Restaurants are a very popular investment these days, but many people are apprehensive about opening one due to perceived low profitability.
Generally, restaurants are a profitable venture. However, their profit margins are quite low compared to other investments. Depending on the type of restaurant you own, your profit margins will likely range between 3% and 6%.Below, we’ll discuss everything you need to know about restaurant profitability. Keep reading to learn more!
Is the Average Restaurant Profitable?
While restaurants can be very profitable, any restaurant enthusiast or prospective restaurateur probably already knows that a restaurant’s profit margins are typically pretty low compared to other investments. Many factors influence how profitable a restaurant will be, including but not limited to:
- Type of restaurant
While a restaurant’s profit margins can vary significantly, the average is somewhere between 3% to 6% for full-service, sit-down restaurants. Fast-casual, or fast food, restaurants usually have slightly higher profit margins, typically between 6% to 9%.
What is the Average Monthly Revenue for a Restaurant?
According to Binwise, the average monthly revenue for a restaurant during its first year is approximately $112,000. Although this number seems relatively high, you have to keep in mind that it can cost anywhere from $100,000 to over $2 million to get a restaurant up and running in the first place. Couple that with overhead costs, and it could take at least a couple of years before your restaurant sees any kind of profit.
For reasons like this, restaurants tend to have a high failure rate during their first few years. Business may be slow until you find your groove, and you need to plan accordingly for this when drafting your restaurant’s business plan.
At the end of the day, most restaurant owners do not open this type of business expecting a high or quick profit. In some cases, they may not even be able to take a salary until profits increase or stabilize. Investors usually get into the restaurant game because it’s something they enjoy above all else. Before you decide to take on this venture, be sure it’s something you’re passionate about.
What Are the Most Profitable Types of Restaurants?
As you would probably expect, restaurants with the lowest overhead and ingredient costs tend to be the most profitable. These include:
- Food trucks
- Fast-casual/fast food
Now, let’s discuss why these types of restaurants are more profitable than others.
If you’ve ever been to a bar before, you already know how high the markups can be. Alcoholic beverages have significantly higher markups than food does, and wine usually has the highest markup of all. If you own a bar, tavern, or pub, it’s much more likely that a high percentage of customers will be spending more money on drinks than on food, which can significantly increase profits.
No matter someone’s age or lifestyle, diners are loved by all. Because of this, they continue to see a high volume of traffic, even when other restaurants are struggling. Plus, since diners traditionally serve low-cost breakfast foods, their profits tend to greatly exceed the cost of ingredients.
Pizza has remained one of the most popular foods in America for decades. It’s quick, it’s convenient for large groups, and best of all, it’s loved by nearly everyone! The products are high in demand and the ingredients are simple, meaning your food costs will rarely exceed your profits.
Over the years, food trucks have become more and more popular. They’re usually run by just one to three people and have no fixed location, leading to incredibly low overhead costs. Food trucks also have much more limited menus than sit-down restaurants, which means they can keep ingredient costs low.
Fast-casual restaurants, more commonly known as fast food restaurants, involve ordering at a counter and seating yourself, or taking the food to go. The food often comes at least partially pre-prepared, leading to faster service, lower labor costs, and higher profits.
How to Increase Your Restaurant’s Profitability
Although a restaurant will almost always yield lower profits than most other investments, there are ways to streamline your operations and increase profitability. It all comes down to reducing costs and increasing sales!
Some of the ways you can increase your restaurant’s profitability include:
- Cutting food costs
- Offering online ordering
- Decreasing overhead costs
Cutting Food Costs
Food and ingredient costs are usually a restaurant’s greatest expense. For this reason, cutting your food costs is one of the most effective ways to increase profitability. Ask your suppliers if they can offer any direct discounts on your orders. If not, see if there’s a way to restructure your orders to be delivered on a less frequent basis, or to slightly lower ingredient quality in a way that won’t affect your dishes.
Another way to cut food costs is by reducing food waste. Ask your kitchen staff to properly measure ingredients before they use them, or reduce portion sizes slightly if you notice there’s a lot left on the table once customers leave.
Offering Online Ordering
In the wake of the pandemic, more people than ever are now opting for online ordering. By listing your restaurant on apps like DoorDash and Uber Eats, you open yourself up to a wider audience than ever and expand your market to those looking to have meals delivered.
Decreasing Overhead Costs
Apart from food costs, labor costs are one of the biggest factors in a restaurant’s low profitability. While cutting hours and wages is definitely a no-go, you may want to avoid hiring new staff members unless absolutely necessary. See if your current servers and bartenders can help you with bussing or hosting, or if they can all work together on after-hours cleaning to avoid hiring anyone new.
It’s no secret that restaurants have famously low profit margins. While you shouldn’t expect a huge return on your investment right away, the right business plan and funding can help you increase these margins and ensure your restaurant stays popular and profitable for years to come.