Are you the owner or manager of a restaurant? Then you know that in order to succeed in the industry, margin and profitability are two essential elements to know.
While it is true that restaurant profit margins are relatively thin compared to other industries, there are ways to support your establishment and make it sustainable in the long run!
In this article, we help you understand profit margins and the different ratios you need to know, so that you can exploit them in your business.
Restaurant margins: what are we talking about?
How to calculate the margin of your restaurant?
In concrete terms, to calculate your restaurant's margin, you need two pieces of data:
- your total income,
- and your total expenses.
The total revenue of your restaurant is the amount of sales it makes. As for your total expenses, they are all the costs associated with the management of your outlet, whether they are fixed (rent, insurance, etc.) or variable (purchase of raw materials, energy, etc.).
You can find these numbers on your restaurant's income statement. To determine the margin, simply subtract total expenses from total revenue.
Want to get a percentage? Divide the margin by the total revenue and multiply by 100: this is the margin rate.
Example 👇
You are the manager of a fast-food restaurant and you sell a sandwich for 8€. Your expenses for this sandwich are 3€, you have made a profit of 5€. Your profit margin percentage is therefore 62.5%.
8€ of total income - 3€ of total expenses = 5€ of margin (also called profit)
5 profit ÷ 8 total revenue x 100 = 62.5% profit margin
The importance of the margin in the restaurant's business activity
The revenues and costs associated with your restaurant business are constantly changing. That's why calculating your margin on a regular basis is essential to know the evolution of your restaurant's profitability.
Depending on the projects you will have for your point of sale (product launch, change of suppliers, recruitments, etc.), it is crucial to check your potential profit margins beforehand to be sure not to make a wrong move.
If you want to open or take over a restaurant or simply obtain financing to expand your business, your banker and investors will want to know the average profit margin of your restaurant.
The different margins
Margin on variable costs
It is the difference between the turnover and the variable expenses. It is an essential element for a restaurant (and any business) to calculate its break-even point and the profit made.
As a reminder: the turnover generated is intended to cover two types of costs: variable costs and fixed costs. Once the expenses are paid, a profit remains. The margin on variable costs is the excess of the turnover over the variable costs.
It is calculated as follows:
👉 Contribution margin = Revenue - Variable costs
And to calculate the contribution margin rate: Contribution margin / Sales x 100
Examples of variable costs: labor costs (due to the often high turnover in restaurants), purchases of solid and liquid raw materials, supplies, staff and manager consumption, gifts, linen rental, etc.
Gross margin
Gross margin is the revenue remaining after subtracting the cost of goods sold. It is expressed as a percentage of total revenue, which is the amount of money you have to pay operating expenses and reinvest in the restaurant.
A high gross margin means that you will be able to grow faster because you will have more money left over to invest in your establishment.
It is calculated as follows:
👉 Gross margin = (Sales - Raw material cost) / Sales x 100
In order to balance your accounts, you must ensure that your gross margin is at least equal to your fixed costs.
Operating margin
The operating margin of an institution is calculated as follows:
👉 Operating margin = Revenues excluding VAT - Operating expenses
This indicator allows you to know the volume of sales that turns into wealth for your restaurant, and therefore to know how well it is performing.
Commercial margin
As for the commercial margin, it is, for example, the ratio between the purchase price of the ingredients of your menu (or dish, or drink), and its selling price (what your guest will pay).
This indicator is important to have a vision on the profitability of your restaurant, but also to position you compared to your competitors.
To calculate it :
👉 Sales margin = Sales excluding taxes - Cost of goods sold.
Profit
A restaurant's profit is simply the money left over after paying for everything (fixed and variable costs). This amount is usually reinvested by the establishment in its own development.
To calculate it:
👉 Profit = Total income - total expenses
How to improve the margin of your restaurant?
Wondering how to improve your restaurant's margin? Don't worry! Solutions exist, here are some of them.
Negotiate better with your suppliers
Negotiation is an art! Think about negotiating your prices with your suppliers to reduce your purchasing costs.
Review prices
While remaining consistent with your brand, don't hesitate to test different rates with your customers and then analyze what works and what doesn't.
Improve inventory management
Managing your inventory will not only save you money, but will also help you avoid food waste.
👉 Going further: 8 tips to avoid food waste in restaurants
Highlighting products that work
Take advantage of dishes that have a good margin (and that your guests like!). To do so, put them forward to generate more sales and therefore increase your margins. You can, for example, create a menu or a dish of the day, make promotions, and focus your digital communication on a particular dish!
Digitalising your restaurant
To ensure the profitability of your restaurant, it is important to optimize everything you can in its operation! From the kitchen to the dining room to the order taking, equip yourself with systems that increase your productivity.
For example, have you considered the following solutions?
- In the dining room: an order terminal, to save time by multiplying the number of orders taken and to highlight your most popular products.
- In the kitchen: production screens, to gain in productivity thanks to a simplified display for your team.
Multiply the number of control channels
Offering new ordering channels will allow you to expand your customer base and generate more volume. Indeed, people who do not live in your neighborhood (and who, therefore, do not necessarily know your establishment), will then become customers!
While going through apps like Uber Eats or Deliveroo to advertise your restaurant is quick and easy to set up, consider hiring your own delivery driver! This alternative is more profitable after a certain volume of orders.
Anthony, manager of Ankka Grenoble recommends it: discover his testimony.
Another advantage of home delivery is that customers tend to order more (appetizers, desserts, drinks), which increases the average basket size and therefore the profitability of your restaurant.
Other key indicators and ratios for a restaurant
Discover the different key indicators that you absolutely must know for your establishment. We explain their role and how to calculate them.
The average ticket
Let's start with the average ticket. This is what your guests spend on average when they come to your restaurant. Your goal is to keep it as high as possible by encouraging your customers to add a dessert, a drink or a supplement to their meal, for example.
Here's how to calculate it:
👉 Average ticket = Sales / Number of covers
Casting ratio
The leakage ratio is the loss of goods (waste, theft, mistakes...). It must be less than 2%, otherwise, it means that you have to review the control of your goods.
His calculation:
👉 Casting ratio = Loss price / Sales x 100
Personnel costs
Knowing your staff expense ratio is important. It allows you to see what percentage of your meal price is salary cost. It should be between 30% and 45%.
It is calculated as follows:
👉 Personnel costs = (Gross salaries + expenses) / Sales (excluding taxes) x 100
Operating expenses
Operating expenses are the costs of maintaining your restaurant every day.
For example: the cost of renting the building and other rental charges, the various taxes (water, electricity, etc.), the service providers to be paid or the insurance.
Cost of ownership
The cost price is the sum of all the direct and indirect expenses incurred by your restaurant to produce a dish or a drink. This sum is then related to the quantity of dishes sold.
How to calculate the cost price?
👉 Cost of goods sold = (Direct expenses + Indirect expenses) / Quantities sold
If you've made it to the end of this article, it's time to get out the calculators and make the right decisions now!
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With Innovorder, put digital technology to work for your business! Contact an expert and discover how to improve your productivity, boost your sales and increase your profitability.
