Owners and Operators of restaurants and bars typically lose sleep over the many challenges they face in hyper-competitive marketplaces, but profitability may be at the top of their “what keeps me up at night list.”

What Is A Good Profit Margin For A Restaurant Or A Bar?

About profit margins… but first a boring but necessary mini Econ 101 refresher course (sorry!): From Investopedia’s What Is Net Profit Margin? “The net profit margin, or simply net margin, measures how much net income or profit is generated as a percentage of revenue. It is the ratio of net profits to revenues for a company or business segment.”

Net profit margin is the best indicator of any business’s basic financial health. Net profit margin is what we are discussing here.

Fascinating data on restaurant and bar profit margins published recently spotlight that successful restaurateurs and bar operators are financially outperforming entrepreneurs in other well-known market segments. For example, healthcare companies in the S&P 500, the stock market index tracking the 500 largest companies listed on stock exchanges, average only 8.9% profit margins. New York University in January 2023 published a survey of profit margins by industry and the Restaurant/Dining segment generated a 9.28% average net profit margin. Food & Beverage entrepreneurs are proving their financial chops, especially when compared to Automobile Dealerships’ 4.07% and Advertising’s 3.79% net profit margins. The NYU survey found that the “total market” net profit margin of surveyed businesses was 7.7%. So Food & Beverage entrepreneurs are doing comparatively well.

The Conventional Wisdom On Average Profit Margins For Restaurants And Bars

According to the conventional wisdom of industry analysts, restaurants and bars average a profit margin of 0% to 15%. This range has been a steady and historic figure trotted out in discussions.

Getting more granular, the typical profit margins for Full-Service Restaurants typically range from 3% to 10%. Fast Food Restaurant profit margins are generally lower, usually ranging from 2% to 6%.

Industry experts on Bars note that margins can significantly vary. But on average, profit margins for bars typically range from 10% to 20%. Profit margins for nightclubs are generally acknowledged to range from 5% to 15%.

Can The Average Profit Margin For a Restaurant Range From 2.6% to 50%?

Getting real-world data on average profit margins for bars and restaurants is difficult. Profit margin data is typically collected in surveys by industry groups like the National Restaurant Association.

But there are some pockets of this wisdom online. On Reddit, the social news aggregation, content rating, and discussion website, a restaurant owner recently started the discussion “What are the true profit margins of a restaurant business?” in the forum r/restaurantowners – which has over 140,000 registered members. This forum is described as an online community to help restaurant owners push their businesses to the next level and a place to share news, tips, and advice. The responses to the question of average profit margin ranged from 2.6% to 50% amid lively discussion.

Average Profit Margins by Restaurant Type

If you’re curious and want to get comparative profit margin averages for your restaurant or bar, you’ll need to do a deeper dive into your unique Food & Beverage category. Whether QSR, FSR, or Michelin Star, competitors in your segment are where you need to start your financial comparison to get a sense of what is an average profit margin.

Here are the most common categories of restaurant types, the generally accepted range of average profit margins, and typical factors that impact the concept’s profitability:

Average Profit Margins At Fine Dining Restaurants

Offering an upscale dining experience, Fine Dining Restaurants aim for higher profit margins compared to other types of establishments. Premium ingredients, exceptional service, and higher price points generally generate a profit margin in the range of 10% to 15%. Some with effective cost control measures and strong brand reputations achieve profit margins above 15%.

Casual Dining Restaurants

Providing a relaxed and comfortable atmosphere, Casual Dining Restaurants are generally known for friendly service and a moderately priced menu. On average, Casual Dining Restaurants realize an average profit margin ranging from 3% to 9%.

Fast Casual Restaurants

Fast Casual Restaurants combine the speed and convenience of fast food with higher-quality ingredients and a contemporary atmosphere. With counter ordering and customizable menu options, Fast Casual Restaurants typically strive to provide a balance between convenience and quality. On average, the profit margin for fast casual restaurants can range from 2% to 6%.

Fast Food Restaurants

Fast food restaurants are defined by their quick service and standardized menu items. They typically offer affordable, easily prepared meals through a drive-through or self-service counters. Operating on a high-volume, low-cost model – often focused on affordability – Fast Food Restaurants tend to have an average profit margin in the range of 2% to 6%.

Cafés and Coffee Shops

Cafés and coffee shops primarily serve coffee (obviously), tea, and specialty drinks along with light snacks, sandwiches, and often pre-packaged items. Cafés usually encourage customers to socialize or work. Average profit margins for Cafés and Coffee Shops usually range from 10% to 15%.

Buffet Restaurants

Buffet Restaurants offer a wide range of self-service food options usually at a fixed price. This model faces unique challenges such as managing food costs, controlling portion sizes, restaurant inventory management, and attracting a consistent customer base. The average profit margin for Buffet Restaurants ranges from 5% to 10%.

Food Trucks

Going mobile to offer a diverse range of often unique cuisines from around the world, Food trucks provide a casual and convenient customer experience with relatively lower overhead costs compared to brick-and-mortar restaurants. The average profit margin for food trucks can range from 10% to 20%.

Contemporary Casual Restaurant

A hybrid business model curates elements of casual dining and trendy cultural concepts like farm-to-table, hyper-local, modern bistro, gastropub, or fusion style. Contemporary Casual Restaurants often feature menu items utilizing fresh and high-quality ingredients. The average profit margin for this restaurant concept ranges from 5% to 10%.

Ghost Restaurant

The now ubiquitous virtual restaurant, cloud kitchen, or delivery-only restaurant. Operating without a physical storefront or dining area, the focus is on delivery. Existing only online and operating through online ordering platforms delivery services like Postmates, UberEats, and GrubHub, the costs associated with rent, decor, and front-of-house staff are eliminated. The average profit margin for a Ghost Restaurant can range from 10% to 20%.

Pop-Up

A Pop-Up is a temporary dining establishment that’s open for a limited time often in unconventional venues. This concept allows chefs and restaurateurs to create unique dining experiences, showcase their skills, and test new concepts. Often a collaboration with local businesses, artists, or musicians, Pop-Up Restaurants are notoriously hard to collect data on given their temporary nature. But estimates range from 20% to 50% for the average profit margin for a Pop-Up Restaurant.

Specialty Drinks Restaurant

A Specialty Drinks Shop focuses on offering a variety of unique and innovative drink recipes that go beyond traditional soft drinks and alcoholic beverages. Staples of the concept include handcrafted cocktails, mocktails, smoothies, specialty coffees, tea blends, fresh juices, milkshakes, and similar concoctions. On average, the profit margin for a specialty drinks shop can range from 10% to 25%.

5 Steps To Track And Optimize Profit Margins At Your Restaurant or Bar

Effective cost control, pricing strategies, competition, market conditions, staff and management effectiveness, software/technology adoption, and even weather all contribute to determining the average profit margin of a restaurant or bar. But there are tried and true steps you can take to improve profitability.

1. Focus On Menu Profitability

Analyze your menu to identify high-profit and low-profit items. Focus on promoting and highlighting the high-profit items, while considering necessary adjustments to pricing, portion sizes, or ingredient substitutions for popular but low-profit items. This process involves understanding the popularity and profitability of each menu item. Use recipe costing software to reverse these issues ASAP.

Evaluate ingredient costs and work with suppliers to negotiate better prices or seek alternative sourcing options. Implement inventory management practices to reduce waste and optimize ingredient usage. Regularly review and adjust menu pricing to reflect changes in ingredient costs. Inventory management software to quickly analyze COGS is helpful here.

Simplify your menu to eliminate complex or overlapping items that may increase ingredient costs or create operational inefficiencies. A concise and focused menu can reduce food waste, lower inventory costs, and enhance back-of-house productivity.

Your savvy wait staff, while ensuring customer satisfaction, should be trained to effectively upsell and cross-sell higher-profit items or add-ons. Encourage suggestive selling techniques to guide customer choices towards more popular and profitable options.

Introduce daily specials or limited-time offers featuring high-margin items or ingredients. This strategy can create a sense of exclusivity, generate excitement among customers, and boost sales of profitable menu items.

Menu engineering is all the rage. Optimize menu layout, design, and descriptions to draw attention to high-profit items. Use persuasive language, enticing descriptions, and visually appealing imagery to make these items stand out. Strategic placement and formatting can guide customers to satisfying and profitable options. The proverbial win-win.

Regularly review sales data to identify popular and profitable items. Incorporate customer feedback to understand preferences, adjust the menu accordingly, and eliminate underperforming items. Your POS can provide data analytics to gain insights and make informed decisions.

Consider the perceived value, competition, and target market when setting menu prices. Strike a balance between profitability and customer willingness to pay. Analyze pricing periodically and make adjustments if necessary.

Introduce seasonal menu items using ingredients that are abundant and cost-effective during specific times of the year. This approach can leverage seasonal trends, create anticipation, and attract customers looking for unique and limited-time options.

2. It’s All About Accounting and Tracking The Data

Tracking and optimizing your restaurant's financial performance, and calculating your restaurant’s profit margin, are crucial for long-term success.

There are a few effective ways to accomplish this:

Most restaurants already use an accounting platform specifically designed for the food and beverage industry. Investopedia lists the most common. This will enable you to track and manage your financial transactions, including sales, expenses, inventory, and payroll. An efficient accounting system will provide you with accurate and up-to-date financial data, allowing you to make informed decisions.

Regularly review and analyze key financial statements such as the income statement (profit and loss statement), balance sheet, and cash flow statement. These statements will help you understand your revenue, expenses, assets, liabilities, and cash flow trends. Identify areas of improvement and take necessary actions to optimize your financial performance.

Identify and track relevant Key Performance Indicators (KPIs) that align with your business goals. Common KPIs for restaurants and bars include average check size, food and beverage costs, labor costs, table turnover rate, customer satisfaction ratings, and employee productivity. Quickly calculating and accessing these metrics will help you identify areas of inefficiency and make data-driven decisions to improve your restaurant's financial performance.

Conduct periodic financial reviews to assess your restaurant's performance and compare it against your financial goals and industry benchmarks. Use this information to develop a realistic budget that aligns with your revenue and expense projections. Regularly review your budget and make adjustments as necessary to stay on track.

3. Improve Your Website, Improve Your Profit Margins

It may be the case that the population seeking to dine out has shrunk permanently. From recent research at Deloitte, the pandemic has fundamentally changed how people view dining out and the news is not particularly good for food and beverage entrepreneurs:

“Since the 1960s, the share of disposable income spent on food eaten at home shrank steadily each year while food eaten away from home grew — until each was essentially tied 50/50 before the pandemic. Why would there be a reversal when the health crisis [pandemic] ends?

… three potential reasons:

The first is structural. Consumers and companies alike expect more working from home to continue past the pandemic. Breakfasts that would have been grabbed on the way to the office and lunches out with colleagues won’t happen on days worked from home, not to mention missed happy hours. If virtual work means less work travel, expensed airport and hotel meals will be down too.

The next is economic. Cooking is a cheaper option and millions will exit the pandemic in much worse financial shape. Roughly 1 in 3 Americans are worried about making upcoming payments and the same number are concerned about their savings and credit card balances.

The final reason is preference. Consumers have gotten better at cooking and, with new services to seamlessly bring groceries to your door, bread cookbook sales up 145%, and countertop appliance sales increasing 32% in 2020, it’s easier to choose what many see as a healthier option. We should note too, with the psychological scars of the pandemic, some consumers will prefer to continue avoiding crowded spaces. When they want restaurant food, they might order it for delivery.”

So a focus on optimizing profitability against these headwinds as dining out and happy hour shrinks as a pastime in our culture is important for maintaining or improving profitability.

In an increasingly competitive climate for bringing in a shrinking population of new customers – or increasing visits from loyal patrons – entrepreneurs need to apply a spectrum of marketing strategies as well as experiment with some new ones to increase profitability.

The easiest start? IMPROVE YOUR WEB PRESENCE! Improving your restaurant’s website can increase foot traffic. Improving your online presence starts with improving your website. Your website ecosystem, social media pages, blog, and reviews, can all help you reach a wider audience more quickly, build more brand awareness, and increase customer loyalty.

Customers usually visit a restaurant's website before visiting or placing an online order. The most important part of your website may be the menu presentation. The menu is often the most important part of the website, and it should be easily accessible from the front page, include all relevant information about each dish, and be visually appealing to customers.

Refresh your website on a reasonable cadence to highlight your brand. Making it easy to navigate, viewable on mobile devices, and making it visually appealing can help attract potential customers. Obvious essential information such as your location, an easy-to-read menu, your hours of operation, contact information, and some graphic elements including photos give potential customers a first impression of what’s in store for their dining experience.

Why Restaurants and Bars Need to Get To The First Page of Search Results

Research shows that 75% of users never scroll past the first page of search results.

So… the first step to getting to the first page is optimizing your Google Business page if you have not already done so. For those who have NOT updated their business profile, Google Business is a free tool from Google that allows you to manage your online presence on Google. By claiming and optimizing your Google Business listing, you can increase your visibility in Google search results, improve your local Search Engine Optimization (SEO), and attract eyeballs to your website and more visitors to your restaurant. This can be achieved by using keywords and phrases that people would use when searching for restaurants in their local area.

Here are a few basic tips and tricks for improving your SEO:

Create Social Media Pages. Creating and updating social media pages on TikTok, Facebook, Instagram, and Twitter can help you find more customers by showcasing your restaurant, and menu, and showcase upcoming events.

Offer Online Ordering. Offering online ordering and delivery services can help make it more convenient for your customers to order, improves your local SEO, and increases overall business.

Solicit Online Reviews. Encouraging your customers to leave positive reviews on online review sites like industry favorite Yelp, TripAdvisor, and Google can help boost your restaurant's online reputation and attract more business.

Engage Online. Engaging with customers on social media by responding to comments and reviews, hosting giveaways, and sharing behind-the-scenes content can help build customer loyalty.

Local SEO. Optimize for local search by using Google Business, and local directories. Ensure that your website is mobile-friendly to help your restaurant or bar rank higher in search results. Improving your local SEO can help your business appear higher in search results when people search for bars or restaurants in your local area.

Here are some immediate and cost-effective ways to improve your local SEO:

• Claim and Optimize Google Business. Optimizing your Google Business listing by adding accurate and complete information such as your restaurant's name, address, phone number, hours of operation, and photos can help it appear higher in search results.

• Get Listed in Local Directories. Getting listed in local directories such as Yelp, TripAdvisor, and OpenTable can help improve your restaurant's local SEO by increasing its visibility to potential customers.

Create Local Content. Creating local content such as blog posts or videos that focus on topics related to the local community can help improve your restaurant's online presence by increasing its relevance to the local audience.

Optimize for Mobile. Optimizing your restaurant's website for mobile devices will make it easier for customers to find and access your restaurant on their mobile devices.

4. Evolve Your Technology Stack To Improve Your Profit Margins

Foodservice businesses today are experiencing a tech evolution. More and more Operators are implementing information technology to improve their operations. Front-of-house automation like POS has been around for a long time, but new and cost-effective technologies – many cloud-based with no hardware purchases required – are now linking back-of-house with front-of-house to reduce labor costs, improve efficiency, and add profits to the bottom line.

Restaurant technology is improving rapidly. In 2020, 75% of restaurants changed their POS system. 81% were using an online reservation system. 97% reported using at least one online ordering platform. Food and beverage businesses are leveraging technology like never before.

A sampling of information technology being implemented or optimized by foodservice businesses to increase profit margins includes:

• Your Website. The most basic and most important technology for building brand awareness and marketing. Your website is instrumental in educating potential new customers about your brand and executing a digital marketing strategy.
• Point-of-Sale (POS) System. POS systems were a leading technology adopted into foodservice. Long accepted as a valued restaurant technology, it enables restaurants to take orders and accept payments.
• Payroll and Accounting Software. Accounting and payroll software play crucial roles in managing the financial aspects of a foodservice business. Payroll and accounting software offers everything from financial tracking, expense management, financial reporting, payroll processing, regulatory and tax compliance, and often the ability to integrate with other systems to streamline data collection and data accuracy. Most solutions integrate with POS and inventory management platforms to create invoices, facilitate vendor management, and even price out recipes.
• Kitchen Display Stream (KDS). KDS occupies a vital place in improving the efficiency and accuracy of foodservice businesses. KDS streamlines customer orders, improves order accuracy, and facilitates communication between front-of-house and back-of-house which leads to faster order preparation, shorter wait times, and improved overall service speed. KDS can integrate with inventory management systems to track ingredient usage and ingredient depletion in real time.
• Online Ordering Platforms. Today, due to customers’ ongoing interest in takeout and delivery, 40% of Operators say they will do more delivery business than before 2019. Online ordering platforms have become increasingly important because it allows restaurants to reach a broader customer base, increase order accuracy, streamline restaurant operations through integration with POS systems, and seamlessly integrate with delivery services without requiring an investment in their own delivery infrastructure. By partnering with delivery services, restaurants can reach a wider customer base and offer additional convenience to customers.
• Inventory Management. Cost-effective SaaS inventory management solutions enable accurate tracking of stock levels and ingredient usage in real-time. Inventory management software also allows bars and restaurants to track Cost of Goods Sold (COGS) and calculate variances between theoretical usage and actual usage in minutes to identify strategies to increase profitability. Inventory management software simplifies the ordering process by providing insights into stock levels, reorder points, and supplier performance as well as insight into recipe costing. And integration with POS systems enables businesses to generate accurate cost of goods sold (COGS) reports and calculate the actual cost of food and beverages used in a restaurant or bar with the theoretical cost based on standardized recipes, portion sizes, and ingredient or beverage prices.

5. Reduce Overhead Costs To Increase Restaurant And Bar Profit Margin

A fifth step to tracking and optimizing profit margins at your restaurant or bar involves simple cost control. But simple is not always easy. Bars and restaurants can implement many proven strategies to lower overhead costs to improve profitability.

Some common ways to achieve this:

• Measure COGS daily. Knowing your COGS is essential to understand what’s profitable or not. Recipe costing software is extremely helpful in reducing COGS and increasing profit margins and revenue for your restaurant. Example: Hospitality group The Other Bird lowered their COGs by 10% with MarketMan.
• Optimize staffing levels. Bars and restaurants can analyze historical data, sales trends, and peak hours to optimize staff scheduling. By avoiding overstaffing during slower periods and ensuring the right number of staff during busy times, you can lower expenses. There are many restaurant scheduling apps, and many POS systems offer that feature.
• Implement effective inventory management practices. You can reduce food and beverage costs through better inventory management. This includes monitoring stock levels, implementing portion control measures, minimizing waste, and negotiating favorable terms with suppliers. By closely tracking inventory and optimizing purchasing decisions, bars and restaurants can quickly lower overhead costs associated with inventory.
• Implement energy-saving measures. Operators can significantly reduce utility expenses by using energy-efficient appliances, installing LED lighting, properly insulating, and thermostat discipline.
• Menu Engineering. Analyzing menu profitability and the cost of ingredients can help identify opportunities for cost reduction. Bars and restaurants can assess the popularity and profitability of menu items, optimize ingredient usage, negotiate better prices with suppliers, and remove or rework items that are not cost-effective with recipe costing software. Strategic menu engineering can increase overall profitability and lower food costs.
• Re-negotiate supplier contracts. Establishing strong relationships with suppliers and negotiating favorable terms can result in cost savings. Bars and restaurants can explore bulk purchasing options, request competitive pricing, and evaluate alternative suppliers. Regularly reviewing supplier contracts and comparing prices can help lower procurement costs. Using inventory management software to quickly identify items and ingredients that are increasing in cost can help you identify where profits are hitting rising costs.
• Automate tedious, time-consuming tasks with technology. There is plenty of restaurant technology that automates lengthy tasks like doing inventory. Newer software as a Service (SaaS) like point-of-sale (POS) systems, inventory management software, and automated ordering systems are cost-effective, improve efficiency, and save time.

The Final Word On Profit Margins For Bars And Restaurants

The bottom line on food and beverage profitability and profit margins is you need to quickly collect, organize, and analyze the necessary data to first take steps to respond to profit challenges. The steps to track and optimize profit margins at your restaurant or bar have a foundation in menu profitability. Using apps and software, and avoiding time-consuming manual data collection, are key to knowing your COGS. To calculate your profitability daily, improve your knowledge of your accounting, POS, and inventory management software to be able to report on these elements of your business. An automated COGS report can be done in minutes with just a few clicks.

Steps to improving profitability and cutting costs can be as simple as updating your website to improve local SEO. Evolve your online presence by creating or updating your social media pages, offering online ordering, soliciting online reviews, engaging customers online, claiming and optimizing your Google Business listing, and creating interesting content.

Restaurant information technology is evolving at a rapid pace, and the costs of cloud solutions tailored for food and beverage businesses are falling just as rapidly. The cost-prohibitive tech you looked at 5 years ago may well have halved in cost today. Evolving your technology stack can show a quick return on investment – front-of-house automation like POS linking with back-of-house technology like inventory management applications reduces labor costs, improve efficiency, and quickly add dollars to your bottom line.

About MarketMan

MarketMan’s roots in restaurants, bars, and foodservice are the foundation of our cloud-based inventory management and purchasing software. MarketMan simplifies all back-of-house operations, streamlining everything from inventory management to budgeting, reporting, supplier management, and food costing. For more info on how quick COGS reports can improve your profitability, visit https://www.marketman.com/

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