Believe it or not, the average profit margin in a restaurant is typically around 5% to 6% of total sales—a lot lower than most people think, and not great overall. While chasing the latest food fad or looking for a quick fix won’t bring long-term results, there are ways to boost a restaurant’s margins, and that starts with a strategy some call “controlling the controllables.” This means taking charge of areas that are within the restaurant’s control, including costs, labor and more.
There are three ways to increase profit margin:
- Increase revenue while maintaining expenses (hard).
- Maintain revenue while decreasing expenses (easy).
- Increasing revenue while decreasing expenses (a combination of the first two strategies, and the most ideal).
If a restaurant wants to quickly increase profits and see more money in the bank, it should focus on increasing its revenue while decreasing expenses.
All restaurants have fixed expenses such as rent, utilities and insurance. These will always exist and shouldn’t vary much month to month. However, there are three expense categories that are very controllable: cost of goods sold (e.g., the cost of meat to make hamburgers) labor costs (e.g., the cost to cook and assemble the hamburgers) and direct operating expenses (DOE) (e.g., expenses related to sales, such as takeout containers).
The key is in DOE, because it is an area that is often taken for granted but can be tweaked easily. One of the first places to look for things to change is vendor relationships. Are vendors taking orders that best serve customers’ specific needs, or are they placing “good enough” orders that meet quotas and best serve themselves? For example, how many sinks of water does it take the staff to do a night full of pots and pans? This might seem like a strange example, but if a restaurant is using a private-label dish soap as recommended by a sales rep, they are likely using 35% more water, energy and product than if you used a trusted brand like Dawn Professional. This can be a common practice, especially if salespeople are commissioned based on sales rather than other factors, such as their customers’ satisfaction.
“As with any product or service, restaurant owners and operators should do the research to understand what they’re really getting from their cleaning chemicals,” said Renee Buchanan, communications manager for P&G Professional. “While private-label products might seem like a good deal on paper, their actual value is typically a lot less than a proven name brand. Using a brand like Dawn Professional can help save money, time, environmental resources and even employee effort in the long run.”
The same principle holds true for other DOE items, such as paper goods, to-go containers and gloves. It can pay to shop around or check reviews from other owners. Owners and operators should regularly check costs, labor and expenses to ensure there is balance. A few questions to ask:
- Are vendors offering the best prices?
- Are food and beverages priced right?
- Is purchasing optimized?
- Is staff working to control portion size and waste?
- Is the menu understandable and targeted to the desired audience?
- Is labor being used effectively?
Remember, there is no magic wand that can increase a restaurant’s profit margin. It takes work to “control the controllables.” Restaurant owners are often looking for different marketing strategies and ways to grow traffic quickly, but no strategy will help if expenses aren’t being managed and no one is controlling the controllables. In addition, tools like clickBACON can help determine food, beverage, labor and DOE costs in real time to better control expenses and increase profit margins.
This post is sponsored by P&G Professional