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The restaurant business is not for the faint-hearted, and a lot of effort, patience, and resources are required to keep the business afloat. You also need to understand the market and be a step ahead of the competition if you’re to survive in this business. Profit margins are the biggest problem, with many businesses going under immediately after they start. Is there a way of improving the restaurant margins?
You can improve the restaurant margins by adopting the following tips to keep the business running:
- Track expenses
- Implement automation
- Expand the business
- Increase sales
However, you still need to provide excellent services and offer entertainment to attract diners.
That’s not all, as you still need to look at the five tips you can follow to improve the restaurant margins, the restaurant’s profit margin, and why restaurant margins are so low, which you will learn if you read on.
Five things to do to Improve Restaurant Margins
Restaurant businesses require a lot of market knowledge, capital, and a dedicated labor force to survive in the modern competitive market. As a restaurant owner, you’ll always find yourself seeking ways to improve the restaurant margins, with many strategies proving absolute. All is not lost, as you can still salvage your business by improving the margins.
However, the results of implementing these tips are not instant, and it might take some time before you start seeing any significant changes.
Try implementing these five tips if your restaurant business hasn’t been performing well and you seek to improve the margins:
Track your Expenses
Expenses are inevitable in any business, and as a rule of thumb, you’re supposed to allocate at least a third of the revenue to these expenses. The restaurant revenues cover the following:
- Labor cost – restaurant workers, are also paid per hour, and you should also factor in overtime pay.
- Cost of goods sold (COGS) – this includes the cost of buying, transporting, storing, and preparing the food or beverages.
- Overhead expenses – costs like rent, marketing, and insurance are considered overheads.
You’ll learn how much money your business requires to keep running by tracking down the expenses. It also gives you some clues as to how you can reduce the costs to grow your margin.
Implement Automation to Reduce Expenses
Now that you already know the total expenses, you can choose to implement automation to help reduce labor costs. Automation can apply to order placement and customer-facing displays. The use of Point Of Sale machines (POS) has helped to reduce labor costs, which helps to add to the margin.
Expand Business Scope
Restaurants make a huge portion of their revenue from sit-in services. However, you could grow your market share by providing take-out and delivery services to people who prefer dining from their homes. You could charge a little bit more for these services, and it’s obvious the customers would be glad to pay as appreciation for the extra effort. However, it’s best to research the market before venturing into business expansion.
Focus on a Profitable Menu
After months of running a business, you should know the type of food your customers love, and it would only make sense if you had this food on your menu. Doing so might make your business dependent on that food type, but it also provides you with specialization and help you narrow down your niche.
Increase Sales Volume
The only way to grow your margins is by increasing the sales volume. You can achieve this by improving the marketing strategies by targeting social media users. Additionally, you could host events that will attract dinners, with many restaurant owners preferring to hire local music bands to perform. You could also have a karaoke night which will attract more customers.
What is the Profit Margin for a Restaurant?
Restaurants were once thriving businesses, with many registering over 17% profit margins. However, these figures have changed recently due to the growing competition. The percentage of people dining out has also reduced, especially post-pandemic, with many reducing the days they eat out in a week or cutting it down completely.
As we stand, the restaurant margins stand between 3% and 7%, with the figures expected to go down in the next five years.
What’s a Profit Margin?
Profit margins determine how much money your business stands to make yearly and is calculated as follows:
“Gross revenue (total sales) – gross expenses = net profit.”
Remember that the total expenses include labor costs, COGS, and overheads. Once you get the net profit, you divide it by the gross revenue to get a profit margin:
“Net profit ÷ gross revenue = profit margin”
You should multiply the profit margins by 100 to get the profit margin percentage.
Fast food restaurants tend to have the highest profit margins, with some like McDonalds taking over 10% profit margins.
Why are Restaurant Margins so Low?
Restaurants might be a beaming business, but the margins tend to contradict the notion. Although the business is profitable, the margins are very low, with the current trend being 5% on average. The lower margins can be attributed to high operational costs that ‘eat’ into profits.
Here are several things that contribute to lower margins in restaurant businesses:
- High expenses – you have to cater to labor and overhead costs that take around one-third of the total sales. COGS also contribute to lower margins as a restaurant business requires more supplies to keep running.
- Tax – besides catering for the expenses, you need to pay tax which amounts to around 3% depending on your location.
Conclusion
The hospitality business is one of the most lucrative industries we have today. However, current economic trends have reduced the margins, making it hard for businesses to thrive. You can start tracking your expenses, implement automation to cut down costs, expand the business scope, focus on a profitable menu, and increase sales volume if you want to improve the margins. Modern restaurants have an average margin profit of 9%. The restaurant margins are lower due to higher operating costs and taxes.
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