It is no secret that the restaurant business is a tough one to crack. With so many moving parts and expenses, it can be difficult to keep your head above water, let alone make a profit.
The average profit margin for a full-service restaurant is 3-5%, while a fast food restaurant makes 6-9% in average profits. High inflation rates are further shrinking these small margins, so it’s imperative for restaurant owners to find more means to stretch that bottom line.
To run a profitable business, you must understand the factors that drag your profits down. We’ve listed the common ones below and what you can do to mitigate their negative effects.
Factor #1: High Food Costs
Food cost is the ratio of the ingredients used to make the dish and the revenue generated when the dish is sold. Our comprehensive guide on the Basics of Menu Pricing and Food Costing will help you gain a better understanding of how food costs are calculated.
The restaurant industry’s average food cost is 40%, although the exact figures vary per restaurant segment. Profitable restaurants operate with 28-35% average food costs and if you’re running above those numbers, then your bottomline is in trouble.
When you created your recipes, you probably accounted for profitability and costs. But let’s say that, suddenly, your restaurant is running high food costs. Here are some things that may be causing it:
- Inconsistent portion controls, resulting in improper recipe yields
- Rising prices of raw materials
- Poor menu design
- Incorrect sales forecasts resulting in over-ordering stocks
- Employee theft
- Food waste due to poor inventory management or excessive leftovers
- Incorrectly calculated ideal food cost
Food costs directly impact how much money you make so it’s crucial that you’re able to keep your costs down without sacrificing quality. Here are some tips to help you address high food costs.
Tips to Lower High Food Costs
- Control portion sizes ensuring that each recipe has the same yields. Consider reducing portions so you can keep the same food quality without increasing menu prices.
- Look for alternative suppliers who can offer lower prices for your raw materials. If you can’t switch, negotiate existing prices by committing a target purchase volume or a longer contract.
- Consider alternatives to high-priced menu items, especially when certain seasonal items are in short supply causing higher prices.
- Increase menu prices and perform menu engineering
- Invest in an inventory management system that will help you track inventory and produce accurate stock forecasts. This will also reduce instances of employee theft since any incident can be identified from the start.
Most restaurant owners calculate food costs manually resulting in inaccuracies. The tedious process also reduces visibility in actual food costs on a regular basis. Food costs should be reviewed on a monthly or quarterly basis so you can nip any issues in the bud. Modern restaurant POS systems will help you stay on top of your food costs. Sapaad’s POS solution helps you calculate recipe costs instantly by simply entering the actual purchase prices. If a supplier increases its price, you can quickly determine the impact to your food cost and make the right decisions.
Factor #2: Uncontrolled Labor Costs
An average of 25% to 35% of total sales is consumed by labor costs, the second biggest determinant of restaurant profitability. Quick-service restaurants typically operate on the lower end, with 25% of sales going to labor costs, while fine dining restaurants operate with 30% – 35% of total sales going to labor costs.
With rising minimum wages, it’s easy for labor costs to remain unchecked and uncontrolled. Improper staff scheduling and decreasing employee productivity are usual culprits. Employee turnover is another, with costs going as high as $5,864 per employee due to expenses in recruitment, orientation, training, and productivity loss.
With manpower being a huge component of running a restaurant, it’s vital to control labor costs.
Tips to Control Labor Costs
The following suggestions will help you control manpower costs:
- Improve staff scheduling by identifying restaurant peak hours and off-peak hours and plotting the correct manpower count for each. This reduces overtime and idle time, which can affect employee productivity.
- Invest in staff training to improve their skills and make employees feel that they are valued members of the company. This will also help reduce employee turnover and improve employee morale.
- Understand labor costs better by grouping staff by positions, e.g., front-of-house staff, kitchen staff, management, etc. This will give you better insight in your manpower efficiency and help you find the right combination of staff that can lower overall labor costs.
- Invest in restaurant technology, like a Kitchen Display System, that improves staff efficiency by sending orders from the POS directly to the kitchen instead of being hand delivered by another staff.
The right manpower count is essential for having satisfied customers. Don’t cut on manpower and overwork your existing staff for the sake of lowering labor costs. Instead, invest in restaurant technology that helps increase operational efficiency and control manpower costs.
Factor #3: Poor customer service
In a highly competitive industry, acquiring and retaining customers is a must for consistent revenue. If your revenue doesn’t grow, your bottom line won’t either.
One of the quickest ways to lose customers is by giving poor customer service. Customers who have had a bad experience are likely to tell their friends and family about it, and they may never come back.
Customers don’t want to come into a restaurant where they have to wait forever for their food or where the waitstaff can’t seem to find their table. They also do not want to see a dirty dining room or kitchen.
Poor customer service causes you to lose customer loyalty, reputation, return business, employees, and profits, among other things.
Tips to Improve Customer Service
There are many ways to provide exceptional customer service. Here are some ideas:
- Have a system in place for taking orders and serving food in a timely manner. A Table Management System, like Sapaad’s Dine-In Features, helps your waiters take orders directly from a smart device. Meanwhile, your restaurant manager can conveniently manage tables from a “running orders” screen.
- Train your staff on how to handle customer service inquiries and complaints. Your employees should always be friendly and professional when interacting with customers.
- Create a loyalty and rewards program to encourage customers to come back and bring their friends and family. Loyal customers are more likely to spend more per transaction and return to your business.
- Offer customers the option to order online or order directly from their tables using QR codes. Giving them more freedom for how they can choose and communicate their orders will not only increase your staff’s efficiency, it will also boost customer satisfaction.
Additionally, you should make sure that your dining room and kitchen are always clean and presentable. Cleanliness is a non-negotiable factor when operating a food business as this communicates that you are invested in the sanitation and safety of your customers.
Factor #4: Inefficient Marketing Strategies
Restaurants should proactively spend 3% – 6% of their gross revenues in marketing strategies. Startups can spend way above these percentages as they need to introduce their concept to the market. But established players should stick to these figures.
If you go above it, make sure it’s only for a short term campaign that generates huge additional revenues. If you’re on a tight budget, spending below 3% may seem practical but it can do more harm than good in the long run.
Marketing is crucial for any business to gain visibility and attract customers. You can’t forgo it but you also can’t overdo it. The key is to strike a balance and ensure campaigns are efficient and are meeting their targets.
Tips for Efficient Marketing Spending
To ensure you’re not underspending or overspending on your marketing budget, follow these tips:
- Ensure that your marketing budget is based on your sales volume. Spend money only when business is good and revenues are high. During peak months, customers are ready to go out and splurge, so be sure that your campaigns reach them and they choose you over the competition.
- During a downturn, be conservative and wise where you spend your marketing budget. Don’t make the mistake of spending more than what you’re earning. Rather, come up with creative ways to attract customers without requiring too much capital.
- Look for huge return but low investment marketing channels such as social media and email marketing. Building an online presence and interacting with your customers in the digital business space is a more efficient way of spending those ad budgets.
- Invest more in customer retention than customer acquisition. Getting new customers is five times more costly than retaining an existing one. Existing customers already trust your brand and it’ll be easier to get them to increase their average spend and try new products.
These are just some of the tips to improve your marketing strategy. Check out our comprehensive guide on Managing A Restaurant Marketing Budget to help you run more efficient and better marketing campaigns.
Factor #5: Lack of Data Visibility
In the digital age, data is king. It’s now possible to track and measure everything, from your most popular menu items to your least used ingredients. Measuring and reviewing the data collected in your restaurant is crucial to managing your bottom line.
Most restaurant owners make the mistake of not regularly reviewing their metrics. Some are even ignorant of their numbers. The factors described above can be easily identified (and quickly resolved) if you’re consistently tracking and reviewing your metrics.
Don’t wait for the annual financial review to know that your restaurant is losing money. Review your P&L monthly and develop KPIs to anticipate where your restaurant is headed. When managing a complex business like a restaurant, you should know the metrics that will determine your success or failure.
Tips to Increase Data Visibility
- Invest in integrated systems that allow you to track essential metrics automatically. Integrating a cloud-based POS system to your accounting system can help save time by reducing the efforts of consolidating manual reports.
- Have a good accounting system that can manage your sales, invoices, payroll, and other expenses. A good accounting system and team can help prevent issues of double charging, identify supplier price increases, and
- Conduct performance reviews weekly, monthly, and quarterly. Today’s modern restaurant POS systems have built-in analytics that make gathering these data seamless.
You can’t correct what you can’t measure. If you suspect your business is losing money, look at the numbers to identify what’s causing the issue. Numbers don’t lie, and in maintaining healthy profits, numbers are your best friend.
Final Thoughts
These are just five of the many things that can harm your restaurant’s bottom line. If you are not careful, these things can quickly sabotage your business and leave you struggling to survive.
Running a restaurant is a tough business with consistently slim margins. But with the tips above and with the right solutions partner, you can increase your revenues, curb your expenses, and enjoy a healthy bottom line.