What is the Average Profit Margin for Restaurants?

What is the Average Restaurant Profit Margin blog header

Updated on: February 3, 2025

Working in the restaurant industry can be so fulfilling.

Your passion drives you, and nothing’s better than seeing those smiles on guests’ faces when they’re enjoying your delicious menu items with the ones they love. A thank you from a guest brings immediate satisfaction. That’s what makes the job all worth it, but at the end of the day, there are some realities to face.

While delighting diners and building a base of loyal customers is key, when it’s all said and done, restaurant owners need to think about profit margins—because if your restaurant doesn’t turn a profit, it doesn’t survive, no matter how high the quality of service or how tantalizing the menu offerings are.

Financial metrics can be a pain, but it’s important to consider them so you can make informed business decisions. In this post, we’ll talk about the average profit margins of restaurants,  (an absolutely essential metric,) how to calculate them, and where yours should be.

What is a restaurant profit margin?

To put it simply, a restaurant’s profit margin is the difference between the money a restaurant earns and the money it spends on operational costs and other costs.

This is a critical metric. The higher your restaurant’s profit margins, the better your profitability. When restaurants first start, it’s normal for profits to be lower, but as they gain popularity. build customer loyalty, and sell more food, profits should steadily grow before generally stabilizing.

It should be understood that the profit margin of restaurants is not high. Like most of the service industry, the food and beverage industry is highly competitive making it difficult to achieve or maintain high-profit rates.

Making good food and creating an enjoyable atmosphere to eat it in is just part of the equation for a profitable restaurant. Financial health through healthy profit margins, restaurant efficiency, and controlled operating costs is essential.

Profitable restaurant management needs to be viewed with equal concern through the lens of finance.

What is the average restaurant profit margin?

The restaurant industry has thin margins and the level of competition is high.

The average restaurant profit margin falls somewhere from 3%-6%.

To be sure, your business model and restaurant type will make a difference in your margins. Fast-casual restaurants will have different margins than delivery-only restaurants or catering service businesses. Quick-service restaurants aren’t likely to pull the same margins as a full-service, sit-down restaurant.

The highest profit margin for restaurants can be upwards of 15%, but that’s not something you can count on, particularly if your restaurant is just getting off the ground, so it’s important to remember that the average profit margin is just that: an average profit margin.

It would help if you also remembered that the average restaurant profit margin is an industry average. It may take a while for your restaurant to find its revenue stream as you manage operating expenses, determine best food costs, establish customer loyalty, and make other informed decisions to meet the industry standard that best aligns with your goals. 

Your profit margin can vary from year to year. It can also vary because of your restaurant size, menu prices, employee turnover rates, seasonal table turnover rates, variable restaurant costs, and customer retention levels. Use average profit margin data as a rule of thumb to guide and inspire you as you find your place in the food industry.

How do you calculate a restaurant profit margin?

While calculating restaurant profit margin is easy in theory, it’s a bit more complicated in practice. Again, the general concept is to determine how much money you earn and subtract from that how much money you spend. There’s obviously a lot that goes into those two numbers, so let’s break it down a bit more.

To calculate your restaurant’s profit margin, you first need to understand the difference between the types of profit margins: gross profit and net profit. And even before that, you’ll need to be familiar with the main types of restaurant expenses. Here’s what you should know.

What are the big three restaurant expenses?

  • Cost of Goods Sold (COGS): Think menu offerings — and don’t forget beverage costs! 
  • Overhead expenses
  • Labor expenses

Cost of Goods Sold (COGS)

This is the cost of your raw materials. When you sell a hamburger, there is a cost of ingredients. The direct costs of goods sold would include the price you paid for the bun, the meat, all the toppings, and any packaging. In other words, how much the food you sell actually costs you. 

This cost should be much lower than the sale price of the menu item because if it’s not, it’ll be difficult to turn a profit. It should go without saying that menu prices should be higher than the overhead costs of the menu items.If they are not, there are menu engineering strategies that can help you maximize profits.

Overhead expenses

Overhead expenses are often thought of as the operational costs that “keep the roof over your head.” 

Think utilities and rent. Often these operating expenses are more fixed than others. For instance, you can generally plan on the rent being consistent each month, while the cost of goods sold could fluctuate monthly depending on seasonality and general ebb and flow. Overhead expenses may be reliable, but they can definitely be major expenses, especially in times of unexpected repair, so don’t underestimate them. Remember that even cooling and heating vary according to season, so anticipate changes in utility accordingly. Opt for eco-friendly kitchen appliances if you can to save energy and money as much as possible.

Labor expenses

To keep your restaurant running, you need to hire employees—chefs to cook, servers to care for customers, restaurant hosts to greet, cashiers to handle payments, and even bussers to keep tables neat and tidy.

Labor costs are a major expense that can be multi-faceted. When you calculate labor costs, you need to take into account everything from salaries and hourly wages for hourly employees to employee benefits like insurance. Be sure you’re accounting for each employee and their hours spent working. Treat your employees well so they can be motivated to enhance customer experience, which encourages potential customers to visit. A loyal customer base can get you through many tough times, so invest in your culture to meet and cultivate customer demand. A customer loyalty program can also be a fun way to foster your relationship with patrons.

How do you calculate your restaurant’s gross profit margin?

To calculate this key metric, you determine the money you have left after you deduct COGS.

Essentially, you take the price of a menu item and subtract the cost of the actual goods to make that menu item, and then you convert it into a percentage. 

Here is the formula for calculating your restaurant’s gross profit margin:

[Selling Price – CoGS] ÷ Selling Price x 100 = Gross Profit Margin

Here’s an example.

If the selling price of a dish is $18 on the menu and the ingredients (COGS) were $9, the calculation would look like this.

                                                      [18-9] ÷ 18 x 100 = 50%

Regularly take inventory of your ingredients so you can adjust your menu pricing to accommodate as many profitable dishes as you can, and take note of which ingredient prime costs you want to invest in. Use your restaurant profit margin calculator to adjust your menu to suit the demand for the time of year. With our new Suggestive Ordering tool, we can help you manage your inventory even easier. Contact us to learn more.

How do you calculate your restaurant’s net profit margin?

The net profit margin of your restaurant is a better barometer for success because it takes more numbers into account. Instead of just the cost of goods sold, it also factors in all other expenses including the rent or mortgage, payroll, administrative and insurance costs, utilities, and any other costs associated with running your business. 

Here is the formula for calculating your restaurant’s net profit margin:

[Total Revenue – Total Expenses] ÷ Revenue x 100 = Net Profit Margin

Here is an example.

If total revenue is $120,000, and total expenses are $90,000, the calculation would look like this.

           [120,000-90,000] ÷ 120,000 x 100 = 25%

So, to sum up, a simplified explanation of net income vs. gross income is that net income is gross income minus the various costs of doing business. Both are highly useful numbers, but net income offers more insights into the costs of running a restaurant. Knowing these financial metrics can improve your business model , prepare you for intense competition in your area, and help you account for market fluctuations.

What is considered a good profit margin in the restaurant industry?

What is considered a good profit margin depends on the type of restaurant you run, the geographic area you’re in, and many other factors.

As was mentioned earlier, the averages generally run between 3 and 6%, but some restaurants can be in the high teens to mid-twenties.

You should also remember that if you’re a fast-casual or a fast-food restaurant, you can expect many different margins than a full-service restaurant or a catering service. Full-service restaurants average more in the typical 3-5% range, while fast casual can be in the 6-9% category, and catering services can be upwards of 7%.

Why are margins in the catering business higher? Fewer expenses since they often require a smaller number of staff members and only kitchen space, since the events space is rented by the customer. Simply not having table service makes a huge difference. 

While full-service restaurants may have lower margins, they might make up for them with higher sales volume and higher-priced menu items. A 3% net profit margin on $500,000 would obviously be substantially higher than that same margin on $100,000.

How do you improve your restaurant profit margins?

There are two basic ways to improve restaurant profit margins.

  1. Increase sales volume in relation to expenses, or
  2. Decrease expenses in relation to sales volume

In short, you either need to sell more items while keeping expenses the same or sell the same number of items while cutting costs. This could entail running a marketing LTO, optimizing your employee scheduling, or keeping a closer eye on costs from your food and beverage suppliers.

What tools are helpful for improving your restaurant’s profit margins?

How are your restaurant margins? The concept of improving your profit margins isn’t too hard to grasp. But actually boosting margins? That’s a lot more difficult. The good news is that with the right software and tools on your side, it’s much easier to improve your restaurant margins. So what do you need? Here’s a helpful list.

Restaurant Reporting and Analytics Software

Accurate tracking and crunching of data is critical.

Without real numbers, it’s impossible to know where you can improve. Our restaurant reporting and analytics software give you real-time sales data and a detailed view of profitability and admin costs. It will even give you featured reports including a product margin analysis, a daily store summary, and a geographical analysis. Take a look at our ROI calculator to determine if SynergySuite is right for your restaurants.

Restaurant Inventory Management Software

Reducing waste, minimizing restaurant costs, and maximizing operational efficiency will help you improve your profit margins and cash flow.

With our restaurant inventory management software, it’s easy to ensure you have the right levels of food and other supplies in stock so you don’t run short while also avoiding waste.

Other Restaurant Software

In addition to reporting and inventory management software, we also offer solutions for cash management, purchasing, food safety, labor scheduling, and even HR.

With the average restaurant profit margin being somewhere between 3% and 6% your restaurant can benefit from any increase in efficiency of administrative costs.

Our examples above were presented for informational purposes. Your monthly revenues, direct and indirect costs, market conditions, and other metrics will vary.So, if you’re looking to improve your restaurant profit margins, let’s connect. With our software, we can upgrade your restaurant infrastructure and help you develop the effective strategy you need to improve your bottom line. From there, we’ll work together to grow your restaurant business. We’re always here to help, so don’t hesitate to reach out.

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