Restaurant Profit Margins: Understanding Profits In The Restaurant Business

The restaurant industry is growing at an exponential pace with the concept of cloud kitchens & multi-outlet quick-service restaurants opening up rapidly in metro cities. We’re being introduced to mainstream Pan-Asian cuisine, quirky concept cafes & exquisite new forms of desserts. All of this indicates that the restaurant industry is booming with new players entering the market and disrupting the industry and at the same time customers willing to give a chance to new offerings in the market. With the market growing, many are trying to get a piece of this growing industry with their restaurant venture and earn a profit. 

restaurant

So, how is restaurant profit computed?

Restaurant profit is a function of revenue and cost. Restaurant Profit = Gross Revenue – Total Cost. This simple equation is a great deal for all business owners. Ultimately, all business decisions are taken in order to ensure the survival of the business, earn a huge profit or aim for revenue growth or expansion. The profit & loss statement of your restaurant can give an accurate picture of the phase of your restaurant and help you in decision making. Find below a reference to a basic P&L statement of a restaurant. 

Particulars Amount (INR)
Sales 1,000,000
Cost of Goods Sold 500,000
Food Costs 400,000
Third-Party Commissions 100,000
Gross Profit 500,000
Rent 80,000
Utility Bills 40,000
Marketing Costs 50,000
Accounting 60,000
Misc. Expenses 35,000
Staff Salaries 110,000
Total Expenses 375,000
Net Income Before Tax 125,000
Income Tax 12,500
Net Income After Tax 112,500

 

New entrants to the market and rise of third-party aggregators have made the restaurant space highly competitive which has affected survival, profits and growth. So what all has changed in the past decade? Let’s take a look! 

Margins 

Margins in the restaurant business have gradually trimmed down due to multiple reasons. Below is the list of factors that have impacted the margins of restaurants:-

Offer-centric Customers

To penetrate the market by acquiring new customers, popular third-party platforms such as Swiggy, Zomato and UberEats have embedded the concept of discounts and freebies in the mind of all customers. Ergo, restaurants have to let go of important margins up to 20% just to acquire or retain customers via offers or loyalty programs. This has also ensured a high burn rate in the initial months for almost all new restaurants that are trying to make a space for themselves in the market.

Third-Party Commissions

Register with Uber Eats

The days of calling a restaurant directly and ordering from them over call are almost done with. Delivery space has been monopolized by giants such as Uber Eats, Swiggy and Zomato. Restaurants tie-up with online food aggregators to increase visibility and quickly grow business. To their credit, they have grown the overall market cap as well but at the same time made it difficult for a traditional or legacy restaurant business to deliver on its own. Commissions absorb anywhere between 10% to 30% of the revenue (and thus margins) depending upon the delivery partner and deal. 

Marketing Costs

Social media has changed the way customers make a purchase. Millennials who are the biggest contributors to the restaurant business spend roughly 2hrs and 38minutes daily on social media. This makes it essential for any restaurant business to focus on reaching customers on social media, branding the products in a way to which millennials can relate to and reach out to them with trendy content regularly.

Marketing Plan in Restaurant Business Plan

All of this adds up to a hefty marketing cost which further trims down your margins. Although, you can minimize these costs by resorting to SMS and Email Marketing which are cost-effective and give a high return on investments. 

So is it all sad & gloomy when it comes to profits? Definitely not! 

The concept of cloud kitchens is proving out to be widely popular and profitable for restaurants. Cloud kitchens are allowing the owners to start a restaurant and get orders without actually setting up a physical shop that is accessible to the customers. Powered by third-party aggregators, cloud kitchens have made it easier to enter the restaurant space and get profitable quickly without putting in high capital investments. 

Delivery orders have allowed restaurants to have multiple streams of revenue by helping them reach out to new customers and grow their business steadily. A lot of small-time cafes that couldn’t afford a delivery fleet of their own have expanded and are now fulfilling the delivery orders with the help of third-party aggregators and also logistics partners such as Shadowfax, Grab, etc., who charge per order. 

Advancement of technology and analytics in the restaurant space has made it easier to keep a track of the key revenue-generating elements. With the help of advanced restaurant CRM tools, businesses can now specifically focus on building loyal customers and brand level customer retention. Customer retention is the secret sauce required to have a steady source of revenue. A loyal customer doesn’t only improve your CLTV (Customer Life-Time Value) but also brings new customers to your outlet with a positive word of mouth and before you know it, your cash register will be all in the green.

Profitability Elements

A restaurant business owner must always have themselves aligned with important financial milestones in the business such as having operating profits, reaching the break-even point, maximizing all revenue streams and more. Here is a quick look at all key elements that you must be thorough with while aiming for a profitable restaurant business in India. 

Operating Profits

The sum total of all revenue generated by a business minus all costs incurred during the time of operations is operating profit/loss. A restaurant will generate revenue from dine-in customers, delivery orders or by event catering while the costs that it would incur in the process will include rent, staff salaries, cost of raw material, utility bills and marketing costs. Higher operating profits ensure the survival of the business in the long run. 

Break-even point

The point in business where the all-time total revenue is equal to costs incurred since the inception of the business is referred to as the break-even point. For a new business, this would be an important milestone as all revenue made from this point onwards (minus the operating costs) is profit for the business owner. Basically, at this point in the business, the restaurant owner would have recovered the initial investment that would have been required to commence the business. 

Cost of operations

Digging deep into the cost of operations, your primary costs every month would be the cost of raw material and inventory which would be your food costs. Ideal food costs vary from 20% to 35% of the selling price of the dish which makes it pivotal to keep a track of your cost per dish or cost per serving. Eliminating all wastages can bring down your cost of operations and make your operations more efficient. Operation costs will also include staff salaries, utility bills, marketing costs, and third-party commissions if the restaurant has partnered with an aggregator. 

Revenue Components

All sources of business from where it generates sales are known as the revenue components. For a restaurant business, orders are pretty much the primary and only source of revenue. However, a restaurant can get orders in multiple ways. An owner can lever dine-in orders, delivery orders, and takeaway orders to generate maximum revenue. Key metrics to track your revenue trends are daily/weekly/monthly orders, average basket size and repeat rate.

It can be a little tough for you to keep track of all of these components but new-age restaurant software will help you with all of this with strong analytics and data insights.

Scope of profit in different restaurants

All restaurants don’t have the same recipe for success which makes it essential to make a calculated decision when it comes to estimating profits in a new venture or maximizing them in an existing one. Your revenue & costs will depend on your restaurant type. Here’s a quick walkthrough of the scope of profits in different types of restaurants. 

Fine Dine

With investments on the higher side, a fine dine restaurant runs with a high operational cost including an experienced and well-trained fleet of chefs and attendants. Lavish crockery lined up neatly on designer furniture will add on to the costs. However, as you serve exquisite caviar along with a glass of red wine to customers who are willing to pay a high price for the experience your business would generate high ticket bills hand over fist.  Profits could vary from 20% to 35% while running at full capacity. In order to maximize your revenue, you need to focus on metrics such as occupancy rate and average billing size.

Cloud kitchen 

A fairly new concept in the restaurant space, cloud kitchens are the safest bets to start your restaurant at a minimal cost. They are a low-risk model that can offer low to high rewards basis the cuisine that you are offering to the customers. Cloud kitchens give you a head start in terms of profitability as they cut down the cost of operations by avoiding space/location costs. You can open multiple brands from one kitchen itself to get multiple streams of revenue keeping the cost of operations about the same. 

cloud kitchen orders
Cafes

Casual cafes are a low-risk bet compared to fine dine restaurants due to their mass appeal to the millennials and their low food costs as they usually open up with American and Chinese cuisine. However, high revenue and subsequently high profits in cafes occur in phases. The target group easily moves towards the new trending and buzzing cafes which makes marketing costs unavoidable for the business. You constantly need to be innovating and avoid the risk of getting off-trend. A dine-in loyalty program can do wonders to your repeat rate which will help you get regular revenue from a loyal customer base. Profitability will hover around 20% for a moderately successful cafe.

Food Truck

Largely dependent upon the location and footfall for revenue, food trucks require slightly lesser investments compared to an average cloud kitchen but can turn out to be highly profitable. As most of them offer finger food which has huge popularity among all types of customers, food trucks with low food costs and maintenance cost make quick cash over the counter. A successful food truck can earn up to 40% profit. However, these profits may be relatively low compared to other restaurant models in terms of the absolute value of profits.  

Food Truck restaurant

Restaurants that are performing well today 

While a lot of restaurants have started in the past decade only a few have made it big and have successfully been able to create a brand image for themselves. It’s tough to find the right balance between aiming for expansion while keeping a steady eye on the profits.

Burger Singh is a quick hit brand that has been able to succeed in all aspects, survival, profit, and growth. By getting all the ingredients right, they have opened nearly 30 outlets, gained a substantial market share in less than 5 years and touched INR 26 crores in annual revenue. Their success has also attracted investors and so they have also raised fresh funds to grow further and reach their vision of 100 operation restaurants by 2022. Burger Singh was one of the first Indian brands to go for the QSR model that focused on building a brand. 

So what have they done right? Great branding, entering the market at the right time, teaming up with third-party platforms along with a personalized order-online platform. They have made the most of loyalty programs and customer retention tools such as SMS marketing. Brands like Tossin Pizza, InnerChef, Wat-A-Burger have given legacy restaurants and multi-outlet western restaurant brands such as McDonald’s, Pizza Hut, etc., a good run for their money. 

Summing up

In the past decade, a lot has changed in the restaurant industry. It’s not just about serving a meal anymore, it’s about serving experiences to the customers that bring them back and attract the new ones. These are exciting times for the Indian food industry as new and upcoming Indian brands are stealing the show with the help of advanced restaurant technology and new concepts such as cloud kitchens, loyalty programs, and food trucks. Running a profitable restaurant would require a focus on metrics such as repeat rate, percentage of food costs, optimum marketing spend and revenue per order. With multiple restaurants opening up and diluting the competitor’s market share, growth in the customer base is also required. In this highly competitive market, you need to ensure that you are not delusional about your brand, revenue, and costs. Your race to profits begins with strong visibility. Over to you!

Restaurant Profit Margins: Understanding Profits In The Restaurant Business
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Shourya

Shourya

Shourya is a Business Analyst at LimeTray. He makes excel dashboards and business processes for his bread & butter. Loves cinema, exploring new music & boxing (but only somedays). Reach him on: Instagram @shouryarajgupta