Guide to Restaurant Profit Margins

he restaurant industry is not for the faint of heart. While passion is the spark that inspires restaurateurs to pursue their dreams, profit margins determine whether or not those dreams are a sustainable business. 

Unfortunately, profit margins are dwindling across the restaurant industry. Two decades ago in Philadelphia, for example, restaurant profit margins stood at a healthy 15-20%. Today, profit margins in this foodie town have shrunk to between 4 and 7%, which is on par with the national average. 

Alas, we’re not here to depress you with statistics about low restaurant profit margins. Instead, we’re here to help you combat this problem with a complete guide to sustainably grow profits so that your restaurant can thrive. In this guide, you’ll learn:

  1. What the average restaurant’s profit margins are
  2. How to calculate gross profit
  3. How to calculate net profit
  4. Why restaurant profit margins are so low
  5. Average profit margins by restaurant type
  6. How to improve restaurant profit margins

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What is the average restaurant profit margin?

While there is no one-size-fits-all answer to that question, Restaurant Resource Group claims that, on average, restaurant profit margins are between 2% and 6%, with full-service restaurants at the lower end of the spectrum and limited-service (or quick service) restaurants at the higher end. 

Before we dive into why restaurant profit margins are low and how you can improve yours, we need to distinguish between two types of profit margins: Gross profit and net profit

What is gross profit?

Your gross profit is the difference in value between the selling price of a dish and the cost of the ingredients and materials used to make a dish (otherwise known as the cost of goods sold, or COGS). 

For financially viable restaurants, gross profit hovers around 70%, meaning that for every $100 a guest spends at your establishment, $70 is gross profit. 

How to calculate gross profit

To calculate your restaurant’s gross profit, you need to subtract the total cost of goods sold (COGS) for a specific time period from your total revenue (your total food, beverage, and merchandise sales). 

For example, let’s say Johnny’s Burger Bar’s total sales from July to September 2022 was $1.25 million and its cost of goods sold was $400,000. 

To calculate gross profit, apply this formula: 

Gross profit = (1,250,000 – 400,000) / 1,250,000

Gross profit = 850,000 / 1,250,000

Gross profit 0.68 

Johnny’s Burger Bar’s gross profit as a percentage is 68%, meaning that for every $100 a guest spends at their establishment, $68 is gross profit that can be used to pay for operating expenses. 

What is net profit?

Your net profit is the amount leftover from the gross profit after you deduct operating expenses like payroll, rent, utility bills, ingredients, and equipment leasing costs. 

How to calculate net profit

To calculate net profit margin as for a certain time period, you need the following information:

  • Sales revenue
  • Gains
  • Expenses
  • Losses

For example, let’s say Johnny’s Burger Bar, a quick-service burger restaurant, has $1.25 million in revenue, $50,000 in gains, and $1.2 million in expenses from July to September 2022. 

Net profit = (1,250,000 + 50,000) – 1,200,000

Net profit = 100,000

How to calculate net profit percentage

To calculate net profit as a percentage, apply this formula:

Net profit as a percentage = (100,000 / 1,250,000) x 100

Net profit as a percentage = 0.08 x 100

Net profit as a percentage 8%

Johnny’s Burger Bar’s net profit margin is 8%. For every dollar a customer spends, they’re keeping 8 cents as profit. 

Why are restaurant profit margins so low?

While there are many factors that contribute to low profit margins in the restaurant industry, one of the main reasons are three major expenses commonly referred to as the “Big Three”.

  1. Cost of goods sold (COGS)
  2. Labor
  3. Overhead

As a general rule, one-third of a restaurant’s revenue is allocated to cost of goods sold, and another third to labor expenses. The remaining revenue must cover overhead expenses like utility bills and rent.

Once all expenses are paid, restaurants are typically left with between only 2 and 6% in net profit.

Note: COGS, labor and overhead expenses can vary greatly depending on a restaurant’s type and location. As such, there are certainly outliers (that’s to say, restaurants with revenue lower than average and restaurants with far above average profit) that impact the average. We recommend researching average profit margins for your restaurant type and setting a goal to have average-or-better profit margins year over year. 

Average profit margins by restaurant type

Full service restaurant profit margins

That 2-6% profit margin mentioned above generally refers to full service restaurants (FSRs), which are establishments that generally include kitchen staff, managers, servers, bartenders and a host, at minimum. However, these numbers can vary greatly depending on factors like restaurant size, price range, turnover rates, location and more.

Cafe profit margins

Cafes typically have profit margins that range from 2.5-15%. This higher margin is often attributed to their focus on specialty coffee beverages, pastries, and light meals, which can be priced at a premium compared to traditional full-service restaurants. However, the actual profit margin can still vary depending on factors such as location, menu offerings, operational efficiency, and competition in the area.

Fast food restaurant profit margins

This number depends on factors like if the location is chain-owned, franchised or independent, but the average profit margin for a fast food restaurant or quick service restaurant (QSR) is around 6-9%. The restaurant profit margin for fast food or quick service restaurants is higher than a full service restaurant because they tend to need less staff, use less expensive ingredients (more frozen and pre-prepared items) and have a higher turnover rate than a full service restaurant.

Food truck profit margins

Food trucks will generally carry similar food cost numbers as a brick-and-mortar restaurant, but they benefit from lower overhead costs including rent, insurance, staff and utilities. And while bad weather can hurt a day’s sales, that can be made up for in rental fees for events. Like fast food and QSRs, the average food truck profit margins are around 6-9%.

Catering profit margins

Similar to food trucks, catering businesses benefit from low overhead costs but similar food costs when compared with an FSR. While a high-end catering business can pull in profits of 15% or more, the overall average profit margin for a catering business is 7-8%.

How to improve restaurant profit margins

There are two ways you can approach this problem: by increasing sales volume and by decreasing overhead expenses

While there are many tactics that can help you increase sales volume and decrease expenses, we’ve put together our list of the most accessible ways to do so.