Average Restaurant Profit Margin for Independent Operators
What do you think the average profit margin is for an independent restaurant? What if I told you that even in these challenging times, most restaurant owners are setting their sights too low? Continue reading, or click below, to learn exactly what I mean.
Years ago, I remember the National Restaurant Association published that the average restaurant makes 5– 8% profit. That's a nickel on every dollar that comes in the door. Do you work as hard as you do for a nickel? I also always refer to a report issued by Ohio State University years back about a study that showed 62% of all restaurants fail in their first three years of business. The first three years of business!
Then there's prime cost, which is your total cost of goods sold plus your total labor costs, including taxes, benefits, insurance, also known as controllable expenses. Well, for years the guideline was that you should be shooting for 65%. Following this guideline, for every dollar that comes in the door, you're using $0.65 in people and product to deliver that product. This just perpetuates the lower profit margins.
What if I told you it's actually worse for most restaurant owners who don't take inventory values to calculate the cost of goods sold on a weekly basis and who don't budget for or track labor on a daily basis? Those restaurants run a 78% prime cost. With this kind of cost, you can see how it leads to that 62% failure rate.
Now what if I told you by implementing systems from budgeting to checklists my members have learned that a 15% profit margin is within reach? With some hard work and a willingness to hold their managers accountable to the systems they put in place, my members see time off, time to work from home, time to grow their businesses, and they experience higher profit margins.
One example of exactly this experience is my member, restaurant owner Brian. He attached his menu and took steps to control his kitchen labor and went from a 65% prime cost to 55% prime cost. He's now making an 18.5% profit margin.
Or let's look at a lower volume restaurant. Patrick, with a low volume restaurant, attacked his labor cost and operating expenses to go from a 65% prime cost down to 54% prime cost. Now, he's only hitting a 9% profit margin, but this is the first time he's actually making money in his restaurant.
Another of my members attacked their menu and labor costs, and added management, and went from a 92% prime cost at the beginning of the pandemic to a 57% prime cost, which literally saved her business.
How about one more example? This time I want to give you the example in dollars. In 2020, her restaurant lost money on $3 million in revenue. She did a lot of hard work and finished 2021 with $3.7 million in revenue and a profit of over $626,000. That's a 17% profit margin.
This is why when someone asks me what the average restaurant profit margin is I reply that with budgeting, implementing systems and holding your management team accountable, you should be shooting for a 15–20% profit margin. Ignore the averages because your restaurants not average.
The key with all of these restaurant owners is they took action. Their first action was to get on a free discovery call with me. The rest of it, as they say, is history.
If you would like to learn how to own a restaurant that doesn't depend on you being in it to be successful, sign up for my free video course that teaches you three key principles to running a successful restaurant. If you're ready right now to make some serious changes in your restaurant, you can also book a 60-minute call with me where we talk about your challenges and figure out exactly what is holding you back from having a restaurant that doesn’t depend on you being in it to be successful.
Be sure to visit my YouTube channel for more helpful restaurant management video tips.