Hey guys,
I know many people out there are thinking about opening and running a restaurant,
And the reason behind opening a restaurant is usually the same:
Make a profit,
And opening a restaurant can be profitable,
But to what extent,
And what are the factors influencing profitability,
In this article I’ll answer how profitable is a restaurant by showing you:
- What you can expect to earn
- What you can expect to spend
- What you can expect to profit
- Tips to increase profitability
To know how profitable is a restaurant,
We’ll follow the same framework as income statements,
We’ll start with the revenue generation,
Then the expenses,
And we will be left with the profits,
But there is more to that,
So without further due,
Let’s jump right into it!
What You Need To Know
Before entering into the nitty and gritty,
I wanted to share with you a couple of insights about the restaurant industry,
A. Initial Costs
B. Failure vs success rate
According to the National Restaurant Association, One out of three restaurants won’t make it,
So if you look at that closer,
It is a 30% failure rate,
Which is quite reasonable,
However,
Making your restaurant highly profitable is another story,
Surviving and succeeding are not the same…
C. Industry profit margin average
The restaurant profit margin can vary a lot,
In fact,
You could see your restaurant’s profit margin anywhere from 0% to 20%,
That will depend on your operational and financial management,
Yet the industry average could be between 3% and 7%,
What You Can Expect To Earn
It’s not a secret that restaurants typically generates revenue through the sale of food & beverage,
And while there are many other revenue streams possibilities to expand your income,
The first thing you should know is that,
How you will earn will depend on your concept,
Your business model is the one that will initially help you determine how profitable you can expect to be,
For example,
Opening a Fine Dinning restaurant and opening a fast food are two different things,
And how a fine dining restaurant will make money,
Is the same as fast food,
And also the growth expectancy is different,
What I want you to understand here,
Is simply that depending on the concept,
You should outline the different ways you can make money,
So let’s take the example of a regular fast food restaurant and see how much we can expect to earn,
A. Profit Timeline
A fast food restaurant will mainly make money by following this simple framework:
Low Margin / High volume
Meaning that they rely on the number of customers coming and the high turnover rate,
This model is extremely profitable,
Let me put this in an example,
Selling a burger that costs you 20$ to make at 100$ to 10 people in a day will make you:
800$,
On the other hand,
Selling a burger that costs you 20$ at 35$ to 100 people a day will make you:
1500$,
That is just an example to show you the difference between fast food and fine dining,
But let’s see how much you can expect to earn in the first year with a fast food restaurant:
Average First Year: 500.000 – 1.000.000$
Average Second Year: 520.000 – 1.100.000$
Average Third Year: 550.000 – 1.100.000$
Average Fifth Year: 630.000 – 1.250.000$
So taking the example of a regular mid-scale fast food restaurant,
You can expect to generate between 600.000 to 1.2 million or even more a year in revenue,
But this doesn’t tell us anything,
We need to see what our costs are to determine the money left for profits,
But before that,
Here’s a table showing you what you can expect to earn depending on the concept:
What You Can Expect To Spend
Revenue alone doesn’t tell us how profitable is a restaurant,
But what does,
When it is paired with great cost control,
But the restaurant industry is known for having high operating costs,
So let’s see in what areas you should expect to spend,
And the average expenditure for each concept,
A. Areas of expenditure
Running a business comes with costs,
And in the restaurant industry,
You can expect to see plenty of them,
And there are specific areas where you can expect to see your money going every month:
- Food costs –> 25-35%
- Beverage Costs –> 25-30%
- Overhead costs –> 20-25%
- Labor Costs –> 20-25%
- Occupancy costs –> 6-12%
Those are the main areas of costs in a restaurant,
But of course, that will totally depend on the business model,
For example, your labor costs in fast food will typically be lower than those in a Michelin star restaurant,
But let’s see the average total yearly costs for each concept,
B. Average costs per concept
Here’s a table showing you what you can expect to spend depending on the concept:
What You Can Expect To Profit
There are many ways to determine the profitability of your restaurant,
And I’ll share with you:
- The typical profit benchmarks of the industry,
- The most profitable concept
- How much do owners make a year on average
A. Profit benchmarks
- NPAT : 10-20%
- EBITDA : 13%-25%
- GROSS : 60 – 70%
- PROFIT MARGIN : 3-7%
B. Most profitable concepts
C. How much restaurant owners make a year
Restaurant owners can make anywhere from 30.000$ to 200.000$ a year,
But according to Payscale.com,
The national average in the US is around 65.000$.
BONUS: Tips To Increase Profitability
A. Apply menu engineering
One way to diversify and grow your revenue is to perform menu engineering consistently,
Menu engineering is simply a control system,
That allows you to determine whether your menu design is bringing profit to your operation,
And yes,
Design plays a huge role in human psychology,
Which is directly tied to how much they spend,
So if you want to learn more about menu engineering,
I recommend you read this full article that will show you how to make more money using it,
B. Implement Loyalty Programs
One of the best marketing strategies in the restaurant is loyalty programs,
Just look at Starbucks,
Their loyalty program is extremely successful,
Which made them even more profitable,
By developing and implementing a loyalty program,
You are increasing your customer return rate,
Hence how much they spend over their lifetime (LTV),
C. Improve online presence
This might sound weird,
But improving your online presence will essentially bring more money,
As your brand gets recognition,
Your occupancy will slowly begin to increase month after month,
Which will slowly increase your revenue,
Improving your online presence is not an easy task,
But if you want to learn more about that,
Check the marketing hub where you will find everything you need,
Summary
And that is it guys,
I hope now have your answer on how profitable is a restaurant,
And just as a reminder,
Here are the key takeaways:
- Opening a fast food is usually more profitable
- There is opportunities to scale a fast food restaurant
- Franchising increase your profit capabilities
So I hope you have enjoyed it,
Stay safe and see you soon!
