Running a restaurant is a passion for many owners, but it’s also a business venture — and to remain viable, it must generate a profit. That’s why your restaurant profit margin is such a critical metric; it tells you the percentage of the total revenue you’re pocketing each month. With that information, it’s easier to make strategic decisions about purchasing, pricing, hiring, and menu design.

Does your restaurant profit margin have room for improvement? When you understand industry averages and the factors that impact profits, it’s possible to expand your margins.

What is a restaurant’s profit margin?

Restaurant profit margin measures how much of your revenue remains after you pay for expenses. It’s expressed as a percentage, and it indicates how many cents of profit your business generates for every dollar you bring in. If your average profit margin is 35%, for example, your restaurant keeps $0.35 of every dollar of revenue. When the business makes $10,000 in sales, you generate $3,500 in profit.

This metric is a quick way to gauge the profitability of your restaurant. You can calculate the profit margin for individual menu items, food categories, or the operation as a whole.

What’s the average restaurant profit margin?

According to the National Restaurant Association, the average restaurant profit margin is 5% before taxes. In reality, the average range tends to fall between 3% and 5%. Your actual margin will vary based on your operating expenses, COGS, interest on debt, and tax burden.

The type of establishment you run can also impact your net profit:

• Full-service restaurants. These businesses, which offer table service and more one-on-one attention, have relatively high labor and supply costs. They often have a net profit margin between 3% and 5%.
• Fast-food restaurants. These establishments may report restaurant profit margins of 6% to 9% — their labor costs are lower, thanks to counter-service and self-ordering options. They also tend to use limited menus and premade ingredients, which helps reduce food costs and increase order volume.
• Food trucks. Food trucks, which have low overhead and labor costs, typically report net profit margins between 6% and 9%. Many owners use limited menus to keep food costs in check.
• Catering services. Catering profit margins often range from 7% to 8%; these companies don’t need to maintain a dine-in property, which reduces overhead. 
• Bars. Bars tend to have the highest net profit margins in the restaurant industry — 10% to 15% — thanks to the high markup on alcohol.

Bear in mind that these figures are merely guidelines; your average restaurant profit margin may be higher or lower depending on factors including your location, business size, and local customer base.

Why is your restaurant profit margin important?

The profit margin — specifically, the net profit margin — is a key indicator of your restaurant’s financial health. If it dips too low, the business is likely just breaking even or losing money. If the average profit margin is consistently high, it means your restaurant business plan is on the right track.

If you’ve been in the restaurant industry for any length of time, you know margins are famously tight. Consistently tracking your gross profit margin and net profit margin is an effective way to identify red flags and take corrective action.

How to get a higher profit margin

If your average restaurant profit margin is on the lower end of the spectrum, you’re not alone. Factors including inflation, ongoing supply chain disruptions, and rising food costs are eroding the margins at many food-service establishments.

Continuous improvement is one way to combat the market forces that impact net and gross profit margins. To start, assess your operation to find key opportunities for increasing restaurant profit margins:

• Reduce costs. Cutting costs can help boost average profit margins, even if your total revenue stays the same. Reduce waste and negotiate supplier agreements to reduce food costs. You can also consider scheduling staff according to forecasted demand and using self-order kiosks to cut labor expenses.
• Boost total sales. Run promotions — happy-hour discounts, daily specials, and family meal deals are three great options — to increase business from both current and potential customers. If you’re not offering app or website ordering, it might also be time to consider the benefits of online ordering.
• Increase menu prices. Combat higher food costs by increasing menu prices; it can also be helpful to eliminate low-selling items, especially if they require special ingredients that aren’t used by other dishes. Help customers navigate the transition by upgrading your menu design.
• Create a customer loyalty program. Encourage repeat business with a loyalty program that rewards customers for visiting regularly. Do the same for your delivery and takeout customers with a digital loyalty program.
• Increase customer retention. Go the extra mile to retain your best customers; try offering exclusive discounts, invitations to the chef’s table, or referral bonuses. You can also request their feedback on new dishes and use personalized marketing to strengthen the relationship.
• Increase trustworthiness. The restaurant business thrives on trust. To maintain a strong reputation, focus on consistent food quality and an excellent customer experience. You can also respond professionally to feedback online, take customers’ insights seriously, and maintain top-notch health and cleanliness standards.

Restaurant profit margin FAQs

Why are restaurant profit margins so low?

The gross profit and net profit margins are low in the restaurant industry because of how expensive it is to run a food business — profit margins are affected by high commercial rents, extensive equipment requirements, large utility bills, labor costs, and rising food costs. Restaurant owners must constantly increase demand and seek new audiences, all while maintaining menu prices that are high enough to guarantee a profit without deterring customers.

Do restaurants make a lot of profit?

On average, restaurants have profit margins that range from 3% on the low end to 9% on the high end. To maximize profits, owners must increase volume by optimizing the operation to meet customers’ needs, ensure quality, and reduce costs. 

What is a good ROI for a restaurant?

In general, you’re getting a good return on investment in the restaurant industry if your business can make back its start-up investment in about 3 to 5 years. You can also calculate the ROI of different business activities, including marketing. To find this number, use this formula:

ROI = (net return on campaign – cost of campaign) / cost of campaign x 100

For example, if you spend $1,000 on a marketing campaign that generates an extra $5,000 in sales, you would calculate (5,000 – 1,000) / 1000 x 100 to get 400%. That means for every marketing dollar, you’re getting $4 in profit.

How do you calculate profit margin percentage?

To calculate your profit margin percentage, use this formula:

[revenue – cost of goods sold (COGS) / revenue] x 100

Say your restaurant made $50,000 in revenue with COGS of $40,000. To find your profit margin, you would calculate:

• $50,000 – $40,000 = $10,000
• $10,000 / $50,000 = 0.2
• 0.2 x 100 = 20% profit margin percentage

Are you interested in the gross profit margin? This metric tells you how profitable your menu items are. To calculate gross profit margin, use this formula:

[(sales – COGS) / sales] x 100

How do you calculate the net profit margin for a restaurant?

The gross profit margin doesn’t account for the other costs that go into running a restaurant; that’s better measured considering net profits. To calculate the net profit margin, you can use this formula:

[(revenue – costs) / revenue] x 100

If your restaurant brought in $50,000 in revenue and had costs of $45,000, you would calculate [($50,000 – $45,000) / $50,000] x 100 to get a net profit margin of 10%.

How Grubhub can help your restaurant’s profits

Maintaining a solid net and gross profit margin for your restaurant is an ongoing process. Grubhub is here to help — we offer multiple tools and resources to support your business, streamline your procedures, and boost sales. Make sure to take advantage of our core services:

• Grubhub Marketplace. List your restaurant on Grubhub Marketplace to reach the 33+ million diners who are actively looking for their next delivery meal. Our technology works seamlessly with your existing setup, making it easier for your staff to manage incoming orders.
• Grubhub delivery. Grubhub empowers you to deliver orders using Grubhub’s trained delivery drivers or your own staff. Our flexible driver management system handles the scheduling and tracking process so you can dedicate your restaurant’s resources to food preparation.
• Grubhub Direct. Create a commission-free ordering website quickly with Direct. You can integrate it quickly with your restaurant’s existing website so customers can order directly from you at no charge. You’ll also get free access to customer data for targeted marketing and analysis.

Is your restaurant ready to improve its profit margins with Grubhub’s help? To become one of our successful restaurant partners, get started with Grubhub today.