When looking at the industry as a whole, the average restaurant profit margin is around 3-5% but can broadly range from 0-15%. It’s never been easy to make money in the restaurant industry. A highly fragmented sector dominated by 70 percent independent owners and operators, the average restaurant’s annual revenue hovers around $1 million and generates an operating profit of just 4-5 percent. A financially sustainable business model for small independents is often elusive.
So when a crisis of the magnitude of the COVID-19 global pandemic forces restaurants to close, and their revenue drops to zero overnight, things get particularly dire. The concerns of restaurant owners and the unique realities and concerns of their industry remain largely unaddressed by government programs designed to help businesses. The industry will see at least 25-30 percent of restaurants unable to sustain themselves.
Over the last two months, authorities have allowed restaurants to function. However, that may not be enough as people are ordering 40-45 percent less online while cooking at home.
Hacking Your Restaurant’s Profit Margin
The biggest profit killers in the restaurant industry are CoGS, labor, and overhead. And while there’s no way of avoiding these costs altogether, there are creative ways to reign them in. There are two main ways to widen your profit margins are increasing sales and decreasing costs.
Increasing Sales Volume
Note: While increasing sales volume won’t impact your CoGS number, it will widen your margin when it comes to fixed costs like rent, utilities, and maintenance.
1. Get on Board with Online Ordering
If you’re not using online ordering for take-out and delivery orders yet, it’s time to start. Online orders have grown 300% more than dining in since 2014, and 60% of diners order in at least once a week.
While using a third-party online ordering service can get your name out there to new customers, it’s also a good practice to integrate a native online ordering system on your website. Not only will you save upwards of 30% in commission fees, but it creates a more seamless process by integrating with your POS.
2. Adopt a Loyalty Program
When done right, a loyalty program can keep guests coming back more often, spend more money overall, and makes them more likely to recommend your restaurant to friends. Just make sure your program is easy to use and doesn’t frustrate guests by being overly complicated or difficult to use – it could end up having the opposite effect.
3. Evaluate Your Menu Design
Do you have a high-profit dish on your menu that you get great feedback on, but is not ordered often? Selling more units of that dish could be as simple as changing the placement on the menu or the wording in the description. By using data pulled from your POS, you can make adjustments to your menu based on what is or isn’t selling, and which items are profit-boosters or cost-killer.
4. Upgrade Your Technology
Speaking of pulling data, is your POS fully equipped to give you all the best insights? In this day and age, your POS should be doing way more than just processing payments, which is generally all that most legacy-based systems can do. By switching to a cloud-based system, your technologies can be integrated all in one place, giving you the best possible insights to help you run your business.
Also, Kitchen Automation can be a game changer in terms of introducing new meu items with promoting hygiene. Plug and play automation will help in reducing dependency on skilled labour. This will surely increase your topline and reduce the bottom line.
5. Get Online
Did you know that 90% of guests research a restaurant before dining (more than any other business type)? That means if you haven’t gone online yet – with a minimum of a restaurant website, operating key social media accounts, and claiming your Google and Yelp pages – you’re missing out on a ton of business that your digital-minded competition is benefitting from.
1. Reduce Cost of Goods Sold (CoGS)
As we said, CoGS is one of the biggest expenses in the industry. Lowering your CoGS can become a balance between wanting to serve your guests high-quality food while keeping costs low. However, there are a few ways to achieve this, like comparing vendors, taking more accurate inventory, getting ahead of food waste, and more.
2. Control Labor Costs
This is another fine balance between maintaining a cost and keeping your staff happy and able to live on their wages. It can be done if you are using software to monitor shifts, create more efficient scheduling, and prevent early clock-ins. There is also something to be said for adding benefits to keep staff happy and loyal. Even if you can’t afford to pay them more money, things like days off, tenure perks, and continuous acknowledgment of their efforts go a long way.
3. Reduce Waste and Theft
Food waste and internal theft are unfortunate but very real problems in the restaurant industry. While it may not be 100% preventable, it can be better tracked by using an inventory management system that increases accuracy versus using spreadsheets or a pen-and-paper method.
4. Decrease Staff Turnover
Not only is it expensive to train new staff, losing a great server can make or break your guests’ experience causing a loss in repeat business. Make sure you are communicating with your staff and implementing their feedback where possible to decrease turnover and increase staff loyalty.
The good news:
The food industry may see an increase in its profit margins in the long term if proper steps are taken. There are several reasons this could happen. And this could include:
Real Estate Cost: As so many food outlets will be closing down, it might help new entrants and existing brands in expansion could negotiate better on real estate.
Kitchen Equipment: They could seek out and buy second-hand equipment for cheaper, and use it in their business.
Pricing: They could price their food nominally, and build their brand identity around safety and hygiene. With even the Central government enforcing norms regarding these, people will lean towards cleaner food, cost notwithstanding.
Online order is here to stay: Another factor will be the pick-up in online orders in the short term and also long term. With WFH culture slated to continue through partial lockdown and even later, many people staying at home will not have time to cook. This means more and more of them will order online, which will boost the industry. This one will be even more important for restaurants to increase their profit margin.