How much profit a restaurant should make depends on several factors, including how long the restaurant has been in business, what type of restaurant it is, what debts it must pay in addition to standard overhead, and more.
Generally, a restaurant needs to turn a high-enough profit to pay all employees a fair wage, pay monthly overhead, pay investors well for their investment, and still leave enough money in savings to handle emergencies, incidental purchases, repairs, and replacements.
What kinds of profits should a restaurant expect to turn, based on its ambiance?
Generally, the more high-end the restaurant is, the lower its profit-to-operation cost ratio. A high-end restaurant has expenses that a basic, family-oriented restaurant does not. For example, most high-end restaurants use cloth table covers and napkins―these must be laundered, and cost more to purchase, replace, and clean than disposable napkins and bare table tops.
As a result of these added overheads, and the higher wages that they are expected to pay employees, high-end restaurants earn, on average, a profit margin of just 8%. In comparison, a family restaurant, with more basic menu options, lower employee wages, and less-expensive amenities can expect to have a profit ratio nearing 35%. Restaurants that serve alcohol earn a far larger profit margin than those that do not, simply because there is such a high markup on alcohol products.
Finally, the percentage of profit a restaurant should expect to earn should, at least in part, depend on how long it has been in business. A restaurant in its first year of business will likely earn a profit of 0%. Restaurant owners in their first year should make it a goal to hit the breakeven point, and then set attainable profit goals quarterly until the restaurant is well established.
What products do restaurants earn the most on?
Restaurants do not earn the same profit ratio on every item they sell. Generally, a restaurant’s total profit ratio depends on what they serve, and what the markups are on their most popular products.
All restaurants earn the highest profit margins on their beverages. When a consumer orders water rather than a flavored beverage, they cut into their meal’s profit margin considerably.
Typically, a cup of soda costs 20 cents per serving, while tea and coffee cost five to seven cents per serving. The markup ranges from 300% to 600%, and carries the lowest cost. This is why restaurants can offer bottomless refills on most beverages, without concern for their bottom line.
Alcohols have a similar markup. Wine has a relatively low price per glass, which is marked up between 200% and 600% depending on the type of restaurant and the wine label. Beer costs between 60 and 70 cents per serving, and carries an average cost, by the glass, of $4.00. This earns a markup of roughly 500% to 600%.
What is the typical markup needed to turn a profit on food?
Typically, a restaurant needs the cost of a meal to total no more than 31% to 34% of the sale price in order to turn a profit. This means that the restaurant owner, or manager, should calculate the cost of creating a meal and multiply that times three in order to have the final sale price.
This may seem like a steep markup, but when you consider that the final sale price of the food must not only cover the cost of the ingredients, but also the cost of preparing and serving the meal, it is key that a business not settle for less.
In order to turn a healthy profit overall, a business must have some menus items with an ingredient cost that is less than 30% of the menu price. There are two ways to improve this cost-to-menu-price ratio.
First, the business can have menu items that are inexpensive to produce, but which are priced in the same general range as more expensive dishes. Pasta dishes are an excellent example.
A large pasta dish typically costs no more than $2.50 to create. However, the menu price can range from $10 to $20, depending on the typical menu price for other similarly sized entrees at the restaurant. This means that the restaurant is earning up to an 800% profit on pasta dishes.
The second way that this is accomplished is up-rounding. If the cost of a dish is $8.22, then the menu price should be a minimum of $24.66. This is a strange number to place on the menu, so the restaurant could round the amount up to $24.99. This increases the profit margin, and will significantly impact the businesses bottom line over time.