Average Gross Profit Margin for Restaurants? Here’s What to Aim For.
While we’d love for running a restaurant to be all about serving great food, connecting with the community, and offering top-notch customer service, there are some not-so-glamorous aspects we can’t ignore.
Stress, worries, and keeping a close eye on profit margins, to name a few.
After all, we have to make a profit. Otherwise, it’s just a hobby. A very expensive hobby.
So, let’s dive into profit margins. Most notably, your gross profit margin, which we at U-Nique address much differently then the marketplace. If you read any other articles out there on this topic, their idea of gross profit margin only addresses the direct costs of ingredients and the %s they quote will be quite different than what you read here. When we talk about gross margin we mean food and beverage costs and all direct labor costs (prime costs).
NOTE: Your gross profit margin tells you how well you’re doing at making and selling your main product. During inflation, it’s a key metric to look at!
So first, let’s look at the difference between it and net profit.
Gross Profit vs. Net Profit for Restaurants
Gross Profit Margin:
Imagine you own a pizza place. The gross profit margin is like figuring out how much money you have left after serving your customers their meal, considering only the “prime costs” of making and selling that pizza (pizza ingredients, beverages and direct labor).
What it tells you: It shows how well you’re doing at making and selling pizzas, covering the basic costs of making and selling them.
Net Profit Margin:
Now, imagine you have to pay for other things like rent for the restaurant, salaries for any administrative staff, electricity, and supplies, in addition to the ingredients for the pizza. Net profit margin looks at how much money you have left after paying for all of these things. Again, we note that most other sites will include your labor costs here in this calculation, while we include those costs in the gross profit margin)
What it tells you: It gives a broader picture of how well your restaurant is doing overall, considering all the direct and indirect operating costs involved in running it.
In short, gross profit margin tells you how well you’re doing at making and selling your main product (pizzas).
The net profit margin tells you how well your entire restaurant is doing after considering all expenses.
What Can The Gross Profit Margin Tell You In Your Restaurant?
So, why just focus on gross profit margin?
Well, you shouldn’t. Net profit is equally as important, and we wrote an entire blog post about it here.
But gross profit margin can tell you a few things about your restaurant that you won’t get from net profit margin, especially if you break it down into 2 main categories: Gross Profit Margin Before Labor, and Gross Profit Margin After Labor (*Note, you need a powerful accounting software such as Xero to run these calculations directly in your financials as QuickBooks won’t let you. To find out more you can read our blog post here and also watch our YouTube video).
Several things you can see from these formulas include:
- Simple Product Check: See how well your restaurant is doing at selling your food and beverages to your customers. It’s like checking if the pizza-making part of your business is profitable.
- Efficiency Check: By looking at this margin, you can figure out how good you are at making and serving your dishes without worrying about other costs. It’s a way to see if you’re using your ingredients and making and serving your food efficiently.
- Price Check: It helps you decide if you’re charging the right amount for your pizzas. If the margin goes down, it might mean you need to adjust your prices or find cheaper ways to make your food. Note: In inflationary periods, your gross profit margin can indicate when it’s time to look for alternative suppliers or raise your prices!
- Starting Point Check: For new businesses, it’s a good starting point. It tells you if your main product is making money before you think about all the other stuff like rent and salaries.
- Focus on the Basics: Since it only looks at making and selling your main dishes, it’s like zooming in on the most important part of your restaurant – the food.
Where Are You Wasting Money In Your Gross Profit?
Right now as we all experience huge cost hikes, it’s more important than ever to pay attention to gross profit.
Here are a few ways you may be wasting money:
- Over ordering ingredients without a clear plan for their use.
- Poor inventory management leading to expired or spoiled ingredients.
- Inefficient food preparation processes that result in excessive trimmings or unused portions.
Inconsistent Portion Control:
- Lack of standardized portion sizes can lead to variations in costs per dish.
- Overgenerous portions without corresponding price adjustments can impact profitability.
Ineffective Supplier Negotiations:
- Failure to negotiate favorable terms with suppliers can result in higher ingredient costs.
- Not exploring alternative suppliers or bulk purchasing discounts.
- Offering a menu with a wide variety of ingredients can lead to higher inventory costs and increased waste. Difficulty in managing inventory for items with low demand.
Lack of Training:
- Insufficient training for kitchen staff in cost-effective cooking methods and portion control.
- Lack of awareness among staff about the importance of minimizing waste.
Pricing Strategy Issues:
- Under pricing menu items without considering the actual costs of ingredients and preparation.
- Failure to regularly review and adjust menu prices based on changing ingredient costs.
Technology and System Inefficiencies:
- Not utilizing technology for inventory management, leading to errors and oversights. (Hint: We recommend MarginEdge!)
- Outdated or inefficient point-of-sale systems that hinder accurate tracking of sales and inventory.
Lack of Regular Financial Analysis:
- Failure to regularly review financial statements to identify areas of overspending or inefficient practices.
- Ignoring trends in ingredient costs and market fluctuations.
Your experienced restaurant accountant can help you go line by line and pinpoint exactly where you may be wasting money. If you don’t have a helpful restaurant accountant, you can get in touch with us anytime.
How to Calculate Your Restaurant’s Gross Profit Margin
Now that we’ve covered why gross profit is so important to measure, let’s talk about how to measure it in your restaurant.
Here’s the formula:
Gross Profit Margin Formula: Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue * 100
Now, let’s go back to our pizza place. Let’s say it generates $100,000 in revenue, and the cost of making and serving the pizzas (ingredients and other direct costs, FOH and BOH labor) amounts to $52,000.
The gross profit margin can be calculated using the formula:
Gross Profit Margin = (($100,000 – $52,000) / $100,000) × 100
Gross Profit Margin = ($52,000 / $100,000) × 100
Gross Profit Margin = 0.52 × 100
Gross Profit Margin = 52%
So, in this example, the gross profit margin for your pizza place is 52%.
This means that 52% of the revenue is left after covering the direct costs of making and serving the pizzas, indicating how well your business is performing in terms of basic production efficiency and profitability.
So, is our imaginary 52% gross profit margin considered good for a restaurant?
What is the Typical Gross Profit Margin for a Restaurant?
A good gross profit margin for a restaurant is typically between 35% and 45%, ideally, and depends on the mix of your Prime Costs. (*Note, we give a goal of 40% as an ideal gross profit margin for clients of U-Nique)
Meaning for financially viable restaurants, gross profit hovers around 35-45%, i.e. for every $100 a guest spends at your establishment, $35-$45 is gross profit.
However, what’s considered “good” can depend on the type of restaurant and where it’s located. Fancy restaurants might spend more on ingredients but charge higher prices and have expensive labor in the 30-40% range, while fast-food places may aim for a higher margin with lower ingredient costs and cheaper labor around 25%.
It’s important to keep an eye on your gross profit margin and make adjustments as needed to keep things healthy.
Because if the main product or service you sell isn’t making a healthy gross profit, making changes like hiring or firing staff, moving to a smaller place, and other adjustments might not be enough to solve the underlying financial issues.
The crucial thing is to ensure that the foundation of your business, which is making and selling your main product, is financially strong.
Need more help getting costs down in your restaurant?
It’s what we’re here for! Use our calendar below to book a complimentary call.
In the meantime, check out our other blog post on the average net profit margin for restaurants.
See you there!
Restaurant Gross Profit Margin FAQs
What is the calculation for restaurant gross profit?
Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue * 100
What costs are included in Cost of Goods Sold?
While others may not, we include all “Prime Costs” which include food and beverage and labor costs
What is the average gross profit for a restaurant?
The average restaurant gross profit is 45% (considering publicly traded restaurants in the U.S.) Although, a healthy gross profit margin for a restaurant is typically between 60% and 70%.
How can you analyze your gross profit margin?
Use the formula above to calculate your gross profit margin and align it with industry benchmarks. If you find your gross profit margin slipping, work with your accountant or financial coach to figure out why. You may need to make changes to your pricing, inventory management, or suppliers.