When you want to run a restaurant business, you should know that it’s not for the faint-hearted. While it’s your passion that inspires you to pursue your dreams and own a restaurant, there’s a profit margin that will determine whether or not a restaurant is a sustainable business. Many people would assume that fine dining restaurant profit margins are very high. But the truth is, it’s not always like that, as profit margins vary based on sales and the number of customers those restaurants have. In this article, you will get ideas about what is the profit margin in high end restaurants to help you start up a business.
Are Restaurants Profitable?
Yes, restaurants are profitable. However, they have low profit margins. If you want to know what is the profit margin in high end restaurants or even average restaurants, be aware the profitability varies on different factors. These factors include the type and size of the restaurant, as well as the economic variables involved.
It takes two years on average for a new restaurant to make a profit. Unfortunately, some restaurants experience a high failure rate because of the lack of planning and funding during the first few years. So, if you’re planning to run a restaurant business, you should develop a proper business plan.
When it comes to the profitability of restaurants, two massive factors affect the profitability; food and labour costs. Food costs can be ten to twenty percent higher than the cost of liquor. However, when it combines with the labor costs, it could be around 20-40%. That way, you can see how the cost of a restaurant outweighs a bar.
Understanding the Profit Margin of a Restaurant
Profit margin applies not only in restaurant or food industries. It is the ratio of a company’s profit and is usually recognized when expenses were deducted from sales, and the result is divided by the revenue. The ratio of profit margin compares the profit to sales. That will determine how well the company is handling its finances.
So, when you’re planning to run a business one day, you must know what is the profit margin in high end restaurants. Why “high-end” restaurants were emphasized, so you will understand if you’re starting with small ones. You should know that the profit margin is always expressed as a percentage.
Furthermore, three other types of profit margins will help in evaluating the restaurant business. These are the gross profit margin, net profit margin, and the operating profit margin to clearly understand the profit margin in high end restaurants.
Gross Profit Margins of Restaurant
Typically, restaurants come with gross profit margins of about 20 – 80 percent. This range is so extensive due to its opposing business models. However, other restaurants run a high volume yet slim margin. On the other hand, there are also some with lesser volume but comes in higher margins.
When it comes to the profit margin in high end restaurants, the food’s cost is just 40-42% of the price given on the menu. So, when you do the math, it’s clear that the profit margin in high end restaurants has a gross profit margin of about 60% on average.
However, you should know that some of the items you see on the menu particularly have lower food costs, like pasta dishes. High end restaurants offer other specials to sell more of these items at a high margin.
Net Profit Margins of Restaurants
The net profit margin is the percentage of the revenue of a business after deducting the entire expenses from sales, divided by the net revenue. Restaurants come with high operating expenses. As a result, the definite net profit is lesser than its gross profit, and the net profit margins of any restaurant nationwide on average is just 4 percent.
Operating Profit Margin of Restaurants
This margin includes costs associated with administration and selling, the cost of goods sold, and the overhead. The formula for the cost of goods sold is just the same in most industries, like restaurants. However, the included elements can vary.
Ways to Improve Profit Margins in High End Restaurants
Now that you know what is the profit margin in high end restaurants, it’s also better to know ways and approach to improve the profit margin. Here are two ways you can do to this issue.
Increasing Restaurant’s Sales Volume
One way to improve the profit margin of restaurants is through increasing sales. There are 6 ways to achieve that:
- Improve your menu pricing
- Updating the layout of your menu
- Give better sales training to your crew and servers
- Increase traffic through marketing
- Enhance table turnover
- Add more seating
Though these ways could be helpful, they may not be applicable in this time of the pandemic. What you can do is try any easy-to-use online ordering system. This could be helpful since the number of customers dining in is limited and since people tend to just dine at home.
Lessen Overhead Expenses
The next possible way to improve your profit margin is by reducing your restaurant’s expenses like utilities and labor. Here are the ways to do it:
- Enhance employee scheduling – To reduce costs and expenses while making the most out of your revenue, it’s suggested in leveraging the restaurant’s employee data and sales. This ensures that your restaurant has enough manpower to meet customer demands any time of the day.
- Reduce wasting of food – Keep in mind that about one-third of a restaurant’s revenue is allocated to the cost of goods sold. So, if you end up throwing food away, you’re going to lose money that could have been an income or used to cover any other expenses.
- Lower Utility Bills – You should also start investing in eco-friendly appliances and lighting that contribute to lower utility bills. In addition, it leaves more revenue from sales that are left in the bank.
While it’s hard to know if a restaurant business is going to be successful or not, knowing what is the profit margin in high end restaurants will give you an idea of what areas you should focus on and improve.
Hopefully, all the information in this article would be a great help when you plan on putting up a restaurant business one day. It’s always better to be prepared and know ways on how to deal with issues and problems along the way.