Opening a restaurant is no easy feat — it takes long hours, careful planning, excellent people skills, and a keen financial sense. Restaurateurs today face massive challenges outside of their control — such as minimum wage increases, constantly changing consumer preferences, and even a global pandemic. To ensure your business thrives, focus on how these challenges will impact your restaurant profit margin.
Getting back to basics: What is restaurant profit margin?
A restaurant profit margin helps operators understand what percentage of their sales has turned into profits. It's a restaurant's true bottom line and serves as an indicator of your business' financial health.
How to calculate restaurant profit margin
Restaurant profit margins are typically expressed as a percentage. To calculate your net profit margin, first subtract all of your expenses from your total revenue to determine your net profit. Then, divide your net profit by your total revenue and multiply it by 100 to get your net profit margin.
Profit Margin Percentage = (Total Revenue - Total Expenses) / Total Revenue
What is the average profit margin for restaurants?
Profit margins vary across the restaurant industry, depending on the type of restaurant, geographic location and a number of other factors. In general, restaurant profit margins tend to be quite low compared to other industries, as restaurants deal with high costs on top of losses due to seasonality, staff turnover, and waste.
Three key restaurant expenses
The industry's low margins are due to a variety of factors, but restaurateurs' largest expenses generally fit into the following three categories:
Cost of Goods Sold (COGS): The cost of creating the food and beverage items on your menu.
Labor: The money spent on staff, including salaries, wages, healthcare, benefits and payroll taxes.
Overhead: All operating costs, such as rent, utilities, equipment, marketing, delivery partner fees, and more.
While it varies by restaurant, these three categories can each take up about one-third of a restaurant's revenue — which is why the remaining net profit margin is often in the single digits.
How to improve your restaurant profit margin
To maximize your restaurant profit margin, focus on two overall strategies: increasing sales and decreasing expenses. Here are six ways to boost revenue or save on costs.
1. Offer online ordering and delivery
As the pandemic continues to transform the dining experience, restaurants can increase restaurant sales by offering online ordering and delivery. In fact, a recent Technomic report revealed that a quarter of United States restaurant operators saw 40% or more of their sales come from third-party delivery in 2020.
Here's an example profit and loss statement for how a restaurant could determine the net profit margin on delivery vs. dine-in sales, with all expenses as a percent of revenue.
Dine-In Profit & Loss:
Cost of Goods Sold: 30%
Sales and Marketing: 3%
General & Administrative: 15%
Depreciation & Amortization: 1%
Net Profit Margin: 10%
Off-Premises Profit & Loss:
Cost of Goods Sold: 30%
Packaging: 4%. (This increases due to the need for takeout containers.)
Sales and Marketing: 3%
General & Administrative: 7%. (This decreases as many restaurants don't have additional G&A costs when handling off-premise orders.)
Labor: 10%. (This decreases as many restaurants don't have to hire entirely new staff to handle delivery orders.)
Rent: 0%. (Many restaurants do not need to lease additional locations for their delivery business. For that reason, real estate costs for delivery are 0%.)
Depreciation & Amortization: 1%
Net Profit Margin: 15%
Customers also tend to order more when ordering takeout — restaurants see a 20% increase in check sizes from online and delivery orders compared to dine-in orders.
Partnering with a technology platform like DoorDash can also help restaurants reach new customers. And if you want to set up online ordering on your own website, DoorDash now offers Storefront, which enables commission-free pickup and delivery directly from your website.
Even with the commission rate, delivery orders can be more profitable than dine-in orders since they are incremental sales that don't often require increased labor or significant overhead expenses.
2. Engineer your menu and pricing
Menu engineering is a strategy that factors in the profitability and popularity of every item on your menu to help increase your restaurant's revenue.
Start by painstakingly breaking down the cost of every menu item (down to ingredients like oil and seasonings) as well as the sales volume for a recent time period.
Next, use that knowledge to group menu items into four categories — quirkily named stars, plow-horses, puzzles and dogs — that determine popularity and profitability.
Finally, redesign your menu with these insights in mind, using visual cues and compelling descriptions to highlight the items that will increase your restaurant profit margin.
3. Train your staff to upsell
Upselling is one of the most effective ways to improve your restaurant profit margin without increasing your labor costs. Incorporate ongoing staff training sessions on the importance of upselling, so your servers can gracefully boost sales (and their tips!). 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.
For off-premise sales, build upselling into your ordering process. Many technology platforms like DoorDash automatically suggest add-ons as customers finalize their carts. Our sales data shows that including photos for your menu items increases these last-minute upsell conversions by up to 15%.
4. Increase efficiency of delivery and pickup operations
To increase the efficiency of your takeout operations, create a streamlined menu featuring a few key items that will travel well and not be a soggy mess by the time your customer gets home.
If you partner with a technology platform like DoorDash, integrate your POS system so takeout orders arrive directly to your register or kitchen, helping to reduce errors and free up staff.
You can also designate a station for delivery and pickup so drivers and customers can grab their orders without having to wait in line. Finally, encourage patrons to place pickup orders in advance through your own website or an app to cut down on people lingering at counters.
5. Optimize staff schedules
Ensuring you have the right number of employees for each shift can impact both your restaurant profit margin and the guest experience. Implement a scheduling tool — whether it's a simple shared Google spreadsheet or a software platform — so everyone has access to the same updates and changes.
This tool will also help you monitor overtime hours, communicate to employees, and track past schedules to understand inefficiencies, with the added benefit of keeping employees happy and improving staff retention.
6. Reduce food waste
Not only is excessive food waste bad for the environment, it can also negatively impact your restaurant profit margin. A 2018 report from Rethink Food Waste found that for every dollar restaurants invest in reducing food waste, they save approximately $8.
Start by conducting a waste analysis — track the weights and types of waste (paper goods, produce, meat, etc.) to get a baseline understanding of your current habits. Then, ensure your staff is storing food properly and your prep cooks' knife techniques yield the most out of your ingredients. Monitor your sales data using your POS system or delivery analytics to forecast busy and slow days so you can order the correct amount of ingredients. You can also see if your produce vendor offers discounts for misshapen fruits and vegetables.
Choose the right strategies for your business
There's no one-size-fits-all solution to improving your restaurant profit margin. That's why DoorDash offers a wide range of products to fit your unique needs, including delivery and pickup, white-label fulfillment, group ordering, online ordering, and more. Do the research, test out some of these strategies, and figure out what makes the most sense for your business.