Guide to Restaurant Profitability

Getting a restaurant or bar off the ground is, in itself, a monumental feat. Keeping the doors open and turning a profit can feel almost impossible at times. However, if you are willing to work long hours, make tough decisions, and invest in planning and preparation, you can overcome obstacles and achieve success. To help you reach your goals, we have put together a guide that will walk you through several creative ways to add restaurant revenue streams, the basics of profit margins, and much more. Consider it your crash course in restaurant profitability. 

How to Add Restaurant Revenue Streams

There are plenty of ways for restaurants and bars to earn revenue outside of food and beverage sales. Here are just a few ideas that may be able to boost your restaurant’s profitability.

Sell branded merchandise

Bars and restaurants with a loyal local following or establishments in tourist areas can sell shirts, hats, pint glasses, mugs, or spices and sauces. When selling merchandise, be creative and speak to your audience in a way that is authentic to your bar or restaurant’s brand. You’ll also want to create an in-store display, make items available on your website or social media storefronts, and consider collaborating with other retail businesses or artists in your area.

Write a cookbook

You don’t have to get signed with a major publisher. You can create a simple booklet of recipes and sell it at your restaurant or online. You can even partner with other chefs and donate some of the profits to charity. Customers will appreciate tips and tricks on how  to create their favorite local dishes at home.

Offer gift cards

You can create digital gift certificates using online programs such as canva.com, as an eco-friendly, cost effective alternative to offering branded plastic gift cards. Just make sure to include an expiration date and some sort of watermark to help prevent fraud.

Offer meal or cocktail kits

This has become especially popular during the pandemic when many bars and restaurants had to close their dining rooms. Kits should include all the necessary ingredients along with easy-to-follow instructions. Customers can have them delivered or picked up at the restaurant or bar depending on your state or city’s local liquor laws. Check out our state-by-state guide on liquor law changes due to the pandemic.
  

Add catering services

You may not have the time or capacity to run a restaurant and a busy catering business, but there may be opportunities to help with special events, festivals, and conventions. Try to take advantage of these opportunities and you may find that you can start small and eventually expand your catering services.

Sell your data

Did you know that beverage suppliers want your on-premise performance data and they are willing to pay for it? The data you are already collecting provides helpful insights that can be used to make more informed decisions about branding, marketing, and sales. Overproof offers the F&B Insights platform so that bars and restaurants can easily sell their data to interested alcohol suppliers. 

Understanding Profit Margin

If you came to this blog looking for ways to add restaurant revenue streams, then you are probably interested in your bottom line. Understanding restaurant profitability and calculating your profit margins is a key component, so let’s take a closer look at profit margins. A profit margin isn’t just how much money you bring in, but is actually represented as a percentage of annual sales.

Operating Costs and Expenses

Before you can truly understand how much you have earned, you have to subtract all your operating costs from the gross revenue. Keep in mind that many bars and restaurants earn revenue from catering, renting out the venue, selling merchandise, franchises, and other revenue streams. You have to take these streams into account when calculating gross revenue and not just focus on food and beverage sales.

When it comes to potential expenses, the list is limitless. There are fixed expenses, like labor, payroll, inventory, rent, advertising, equipment maintenance and repair, restaurant POS system technology, in addition to variable and above the line expenses. Once you start subtracting these from your gross revenue, you’ll start to get a better idea of your annual profit.. 

Restaurant Profitability and Sustainability

Remember that it is common for the first few years of a restaurant to be pretty lean, so it’s important to keep expectations reasonable. The reality is that most restaurateurs have to take on a lot of debt only to enjoy limited profitability when they first open. 

Instead of focusing solely on profits, the main goal should be sustainability. There are bound to be unexpected costs that pop up, so keeping profit estimates conservative can work in your favor over the long run. Profit margins can be influenced by a variety of unforeseen factors, but you’ll have a better chance of succeeding and earning money if you add alternative restaurant revenue streams early on.

Calculating Restaurant Profitability

Once you have determined your total revenue and your total expenses, you can calculate profit margins by using this formula:

Total Revenue – Total Expenses = Net Profit

(Net Profit ÷ Total Revenue) x 100 = Net Profit Margin

To learn how restaurant profit margins relate to your markup, visit our article about margin vs markup.

How to Improve Restaurant Profit Margins

• Use a well-organized accounting system: The ability to track daily revenue, expenses, and other data is the key to making better business decisions.
• Edit the menu: Remove any dishes that are unpopular or unprofitable and consider marking up customer favorites.
• Reduce food costs: Negotiate prices with your vendors, look for less expensive ingredients and consider reducing portion sizes if guests aren’t finishing the meal.
• Offer specials: Test new recipes, get rid of excess inventory and create a sense of urgency.
• Maximize marketing: Make sure that you are posting pictures and engaging on social media.
• Upsell: Train your staff to upsell whether it is promoting desserts or offering top-shelf liquors.
• Create a rewards program: Regulars can earn points towards discounts or prizes, which will keep them coming back.

How Much Profit Should My Restaurant Make?

Profit margins can vary widely based on the type of restaurant, whether the staff is able to upsell and increase the average cost per customer, and much more. This means that profit margins can run anywhere from 0-15% although most restaurants fall in the 3-5% range. If you are operating a Michelin star restaurant you are probably enjoying higher profit margins than a quick-service restaurant. To get a more accurate view of how much you should be making, research other restaurants in your specific niche and area, and set a goal of meeting or slightly exceeding the average.      

Most Profitable Types of Restaurants

If you are considering opening a food establishment and restaurant profitability is your main goal, then you can strategize about the type of restaurant you open in order to minimize expenses and maximize revenue. Here are some of the most profitable restaurant models.

Bars

Hands down, bars are the best option for earning profits. Pubs, grilles and bars that push alcohol sales can be expected to earn around $300,000 annually. That is mainly because alcohol offers a high-profit margin. Of course, earnings will depend on location, the type of establishment, etc. Just keep in mind that opening a bar requires more of an upfront investment, although you should be able to recoup costs in about one to two years.

Cloud Kitchen

If you aren’t familiar with cloud kitchens, they are essentially virtual kitchens, otherwise known as a dark kitchen or ghost kitchen. Restaurateurs rent a small kitchen where they can prepare food and customers can have it delivered to their homes. There is no need for a dining room, servers, or many of the typical overhead costs. This relatively new business model is becoming popular because it keeps costs low and makes it easier to get started.

Food Truck

Food trucks also offer high profits because they reduce costs. It is also great because you can choose the design of the truck and have either a permanent spot or move throughout the day or week. As an added bonus, over 50% of food truck owners earn at least $150,000.

Cafe

Nearly everyone enjoys a good cup of coffee. Just think about all the Starbucks locations around the world. While the pandemic has slowed growth in this sector, the industry did grow 3.3% from 2018 to 2019 to earn 47.5 billion in the US alone. That is why experts still think cafes are a safer bet within the restaurant industry.

Diners

Diners offer the potential for a higher profit margin because they mostly serve breakfast items, which tend to be low-cost. To further encourage profits, you can offer extended hours where you continue to serve breakfast and other specialty items. With 37% of diners between the ages of 18-35 preferring breakfast foods over traditional lunch and dinner dishes, you can’t go wrong. In addition, you can always expand the menu once the diner is on solid ground. 

Pizzeria

While the initial costs of developing a pizza restaurant can be high, once it is up and running, the ingredients are relatively inexpensive. This can help with sustainability and lead to a pizzeria earning about $450,000 a year. Pizza continues to be a favorite and with loyal customers and delivery options, you can stand to make quite a profit.

How Much Do Restaurant Owners Make?

Salaries will depend on a variety of factors. High operational costs during the first few years can mean a lower starting salary for restaurant owners. The weather, location, parking accessibility, population density, and working with the right vendors can all influence operational costs and sales. With that being said, restaurant owner salaries can range from $24,000 to $155,000.

Creating a successful and profitable restaurant is, without a doubt, challenging, but it is possible to be successful with the right tools and strategies. As you start out, remember to keep expectations in check, especially during the first few years. Once you have become established, you can look for creative ways to improve profit margins, like adding revenue streams that increase restaurant profitability through sales that go beyond food and beverages.

FAQs

What is a restaurant profit margin?

Profit margin is represented as a percentage of annual sales and is the amount of money that remains after expenses have been subtracted from the gross revenue earned.

How much profit should a restaurant make?

This can vary depending on the type of restaurant, location, etc. In general, the average profit margin is 3%-5%. Your best bet is to research profit margins that are specific to your niche and determine the average.

What is the most profitable type of restaurant? 

A bar, grill, or pub, where the focus is on alcohol sales will earn the most profits.

Do restaurant owners make good money?

Restaurant owner salaries can range from $24,000 to $155,000 on average. Salaries can vary per year and even per month due to factors like weather, fluctuating food costs, location, etc. 

How do you calculate the profitability of a restaurant? 

Total Revenue – Total Expenses = Net Profit

(Net Profit ÷ Total Revenue) x 100 = Net Profit Margin

How do you improve restaurant profit margins?

Cut food costs, retire recipes that are unprofitable or unpopular, implement a well-organized accounting system, upsell items, take advantage of free marketing opportunities like social media, offer specials, create a rewards program for regulars, add new and creative revenue streams.