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How to increase your restaurant’s profit margin

How to increase your restaurant’s profit margin

minutes read
Published on
September 14, 2023
Last updated on
Aron Lewis
Growth & Marketing Lead
Aron Lewis
How to increase your restaurant’s profit margin
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    One of the crucial ingredients to restaurant success is raking in some serious dough - and that means maximising your profits. But with the rising costs of ingredients, wages, energy use, and premises to pay for, increasing your profit margin is easier said than done. 

    Fortunately, we've got the secret sauce to help you beef up your bottom line! From trimming your overhead costs to mastering your inventory management game, we're serving up some juicy tips to help you boost your profits and decrease your costs. 

    But first, let’s clarify what a restaurant’s profit margin actually is. 

    What is restaurant profit margin?

    Your restaurant profit margin is the percentage of revenue that’s left over after deducting all your other expenses. These expenses include:

    • Food and beverage costs
    • Labour costs
    • Rent
    • Utilities
    • Equipment and maintenance 
    • Marketing and advertising
    • Insurance
    • Taxes and national insurance

    Profit margins are a critical metric for success. They indicate the financial health of your hospitality business and its ability to generate profits. If your profit margins are decreasing, you can put measures in place to turn things around. 

    How do I calculate my restaurant’s profit margin?

    You can find your restaurant’s profit margin by subtracting the total costs and expenses of running the restaurant from the total revenue.

    For example, if your restaurant's total revenue is £100,000, and its total expenses are £25,000, the profit margin would be calculated as follows:

    • ((Total revenue - Total expenses) / Total revenue) x 100
    • ((£100,000 - £25,000) / £100,000) x 100 = 25%

    In this example, your profit margin is 25%, which means that for every £1 of revenue, you make 25p in profit. 

    With an automated point-of-sale (POS) system, these figures should be easy to find.  If you don’t have an automated POS system, you’ll have to track this information manually to calculate your margins.

    What is a typical profit margin for restaurants?

    The typical profit margin for restaurants in the UK can vary depending on various factors, such as the type of restaurant, location, size, and competition. Not to mention, many hospitality businesses experienced reduced sales and increased costs due to health and safety measures from the pandemic. 

    A 2022 study from Barclays found that most leisure and hospitality sectors have average profit margins of 41%, compared with 39% pre-covid. Here’s a breakdown by some of the different types of food operators: 

    Source: Barclays

    Other studies from various sources report that average restaurant profit margins lie between 3-5%. This is quite a big difference from the 41% average in the study above.

    So what exactly does this mean?

    It means there’s no typical profit margin for hospitality businesses in the UK.

    A large chain restaurant will likely have a considerably higher profit margin than a small, independent cafe. There’s no way to determine a ‘typical profit margin’ that applies to both of these businesses as they’re simply not comparable! 

    Why are restaurant profit margins so low?

    Restaurant profit margins tend to be lower than other businesses for the high cost of operating a restaurant. 

    Restaurants require upfront investments in equipment, facilities, and staff - all of which can be expensive to maintain. Add overheads into the mix, and it’s a lot to fork out over time. 

    This is where running a virtual brand can be helpful for boosting margins without sacrificing large sums of money.  

    With a virtual brand, you create food for online delivery, meaning you don’t have to worry about the overheads associated with a dine-in restaurant.  It operates from your existing kitchen, with your current staff, and you can use the equipment you already have

    It can also incorporate your existing ingredients, meaning you have less food waste and can buy more bulk ingredients at a lower price!

    Find out more about the benefits of launching a virtual food brand.

    Recommended margins for restaurants

    Because there are so many types of hospitality businesses, there’s no single formula for the ideal profit margin. It’s unique to each business and varies on a case-by-case basis. 

    However, here’s how a typical restaurant might split their costs to get a 10% profit margin:

    • 30% labour
    • 30% food costs
    • 30% overhead expenses
    • 10% percent profit

    Ultimately, the higher the profit margin, the better the restaurant's financial performance!

    What is the highest profit margin food?

    There’s no single food that generates the highest profit. It varies depending on the type of cuisine, the location of the kitchen operator, and competition in the local area. 

    However, some of the highest profit margin takeaway foods include the following: 

    • Pizza: Pizza typically has high-profit margins due to the low cost of ingredients and high demand. With a variety of toppings, pizza can cater to a wide range of tastes and preferences, making it a versatile and profitable menu item.
    • Sandwiches: Sandwiches are a quick and easy food that can be chopped and changed to suit individual preferences. They have relatively low food costs and (depending on quality) can have high-profit margins, making them a popular choice for many hospitality businesses.
    • Fried chicken: Fried chicken is a popular takeaway food that tends to have pretty good profit margins due to high demand. It can be served in various forms such as wings, strips, burgers, or nuggets - making it a flexible menu item for different tastes and preferences
    • Sushi: Sushi is another customisable food that can suit individual preferences. The ingredients can be expensive and in short supply, but the demand is high, meaning that there’s potential for a solid profit.
    • Burgers: Burgers are a popular food choice that are easy to prepare, making them a good choice for any menu. With a variety of toppings and sauces, they also appeal to a wide range of tastes and preferences. 

    While these foods can have high profit margins, they’re also popular food types. This means there’s often lots of competition, making it harder to attract customers. 

    The good news is, there’s a way to use these foods to boost income and attract the attention of local customers.

    The answer? Launching a virtual food brand. 

    Working with a franchise partner (like us at Peckwater - hi 👋), you can provide local customers with food they actually want to eat. We review your location, customer preferences, and market demand to help you launch a brand that appeals to local customers. 

    Take a look at some of our virtual restaurant brands to see what we have available! 

    How can I increase my restaurant’s profit margin?

    Are you wondering how to increase profits in your restaurant? You’re in luck. Let’s take a look at some of the ways you can increase your restaurant revenue to boost your profit margin. 

    Increase your volume of sales

    Boosting sales is the first step to increasing your food profit margin. With more orders coming through the door, you’ll be making more money and therefore increasing your margins. 

    But how exactly can you increase your sales volume?

    If it was a simple process, everyone would be succeeding! To get started on the right foot, here are three important aspects to consider: 

    • Attract more customers: You need to attract more customers to get more orders. There are different ways you can approach this, including creating regular “specials”, experimenting with innovative ingredients and popular trends, and investing in your marketing. If you’re running a food delivery service, your ranking on online food delivery platforms will also impact your discoverability - so bear this in mind!  
    • Encourage repeat customers: Customer retention is another way to increase your order volume. Providing delicious food alongside excellent customer service, launching a loyalty scheme, and offering exclusive discounts for loyal customers are just some ways to keep customers coming back for more. 
    • Upsell your menu items: Encouraging customers to buy more food while eating at your restaurant or ordering from you online is a great way to increase your sales. For example, let’s say a customer wants to buy a burger. You might encourage the customer to also buy fries and a drink to qualify for your meal deal. As a result, they spend more money and you get more income. 

    Reduce costs and minimise expenses

    Every hospitality business has set costs to pay every month. Your rent, for example, is probably not negotiable (as awesome as that would be). However, there are some areas where you can minimise costs to improve your restaurant profit margin on food.

    Let’s take a look at what they are: 

    • Review the cost of ingredients: To make sure you’re getting the best deal for the food you buy, be sure to regularly review supplier contracts and negotiate better deals when possible. You can also look for opportunities to buy in bulk or make volume purchases to save on ingredient costs.
    • Minimise food waste: When thinking about food costs, cutting down on food waste is a big element. Audit your processes, inventory management, recipes, and supply chain to make the most of the ingredients you already have.
    • Prioritise employee retention: Labour costs are one of the highest expenses for any hospitality brand. Drastically cutting wages is a big no-no, but think about how much money you can save by focusing on employee retention - especially when the average cost to onboard a new employee is £3,000.
    • Consider how you can keep your team happy, boost motivation, and provide effective training to make sure everyone is engaged in their work. That way, they’re more likely to stick around. 

    Launch a virtual brand

    Launching a virtual food brand generates an additional avenue of income. As a result, you can boost your revenue and increase your profit margins.

    Let’s look at some of the benefits in more detail. 

    • Spend less on startup costs: A virtual food brand can be launched with significantly lower startup costs compared to a traditional restaurant. There’s no need to rent or purchase a physical space, because you already have it!
    • Reach a wider audience: A virtual food brand can reach a wide audience base of customers in your local area. This means you’ll be able to serve customers nearby that don’t want a dine-in experience. And if they enjoy the food, they’re likely to order again. 
    • Maximise your capacity: If you’re running a traditional restaurant but often find that you have the time and resources to make more food, a virtual brand is a great way to maximise that capacity. As a result, you’re making more money by filling your time with more orders. 

    Boost your restaurant profits with a virtual brand 

    A virtual brand is a great move for any commercial kitchen that wants to increase restaurant profitability. You can use your existing premises and equipment to serve more food to customers in your local area.

    Contact our team today to get the ball rolling and watch your income soar!

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