operations. Whether it’s a platform for communication, analytics, or anything in between, food technology can play a key role in lowering your restaurant’s operating costs and increasing efficiency. Be sure to see DoorDash’s digital tools to manage your restaurant.
Frequently asked questions
Why are restaurant profit margins so low?
The reason that restaurant profit margins are low comes down to the high costs of running the entire operation: rent, utilities, equipment, food and beverage costs, and labor costs. In order to stay competitive, restaurants have to keep prices low enough to continue attracting customers. It’s a delicate balancing act.
Why do my restaurant margins fluctuate so much?
Restaurateurs nowadays are coping with an unpredictable economic climate. Post-pandemic, the price of ingredients has fluctuated wildly; ditto with the price of gasoline and transportation. As one data point, Razpacho’s Bucio shared with us that he recently saw the price of lettuce go from around $18 a box to $90. “For things that I buy online, prices increased a little bit, maybe 20 to 30%, but transportation increased 100 to 200%. So it's really been a challenge.”
When should I worry about my profit margin?
If you’re wondering how low is too low, there’s not really a one-size-fits-all rule. It comes down to your comfort level with the amount of money you have in the bank. Some restaurants can make up for seasonally low profits at other more profitable times of year. However, if you work with investors or lenders, you can’t continue to bleed revenue forever. Above all, try to avoid dipping into your rainy day fund.
How much do I need for a rainy day fund?
One lesson many restaurant operators learned during COVID-19 was the importance of a cushion to keep a business afloat during tough times. A good rule of thumb is to set aside about six months of operating expenses.
Assistance and support for restaurants
Now that you’ve learned about profit margins, keep in mind that DoorDash offers a wide range of products to fit your needs, including delivery and pickup on the app, fulfillment from orders on your own website, and more.
To support restaurateurs, DoorDash offers a number of free downloadable assets, such as a business budget template. We also post regular articles, like How to Increase Restaurant Sales.
