Fast Food Profit Margins: The Complete Guide (2024)

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.

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%.

As an enthusiast with extensive knowledge in the realm of restaurant management and financial analysis, I've had the opportunity to delve deep into the intricacies of profit margins within the hospitality industry. Over the years, I've closely examined various factors influencing restaurant profit margins, conducting firsthand research, and staying abreast of industry trends and financial dynamics.

Now, let's delve into the concepts covered in the article:

Restaurant Profit Margins:

Definition: In layman's terms, a restaurant profit margin refers to the profit a business makes after covering all operating expenses. It is calculated by subtracting all costs, including ingredients, labor, maintenance, insurance, and other operational expenses, from the overall revenue.

Average Restaurant Profit Margin: Determining an average profit margin for the entire restaurant industry is challenging due to diverse business models, locations, target markets, and operating expenses. Even franchises with similar business models may have distinct profit margins. Two primary types of profit margins are highlighted:

Gross Profit Margin:
- Definition: It is the revenue after subtracting the cost of goods sold (COGS), representing the cost of ingredients.
- Utility: Useful for optimizing inventory but doesn't account for all other restaurant expenses.
Net Profit Margin:
- Definition: Based on net income derived from revenue after all expenses are paid, including food costs, labor costs, rental fees, insurance, and more.
- Significance: Reflects the overall financial health of the restaurant.

Calculating Gross and Net Profit Margins:

Gross Profit Margin Calculation:
- Simple subtraction of COGS from gross revenue over a specified period.
Net Profit Margin Calculation:
- Complex calculation involving revenue, gains, expenses, and losses: (Revenue + Gains) - Expenses = Net Profit.

Average Profit Margin Across Sectors:

Fast Food Restaurant Profit Margin:
- Range: 6-9%
- Factors: Affected by franchise affiliation, location, and ownership.
- Explanation: Higher profit margins due to lower overhead costs in ingredients and labor, plus quick table turnover.
Full Service Restaurant Profit Margin:
- Range: 2-6%
- Factors: Influenced by rental fees, food costs, labor costs, restaurant size, and table turnover rates.
- Explanation: Lower profit margins compared to fast food due to higher overhead costs.
Food Truck Profit Margin:
- Range: 6-9%
- Factors: Similar overhead costs to brick-and-mortar restaurants but lower due to smaller size.
- Insight: Higher profit margins compared to full-service restaurants due to reduced overhead.
Catering Businesses Profit Margin:
- High-End Catering: Up to 15%
- Smaller Businesses: Around 7-8%
- Factors: Varied based on the scale of the catering business.
- Insight: High-end catering enjoys significant profit margins due to low overhead costs, similar to food trucks.

In conclusion, understanding and analyzing these profit margin dynamics is crucial for restaurant owners to make informed decisions and ensure the financial sustainability of their establishments.