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In the fiercely competitive restaurant industry, maintaining healthy profit margins isn’t just a goal—it’s essential for survival. With razor-thin margins throughout the industry, common missteps can take huge bites out of your profitability.
The good news? You can prevent these missteps with a helping hand from technology.
Utilising advanced systems to streamline operations isn't just a smart move; it's necessary to boost profitability and secure your future. 🚀
In this article, we’ll explore common challenges faced by the restaurant industry and delve into how technology can transform these challenges into opportunities for growth.
Understanding profit margins in the restaurant industry
Profit margins in the restaurant business are constantly under pressure from various sources—rising food costs, increasing employee wages, and fluctuating customer demands are just a few examples.
Add to that the need for operators to navigate through a landscape of increased regulations that complicate management processes. Identifying and addressing these potential leakages is critical for sustaining and enhancing profitability.
What is a good restaurant profit margin?
A good profit margin for restaurants typically hovers around 3-5%.
Achieving this benchmark consistently requires meticulous cost control—because every percentage point saved makes a significant difference in the long term.
Restaurant costs are generally divided into several key categories:
- Labour
- Food
- Rent
- Overheads
Labour and food costs make up a huge % of these costs, usually comprising about 60-70% of your revenue. This means they require super close monitoring and management to avoid overspending.
How to calculate gross and net profit in your restaurant
To understand your profitability, it’s essential to know how to calculate gross and net profit:
- Gross profit is calculated by deducting the cost of goods sold (COGS) from your total sales. It’s useful for measuring the day-to-day efficiency of your business, but it doesn’t factor things such as running costs.
- Net profit does take all your expenses and running costs into account, including operating costs, labour, rent, and utilities. It gives you a more accurate picture of your total earnings after all your bills and costs are deducted.
Understanding the difference between these types of profits helps make smarter and more informed decisions to boost margins and help your restaurant succeed.
Why are restaurant profit margins so low?
Several factors contribute to the low profit margins in the restaurant industry. Let’s walk through some of the most common causes.
Unpredictable costs
As mentioned, restaurant costs are highly unpredictable. Changes to market prices, seasonality, updates to your menu or staff can lead to significant budget fluctuations. This adds more complexity to your financial management, impacting your bottom line and making it hard to keep profit margins healthy.
High food costs
Food costs are typically one of the largest expenses for a restaurant, with the prices of ingredients fluctuating due to seasonal availability, supplier rates, and market demand. Without real-time monitoring and data-driven forecasting, managing these costs is challenging.
Labour costs
Labour costs are another significant part of a restaurant's expenses. Hiring and retaining qualified staff, minimum wage increases, and employee benefits all add up. If staffing isn’t aligned with customer demand—resulting in overstaffing during slow periods and understaffing during peak times—labour costs can quickly spiral out of control.
Waste management
Food wastage—whether due to over-ordering, spoilage, or inefficient portion control—directly impacts profit margins. Without effective inventory management systems to track and forecast needs accurately, wastage becomes an inevitable and costly problem.
Operational inefficiencies
Inefficiencies in daily operations, from kitchen processes to front-of-house service, can drain resources and erode profit margins. Lack of real-time data and analytics to identify and address these inefficiencies only exacerbates the problem, making it hard to pinpoint the exact cause of the problem and how to fix it.
Fluctuating customer demand
Customer demand can be highly unpredictable, influenced by factors like weather, holidays, and local events. Without accurate forecasting and flexible operational strategies, tackling these fluctuations can be tough.
Regulatory landscape
Restaurants have to navigate a complex regulatory environment, including health and safety standards, labour laws, and environmental regulations. Compliance can be resource-intensive and expensive if not managed efficiently.
6 ways to improve restaurant profit margins with technology
The good news is that it’s possible to make costs more consistent and predictable.
How?
By using technology.
Tools that offer real-time data, forecasts, and streamlined operations help you effectively manage fluctuations. With these accurate and up-to-date insights, you can make informed decisions that keep your costs in check.
Take a look at some of the ways you can use technology to increase your profit margins.
1. Optimise menu pricing
Efficiently pricing your menu is crucial for restaurant success, ensuring that all your dishes are profitable and aligned with market conditions.
Using data from your Point of Sale (POS) system—such as Vita Mojo, Lightspeed or Toast—can help track the popularity and profitability of each item. As a result, you can adjust prices based on demand and cost of ingredients, maximising your earnings in the process.
Food for thought💡Nory keeps you updated with real-time alerts when food costs from suppliers increase. This allows you to make quick decisions to adjust your menu or negotiate better deals, helping you maintain stable restaurant profit margins.
2. Invest in staff training
Investing in staff training improves service quality and efficiency, leading to higher customer satisfaction and repeat business. And when you get more repeat business? You generate more revenue and higher profit margins.
With technology, you can identify skill gaps and monitor training activity, making sure your workforce is well-equipped to deliver the best possible dining experience.
3. Create effective marketing strategies
Marketing strategies can drive more traffic to your restaurant. And with technology, you have the perfect toolkit to implement effective and successful marketing tactics. You can identify your ideal demographic, learn about their behaviour, and create personalised marketing strategies.
For example, you can use social media to launch targeted promotions to attract new customers. Or you can create digital loyalty programs that provide tailored discounts based on customer preferences.
All of this activity helps you reach a wider audience to attract new customers and build relationships with existing customers to encourage repeat visits—both of which are beneficial for your bottom-line.
4. Optimise your labour costs
Inadequate restaurant staffing can take a huge chunk out of your bottom line. Too many staff during a quiet shift, and you’re forking out a lot of money on unnecessary wages.
Fortunately, labour costs can be optimised by aligning staff schedules with customer demand. Analysing sales patterns and peak hours through data can ensure you have the right number of employees at the right times, avoiding both overstaffing and understaffing.
Food for thought💡Use Nory’s demand-based scheduling to ensure that staffing levels are aligned with expected customer traffic. This reduces labour costs by avoiding overstaffing during slow periods and ensures you have enough staff during peak times
5. Reduce food waste
Implementing better inventory management practices can significantly reduce food waste in your restaurant, which minimises your food costs and keeps your profit margins healthy. And let’s face it—it’s better for the planet, too.
AI-powered technology allows you to order ingredients based on demand forecasts and historical data. This means you have the right amount of stock for each shift, minimising spoilage and wastage while keeping your costs lower.
Food for thought💡Nory’s demand-based ordering feature helps you manage inventory more effectively. By accurately predicting demand, you can order the right amount of stock, reducing food waste and ensuring fresh ingredients.
6. Have an overall view of performance
Without insight into your restaurant’s financial performance, it’ll be much harder to improve it. The good news is that technology can give you a comprehensive view of your restaurant’s performance.
Restaurant operating systems provide live performance metrics, allowing you to react quickly to any issues and optimise day-to-day operations. You can make instant adjustments to increase profit margins as quickly and efficiently as possible.
Food for thought💡Nory offers live Profit & Loss (P&L) tracking, providing you with real-time insights into your restaurant’s financial health. You can monitor expenses and revenues closely, making it easier to adjust strategies and optimise profitability.
Improve your restaurant profit margins with the right technology
Improving your restaurant's profit margins requires a multi-faceted approach, from optimising menu pricing and reducing waste to better staff training.
As Tesco puts it: “Every little counts.”
This couldn’t be more true for restaurants. Luckily, technology like Nory allows you to make these changes and take control of your costs in one centralised system.
If you’re curious to know more 👀 - then reach out to Nory’s expert team for a chat.
FAQs about restaurant profit margins
What is a good profit margin for a restaurant?
A good profit margin typically ranges between 3-5% for full-service restaurants and 6-9% for limited-service eateries.
How can technology improve restaurant profit margins?
Technology can streamline operations, reduce food waste, and enhance customer experiences—all contributing to improved profitability.
Plus, with an AI-powered platform like Nory, technology can analyse historical data to make predictions and suggestions to improve your bottom-line.
What are common pitfalls in restaurant profit management?
Common pitfalls include poor inventory management, inefficient staffing, and ignoring customer feedback.
Not using real-time performance technology is also a downfall. These restaurants are missing out on opportunities to improve their bottom-line, relying on outdated and inaccurate data. Technology is the key to restaurant success.
How does reducing waste contribute to profitability?
Minimising food waste means ordering the right amount of food to meet customer demand. Instead of overordering and throwing ingredients away, you only order what you need. As a result, you spend less on ingredients and increase your profit margins.
How do pricing strategies impact profit margins?
Smart pricing strategies ensure that items are priced to cover costs and optimise profits. It considers customer demand and preference patterns to make sure your prices are optimal for your business.
Embedding intelligent systems like Nory into your restaurant’s operations isn’t just an upgrade—it’s a transformation towards sustainable profitability.
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