Fast Food Profit Margins: The Complete Guide

For many in the hospitality industry, opening their own restaurant and making it a success is a dream. Being able to serve customers delicious meals and provide exceptional service is a very commendable goal. Unfortunately, getting into the restaurant industry and becoming a success is a long and difficult road.

One of the universal difficulties in the restaurant business is razor-thin profit margins. Turning a profit is a constant worry for restaurant owners and it can be very difficult to stay in the green. Even fast food restaurants, with their cheaper ingredients and higher turnover rates, can struggle with their profit margins.

Fast food restaurants occupy an interesting space in the hospitality industry. While industry purists wouldn't consider them "real" restaurants, they are incredibly popular with the general public and endemic worldwide.

McDonald's, the world's most popular fast food restaurant, boasts locations in 120 of Earth's 195 countries. Visitors to the Sistine Chapel need only walk 10 minutes down the road to get their fix of 9 chicken nuggets, fries, and a chocolate milkshake.

Despite their higher than average restaurant profit margin, fast food businesses can still struggle. In this article, we'll be exploring restaurant profit margins with a focus on the fast food industry. If you've ever considered setting up your franchise of your favourite fast food chain, read this blog first.

What are restaurant profit margins?

In layman's terms, a restaurant profit margin refers to how much profit your business makes once you pay all your operating expenses. Your restaurant profit margin (sometimes called net profit margin) is how you calculate your overall gross profit.

Your profit margin measures how much revenue you take home after you pay for ingredients, labor costs, brick and mortar restaurant upkeep, insurance, and all the other expenses that come with running a restaurant.

What is the average restaurant profit margin?

Considering the vast differences between companies in the restaurant business, it's difficult to work out an overall average profit margin. There are many different factors in calculating a restaurant's profit margin, such as the ingredients they use, their location, their target market, and their operating expenses. Even restaurants in the same franchise can have widely different profit margins despite having the same business model selling the same products.

There are two different types of profit margins. These two types are:

• Gross profit margin - Your gross profit margin refers to your business's revenue after removing the cost of goods sold (COGS). The cost of goods sold is how much the ingredients in your menu items cost. While this way of looking at your profit margin can be useful when you're trying to optimise your inventory usage, it doesn't take your other restaurant expenses into account.
• Net profit margin - This is the profit margin that most restaurant owners will be concerned with. Net profit margin is based on your net income, which comes from the revenue you earn after your expenses are paid. Unlike your gross profit margin, which mainly focuses on your cost of goods sold, net profit margins take account of all your expenses, including rental fees, insurance, and labor costs.

How to calculate a gross profit margin

Calculating your gross profit margin is quite simple. All you need to do is choose a set period (a week or two weeks will be fine) and subtract the COGS against the gross revenue you earned in that period.

As we mentioned above, your gross profit margin isn't the best indication of the financial health of your restaurant as it only considers your food costs. While you should always keep track of your gross profit, it's only really useful if you're decreasing food costs.

How to calculate a net profit margin

Unlike calculating your gross profit margin, where you only need to factor in one expense, calculating your net profit margin requires you to consider several different pieces of information. This includes expenses like food costs and labor costs, sales revenue, gains, and losses.

To calculate your net profit margin, you should use the following formula:

(Revenue+gains) - expenses = Net profit

Since your net profit margin takes account of all your costs and gains, it is a good way to evaluate how healthy your business is.

The average profit margin for restaurants by sector

As we mentioned above, it is very difficult to calculate an average restaurant profit margin across the entire hospitality industry. The differences between individual restaurant profit margins make this task nearly impossible.

What we can do is work out the average profit margin across different sectors of the restaurant industry. We can do this as restaurants in these different sectors are similar enough to work out an average.

Fast food restaurant profit margin

Fast food restaurants, or quick-service restaurants, have several factors to consider when estimating their average profit margin. Is the restaurant part of a franchise, or is it independent? Where is it located? Is it chain-owned?

The average profit margin of a quick service restaurant is generally higher than the restaurant industry in general. For quick service restaurants, the profit margin sit at around 6-9%. This is higher than the industry average due to several factors.

These sorts of restaurant have lower overhead costs in both their ingredients and labor costs. Quick service also has a much higher table turnover rate than full service as most customers take their food to go.

Full service restaurant profit margins

A full service restaurant is an establishment with a set menu that diners can sit down in. These are the most common form of restaurants and feature independent businesses and more franchises. Full service restaurants range from humble diners to famous businesses like The Ivy in London. Full service restaurants can sometimes be attached to other hospitality businesses such as hotels.

The profit margin for a full service restaurant generally sits between 2-6%. This profit margin depends on several mitigating factors, including rental fees, food costs, labour costs, restaurant size, and table turnover rates.

Food truck profit margins

Food trucks have become increasingly popular over the last couple of years. The allure of a pick-up-and-go hospitality business is very strong for restaurant owners that want the freedom to cook what they want and serve it wherever they can.

It may surprise you that food trucks carry many of the same overhead costs as a regular brick and mortar restaurant. With this being said, due to the business's size (physical and financial), food trucks have low overhead costs as they employ less staff and buy fewer ingredients. Restaurant owners with food trucks do need to be conscious of added expenses like fuel and extra licences.

Similarly to quick service businesses, food trucks have an average profit margin of around 6-9%. Compared to full service restaurant profit margins, this represents a lot more money per month for food truck owners.

Catering businesses profit margin

Catering is difficult to average as there can be a marked difference between a high end catering business and smaller businesses. Catering benefits from the low overhead costs similar to food trucks.

For high end catering businesses that service important events and parties, the profit margin can be as high as 15%. For smaller businesses, catering profit margins have similar food cost numbers to food trucks and a profit margin of around 7-8%.

How to improve your restaurant's profit margin

Improving your business' profit margin comes down to two strategies: increasing sales volume and decreasing your overhead expense. While most franchises require you to sell a specific menu and market it in a specific way, this isn't the case with independent fast food restaurants. To help you improve restaurant profit margins, we've compiled a list of tips you can use in your own business.

Optimise your menu items

Making sure your menu is optimized to make you the most money is a great way to keep your business fresh and improve low profit margins. To maintain a financially healthy restaurant, your food cost percentages need to be between 25% to 35%. The smaller your food costs, the more you'll have to spend elsewhere.

To calculate your food cost percentage, you'll need to determine how much it costs to make each item. The overall cost of each item is made up of the price of the ingredients it uses and the labour costs that go into making it. Your head chef should be able to help you work out this information.

Once you work out your food percentage costs, you can very quickly optimize your menu. If any menu items end up costing more than the 25% to 35%, you're underpricing them. While raising prices may drive away a few customers, your improved profit margins will make up for it.

As a bonus, optimising your menu will help you cut down on food waste and unnecessary food costs. If you identify the dishes that aren't performing as they should, you can improve their recipe or cut them from the menu entirely. The less food you use, the more you'll be able to reduce food waste

Train your staff to increase sales

When it comes down to it, your staff are the main way you sell your food to the customers. While your marketing may bring them in the restaurant, your team members will ultimately be the ones that sell the food. For this reason, you need to train your staff to confidently upsell your food.

To do this, they need to focus on the following areas:

• Speciality drinks - Tap water is all very well and good but speciality drinks will help you bring in significantly more money. These drinks, soft drinks and alcohol, can have a very high markup and bring in a lot more extra money.
• Sides - Side dishes like fries, sauces, and other extras are a great source of sales volume. By offering these sides and a regular order, your team can quickly markup a meal.
• Desserts - Common desserts such as ice cream or cookies come with a very healthy profit margin. Your team should offer these alongside a regular meal as they would with extra sides.

While most diners believe themselves immune to upselling, fast food restaurants can easily exploit poor impulse control amongst your customer base. Increasing sales with upselling only takes some extra training. Teach your staff to be friendly, conversational, and familiar with your menu items.

Turn over tables

Table turnover refers to when customers occupy a table in your restaurant. This period, measured from when diners sit down to when they leave, is crucial to restaurant profit margins as it dictates how many eat-in customers you can serve. Luckily, quick service restaurants already have quite a high table turnover rates, but there are still ways you can get it even higher.

It should be said that you should never make your customers feel rushed. If you focus on turnover, you can give your customers the impression that they're not welcome and negatively affect your customer experience. You must walk a delicate line between good service and 2uick turnovers.

Online ordering can be a huge help. with online ordering, your customers can place their order before they walk in the restaurant and collect their pre-pre prepared items quickly and without fuss. Since the pandemic, online ordering has become increasingly popular in the restaurant industry. There are many ways to implement online ordering such as using integrations in your point of sale (POS) system.

Shortening your menu can also improve your turnover rate. If your customers have fewer options, they'll be able to decide what they want much faster. Shortening your menu also has the added benefit of reducing food waste.

Improve your restaurant profit margin with perfect POS

Despite your best efforts, restaurant profit margins can sometimes be very tight. The average restaurant profit margin is difficult to improve, but with our tips, you should be able to make a positive impact.

Another way you can make your restaurant as efficient as possible is by investing the best hospitality tools. One such tool is the Epos Now Complete Solution, the best POS system on the market.

Epos now has over a decade of experience in the POS industry and serves tens of thousands of customers across the world. We offer both hospitality POS and retail POS systems. Epos Now customers can access a suite of award-winning applications, payment processing services, and sophisticated business management tools.

If you'd like to know more about Epos Now and their work in the restaurant industry, get in touch with our team of experts below.