What Is a Good Profit Margin for Restaurants
What is a good profit margin for a restaurant? Have you been searching for a magic number? Do you want to know where you stack up against the competition? Are you worried that you're leaving a lot of money on the table, or are you just looking to make money for the first time? If you’re looking for the answer, allow me to explain two truths about restaurant profits and your restaurant’s potential.
First, before you can get to the true profit margin potential for your restaurant, you have to first understand there are the two profit truths in the restaurant industry.
Truth number one, you can't use industry averages to run your restaurant. What do I mean by that? When the National Restaurant Association does all their surveys and compiles all the data for restaurants, they’re combining data from all kinds of restaurants, from a pizzeria to a steakhouse. They say the average restaurant makes a nickel to 8 cents on every dollar that comes in the door. That’s a profit margin of 5 to 8 percent on average. That combines the good, the bad and the ugly.
I don't know about you, but I really don't want to get in the restaurant business to make a nickel on every dollar. In this industry there are a lot of challenges. It's a tough business. It can be rewarding as hell, but at that margin, you’re putting your money and your future at risk, especially when you think about the chances of success. For example, several years ago Ohio State University did a study that found that 62 percent of all restaurants fail in the first three years of business. Looking at the chances of failure and a lowly 5 percent profit margin, why would you want to be in the restaurant business?
The second profit truth is that most independents are running their food cost and labor cost at least 10 to 23 percentage points above their targets. I discovered this in coaching independent restaurant owners just like you since 2003. I’ve based my entire business on this fundamental truth.
If the National Restaurant Association says you can make a nickel to 8 cents on every dollar, and I'm telling you that you are already 10–23 points above where you should be, can you start to put those things together to see there is greater opportunity for profit if you simply learn how to manage your restaurant properly?
To figure out where your profit margin should be, first you have to know about prime cost way back when and prime cost now. Prime cost is the term for controllable expenses in the control of management: how you hire, fire, train, utilize your people, purchase product and utilize that product.
Prime cost is total cost of goods sold plus total labor costs, including taxes, benefits, insurance.
What should your prime cost be? The old standard was a 65 percent prime cost for a full-service restaurant and 60 percent for a quick serve. That number doesn't work anymore. It’s old school based on costs and operations pre-9/11.
Costs in the restaurant industry are changing all the time. The $15 an hour minimum wage is sweeping across the country. Product costs are going through the roof. There always seems to be something impacting costs. It started with 9/11, then the Great Recession, and this last year it was shortages from COVID. Costs are going up all around you, and you cannot operate off a 65 percent prime cost anymore.
Instead, if you do at least $850,000 in annual gross sales today, your new prime cost target is 55 percent or lower. If you are a quick service, it's 60 percent. If you're under $850,000 a year in sales, it's 60 percent.
Going back to my earlier point that most independent restaurants are operating at least 10 points above their target, right there for most people, you have an opportunity to make money. Lower your prime cost, and you can get to a 15 percent profit margin, 10 points above what the National Restaurant Association says.
I have literally worked with thousands upon thousands of restaurant owners as a restaurant coach. I’ve built software that served almost 600 restaurants in it before I sold it. I've seen the numbers and operations of a great number of restaurants, and I know what's possible. You can get your restaurant to this kind of profit margin.
To figure all of this out for your own restaurant, you need to put a budget together. There is no other way to figure out the two parts of your prime cost, cost of goods sold and labor. A budget is critical. It's your plan for success. Once you see where you’re landing on prime cost, you can put together a plan to lower it. What systems are you going to put in place to get you to those numbers, lower your costs, control your costs? How quickly can you achieve the numbers you want?
Here is the important point I want you to take away. You don't magically lower your prime cost 10 points because you said so or because you put a couple of systems in place, like a key item tracker and waste tracker. You have to use those systems and the information they provide to get your numbers where they should be. And most importantly, you must hold everyone in the restaurant accountable to the systems and the changes you make.
A quick note on figuring out your prime cost: if you’re not at that $850,000 minimum I mentioned, you're going to have less opportunity to make higher profit margins because you don't have enough dollars to shave pennies off to make more. Now, if you're a $1 million, $2 million, $5 million or $10 million dollar restaurant, your profitability can go through the roof for the exact opposite reason.
That means, depending on where your sales volumes are, I want you to hit a 15 to 20 percent profit margin. I've seen it done time and time again without:
- Going against your core values.
- Buying crappy product.
- Giving crappy service.
- Cutting corners.
There is so much opportunity in the restaurant business when you put that budget together, when you understand your targets, and all of a sudden, a 15 to 20 percent profit margin is obtainable.
Now, this all hinges on creating your plan for success, implementing systems to achieve your new prime cost targets and operating your restaurant to your budget. So let’s do it!
If you would like to learn how to own a restaurant that doesn't depend on you to be successful, watch this 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.
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.
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